Author Archives: Bovarnick

These are unprecedented times. While virtually nothing is certain, one thing that most people agree on is that there will be a wave of bankruptcies. What should you do if a company you deal with files? Here are a few things to know.

  1. The Automatic Stay – As soon as a company files for bankruptcy (it is called a debtor or debtor-in-possession), any collection efforts against it (whether itis a demand letter, a lawsuit or anything else) must immediately stop. The purpose of the automatic stay is to give the company breathing space to figure out what it is going to do. The automatic stay is most likely the main reason why companies will file. As a creditor, you can ask the court to grant relief from the stay. There is a better likelihood that you will be granted relief if you are a secured creditor. While unsecured creditors can get relief, it is more the exception, rather than the rule.
  2. First Day Motions – As soon as a company starts the bankruptcy case, it files motions known as “first day motions.” These are motions that will let the company continue to operate, by paying wages owed to employees just before the filing, permitting the company to utilize cash to pay its post filing bills and so forth. Even though you will get formal notice of the filing, that will not happen for a few weeks. By then, the first day motions have already been ruled on. If you hear a rumor that a company you deal with has filed, contact your lawyer immediately. Your attorney will be able to go onto the federal court dockets to see whether the case was filed. Why is this important? There are a number of reasons. For example, if you are what is known as a “critical vendor,” you may be able to get paid what you were owed when the case was filed. The standard to be a “critical vendor” is high, but if the company files that kind of a motion, you should try and have your business included.
  3. Cash Collateral – If a company borrows money before bankruptcy, the lender will insist on some type of security. This security normally will include, among other things, liens on real estate and accounts receivable. Once the company files for bankruptcy, it can only use cash either with permission of the lender or with the approval of the court. One of the first day motions will be a request to use cash collateral. The motion will include a budget. You should have your lawyer ask the debtor’s attorney to see the budget, to see if the debtor intends to pay you going forward.
  4. File a Request for Notices – It is difficult for a non-lawyer to monitor a bankruptcy case. If your lawyer files a request for notices, they will receive everything filed in the case via email.
  5. Schedules – Early on in the case, a debtor must file what are called its Schedules. The Schedules are a listing of what a debtor owns and what it believes it owes. It is very important for your attorney to review the Schedules to make sure (1) your claim is included and (2) it is for the right amount. If the amount your company is owed is either not included or included for the wrong amount and you do nothing, what the debtor says in the Schedules will form the basis for the amount you will receive. There is also a Schedule listing all of the debtor’s contracts. The debtor gets to decide if it wants to keep or reject the contract. While that happens later in the case, under certain circumstances, you can ask the court to require the debtor decide earlier. There are specific rules (and timing) for leases of non-residential real property.
  6. Proof of Claim – In order for you to tell the debtor how much you believe you are owed, you will need to file a proof of claim. This is not something that has to be done immediately and you will receive formal notice of the deadline of when to file, as well as how it is filed.
  7.  Reclamation – IF THIS APPLIES TO YOUR COMPANY IT IS IMPORTANT BECAUSE THERE IS A NARROW WINDOW. Reclamation refers to the right of a seller to reclaim goods sold to a debtor while the debtor was insolvent. The Bankruptcy Code sets out the specific process and timing that has to be followed in order to be able to reclaim your goods. If your company is in this position, it is important that you notify your attorney immediately of the bankruptcy.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

No small business wants to file for bankruptcy. Even though a chapter 11 filing allows for reorganization, not having to file is the preferred course. What about in the age of Covid-19? While the current state of affairs, as well as the new Small Business Reorganization Act, makes a chapter 11 a better option, good planning may be able to keep your company from having to file.

Approximately 630,000 retailers have been closed since mid-March. There have been countless reports and articles that the next wave of bankruptcies will be a virtual tsunami, including such well-known names as J. Crew (who filed in May 4), John Varratos (May 6), Gold’s Gym (May 6), Neiman Marcus (May 7), the XFL, Diamond Offshore and Victerra Energy, just to name a few.

Over the first 6 weeks of the shutdown, not many large companies filed. We are now starting to see more and more every day. Why all of a sudden? Because these large companies have spent time preparing to file and are now ready. Your company should be taking the lead from the large companies. That does not mean that you should file, but in taking steps to figure out your best option. So, if you need to file, you will be ready.

