As a business owner, you’re probably wondering what will happen to the contracts that you have entered into with people or companies that you transact business with in light of the business disruption caused by the current global health crisis.
You may also be wondering what this means for your undelivered goods and unrendered services which have been paid for by your customers. You’re worried that your customers might demand a full refund of their payments as you are breaching the terms of the contract you signed with them by not performing your obligations in the contract.
Are you one of such business owners? Well, you need not worry at all if your contract includes a force majeure clause and even when it doesn’t you may still have a cover.
Importance of a Force Majeure Clause
Directly translated as “superior force” from its French origin, a force majeure is a contractual clause that frees both parties to a contract from any liability or obligation when an uncontrollable event, such as a war, strike, riot, crime, epidemic, pandemic or an act of God such as natural disasters, prevents one or both parties from fulfilling their obligations under the contract.
Although this clause frees both parties from any liability, it sometimes does not excuse a party’s non-performance, but only suspends it for the duration of the force majeure.
A force majeure clause is usually drafted like this:
“In the event that either party is unable to perform its obligations under the terms of this Agreement because of natural disasters, strikes, acts of God, or any event reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. Notice of a party’s failure or delay in performance due to force majeure must be given to the unaffected party promptly thereafter but no later than five (5) days after its occurrence which notice shall describe the force majeure event and the actions taken to minimize the impact thereof.”
(This is why you need expert hands to help with all your legal documents, guys.)
For most businesses, the Coronavirus outbreak with its resultant effects such as the lockdown in place in some states in Nigeria and movement restrictions in other states has made it nearly impossible to fulfill certain contracts. This should automatically trigger the force majeure clause in their business contracts (if it was included).
So, what do we advise you to do now?
- Swing into action with a contract review – As a business owner or founder, you need to ascertain whether your contracts have a force majeure clause and whether the Coronavirus outbreak has substantially impacted the performance of your contracts. Where your contracts do not contain a force majeure clause protecting you from any liability, it needs to be reviewed and updated by your lawyer. You may also be able to rely on a legal doctrine known as “Frustration”. We talk more about this later.
- Comply with notice requirements – Many force majeure clauses require a period of notice by the party triggering the clause (beginning from when they first became aware of the circumstances) for it to count. You need to comply with this notice period and give written notice to the other party.
- Renegotiate other key clauses in your contract and/or replace with a new contract if need be. This goes without saying. With the help of legal experts, you can take action on negotiating alternative ways to fulfill a contract with other parties.
- Frustration. Unlike force majeure which does not always terminate a contract, frustration always results in the termination of a contract. It applies when situations not covered or contemplated by a contract arise. Frustration kicks in when it is impossible for a party to a contract to perform a contract because of external unforeseen situations that makes it impossible, impractical or onerous. You may be able to rely on this in some situations, a lawyer can advise if the doctrine of frustration applies to your situation.
The force majeure scenario occasioned by the Coronavirus outbreak serves as a reminder for every business to always have their contracts drawn up professionally and to ensure that every possible circumstance is covered in business agreements.
Remember to stay proactive, evolving as the society and the economy is, as this will do a great deal of good for your business.