Updated: Apr 4, 2020
As a millennial business lawyer, I take pride in counseling my clients on best practices in business. One piece of advice I find myself sharing most often, with both my large corporate clients and small business clients, is to avoid taking short cuts in business transactions; more specifically, I advise them not to enter into business deals without executing a written contract. What today's blog will focus on is the importance of using contracts for business deals and how one specific provision could've helped multiple businesses mitigate risk during this COVID-19 pandemic.
Mitigating Risks with Contracts
I'm sure many of you think it is common sense to have a contract whenever you plan to do business with someone; but the truth of the matter is, so many business owners and executives get so caught up in the hype of potentially making money, that they completely forget to materialize the details of their relationship on paper. While sometimes this doesn't initially appear to be an issue, it certainly becomes an issue when (a) the original parties in the business transaction are no longer with the companies, or (b) when a dispute arises regarding each party's obligations in the business relationship. Trust me, between bad memory and inaccurate perceptions, it is very easy to find yourself in a world of costly regrets without a written agreement. I've seen this come to fruition in multiple instances, even with multi million dollar corporate deals, and typically what it results in is thousands of dollars spent in court costs and attorneys fees. YOU DO NOT WANT THAT KIND OF PRESSURE!
So to keep it simple, here are the kind of risks that written contracts help to mitigate:
1. Outlines each party's rights
2. Outlines each party's obligations and when the obligations become due
3. Specifies the remedies each party has if the other party fails to complete their obligations
4. Discusses the anticipated value of products and services
5. Outlines what each party is warranting for their company, product, or service
6. Discusses potential remedies outside of what may typically be granted by a court
7. Discusses when obligations may be excused or delayed
Force Majeure and COVID-19
So at this point, I'm sure you're asking, how does a contract help businesses in the midst of this COVID-19 pandemic? I'll respond by using one term: "Force Majeure".
At this time, many businesses may be facing the tough decision between having to continue to provide services with little to no money to pay employees, paying vendors for products/services they cannot use at this time, or closing business and finding themselves in litigation because they aren't fulfilling obligations. A Force Majeure provision is a term in a contract that many smart businesses have relied upon to help eliminate those concerns.
A "Force Majeure" clause is a provision in a contract that excuses a party from performing its contractual obligations because performing such an obligation has become impossible or impracticable due to an event or effect that the parties could not have anticipated or controlled. Many contracts often include this provision which openly defines a "Force Majuere" as "forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes, acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services"; but quite simply, parties have the right to define what constitutes a Force Majuere in its own transactions. Many lawyers are also crafty enough to include a termination provision in the event a Force Majuere exceeds a certain period of time, which will then allow the business to no longer be obligated to pay or provide the product/service if that contingency is met.
In the case of this COVID-19 pandemic a Force Majuere provision could be the saving grace to allow many businesses to close its doors without fear of litigation for not providing a service or a product it was previously obligated to provide by a certain deadline. In other cases, it could be the excuse necessary to prevent or delay businesses from having to order certain supplies or use certain venues it was previously obligated to order or use.
In any circumstance, it is always great to be in a position where you have options! Contracts are there to help negotiate those options before the need even comes about. For this reason, I encourage every business owner to seek the counsel of a business attorney or corporate counsel to help with business strategy even as early as the planning stages.