As the late, great UCLA basketball Coach, John Wooden, once said, “when you fail to prepare, you are preparing to fail.” This is true whether you are preparing to play basketball or plotting out the future of your company. Pre-bankruptcy planning is the norm among large companies. Often, these companies will have the case effectively done before they ever file, by having a pre-packaged bankruptcy, a pre-negotiated bankruptcy or an agreement in place to sell all of the assets. Even if a company intends to reorganize in chapter 11 and exit as an operating entity, there is still a great deal of planning that takes place before the filing. The company is speaking with its lenders to see if the loan documents can be modified. The company will arrange for a “bankruptcy loan” known as debtor-in-possession financing (if you run out of cash in bankruptcy, the case is generally over). Companies that have multiple locations need to decide which they want to keep (this is one of the things Gold’s Gym did). Even with those they want to keep, they are likely speaking with the landlords.

Planning is “not just for the other guy.” In many respects, pre-bankruptcy planning is more important for a small business, particularly now.

When I sit down with a client that is contemplating filing for bankruptcy, I always ask for the exit strategy. Then I work with the client to plan how to achieve that strategy. Whenever possible, we don’t file until the exit strategy is thoroughly flushed out.

What are some of the things the small business should be doing right now? Here is a partial list:

  1.  First, apply for the PPP (or any other government) funding. It is becoming clear that
    you will be denied PPP funding if you apply for the funding after you file. It is also
    clear that, if you apply before you file and are funded after you file, the funding will
    not be authorized. Also, this influx of cash may be just what you need to be able to
    stay out of bankruptcy.
  2.  Make a number of sets of new financial projections. The first should be short term,
    no more than 2 months and should be based on the current reality and assuming a
    slow ramp up. The second one should be 6-12 months and should be based on
    realistic assumptions.
  3. What steps will you need to take to increase revenue; first, to the pre-shutdown level
    and second, to whatever level you think you can attain?
  4. Where can you cut expenses?
  5. Speak with your vendors about stretching out terms.
  6. If you haven’t already done so, consider drawing down on your line of credit so you
    will have extra cash on hand.
  7. Take a hard look at all of the contracts and decide which ones need to be kept, which
    ones are no longer needed and which ones can be replaced.
  8. Look at your employees. How many will be needed going forward?
  9. Talk to your landlord about redoing the lease. If April rent was not paid, see if you
    can pay it over time or at the end of the term.

Meeting with a bankruptcy attorney makes sense. They are trained in keeping companies out of bankruptcy, not just in filing cases. This person will be able to review your strategy and come up with questions and obstacles you may not have considered.

One of the best pieces of news is the Small Business Reorganization Act. This is a game changer for small companies (for the next year, that means companies with nor more than $7,500,000 in debt). The new law was structured to get the company in and out of bankruptcy within about 4 months. Not only is it fast, it keeps attorney’s fees down. A win-win for the company. While bankruptcy will provide time to have the exit strategy approved by the court (known as a plan of reorganization), time is not necessarily your friend. There are some hard deadlines. For a small business utilizing the new law, there is a 90 day deadline to file the plan. There are other deadlines for cases not under the new law, such as a 120 day deadline to decide whether you will keep or get rid of your real estate leases.

Even if you don’t expect to have to file, you should still be going through these steps to give your business every chance to survive.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

Since the nationwide shutdown, many people have been waiting for an avalanche of bankruptcy filings under Chapter 11. As of the writing of this article, there have only been a few notable filings, such as the XFL, Frontier Communications and True Religion. While there has been a lot of anticipation about filings by large retailers, such as Neiman Marcus, Lord & Taylor and JC Penny, none have filed. Some have suggested that the delay is the recognition that there is no advantage to filing at this time, because lenders and other creditors have limited options. For example, many state courts are closed, so while lenders could declare a default under loan documents, they cannot start a lawsuit. However, while these companies are not yet filing, that doesn’t mean they are doing nothing. Rather, they are taking steps that will either keep them from having to file or aid them if they do file. Small businesses should be doing the same thing.

Since the scope and duration of the shutdown is still unknown, it would be difficult for any company to be able to come up with its exit strategy. When a large retailer files for bankruptcy, even if it going to reorganize, it will likely need to reduce its footprint, both in terms of locations and inventory. The way that happens is some type of deep discount sale at the stores. However, since the stores are closed, those types of sales cannot take place.

Also, once a retailer (or any company) files, it will need to start paying its ongoing expenses (called “administrative expenses” in bankruptcy). By not filing, it can delay paying these expenses.

What is happening for a number of the retailers is the lenders are offering “lifelines,” either in the form of additional financing or debt forbearance agreements, which will delay the restructurings, whether in court or out of court.

