Preparing For That Which Cannot Be Prepared

risk
force, majeure, contract, risk, busine, management, provisions, munns, insurance, proactive

In the prior article in this series entitled https://www.boginmunns.com/business-stops-in-its-tracks/ the interrelated topics of proactive risk management and insurance – particularly business interruption coverage – were discussed in detail.

Long story short about proactive risk management:

The core tenet of proactive risk management is that a better use of one’s physical, fiscal, and human resources is to take what one has learned to-date, to apply that maturing knowledge-base against the constantly evolving business, economic, regulatory, and scientific environments, and to develop measures to address repeat, incremental, or drastic changes in those environments, and, again and perhaps most important, to implement those plans on regular routine, and pre-scheduled basis (often with the support of checklists), at all times with a keen eye towards being flexible to update those plans to meet further environmental changes. 1

As also argued in the prior article business operators are well put to ‘partner’ proactive risk management activities with reactive risk management devices, which are intended to attend to loss and damage after they have occurred. Insurance, a specific type of contract, is a commonly used reactive risk management tool.

Contractual provisions can be used for both proactive and reactive risk management purposes. Examples of proactive risk management contract provisions involve matters such as maintenance and repair obligations and insurance procurement. Examples of reactive risk management provisions, in turn, concern issues such as dispute resolution and insurance award disbursements. In all these cases, the relevant contract terms allocate rights 2, responsibilities 3, and privileges 4 among the parties to the contract. Matters which can be allocated inside a contract include financial, operational, and risk processes.

And now to the ongoing Coronavirus/COVID-19 pandemic, which has been addressed numerous times in this series. 5 Natural phenomena, such as flu, hurricane, and (now) red time/blue algae seasons, have become largely environmentally predictable (hence the use of the term seasons). 6

Pandemics, by their wide-scale and non-cyclical nature, however, are not particularly predictable. 7 Which makes meaningful planning, with affiliated advance deployment of human, financial, and material resources, particularly challenging.

One way in which contracts can address the unpredictable is by the use of a force majeure clause. (Or, as my noted actor/comedian/impressionist/painter/animal rights activist Roger Kabler 8, prefers to call it, a “force du jour” clause…) Force majeure is defined as “an event that no human foresight could anticipate or which, if anticipated, is too strong to be controlled.” 9 Because these events are realistically unforeseeable, they result in a suspension, or sometimes even termination, of the obligations of one or more parties to perform their respective functions under a contract related to the force majeure event.

The contract provisions which spell-out the force majeure terms are often considered standard or ‘boilerplate’. However, as with all provisions in a contract – with the exceptions of those which are mandatory or prohibited by statute, rule, regulation, or case law -, force majeure clauses are negotiable. As a result, while the situations which give rise to a force majeure event are unpredictable as to their particular nature, cause, outcome, or scope, the impact on the parties to the contract can be tailored to meet their ongoing interests and needs.

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The following is a typical force majeure provision from a commercial lease (as used by this writer):

Any prevention, delay, or stoppage of work or other obligation to be performed by the Landlord or the Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes, Acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualties, or other causes beyond the reasonable control of the party obligated to perform under this Lease, will excuse performance of the work or obligation by that party for a period equal to the duration of that prevention, delay, or stoppage. Nothing in this paragraph will excuse or delay the Tenant’s obligation to pay Rent or other charges under this Lease.

Notice the scope of potential force majeure events outlined in “Any prevention, delay…civil commotion, fire”. This recognizes that in most cases those events are unpredictable, and assuredly unplanned. Then see the key clause “beyond the reasonable control of the party obligated to perform under this Lease” which shows the inherent lack of environmental predictability or foreseeability underlying the disturbance. Finally, focus on the use of the word “excuse”, which means that when the force majeure incident lifts, the performance obligations are automatically restored.

