Business leaders are looking at every available option to control costs and manage their company's way through the pandemic. As a result, once obscure clauses in contracts, such as force majeure, are being read, discussed, and considered. But what does it mean to exercise a clause called force majeure? And should the clause even be activated?
Force majeure is a legal term that refers to a contract clause that removes liability during natural and unavoidable catastrophes that interrupt the expected course of events, and restrict participants from fulfilling their contractual obligations. Because these events are unforeseen, this section of a contract is often referred to as the Act of God clause.
What might compel an entrepreneur to cite force majeure? Right now, it may be a state and local government requirement that businesses curtail their operations.
A company can cite force majeure but it has to be ready to defend its position. A business should always keep in mind that if this clause is exercised, there is still the risk of being taken to court and being sued for losses from the other party. And it works two ways. If you exercise the clause, the other party too may be relieved of contractual obligations.
Avoid the thorny issue of citing a force majeure event with these steps that preserve your business's integrity and help sustain your company over the long term.
Develop a communication channel with your partners and clients
Speak to your partners in advance about your inability to keep the contractual promise. Being transparent with your creditors is a good way to get the discussions going. The good relationships developed between partners and clients will go a long way during this time.
While every business may not be in the same boat, every business is in the same storm, so it is most likely that partners will listen and work out ways to set up new ways of working together.
Explore current contracts
Determine where in a contract there might be flexibility with payment terms or penalties. What kind of addendum can be added to the contract that takes into account this extraordinary business climate?
Your trusted partners understand that this situation is temporary and should be eager to continue business in the ways established before the virus. You can look at ramping down some of the work streams or defer payments based on good will and past relations. Given the situation, most people will be interested in the retention rather than churn at this point. It's more expensive to onboard a new client or partner than to retain an existing one.
You likely hear about and experience a variety of problems created by the pandemic. These problems are real and should not be minimized. However, this pandemic isn't just about problems. It is also about change and opportunity.
This is the time to shore up your business with new strategies, develop new marketing materials, and pitch new projects. There are businesses out there that want to engage your product or service. It's just the manner in which you'll make that sale and deliver that service that has to be adjusted.
Explore all options with governmental agencies
Look for all and different types of support that the government is offering. It will be prudent to first turn to those entities to learn what financial support or loans can help bridge the gap. You can also look for ways to pivot to doing work in support of a government entity and thereby be considered an essential company to continue operations and bridge the gap until we get back to pre-pandemic business operations.
Declaring a force majeure event can be risky and expensive. It often requires the cost of legal support and entails risks even after the crisis period ends. Self-reliant entrepreneurs and the leaders of small corporations know all too well the challenges of running a business in the best of times. Keeping a business running during a pandemic, well, that's an entirely new challenge that tests the tenacity and creativity of even the most seasoned leaders. This pandemic is compelling these leaders to explore every option available to them to keep their business running.
While force majeure seems like a powerful tool to use in the short term, its use has several pitfalls. These pitfalls can be avoided by using the other skills that business leaders have developed: clear communication, honest negotiation, and thorough research into alternatives that keep a business going while maintaining good relationships all around.