Force Majeure is a French term that translates literally to superior force. In the context of business contracts, it refers to a specific clause that frees both parties from liability or obligation when an extraordinary event occurs.
These events are circumstances beyond the control of the parties involved. They prevent one or all parties from fulfilling their contractual duties.
For a startup founder, this is not just legal boilerplate to ignore. It is a critical component of risk management.
When you are building a company, you rely on a web of agreements. You have contracts with suppliers, landlords, software vendors, and perhaps clients. If a disaster strikes, you need to know who is on the hook for what.
The Criteria for Qualification
#Not every bad event qualifies as force majeure. The standards are generally quite high. For a clause to be triggered successfully, the event usually must meet three specific criteria.
First, the event must be external to the parties involved. It cannot be a result of your own negligence or poor planning.
Second, the event must be unforeseeable. If you build a warehouse in a flood zone, a flood might not count.
Third, the event must render the performance of the contract impossible. It is not enough for the performance to merely be difficult.
Common examples often cited in these clauses include:
- Natural disasters like earthquakes, hurricanes, or floods
- Wars or acts of terrorism
- Government actions or sudden changes in laws
- Labor strikes or industrial action
Review your vendor contracts immediately.
Distinguishing from Commercial Hardship
#There is a vital distinction founders must understand. Force majeure is different from commercial hardship or impracticability.
Commercial hardship occurs when performing the contract becomes significantly more expensive or difficult than anticipated. However, it is still technically possible to fulfill the agreement.
Force majeure requires impossibility.
If the price of raw materials triples, that is a hardship. It hurts your margins, but you can still buy the materials. You likely cannot invoke force majeure to get out of the contract.
If the government bans the import of those raw materials entirely, that is likely force majeure. Performance is now illegal or impossible.
Founders often conflate these two concepts. Mistaking a bad financial situation for a legal exit ramp can lead to expensive litigation.
Scenarios for Startups
#Consider how this applies to your specific startup environment. You must look at both sides of the table.
If you run a SaaS company, does your Service Level Agreement (SLA) account for server outages caused by massive geopolitical events? If AWS goes down due to a war, are you liable to your customers for the downtime?
If you are a hardware startup, look at your manufacturing contracts. If a pandemic shuts down the factory in China, does the manufacturer owe you damages for the delay? Or does their force majeure clause protect them?
Office leases are another common friction point. If a city mandate forces everyone to work from home, are you still required to pay rent for an office you cannot legally occupy?
These are the questions you must ask before the crisis happens. You need to review your current contracts. Determine what is defined as an extraordinary event. Check if pandemics or government shutdowns are explicitly included or excluded.
Building a company requires resilience. Understanding where your liabilities stop and start is the foundation of that resilience.