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Force Majeure Contract Clauses

COVID-19 has caused us to take a deeper look at many of our business practices, including the physical workplace, business plans, and emergency contingency plans. Business contracts are another area that need review.

Business agreements routinely include boiler plate language, such as a force majeure clause. This language protects the parties in the event of an unlikely circumstance that would significantly impair either or both parties’ ability to perform, such as fire, war, flooding, earthquake and the like. While these clauses have rarely been relevant, the pandemic requires us to take another look.

One of the benefits of force majeure clauses is that they protect a party that is unable to perform from claims of breach of contract and related damages resulting from non-performance. The events listed in force majeure clauses differ from a breach of contract scenario because the party did not choose to not perform, rather circumstances beyond its control caused its inability and thus failure to perform.

If your business cannot perform under a contract due to COVID-19, either because of the virus itself or the government’s response to it (shelter in place orders, quarantine or other governmental restraints), look at your existing contracts to determine whether each has a force majeure clause and, if so, whether it is broad enough to include the current pandemic, and how the parties agreed to proceed in the event the clause is triggered. If there is no force majeure clause, or if it is not broad enough to cover COVID-19, there are other legal defenses that can help you, such as frustration of purpose and impracticability.

And while force majeure clauses and other defenses may be available, the best first strategy is to communicate with the other party to the agreement. Using common sense, issues related to non-performance or inability to perfom can hopefully be resolved without resorting to legal action.

Until now, virus, pandemic, quarantine and the like have not typically been listed in force majeure clauses. Many businesses are taking the time now to update their contracts to include such circumstances as a hedge against future unknowns.

By Stacy Bauer

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What’s Wrong With This Transaction?

Bob Buyer and Stu Seller agree that Bob will buy Stu’s business.  Stu is 100% owner of the corporation.  They agree on an asset only purchase, for a purchase price of $425,000.  They each sign a two page document showing a purchase price of $250,000, and Bob provides Stu with $100,000 in cash and a personal check for $40,000, payable to Stu.

There are several problems with this scenario.  First, it is difficult to prepare an adequate asset purchase agreement in two pages, and certainly the purchase price in the document should match the agreed upon purchase price.  It is doubtful this document was prepared, or even reviewed, by an attorney.  No mention is made of a bill of sale, assignment of lease or any other mechanism to transfer the business from Stu to Bob.  

In addition, Bob should not personally purchase the assets, but should create a corporate entity to purchase and own the assets.

Next, paying cash provides no paper trail, which would be necessary in the event something goes wrong.  Further, Stu is not the owner of the assets, his company is, thus has no legal right to transfer them.  Any check should be payable to the company and all funds deposited in the company’s account. 

Finally, it is unclear what the purchase price is or how it will be paid.  $140,000 is neither the agreed upon price or the price reflected in the document.  How much does Bob owe, and what are the terms regarding its payment? No mention is made of a promissory note or other document describing any balance owed by Bob or the payment terms.

By Stacy Bauer