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 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
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:
" 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.
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.
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
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
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
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