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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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Business Basics – 101

Part 3 – The Importance of Entrepreneurs to the Creation of Wealth

There are two ways to succeed in business, either to rise through the ranks of a large company or to become an entrepreneur. Working for others offers the advantages that somebody else assumes the company’s entrepreneural risk and provides you with benefits, like paid vacation time and health insurance.

Becoming an entrepreneur is risker but more exciting. Owning your own business allows you to reap its profits or to fail. As an entrepreneur you don’t receive benefits, such as paid vacation, day care, a company car or health insurance. You have to provide them for yourself. But you gain the freedom to make your own decisions, opportunity and possible wealth, so the trade off can be worth the effort. Part of your due diligence before taking on the challenge of starting your own business should be to study successful entrepreneurs to learn the process.

Economists have identified five factors of production that seem to contribute to wealth:

  • Land/natural resources. Land and other natural resources are used to make homes, cars and other products.
  • Labor/workers. People have always been an important resource in producing goods and services, but many people are now being replaced by technology.
  • Capital. This includes machines, tools, buildings, and whatever else is used in the production of goods. It might not include money; money is used to buy factors of production but is not always considered a factor in and of itself.
  • Entrepreneurship. All the resources in the world have little value unless entrepreneurs are willing to take the risk of starting businesses to use those resources.
  • Knowledge. Information technology has revolutioned businesses, making it possible to quickly determine wants and needs and to respond with the desired goods and services.

Traditionally business and economics textbooks emphasized only the first four factors, but the late management expert and business consultant Peter Drucker said the most important factor of production in our economy is and will always be knowledge.

When we compare the factors of production in rich and poor countries, we find that land is not the critical element for wealth creation; numerous poor countries have plenty of land and natural resources. Nor is labor. Most poor countries have plenty of laborers who need to find work to make a contribution, thus they need entrepreneurs to create jobs for them. In addition capital, such as machinery and tools, is now fairly easy for companies to find in world markets, so capital is not the missing ingredient either. In fact, capital is not productive without entrepreneurs to put it to use.

What makes countries rich is a combination of entrepreneurship with the effective use of knowledge. Entrepreneurs use the knowledge they have learned in order to grow their businesses and increase wealth. The business environment either encourages or discourages entrepreneurship, which helps explain why some states and cities in this country grow rich while others remain relatively poor.

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Business Basics – 101

Part 2, Business and Wealth Building

Standard of Living and Quality of Life

Entpreneurs such as Sam Walton (Walmart), Bill Gates (Microsoft), Jeff Bezos (Amazon) and Sara Blakely (Spanx) not only became wealthy themselves, they also provide employment for many other people.

Businesses and their employees pay taxes that the federal government and local communities use to build hospitals, schools, libraries, playgrounds, roads and other public facilities. Taxes also help keep the environment clean, support people in need, and provide police and fire protection. Thus, the wealth businesses generate and the taxes they pay help everyone in their communities. A nation’s businesses are part of an economic system that contributes to the standard of living and quality of life for everyone in the country.

Standard of living refers to the amount of goods and services people can buy with the money they have. The United States enjoys a high standard of living largely because of the wealth created by its businesses.

Quality of life refers to the general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide. Maintaining a high quality of life requires the combined efforts of businesses, non-profit organizations, and government agencies. Remember, there is more to quality of life than simply making money.

Responding to the Various Business Stakeholders

Stakeholders are the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. These include customers, employees, stockholders, suppliers, dealers (retailers), bankers, people in the surrounding community, the media, environmentalists, competitors, unions, critics and elected government leaders.

A primary challenge for organizations in the 21st century is to recognize and respond to the needs of their various stakeholders. For example, the need for the business to be profitable may be balanced against the needs of the employees to earn sufficient income or the need to protect the environment. Ignore the media and they might attack your business with articles that hurt your sales. Oppose the local community and it may stop you from expanding.

Staying competitive may call for outsourcing. Outsourcing means contracting with other companies to do some or all of the functions of the company, like its production or accounting tasks. Insourcing is the opposite side of that coin, which can create many new jobs to help offset those jobs being outsourced. While it may be legal and profitable to outsource, is it best for all stakeholders? Business leaders must make outsourcing decisions based on all factors; pleasing stakeholders is not easy and often calls for trade-offs.

Using Business Principles in Non-Profit Organizations

Despite their efforts to satisfy their stakeholders, business can’t do everything needed to make a community all it can be. Non-profit organizations, such as public schools, civic associations, charities, and groups devoted to social causes, also make a major contribution to the welfare of society. A non-profit organization is an organization whose goals do not include making a personal profit for its owners or organizers. Non-profit organizations often do strive for financial gains, but they use them to meet their social or education goals rather than for personal profit.

Your interests may lead you to work for a non-profit organization. You will still need to learn and understand business skills such as information management, leadership, marketing and financial management.

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Business Basics – 101

Business and Wealth Building, Part 1

Success in business is based on constantly adapting to changes in the market. A business is an activity that seeks to provide goods or services to others while operating at a profit. To earn that profit, you provide desired goods, jobs and services to people or other businesses. Goods are tangible products, e.g. computers, food, clothing, cars and appliances. Services are intangible products, e.g. education, health care, insurance, recreation, travel and tourism. Once you’ve developed the right goods and services, based on consumer wants and needs, you need to reach those consumers using their prefered media, including TV, social media, online advertising and more.

Although wealth doesn’t need to be your primary goal, one result of successfully filling a market need is that you can make money for yourself, sometimes quite a bit, by giving consumers what they want. An entrepreneur is a person who risks time and money to start and manage a business.

Revenues, Profits and Losses

Revenue is the total amount of money a business takes in during a given period by selling goods and services. Profit is the amount of money a business earns above and beyond what it spends to run the operation, such as salaries and other expenses. A loss occurs when a business’s expenses exceed its revenues. If a business loses money over time, it will likely have to close. Over 175,000 business in the US close each year.

As noted, the business environment is constantly changing. What seems like a great opportunity today may become a huge failure when the economy changes. Starting a business may thus come with huge risks, but huge risks often result in huge profits.

Matching Risk with Profit

Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Not all enterprises make the same amount of profit. Often big risk can mean big profits.