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Terrorism Articles
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By Doug Fox, CCE and Scott Blakeley, Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

The terrorist attacks on our country on Sept. 11 are unprecedented as to their loss of life and impact. In light of the magnitude of these events and disruption to the economy, a credit professional must reconsider the terms of its documents in light of these events.

Some customers indirectly affected by the Sept. 11 events -- or some future event - may rescind their purchase orders for goods contending that the supervening terrorist event has fundamentally changed the agreement. The customer may contend that the event has made their performance impossible which allows them to rescind the purchase order with no obligation owing for the breached agreement.

The seller considers Article 2 of the Uniform Commercial Code and contends that it may sell the goods to another buyer and the customer must cover any losses the seller suffers, and the terrorist event is not an excuse to cover the loss. The credit professional should consider provisions in the sales contract that may limit this new uncertainty, such as:

1. Act-of-Terrorism Protections

a. Force Majeure

A force majeure provision, or Act of God, provides that performance may be excused or suspended in light of an unpredictable event. What event qualifies as a force majeure is key. What of a terrorist act? Under the terms of a contract, an Act of God will not be excused absent a contract provision to the contrary. To avoid the risk and uncertainty, the parties may agree to arbitrate whether an event qualifies as a force majeure event.

The seller may consider the following force majeure provision, that includes an act-ofterrorism exception:

" Seller shall not be liable for delays or failures in delivery, damage to Goods, or performance due to acts of God, governmental authority or public enemy, fire, flood, strike, labor disturbance, epidemic, war, terrorist event, riot, civil disturbance, power failure, embargoes, shortages in materials, components or service, boycotts, transportation delays or any other cause beyond Seller's control."

But what is a terrorist act? The buyer and seller may agree to arbitrate what constitutes a terrorist event.

b. Impossibility of Performance

Do the Sept. 11 events make the contract with your customer unenforceable? A customer may refuse to perform under the agreement, such as accept delivery of the goods, claiming that basic assumptions of the agreement are different today because of the terrorist acts. The customer may contend that the extraordinary events of Sept. 11 that makes performance impossible, and is a defense to performance.

c. Act-of-terrorism exclusion

The Sept. 11 acts have resulted in exclusionary provisions from insurance companies, such as:

Terrorism Exclusion

" Notwithstanding any provision to the contrary within this insurance or any endorsement thereto it is agreed that this insurance excludes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any act of or threat of or fear of terrorism (whether actual or perceived) regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

For the purpose of this endorsement an unlawful act of terrorism means an act, including but not limited to the use of force or violence and /or the threat thereof, of any person or groups) of person, whether acting alone or on behalf of or in connection with any organizations) or government(s), committed for political, religious, ideological or similar purposes including the intention to influence any government and/or to put the public, or any section of the public, in fear.

This endorsement also excludes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any action taken in controlling, preventing, suppressing or in any way relating to any act of or threat of or fear of terrorism (whether actual or perceived). If the Underwriters allege that by reason of this exclusion, any loss, damage, cost or expense is not covered by this insurance the burden of proving the contrary shall be upon the Assured.

In the event any portion of this endorsement is found to be invalid or unenforceable, the remainder shall remain in full force and effect."

Expect this type of provision in the future. To exclude this type of provision, a business may have to pay more.

2. Insurance

Insurance may be used to shift risk. The issue for the Sept. 11 events is whether insurance may provide some protection - whether direct or indirect - to businesses for losses suffered as a result of the Sept. 11 attacks, and coverage for any future acts. Customers, as well as the credit professional's business, may carry insurance that provides for coverage for business interruption losses. Whether insurance coverage protects against indirect losses, i.e. where the business has not been struck by terrorist act but has been significantly affected by downturn of business because of the terrorist act, depends on the terms of the insurance policy.

