When a key owner or partner can no longer participate, the ripple effects are felt throughout the entire business. Who makes decisions? Who steps into leadership? Does the ownership interest pass to a spouse or heirs—who may have no industry or business experience—or does it stay within the company? What happens to ongoing obligations under a drilling contract, JOA, or supply deal? Without clear rules, disputes can erupt, operations can stall, and value can erode almost overnight.
Well-crafted death, disability, and incapacitation clauses address these concerns head-on. They define what happens when a key party to a business or contract is no longer able to fulfill their obligations. These clauses appear in both:
● Ownership, Governance, and Internal Company Agreements – agreements among the owners, managers, and insiders of a company, such as Shareholder Agreements, Operating Agreements, Partnership Agreements, and Executive Employment Agreements.
● Commercial and Operational Contracts – contracts between the company and outside counterparties, such as a JOA, Farmout Agreements, Drilling and Service Contracts, MSAs, and Vendor or Offtake Contracts.
For Ownership and Governance Agreements, death, disability, and incapacity clauses outline how to handle succession planning, the resulting transfer of interests, and compensation. In short, they delineate predictable pathways for ownership, management, and compensation, reducing uncertainty for both the company, its stakeholders, and the affected family.
For Commercial and Operational Contracts, these clauses specify whether contractual obligations are terminated, suspended, or modified. They may also incorporate key person clauses, step-in rights, and reassignment or reversion rights. No matter the shape or form, the bottom line is that these clauses aim to give businesses clarity about how work proceeds when a key figure becomes unavailable.
The Three Scenarios
Death – Clauses can require the company to buy back the deceased owner’s shares, transfer them to the remaining partners, or pass them on to the heirs. In operational contracts, they may allow termination or replacement without penalty.
Disability – Prolonged disability can be just as disruptive as death. Clauses define what qualifies (e.g., inability to perform duties for 90 or 180 consecutive days) and provide interim protections while designating a pathway for continuity.
Incapacitation – Often referring to loss of legal competence (e.g., dementia, guardianship proceedings, imprisonment). Here, the critical step is defining incapacity clearly to avoid disputes and prevent leadership or performance gaps.
Key Tools in the Toolbox
Ownership and Governance Agreements (inside the company)
● Buy-Sell Agreements – Often funded by life insurance, these give the company or remaining owners the right (or obligation) to buy out the departing owner’s interest at a pre-set formula or valuation. They often ensure predictability and prevent the sudden appearance of “unwanted partners.”
● Succession Plans – These provisions identify interim and long-term leadership replacements.
● Funding Mechanisms – Insurance policies, disability buy-out coverage, or reserve funds provide liquidity to make ownership transfers possible without bankrupting the business.
● Executive Employment Agreements – These set clear standards for incapacity and termination benefits.
Commercial & Operational Contracts (across the table)
● Key Person Clauses – Key-figure clauses are used when a specific individual’s skills, reputation, or authority are central to the deal. These clauses identify essential individuals and require the counterparty to provide suitable replacements “of equivalent qualifications and experience” within a set timeframe.
● Step-In Rights – These are essentially business continuity clauses. They allow one party to temporarily take over another’s obligations to stabilize operations while the original party is unable to perform. For example, suppose a contractor is unable to fulfill its duties under a service contract (e.g., drilling or completion contracts). In that case, the operator may “step in” and hire a third party (or use its own crews) to keep the project moving.
Final Word
Planning for the unplanned isn’t pessimism—it’s professionalism. In energy and corporate deals alike, the unexpected loss or incapacity of a key person can derail projects, hinder decision-making, and erode value. By addressing death, disability, and incapacitation upfront—through Buy-Sell Agreements, succession planning, key person clauses, and step-in rights—you give your company and its counterparties the clarity they need to keep business moving.
At RR&A, we help clients build practical protections into both Ownership Agreements and Commercial & Operational Contracts, so operations stay steady even when life takes an unexpected turn. If your agreements don’t yet answer the “what if” questions, let’s talk—we’d be glad to help you put the right safeguards in place.
Disclaimer: The information and material on this website is general information about our practice and firm. This information does not offer specific legal advice and the use of this information does not create an attorney-client relationship with RR&A or any of its attorneys. The information on this website should not be used for legal advice, and persons should not act upon the information on this website without engaging professional legal counsel.
