The Importance of Force Majeure Clauses
By Logan S. Parker
Force majeure is a clause common in commercial contracts. The clause allows a party to terminate a contract or delay performance of a particular term in a contract upon the occurrence of an unforeseen or extraordinary event. Force majeure clauses were invoked quite frequently during the start of the Covid pandemic, and they are often invoked after natural disasters, such as hurricanes. If properly written, they can also be invoked for some of the events plaguing dealers today, such as supply chain issues and high inflation. Force majeure clauses are a must-have for any long-term or financially significant contract, especially contracts involving franchisors, distributors, and banks.
Force majeure clauses come in all shapes and sizes. Some are limited to acts of war and natural disasters and others are broad enough to cover any event or occurrence that materially affects a party, and when dealing with a major player (like a franchisor), the clauses are usually one-sided. It’s not just good enough to have a force majeure clause in your contract. The clause needs to be tailored to the dealer. The proper wording could save millions of dollars.
For example, when the times were really good in late 2020 and 2021, many franchisors saw an opportunity to pressure dealers to build new facilities or renovate their current facilities. Many dealers signed contracts, whereby the dealers obligated themselves to start and complete construction projects within a 1-to-3-year period. We are now at the point where many of those contracts require physical construction to begin, but business conditions have changed drastically since those contracts were signed. Construction costs are more than 35% higher than they were at the start of the pandemic, high inflation has reduced consumer demand, interests rates are significantly higher than in 2020, the used car bubble has deflated, and franchisors are struggling to fill new vehicle and parts orders. If your contract has the traditional run-of-the-mill force majeure clause offered by the factory, or no force majeure clause at all, you may have a difficult time arguing that the start of construction should be delayed. However, if you negotiated a force majeure clause that accounted for changes in economic conditions that could affect construction costs, you would be able to delay construction or terminate the contract altogether.
Force majeure clauses are important for any commercial contracts. You should read and understand them prior to signing any contract, and we recommend that you have an experienced attorney review them as well. Even a slight change to a force majeure provision could save a dealer substantial amounts of money in the long run.