Note: Brett Schoell wrote this post, which was originally published on the ktMINE blog. Republished here with the author's permission.
As COVID-19 continues to shift everyday life and the global economy, accounting professionals are looking for information to help guide their clients through these trying times. These organizations will lean on their in-house experience and should pay close attention to the lessons learned during the 2008 market crisis. Force Majeure is a clause included within an agreement that is commonly referred to as the “Act of God” clause. The clause is generally intended for acts of nature that were unpredictable such as floods, fires, or earthquakes but are not limited to these examples. Force Majeure clauses use specific language in transactions that can absolve the involved parties of their responsibilities. This allows the opportunity to renegotiate when an event occurs that is outside the control of either party.
In order to better understand Force Majeure contracts, companies should use data to help draft clear language in relation to potential pandemics, especially in light of the current COVID-19 situation. Thankfully, license agreement and other types of agreements provide a window into how companies are addressing this crisis. Contracts referencing Force Majeure and pandemics (or similar biological issues) should be leveraged to help understand how to structure contracts in the future.
We are hearing of many cases entering the courts where parties are claiming the contract needs to be voided or modified due to the nature of the pandemic citing it as a Force Majeure reason. However, just because a Force Majeure clause is present, there’s no guarantee it will cover this specific instance depending on the clause language. In fact, the only way to fully understand how the clause is constructed would be to review the contractual language to understand the extent of coverage.
With the varying levels of economic uncertainty brought on by the COVID-19, companies should protect themselves by including Force Majeure language in their intercompany agreements that removes any ambiguity and is not overly broad. Ultimately, ensure the agreement meets the business needs and risks. The most effective way to ensure the language being drafted is appropriately structured would be to analyze existing clauses.
Are you certain your intercompany agreements protect your business and give you the support, protection, and flexibility to act in the current environment? Be on the lookout for a follow-up blog providing a more in-depth analysis and use cases of what we are seeing within our agreements dataset.
For more information about the ktMINE Royalty Rate Comparables & Full Text Licensing Agreements Database, please visit us online or feel free to contact us with any questions. Finally, be sure to stay informed on the latest news and updates involving coronavirus and the business valuation community by visiting our coronavirus resource page.
About the author: Brett Schoell: As lead development and account manager for ktMINE’s Transfer Pricing, Valuation, and Forensics markets, Brett supports clients’ research efforts to reduce the time needed to make critical business decisions for our IP platform.