What Every Business Owner Should Know About Force Majeure Clauses

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force majeure clausesWhat Are Force Majeure Clauses?

Force majeure clauses (a.k.a. Act of God clauses) are popular in agreements because they take into account some types of foreseeable disaster that might occur during performance. In short, the provision explains how the parties to the contract will act if a disaster at least temporarily prevents full or partial performance of the contract’s requirements.

Avoid Lawsuits

If all goes well, the roadmap laid out in the clause will let the parties address a triggering event without heading to court in a breach of contract lawsuit.

Types of Disasters

What events are typically covered in force majeure clauses? A well-drafted provision will cover a laundry list of potential disasters. These include pandemics (e.g. the coronavirus), fires, earthquakes, tornadoes, hurricanes, and the like.

Uniqueness

It’s important to note that there’s not a one-size-fits-all force majeure clause. For example, the terms and conditions of the provision can favor your business, favor the other party, or pretend to treat both parties equally. Even the “neutral” clause that looks like it treats both parties equally will in practice benefit one over the other because of the subject matter of the agreement and the circumstances of the parties.

Suspension Plus Termination?

When having your business lawyer prepare force majeure clauses for your agreements, there’s also the issue of whether suspension of performance can turn into termination instead.

For example, force majeure clauses can provide that after XX days have passed, if a party still can’t perform, then the contract either automatically terminates or a party can elect to terminate by following certain steps (e.g. written notice of termination).
Again, this part of the provision can be drafted to favor either party or to be ostensibly neutral by providing both parties with the same termination rights.

And what happens if there’s suspension or termination of performance because a force majeure clause is triggered? Will there be a partial refund or other compensation that changes hands? This should be taken into account too when an experienced business attorney prepares your contracts.

Terminating A Business Lease Because Of The Coronavirus

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terminating a business leaseIf your business has been ordered shut down by the government during the coronavirus because it is allegedly “non-essential,” you may be able to terminate your commercial lease.

I’ve previously discussed business owner rights under force majeure clauses in leases and other contracts. However, there are other provisions that may apply too. For example, some business lease agreements have provisions that cover eminent domain.

Now it will undoubtedly be litigated in courts whether or not pandemic shutdown orders constitutes a taking that requires government compensation. But that’s not the most important issue.

In fact, the key thing to know is the meaning of the exact language used in the eminent domain lease clause(s). For example, some are written in such a way that a lease automatically terminates if at least XX% of the leased premises becomes unavailable because of the government’s actions. Other clauses state that the tenant has the option to terminate if such an event happens, i.e. lease termination isn’t automatic but requires the tenant to give notice.

Are all eminent domain clauses written this way? No. But enough are that it’s worth reading your lease agreement if you’re a business owner struggling to make ends meet because of the coronavirus pandemic orders. If nothing else, the language in your lease (force majeure, eminent domain, etc.) may be give you some bargaining chips you wouldn’t otherwise have when trying to renegotiate to receive more favorable terms instead of terminating the lease.