Contracts, In-House Counsel, Practice Pointers

House Rules: Catastrophic Events…

Talking to my mother in Edmond, Oklahoma on Monday afternoon took a turn for the scary when she told me that Moore had just been hit by another very serious tornado and another one was (click)….

It took me two hours to reach my brother, who also lives near Oklahoma City, and who ironically enough works for a large cellular company. After my ranting about the lack of service that scared the bejeezus out of me, he informed me that while all was well with my family, Moore was devastated — again. I am guessing that some readers were around eight years old in 1999, when Moore was last left resembling Hiroshima in a Technicolor film. I am certain that some residents thought a once in a lifetime storm would never happen again, but it seems that Moore sits on some sort of Hellmouth. That’s the thing with tornadoes, they come out of the blue, there’s nothing you can do to stop them, and your only protection when you have no basement, is to hunker down in a bathtub and pray — and that’s if you’re lucky. It is the same thing with business catastrophes. And while that segue might seem rough at first blush, put in the context of this week’s damage, it makes a certain amount of sense…

A report issued today states that there are approximately 2.6 billion dollars in damage on the ground in Moore right now. Any number of contractual arrangements, legal documentation, business operations, etc., ceased to be efficacious as of Monday at 4:56. This is why we place force majeure clauses in contracts, and this is also why contingency plans are absolutely necessary. I presume that smart lawyers in that part of the country know how to ensure that such clauses and plans are de rigeur. Two once in a lifetime tornadoes are certainly rare, but most of the Midwest experiences some sort of tornado season from April through the summer. The East Coast has hurricanes and the occasional earthquake, while the West Coast regularly experiences tremors. So, force majeure and business continuity plans need to be given proper consideration.

When negotiating force majeure, one should be cautious not to treat it as a throwaway clause solely dealing with Acts of God. This clause should define your rights and responsibilities should something occur that prohibits your company from performing under a contract. This should include providing timely notice to the Vendor/Customer, a suspension (or termination without penalty in the event of a total loss), and a contingency for making the parties whole at the termination of the event. Sometimes, this can be an agreed upon delay in performance by both parties, until the damaged entity is operational.

There is also a public relations aspect to these situations. Does your company really want the publicity of going after payment from an entity that has been destroyed? Might it not make more sense to write down, or off, the income or expected revenue and look like a good business partner? As with every law-related answer, it depends. Fact specific events such as force majeure occurrences require a careful analysis of variables such as lost income versus lost reputation.

Business continuity can also go both ways — for the damaged party as well as the expectant party. I have been seeing more and more continuity requirements in contract paper from our customers. Many want to ensure that if something goes wrong, we have a plan in place to continue performance. Some are required by regulation to ensure that we have such plans in place. There are also folks internally tasked with ensuring compliance with continuity. Once a year I am surveyed about my technology requirements to continue to perform my job in the event of a catastrophe.  By adhering to a practice of attending to these issues, when catastrophe does strike, and chances are it will at some point at some level within your company, you will be prepared to carry on.

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