Small businesses should be doing the same thing. Right now, lenders will most likely be amenable to assisting the borrower. This is also a good thought for anyone who you owe money to or who owes you money. Planning now will make a difference down the road.

Small businesses should also wait to file for bankruptcy under the Small Business Reorganization Act. There are a number of reasons for this, one of the most significant being that the filing starts the 90 clock on filing the plan of reorganization. Better to wait until there is clarity as to what will constitute the “new normal.”

The same thing applies to landlords. Anecdotal evidence appears to be saying that the landlords are less flexible than the lenders. This may be because the landlords are pressured to continue paying their debt service. If so, the landlords should be making the same calls to their lenders. Also, you should check to see if your state or local government has issued any guidelines regarding rent payments or evictions. While most of these have been limited to residential tenants, you should check.

The other thing that small businesses should be doing is preparing short term projections. It is suggested that companies prepare projections going out 2 months, based on current revenue and expenses. It appears that the economy will start up, at least to a certain extent, within the next month. At that time, the projections can be revised, at which time the decision as to how to move forward can be made with better knowledge

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

We all find ourselves in a similar place with our businesses. Best case scenario is your business is able to continue operating relatively normally (while you are home). More likely is you are able to operate, but at a reduced level. There is also a possibility that you have stopped operating. What should you be doing at this time? Here are some thoughts.

1. Apply for all possible government programs.
This is one thing we hear all the time. While you can try to do everything on your own, I would suggest contacting someone who may have a better handle on the specifics. This could be your banker (if you can reach that person), or someone else who spends a lot of time looking at the various programs. I know I receive numerous emails each day from sources including law and accounting firms, together with “blast emails” from persons that I am not familiar with. At a minimum, you should read those emails. Second, if you are getting an email from one of your trusted sources, contact them. Most important, BE CAREFUL on clicking on any link. While it may look okay, it may be spam, phishing, or worse, a virus.

2. Look at your insurance policies
Look at your insurance policies and see what it provides (if anything) regarding business interruption. Call your insurance broker or agent and discuss it with them.

3. Cash is king.
Of course, we know that revenue has been (and will continue to) go down, certainly in the short run. You should do everything you can do to conserve cash. If you placed orders before the shutdown, see if they can be cancelled. Before you do this, check to see if there is any kind of penalty for cancellation. If you are not sure, contact your attorney and have them review the contracts. Look at your A/R and see what you can do to collect old receivables. Enter into terms with these

people. Provide a discount for payment. If you take credit cards, advise your customers that they can pay you that way.

4. Prepare new financial projections
If you prepared financial projections late last year or early this year, they are clearly out of date. Go through the process of creating new projections. How much cash do you currently have? How much do you need to continue operations? Look carefully at your expenses and see which can be reduced or eliminated.

5. Line of credit
If you have a line of credit that you have been saving for a “rainy day,” this is it. You should consider drawing down on it, even if you don’t currently need it. That is why you got it in the first place.

6. Speak with banks, landlords and others
If you have long term debt, you should call your banker to see what can be done to modify your loan agreements or to see if there can be a moratorium on the monthly payments. At the same time, your banker may have access to information that you don’t have and may be a valuable resource. You should also call your landlord.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

Under the CARES Act, the debt limit to qualify to be a debtor under the new small bankruptcy law has been increased to $7,500,000 for the next year, up from $2,725,625. The new law (known either as the “SBRA” or “Subchapter 5”) is a way for small businesses to go through reorganization in chapter 11 within months (instead of years), with it costing much less.

The increase in the debt limit will open up the doors to many, many more businesses to take advantage of the expedited bankruptcy process. Now that the CARES Act is law, this increase may be a game changer for many small businesses.

This article will explain the primary differences between the way bankruptcy works for large companies, how it had worked since 2005 for small businesses and how it will work under the new law.

What is Bankruptcy?
When most people think of bankruptcy, they think of the company going out of business. This is chapter 7. What happens in a chapter 7 is a “chapter 7 trustee” is appointed by the Office of the US Trustee (part of the Department of Justice). That person takes the keys from the owner, sells all of the stuff and distributes the money as set forth in the Bankruptcy Code. Chapter 7 applies to both individuals and businesses.

There is also Chapter 11. This is reorganization. In a chapter 11, the end game is for the company to come up with a business plan (called a plan of reorganization) that describes how much it will pay existing debt and how it will operate going forward. If approved by the Court, it becomes binding on the company and all of its creditors. A company can also liquidate in chapter 11. The main difference between liquidation in chapter 7 and chapter 11 is that, in the chapter 11, the owners still run the company and they are in charge of the wind down.

