(As featured in Credit Union Times)
“Don’t talk to me about contracts, Wonka, I use them myself.”
– “Square Deal” Sam Beauregarde
“Oh, that’s just boilerplate language.” I hear this comment far too often from business clients when negotiating contracts. Yes, I understand there are often provisions in contracts that looks like lawyers creating vague and wordy provisions just for the sake of considering every conceivable risk known to humanity.
But I’m going to let you in on a dirty little secret . . . these legalese paragraphs typically have specific intention behind them and can blindside your business if not proactively clarified and negotiated. As an example, consider the “force majeure” provision which can postpone, extend or even excuse contractual performance due to acts reasonably beyond your control, such as government actions or pandemics. You probably see where I’m going with this in light of pervasive business disruption issues involving coronavirus (COVID-19).
Seeing is Believing
After doing some quick online research, I tracked down agreements used by three competing companies in the same industry, which revealed the following differentiated “force majeure” language:
- Force Majeure. If either party is unable to perform any of its obligations under the Agreement or to enjoy any of its benefits because of a natural disaster, actions or decrees of governmental bodies not the fault of the affected party (“Force Majeure Event”), the party who has been so affected immediately shall give notice to the other party and shall do everything commercially practical to resume performance as quickly as possible. Upon receipt of such notice, the Agreement shall be immediately suspended.
- Force Majeure. Except for your obligations to pay the Company hereunder, neither party will be liable to the other party for any failure of delay in performance caused by reasons beyond its reasonable control, including but not limited to, restrictions of law, regulations, orders or other governmental directive, labor disputes, acts of God, third-party mechanical or other equipment breakdowns, fire, explosions, fiber optic cable cuts, interruption or failure of telecommunication or digital transmission links, internet failures or delays, storms or other similar events.
- Force Majeure. The Company shall not be responsible for liability, loss, or damage of any kind resulting from any delay in the performance of or failure to perform its responsibilities hereunder due to causes beyond the Company’s reasonable control.
Now, let’s turn attention to the coronavirus (COVID-19) pandemic, which will almost certainly trigger the language of each version above, but with different consequences.
In the first version, both the company and its contractual counterpart may suspend performance in the event of “a natural disaster” or “actions or decrees of governmental bodies not the fault of the affected party.” While the pandemic is arguably a natural disaster from a purely definitional standpoint, the governmental response (i.e., closing businesses) almost certainly will excuse the performance of either party.
As such, the company’s counterpart in this particular agreement will be able to stop all performance entirely and without any consequence whatsoever, potentially leading to some level of business interruption for the company. Of course, such language will also permit the company itself to likewise stop all performance as well.
In the second version, the “force majeure” event includes a more robust list of events along with the catch-all language “caused by reasons beyond its reasonable control.” However, such events do not allow the counterpart to back out of the agreement, but only to delay performance generally. And the first ten words of the paragraph make clear this will not apply to the counterpart’s payment obligations under the agreement, which will still need to be made in a timely manner.
In the third version, only the company may delay performance (or not perform) in the event of “causes beyond the Company’s reasonable control” without consequence, which would encompass pandemic-related business interruption. There is no explicit right of the counterpart to delay or not perform, and any attempt to do so could arguably be considered a breach or default under the contract (although consider whether pursuing a claim against a counterpart for pandemic-related reasons is wise from a reputational standpoint).
Long story short, what you initially thought was simply “boilerplate” language could have significant consequences as far as your – and your counterpart’s – performance obligations in light of the coronavirus (COVID-19) pandemic.
Now, let’s expand this analysis to the remainder of the contract and outside the scope of pandemic events. Aside from differing versions of force majeure language, other “boilerplate” provisions may have you assuming unanticipated obligations and liabilities on behalf of your counterpart. You may also find that recourse against your counterpart in the event of a breach or default is severely limited . . . and further that you may even be required to indemnify your counterpart for some unexpected claim by a third party.
The Ounce of Prevention
In order to minimize this contractual exposure, consider developing your own set of “pro company” contracts which can be tailored across multiple business functions and deployed proactively. Needless to say, the “boilerplate” provisions should be focused toward protecting your interests to avoid being blindsided and taking on unforeseen risks.
A process should also be developed to be flexible enough to accommodate having to react to the other side’s forms when necessary. Keep in mind, some business partners will demand their forms be used. That’s okay, you shouldn’t simply blow up relationships over initial stubbornness.
Instead, if this occurs, simply request and receive a copy of the contract in Word (or other editable) format. Reasonable business counterparts should expect that you will want a copy to redline if they demand use of their one-sided form. And if they refuse to do so, this should be seen as a red flag warranting consideration of other business partners (hint, if they are going to be this difficult in these initial negotiation stages, just imagine how problematic they’ll become if there are any issues with regard to contract performance!).
Being proactive with your contract development practices can realize immediate benefits:
- Managers are not burdened with contract review tasks and are able to focus energy on managing their teams and providing good services.
- There is an enterprise-wide consistency around the contracting process.
- Contracts with business partners are more balanced between the parties, and often even skewed in favor of the company when counterparts sign those forms without negotiating them (hint, the company is likely not the only one disregarding “boilerplate”).
- Since the contract language has been discussed and negotiated in advance, issues with vague, ambiguous and overbroad provisions are minimized.
- The company is able to identify early on whether certain prospective business partners would be a long-term fit for sustainable success.
- The contracting process finally supports providing top-shelf services, instead of hindering it.
Contract negotiation and development may not be the sexiest part of operating a business, but it is one of the most important. Preventive Law practices like those discussed above can ensure “boilerplate” language in contracts is appropriately considered and addressed with prospective business counterparts well in advance of any potential landmines.
KEEFER is your ounce of prevention.