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If you are operating a business, things might not always go according to plan. For example, unexpected events may impact your ability to perform your contractual obligations. As such, contract protection is crucial. A force majeure clause is a critical clause that can protect your business from liability if unforeseen events stop you from fulfilling your contractual obligations. However, knowing when you can rely on the clause is critical. This article will explain how a force majeure clause can protect your business from risk.
What is a Force Majeure Clause?
A force majeure clause is a contractual provision that allows the parties to alter their obligations in a contract if something unexpected happens. Most commonly, a force majeure clause will seek to limit the liability of one or both parties if certain unexpected events occur, which make it difficult or impossible to meet the obligations under the contract.
Depending on how the clause is drafted, the clause could have various consequences. For example, a force majeure clause can:
- excuse a party from performing their obligations under the contract;
- excuse a party from a delay in the performance of their duties;
- give a party an extension of time to perform their duties; or
- give a party the right to end the contract.
Usually, a force majeure event is beyond the reasonable control of a contractual party. Nevertheless, it is crucial that your contract clearly defines what constitutes a force majeure event. Some of the most common examples of these events include:
- wars;
- armed conflicts;
- terrorist attacks;
- natural disasters such as earthquakes, fires, floods or storms;
- epidemic or pandemics; and
- nuclear, chemical or biological contamination.
How Can a Force Majeure Clause Protect Your Business?
There are various ways a force majeure clause can protect your business from risk. Some of the most significant ways are as follows:
1. Greater Contractual Rights
A force majeure clause must be included in a commercial contract if you wish to rely upon one. That is to say, a court will not imply the existence of force majeure rights in a contract without it stating otherwise.
If you do not have the clause in your contract, your rights will be much more limited if unexpected events impact your ability to perform your contract obligations. Instead, you may be able to rely upon the law of ‘frustration’.
As such, including a robust clause will give you far greater protection and is more likely to protect you from the potential liabilities that could arise.
2. Protection in Uncertain Times
The COVID-19 pandemic demonstrated the importance of having contractual protection to protect a supplier when unexpected events occur.
When entering into new commercial agreements, it is vital to consider the risks involved. By including a force majeure clause in your commercial contracts, you can mitigate against potential risks. Including the clause will give you comfort when trading, so you know you have contractual protection if unforeseen events impact the performance of your obligations. As a supplier dealing with several customers and a lack of control over external factors, this can help put your mind at ease.
3. Minimise the Risk of a Business Dispute
Including a force majeure clause rights will give you certainty about your legal rights and options if an unforeseen event occurs. When drafting the clause, you can decide on the appropriate procedures to follow and mitigate against the risks you could face.
Without a force majeure clause, you could find yourself involved in arguments with customers if unexpected events occur that prevent or delay the performance of your obligations. Without the clause, your customer is not forgiving if you cannot perform your obligations due to unexpected events. By including a clear clause, you will have a contractual procedure to follow and will be less likely to encounter a dispute.
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Key Takeaways
Although unexpected events may seem unlikely, it is essential to consider them as part of your contract risk management. Including a force majeure clause will give certainty on what procedures to follow if unexpected events occur that delay or restrict your ability to perform your contractual obligations. Significantly, the clause can also reduce your exposure to risk and liability if unforeseen events occur during your commercial agreements.
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