Insurance policies cover many forms of losses, and must be reviewed to determine the nature of the policy, including whether the policy covers all risks, or only those risks expressly named. A pre-Sept. 11 probably does not contain a provision that excludes coverage for terrorists acts. However, the policy may exclude coverage for an act of war. Courts have interpreted an act of war as an attack by a sovereign government. The Sept. 11 attacks should be excluded from the act of war exclusion, as they were not attacks by a sovereign nation.

The credit professional may consult with an insurance broker to review the amounts and types of insurance to be carried. In the future, it is likely that creditors can now expect insurance carriers to share risk; not absorb it. Also, in certain cases, it may make sense that the insurance requirements flow down to vendors or subcontractors.

3. Indemnity

Indemnity may also be used by the credit professional to shift risk of loss from a terrorist act. Indemnity allocates particular risks between the parties, wherein one party agrees to hold another partially or wholly harmless from the consequences of a terrorist act, usually damage to property or personal injury (including death). The seller may want to cap the indemnity to the value of any applicable insurance; the buyer may not want to cap the liability.

4. Liquidated Damages

The vendor may include a liquidated-damages clause in the credit agreement. Under the liquidated-damages clause, the agreement provides the amount of damages in advance, which can lend to more certainty for the parties. Given the uncertainty of the economy and the threat of disruption from terrorist acts, the liquidated-damages provision may be used to limit damages in the event of a specific default, such as late delivery:

" LIQUIDATED AND ACTUAL DELAY DAMAGES. In the event of Customer's failure to purchase Items in accordance with the schedule established in this Agreement, as modified by authorized time extensions and/or mutually agreed revisions, Customer shall be liable for all delay damages payable by [__________] to Supplier as the proximate result of Customer's delay in purchases from Supplier. Any damages resulting from this provision will be limited to $[________]."

5. Contractual Limitation of Liability Like a liquidated damages clause, the buyer and seller may contract to limit liability to add certainty to the sale and risk of loss. The following sets forth limiting language:

" In no event shall either Buyer or Seller be liable for anticipated profits or for incidental or consequential damages arising out of either party's performance or failure to perform hereunder. With the exception of liquidated damages of which Seller's liability shall be limited to [______%] of the purchase order value, neither party's liability on any claim of any kind or for any loss or damage arising out of or in connection with this order shall in any case exceed that portion of the order price allocable to the goods or services or portion there of which gives rise to the claim. Any action by either party against the other party from this order, including either party's breach thereof, must be commenced within one year after the cause of action has occurred or shall be deemed waived."

6. The "Battle of the Forms" Companies that acknowledge purchase orders for goods with sales order acknowledgements run the risk of the "battle of the forms;" with each party's documents passing one another. In the post Sept. 11 environment, the credit professional must be mindful of a customer's new terms and attempts to limit its liability.

In the event that the seller's sale order acknowledgement contains terms and conditions different from the buyer's purchase order, then the two parties will be considered to be engaged in the "battle of the forms" - an unsigned contract which would then likely be interpreted by Article 2 of the Uniform Commercial Code.

7. Warranty and Limitation of Liability

From the seller's view, the contract will exclude the implied warrantees of merchantability and fitness for a particular purpose; as well as special, incidental and consequential damages. However, exceptions may apply, such as when the buyer relies upon the seller's product design intended for a specific use.

Most seller's try to limit their liability to the value of the order which gave rise to the claim (except in the event of personal injury (including death) or damage to property; in which case the seller's best hopes would be to limit the liability to the value of any available insurance then in place, or mandated by law).

Each party's liability to the other may be affected in ways unimaginable prior to Sept 11 - particularly with any underlying documents which may have been drawn up prior to Sept 11.

Douglas G Fox, GSCFM, CCE is a member of Mid-Atlantic NACM and is active in the Greater Delaware Valley Region and Philadelphia area.

Scott E. Blakeley is a principal of Blakeley & Blakeley LLP where he practices creditors' rights and bankruptcy law. He can be reached at sblakeley@bandblaw.com

 
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