Blog | Personal Finance

Force Majeure and Contracts

What you need to know about “force majeure” clauses in contracts during this pandemic

As we assess health risks in the midst of the coronavirus pandemic, it’s a good time to look at risks to our business – beyond the obvious pressures we are facing from the drop in revenue or the inability to even open our doors.

While we all have contracts – with our landlords, our suppliers, our employees and others -- we also have integrity and people are going to have to give a little bit to get through this.

There are going to be some disruptions. You have contracts but you’ve also got to be able to act within the national emergency, not just the four corners of the contract.

Adversity reveals character, so hopefully things can be worked out if parties can get beyond those four corners.

Either you have a “force majeure” provision in your contract or you don’t. Usually these provisions – with this specific legal term -- are buried at the end of the contract.

Force majeure basically means “superior force.” Sometimes things intervene that mean that the contract is not enforceable or can’t be performed due to circumstances or conditions that could not be foreseen at time the contract was drafted and signed.

Of course, while these clauses are included, most people read past them, thinking they won’t get caught in an act of God, war or terrorism.

Force majeure is very fact specific, so it’s going to depend on the circumstances of each individual case. That means more litigation to try to resolve who is responsible for losses.

You need to take the time to look at your corporate documents to ensure they serve the purposes you need. For example, if you’re a single owner of a company, what happens when you pass? You need to have your estate planning in line.

Corporate documents are vitally important for other reasons as well. Without the proper wording, you can have your corporate veil pierced, meaning people suing the corporation. If the corporation has no money or hasn’t followed the formalities, potential litigators can try to go through the corporation to get at your personal assets,

In half of all cases, companies have their paperwork in order. That means that half the time, companies are not following the corporate formalities, such as doing the minutes every year and doing the proper filings. That leaves them open for risks they could have avoided.

If you have questions about those filings, read more in Start Your Own Corporation: Why The Rich Own Their Own Companies And Everyone Else Works For Them.

You never know what a potential litigator will try to throw at you. Perhaps a grieving family will say a delivered item transmitted coronavirus, which led to a woman’s death.

While I think you’d have a hard time proving that case, that doesn't mean an attorney wouldn't bring that kind of claim.

Coincidentally, the insurance industry has excluded viral attacks from its coverage since 2006 so this is going to be a big area of litigation. Attorneys are going to tell their clients that their insurance agents didn’t tell them that viruses were excluded, so they should sue the insurance company. That's going to be messy.

I will leave you with this. In this crisis, you need to believe in yourself as we believe in each other. Surviving is winning and this too will pass.