It is currently a ‘hot topic’ as to whether pandemic-caused failures of performance are protected by force majeure clauses. First, those clauses must actually be included in a contract. (Recall the mention of negotiability above.) And, then, the scope of the provision must be broad enough to encompass an unplanned phenomenon like a pandemic. Careful attention must be paid to the preparation, review, and negotiation of force majeure clauses. They are not to be overlooked as simply lawyerly ‘mumbo jumbo’ and space-fillers– they do, in reality, have a material impact to the performance relationship between the parties to the subject contract.

But – as stated in several television commercial – ‘wait, there’s more’. 10 The last sentence of the force majeure paragraph above, as in many such contractual provisions, includes a specific carve-out requiring continued and timely payments. Which brings this topic full-circle to the business interruption insurance discussion. If revenue flow slows or even stops, there must be a ‘back stop’ such as insurance, reserves, or other savings to ‘pick up the slack’ during the performance hiatus.

As with all things planned and unplanned, a business’ ‘eye cannot be taken off the ball’ regarding planning for the unplanned. Perhaps not much heed was given to force majeure provisions in the past. The time for reckoning has on that front has certainly arrived in light of the pandemic.

For information about Bogin, Munns & Munns’ own response to Coronavirus readiness.
Note: Citations are given to third-party sources to respect the original authors’ copyrights.

 

1 https://www.boginmunns.com/business-stops-in-its-tracks/.

2 Freedoms one has to do an action and protections against actions being taken.

3 Actions one must do, must not do, or certainly should not do.

4 Granted abilities one can do.

5 See https://www.boginmunns.com/florida-prepares-to-reopen/, https://www.boginmunns.com/business-stops-in-its-tracks/, https://www.boginmunns.com/another-timely-coronavirus-covid-19-update-plus-one-more/,

https://www.boginmunns.com/additional-resources-for-florida-businesses/, https://www.boginmunns.com/a-brief-note-for-floridas-individuals-families-and-businesses-about-extensions/, https://www.boginmunns.com/coronavirus-state-and-federal-resources-to-florida-laid-off-and-furloughed-workers/, https://www.boginmunns.com/another-important-coronavirus-covid-19-pandemic-resource-the-paycheck-protection-program/, https://www.boginmunns.com/the-coronavirus_pandemic-resources-for-floridas-businesses-families-and-individuals/, https://www.boginmunns.com/life-in-the-times-of-the-coronavirus-week-2/, https://www.boginmunns.com/life-in-times-of-coronavirus/.

6 See, for example, https://www.boginmunns.com/starting-2019-with-safety-mindset-hurricanes-flu-planning/, https://www.boginmunns.com/red-tide-returned/.

7 For a list of several pandemics and their natures, see https://en.wikipedia.org/wiki/Pandemic.

8 https://en.wikipedia.org/wiki/Roger_Kabler, https://www.imdb.com/name/nm0434079/, https://www.facebook.com/1robinwilliams/, https://www.facebook.com/Roger-Kabler-Artist-Page-148776588515827/, https://robinexperience.com/. For those who remember, he was also the famous television “Zima Guy” – see https://www.youtube.com/watch?v=SbvKGdFlSQ0.

9 Source: https://legal-dictionary.thefreedictionary.com/force+majeure, citing in turn to Collins Dictionary of Law © W.J. Stewart, 2006.

10 https://www.youtube.com/watch?v=i_RLYSaPvak.
– For more information, call Philip N. Kabler of the Gainesville, FL office of Bogin, Munns & Munns at 352.332.7688, where he practices in the areas of business, banking, real estate, and equine law. He has taught business and real estate law courses at the University of Florida Warrington College of Business Administration and Levin College of Law and is the President-Elect of the Eighth Judicial Circuit Bar Association.

NOTICE: The article above is not intended to serve as legal advice, and you should not rely on it as such. It is offered only as general information. You should consult with a duly licensed attorney regarding your Florida legal matter, as every situation is unique. Please know that merely reading this article, subscribing to this blog, or otherwise contacting Bogin, Munns & Munns does not establish an attorney-client relationship with our firm. Should you seek legal representation from Bogin, Munns & Munns, any such representation must first be agreed to by the firm and confirmed in a written agreement.

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