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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.

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Signed Security Agreement

A security interest is enforceable against the debtor when it has been attached to collateral.  Unless the secured party takes possession of the collateral, attachment requires an authenticated record, typically a written security agreement signed by the debtor.  The agreement must indicate that the debtor has conveyed an interest in the collateral, and include a description of the collateral that reasonably identifies the collateral by item or type.  For example, a description of “all of the debtor’s property” or a similar non-specific description is insufficient.  If the collateral is consumer goods, securities, a “commercial tort claim”, or if the loan is made for the personal, family or household purposes of the borrower, the agreement must describe the collateral in greater detail.  Otherwise, the agreement may describe the collateral by its type, such as “equipment”, “inventory” or “accounts”.

Fountain Pen and Signature

If the collateral is other than consumer goods, i.e. those items that are bought or used primarily for personal, family or household purposes, the security agreement may cover both existing collateral and “after-acquired” collateral provided that the agreement specifically states as such.

The attachment and enforceability of a security interest is governed by Ohio Revised Code Section 1309.203.

The United States Federal Trade Commission restricts the types of consumer goods which can collateralize most loans. With certain limited exceptions, the FTC prohibits a secured party from taking a security interest in most household goods, including clothing, furniture, appliances, one radio, one tv, linens, china, crockery, kitchenware, personal effects and wedding rings. There is no such prohibition on security interests in works of art, other electronic entertainment equipment, items acqured as antiques (more than 100 years old) or other jewelry. See Title 16 of the Code of Federal Regulations, parts 444.1-444.5 (2006) for additional information.

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Formalize Your Agreements

We recognize that many small business owners often operate with various informal agreements. However, we want to ensure you recognize that it is frequently important to formalize an agreement with a legal contract. For example, any agreement upon which you rely that can affect the future of your business is important enough that it should be formalized.

Among other things, contracts allow both parties to clearly define their obligations and expectations to and from one another, establish (and potentially limit) their liability, set forth payment terms, and allow each party to understand its responsibilities.

A legally valid contract has four basic components:

A meeting of the minds. Both parties understand and agree to the essential elements of the arrangement.
Consideration. Something of value must be exchanged by each of the parties. This can be in the form of money, goods, or even a promise to do something.
An agreement to enter into the contract. A written contract signed by both parties satisfies this requirement. (Oral agreements can also be valid in certain circumstances.)
Legal competence. Each party must have the capacity to enter into the agreement, meaning each must be of sound mind, and neither can be a minor.

While most contracts address specific items, such as payment terms, timing issues, and the exact subject of the agreement, the above four components are a critical starting point. Remember, if it’s important enough to cause you to wonder, it’s probably important enough to formalize the agreement.

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Contracts and Small Business

We recognize that many small business owners often operate with various informal agreements.  However, we want to ensure you recognize that it is frequently important to formalize an agreement with a legal contract.  For example, any agreement upon which you rely that can affect the future of your business is important enough that it should be formalized.

Among other things, contracts allow both parties to clearly define their obligations and expectations to and from one another, establish (and potentially limit) their liability, set forth payment terms, and allow each party to understand its responsibilities.

A legally valid contract has four basic components:

  1. A meeting of the minds.  Both parties understand and agree to the essential elements of the arrangement.
  2. Consideration.  Something of value must be exchanged by each of the parties.  This can be in the form of money, goods, or even a promise to do something.
  3. An agreement to enter into the contract.  A written contract signed by both parties satisfies this requirement.  (Oral agreements can also be valid in certain circumstances.)
  4. Legal competence.  Each party must have the capacity to enter into the agreement, meaning each must be of sound mind, and neither can be a minor.

While most contracts address specific items, such as payment terms, timing issues, and the exact subject of the agreement, the  above four components are a critical starting point.  Remember, if it’s important enough to cause you to wonder, it’s probably important enough to formalize the agreement.

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Letter of Intent

There are numerous types of contracts that will be important during the life of your business. An example is a letter of intent, which is often used for doing a particular deal. A letter of intent conveys to each party that the other is serious about doing the deal.

There are two differing thoughts as to how to draft a letter of intent.  One suggests that letters of intent should be short and to the point, highlighting the key points of the proposed deal.  The second says that letters of intent should be fairly detailed, addressing every major point of the proposed deal.  Which version works for you depends both on the circumstances of the particular deal and your personal preference.  The more detailed the letter of  intent, the more assurance there is of a meeting of the minds between the parties (though of course, that is not guaranteed).

Letters of intent often include certain basic terms, such as the confidentiality of ongoing discussions, the basic structure of the deal, the price and terms of the deal, the key obligations of each of the parties, the proposed closing date, whether or not negotiations are exclusive between the parties, conditions to be met prior to closing, and what obligations of the letter of intent are legally binding upon the parties.  These are just examples, and each letter of intent should be specific to the particular deal to which it applies.