Businesses can always get covered in the cloud of uncertainty and the current world situation is proof of that. The setback faced by businesses (especially SMBs) due to the pandemic has been severe. Can contractual clauses help tackle these situations in a well-clause-equipped way now and even in the future?
Clauses that save the day
Contractual documents are a combination of multiple clauses where some clauses are highly negotiated, others are not paid much heed. We bring out some underdog clauses that save the day in times of uncertainty.
Force Majeure
The thought of a contract dissolution due to a force majeure clause was a rare occurrence before the pandemic struck the world. But for the past two months, most lawyers and law firms have been busy explaining the applicability of this clause to its client.
Force majeure also known as Act of God is a clause that relieves the parties to a contract from any liability or obligation of performing any task. This is due to the occurrence of an extraordinary event or circumstance which is beyond the control of the parties such as war, natural calamity, or a pandemic.
Some things to keep in mind when drafting or reviewing a force majeure clause are –
- A force majeure clause in any contract specifies the events or situations that can excuse the parties’ performance.
- The scope of this clause is a matter of contract interpretation. The clause typically lists events and situations that will excuse performance or will not excuse performance.
Businesses should evaluate the clause to see whether they qualify to be exempted from their liabilities and obligations under the specific event.
An example of a force majeure clause invoked
E2W, LLC v. Kidzania Operations S.A.R.L
- E2W has sued KidZania Operations for allegedly breaching the parties’ franchise agreement by terminating the contract following E2W’s invocation of a Force Majeure clause.
- Since E2W could not operate its amusement park amidst the pandemic, it invoked the force majeure clause as they were unable to make required payments to its franchisor.
- The clause listed down circumstances and events that excuse the non-performance including “governmental orders” and acts of God, but had no specific reference to the outbreak like COVID-19 where the parties could be relieved from their contractual obligations.
- E2W persuasively argued for preventing KidZania from terminating the contract based on conversations in February and March when the Covid-19 pandemic was just reaching the US shores. E2W presented the possibility of imminent harm if the termination happens.
The court on 7th May 2020 ordered that KidZania prohibits terminating the agreement and not take any action that will interfere with the continued operations of E2W. The Parties are ordered to otherwise maintain the status quo of their operating relationship, pending a decision in the ICC arbitration regarding the termination of the Franchise Agreement.
There is no standard force majeure clause that is included in all business contracts. While they do fall under the standard term clauses but they remain subject to negotiation like any other clause term. These clauses use different measures to tie the force majeure event to contractual obligations which are – impossibility, impracticability, and illegality.
Related doctrines of force majeure to help respond in times of uncertainties
Commercial impracticability
You enter into an agreement to sell goods and provide services. But performing those tasks can get expensive due to changes in government regulations such as taxes, regulatory issues, raw materials rates, etc. The parties did not expect these changes while signing the contract thus invoking commercial impracticability that excuses the party from performing its task. It creates a commercial impracticability situation when a contract is live or in force, but the party is unable to perform their obligations due to no fault of theirs. There is an occurrence of an event that has caused contractual obligations to be unfeasibly difficult and costly to perform
Impossibility and illegality of performance
Parties to a contract can be excused from their duties when it becomes impossible to perform. This can happen when the,
a) the subject matter of your contract becomes illegal like a contract for making and selling a specific chemical later banned by the gov,
b) the task could cause harm or be of risk to others
c) Contract is interrupted by natural disasters eg- floods, hurricanes, earthquakes, etc., or,
d) when a party to the contract dies or becomes physically or mentally disabled.
The performance of a task will be excused only when it is not the fault of the performing party.
Frustration of purpose
A company has a contract for managing a SaaS event. The company is ready with the plan to implement it but the event got canceled due to the COVID-19 pandemic. They can still perform the activities but the point of the transaction was that it will be attended by thousands of people which isn’t the case now. The parties can invoke the doctrine of frustration in a situation when the performance is not impossible but due to some significant changes in circumstances have resulted in the non-materialization of the agreement. So in this instance, the frustration of purpose, not the impossibility of performance, is a better argument.
Other underdog contractual clauses you should look out for
| Automatic renewal clause | Foreign laws |
Automatic renewal clauses can be tricky. You might have signed up for a specific time but some companies squeeze in this clause and if you sign it, then an advance notice has to be given to terminate the agreement. This can cause difficulties especially when you are not even aware of the clause being there in the first place. | Businesses today are spread globally which brings in the aspect of foreign laws within contracts. Be precarious when signing contracts subject to the laws of a foreign country. You might find yourself without enough protection because you took certain clauses for granted. Ensure that you understand the contract you are getting into along with the terms and their implication on your business |
| Financial obligations | Forum selection clauses |
Arising of financial obligations because of a dispute, this clause requires you to pay for the other party’s legal fees or other financial obligations. You have to be very careful while reviewing contracts for such conditions. If you sign this, there is little you can do to defend yourself. | This clause geographically prohibits you to litigate against the other parties in case of a conflict. They stipulate a specific venue or forum where the litigation can take place. Agreeing to a clause like this might put you and your business in an inconvenient situation. |
Documents with contractual clauses are complicated yet very critical to business functioning. So the teams responsible for contract creation, review and management need to ensure that every little detail of a contract is created, reviewed, and approved with absolute scrutiny. This avoids unnecessary problems and helps manage uncertainties in a more robust and qualified way.
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