Business contracts usually contain a “Miscellaneous” or “General” section at the end of the document. The provisions under such a section are often viewed as boilerplate. However, such provisions can dramatically affect business terms and associated risks.
Typically, the focus is appropriately on pricing, timing and manner of payment, delivery dates, warranties, liability considerations and the description of the products to be obtained and any related use rights. When completed, all business terms and associated risks are hopefully included within the contract and understood. Whether all risks are understood may depend on the miscellaneous “boilerplate” within the document.
How can such terms affect business terms and associated risks? This article will highlight just one example.
Force Majeure Provisions
Force majeure provisions are intended to address non-performance due to events in which the risk should be borne by both parties. Often such provisions operate to inappropriately shift the risk of doing business to the other party. Take the below provision:
Force Majeure. Vendor shall not be liable for the non-performance of its obligations under this Agreement if such non-performance is caused by acts of God, acts of terrorism, war, riots, strikes, labor disputes, embargoes, failures of the Vendor’s suppliers and subcontractors to furnish equipment, parts, labor or services, governmental actions or regulations, fire, earthquake, flood, accident, the inability to secure transmission facilities, or connectivity failures or delays affecting telecommunication systems or the public Internet, and any other events outside of the Vendor’s reasonable control (each a “Force Majeure Event”).
If you are not the Vendor and the above provision is within the “boilerplate” of your contract, your company has just assumed many of the risks the Vendor routinely assumes as a going concern. For example, if the Vendor’s performance under the contract depends on equipment, parts or labor from a supplier, the Vendor will have no liability to your company in the event such equipment, parts or labor never show up. Further, if your company contracted for hosting services and such services are down due to connectivity failures beyond your demarcation point, the Vendor will have no liability to your company. This would remain the case even if the Vendor contractually committed to providing redundant lines to avoid just such a failure.
What to do? Do not assume any terms within a business contract are boilerplate. Below is a brief checklist of items to consider when reviewing a force majeure provision.
(a) Limit events to natural disasters and other events the risk of which should rightfully be borne by both parties (i.e. acts of God, war, civil disturbance and terrorism).
(b) Exclude from the events listed in (a) above, events which the Vendor, at the time of entering into the contract, could have known or whose consequences it could either have reasonably avoided or overcome, including technology failures avoidable through disaster recovery plans and/or backup systems.
(c) Limit the period of non-performance to a set number of days (e.g. 60 days) based on an assessment of actual risk and period acceptable to wait.
(d) Provide for termination rights in event the Vendor is unable to perform after a certain number of days after the force majeure event.
(e) Make the provision mutual if your company has performance obligations beyond payment obligations.
Attention to “boilerplate” provisions will assist in protecting your business interests and expectations. Realizing there is no such thing as boilerplate terms is only the first step.