Business Transactions

The Importance of Force Majeure Provisions in Contracts

Force Majeure is a common provision found in contracts. Literally, force majeure means superior or irresistible force in French.

What Is a Force Majeure Contract Provision

A force majeure contractual provision provides for any unforeseen and extraordinary circumstances that prevent you from performing your obligations. The event must be beyond your control or incapable of having been anticipated. For example, a force majeure provision would likely not apply to something like a server crash or your inability to secure necessary rights from a third party.

Here’s A Force Majeure Definition You Might Find in A Contract:

An event of Force Majeure is any act of God, natural disaster, war, riot, civil war, blockade, insurrection, terrorism, sabotage, acts of public enemies, civil disturbance, boycott, third party strike, or similar event that prevents or delays [the party] from rendering the specified services.

Some Examples

For example, a force majeure provision might apply to your inability to complete your contract duties due to one of the following:

• Hurricane Katrina
• 9/11 and its aftermath
• the Hollywood Writers’ strike
• a computer virus that affects computers nationwide

It is especially important to consider a force majeure provision if the contract obligates you to perform a task by a critical deadline or if your failure to meet a deadline carries penalties.

Securing Upfront Money

If you plan to finance your company by offering equity to private investors, you cannot use any investor funds until your offering closes. Until closing any money provided by investors should be held in an escrow account or in a bank account that is separate from your company operating account.

For example, if you have told investors that you will not close the offering until you have raised a minimum of $1,000,000 and to date you have raised only $500,000, you can’t touch the $500,000. The exception is if one of your early investors agrees to provide “upfront money”. By upfront money, I mean money that an investor has given permission to use prior to the full capitalization of the company.

The upfront money arrangement can be structured in a variety of ways including as an early subscription to the offering in which the investor waives the right of refund if the offering fails to close. If you use that mechanism, the investor waiving refund must acknowledge the possibility of losing all or part of her investment if insufficient funds are raised to complete the offering.

Another method of structuring an upfront money arrangement is as a loan which can later be converted to equity as part of the offering. Of course, remember that if the offering does not go forward, the loan is ostensibly repayable.

A New Small Business Online Community

The Small Business Administration's Business Gateway Program recently launched a government-sponsored online community for small businesses. SBA describes the online community as a place where business owners can discuss and share the information required for starting and running a successful business.

You can access the small business resource at the following link:
http://Community.Business.gov

The community is part of Business.gov, which is the United States government’s official website for small businesses and which was developed through the Business Gateway program. The Business Gateway program is a joint project of twenty-two federal government agencies. Its mission is to provide access to federal, state, and local information to business owners so that they can successfully start and operate their businesses and stay in compliance with applicable laws and regulations.

Should Your LLC Be Member-Managed or Manager-Managed?

After evaluating the advantages and disadvantages of each type of business entity structure, perhaps you ultimately decide to organize your company as a limited liability company (LLC). Next, you have to decide how to structure the management of your LLC. The LLC’s popularity is partly due to its adaptability and flexibility in accommodating management styles.

You can organize your LLC so it mirrors the management style of a general partnership. This would be a Member-Managed LLC. Each of the members in the LLC has an equal vote (or a vote consistent with their ownership percentage) in the LLC and each of the members is authorized to bind the company in a contract.

You can organize your LLC so it more closely resembles a corporation or a limited partnership. You can even have a Board of Directors. LLC’s selecting a corporate of LP management style might also elect to make the LLC manager-managed. In a manager-managed LLC, elected managers run the company’s day-to-day affairs. Managers can be members of the LLC but they are not required to be. This might be the route you choose if your company will have owners who do not actively participate in the day-to-day management of the company.

You can also choose a hybrid or combination management style. For example, most of the power might reside in one or a few members with the other members being silent on most matters but having a vote on major company decisions (e.g., the company going into a new line of business).

In most states, the default for LLC management is member-managed. If you want the LLC to be manager-managed, you must specify that in your LLC operating agreement. Some states also require that the election to be a manager-managed LLC be indicated in the articles of organization.

Changing Jobs Impacted by Non-Competes and Confidentiality Agreements

As news reports continuously tell us, many people have recently lost their jobs and are now seeking replacement jobs.

Employees, consultants, and business partners of technology-related companies often sign non-disclosure and non-compete agreements. Hence, technology workers seeking new positions and technology employers seeking new hires should verify that the new position will not violate a non-compete or confidentiality agreement with a former employer.

The enforceability of non-competes and confidentiality agreements depends largely on state law. While some states such as California refuse to enforce most non-competes, other states do enforce non-compete agreements as long as the non-compete is reasonable in scope.

Non-disclosure and confidentiality agreements are more universally enforced. In an employer-employee non-disclosure agreement or confidentiality agreement, the employer agrees not to disclose nor use the trade secrets and confidential information of the employer. So for example, if you hire a software programmer who previously worked for a competitor, you need to be certain that your new programmer doesn’t use or incorporate any of your competitor’s trade secrets into your work environment and products.

Execution Is the Most Important Step for Your Negotiated Contract

After weeks of negotiating with the other side, you’ve reached an agreement in principle. You’ve gone through several drafts of the contract and even incurred legal fees for an attorney review. So why is that contract now a worthless piece of paper? Because it was never properly executed.

Not only does your document need to be signed by all the parties, it needs to be executed properly. Proper execution means at a minimum doing all of the following:

Identify the contracting parties correctly. While this seemingly obvious suggestion might make you roll your eyes and say “Duh!”, there’s a surprising number of contracts that get this information wrong. Hence, if you’ve organized a company so you can have limited liability for your business activities, make sure the company – and not you – is the contracting party. If you or the other side is a company with subsidiaries and affiliates, make sure the contract names the correct subsidiary.

Insist on legibility. At some future point, you might need to prove the contract is valid and you’ll want to be able to identify the person on the other side who signed. Some people have signatures that are completely illegible. I’ve seen signatures that are nothing but a loop followed by a wavy line. If your counterpart has that genre of signature, it is even more imperative that she also print her name beneath the signature and provide a title if signing on behalf of a business entity.

Don’t forget the initials. Indicate whether the contracting party is a corporation, general partnership, limited liability company, or a solo proprietorship doing business under an assumed name. Do this by using the full legal name of the contracting party which may include an “Inc.”, “LLC”, or “DBA”.