The Automatic Stay
The purpose of a bankruptcy is to give the company “breathing space” to figure out its plan of reorganization. As soon as a company files for bankruptcy, the “automatic stay” goes into effect. This automatic stay does a number of things, most importantly stopping creditors from trying to get paid from the company (whether there is already a lawsuit going on or not).

Also, with certain exceptions, once a bankruptcy is filed the company is not permitted to pay any of the money it owed prior to the filing of the case. So, a bankruptcy is a good way to stop paying the creditors, which can be valuable when cash is limited.

Executory Contracts and Leases
One of the things a debtor gets to do is to examine all of its contracts and decides which ones it wants to keep (called assumption) and which ones it wants to get rid of (called rejection). The standard for assumption and rejection is the debtor’s business judgment. If a contract is assumed, the debtor will have to pay any arrearages (or show how they will be paid). The debtor has until the end of the case to make these decisions. With respect to leases of non-residential real property, there are different rules as to when the decision to assume or reject must be made.

The Plan of Reorganization
The plan of reorganization is the “business plan” for the company going forward. It has two primary goals. First, it advises the preexisting (prepetition) creditors how much of their claim will be paid, how it will be paid and over what time frame. Second, it describes how it intends to operate going forward. The plan will include projections going out a number of years.

A plan of reorganization divides the creditors into “classes,” depending on the type of debt. For example, a bank with a secured debt (such as a mortgage) would be in one class, taxing authorities would be in another and trade debt (called general unsecured debt) is in another. There can be (and usually are) others, but this is enough to get an understanding.

A court can approve a plan one of two ways. If all of the classes agree, the plan is “consensual.” If at least one class disagrees, then the plan can only be approved through something called “cram down.” While there are certain standards for cram down, at its core, the company must show that the creditors are being treated “fairly and equitably.”

A Brief History of Business Bankruptcy for Small Businesses
Chapter 11 is inherently time consuming and expensive. It works fairly well for large companies, such as General Motors. However, it is difficult for small businesses. To try and fix this problem, in 2005 Congress passed what is known as BAPCPA (the Bankruptcy Abuse and Consumer Protection Act of 2005). Part of this law was to streamline the process for small businesses (defined as a company with less than $2,500,000 in unsecured debt). The goal was to make the process take less than a year. While much better than it had been, it was still a long time.

Under BAPCPA, the company had to file its plan within 300 days of the beginning of the case. That means that a small business case would generally take about a year.

The Small Business Bankruptcy Reform Act
The new law streamlines this even further. The goal is to have the case over even faster (perhaps as quickly as 4 months). When the law was passed the debt limit was $2,725,625. Under the CARES Act, for ONE YEAR the debt limit has been increased to $7,500,000.

How does the SBRA work? As soon as a case is filed the Office of the United States Trustee appoints a Chapter 11 Trustee (these are a group of qualified attorneys who have gone through a screening process). While they have a number of functions, one of the primary duties is to assist in the negotiation of the plan of reorganization. Since the law is new, it is uncertain as to whether the trustee will be more of an advocate or a mediator. Regardless, this will be very helpful to the company, as a neutral third party will be working with the debtor and the creditors to get them to agree on the terms of a plan.

Also, now the plan has to be filed within 90 days. While that is very fast, it means you will know very quickly whether you will be able to save your company.

If the debtor and the trustee are unsuccessful in getting the creditors to agree to the terms of the plan, the debtor can still have the plan confirmed through the cram down process. Again, the key is that the court has to find that the plan treats the creditors “fairly and equitably.”

One potential down side with a plan confirmed under the cram down process is that the debtor has to provide is disposable income to the trustee for 5 years. While this may put a crimp in some things the company wants to do after bankruptcy, at least it will be out of bankruptcy and continuing to operate.

Conclusion
The increase of the debt limits is significant. It allows what was, up until 2020, a viable company, to file a chapter 11 and have a fighting chance to remain viable. The company in bankruptcy will probably know early on whether it will be able to propose a confirmable plan. The alternative is to be defending multiple lawsuits and hope and pray that business immediately picks up. Bankruptcy will give companies protection to see if they can continue.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

Up until a week ago, most of you had never heard the phrase “force majeure.” However, I imagine that since then many of you have dusted off your contracts to see if yours contains that clause.

What happens if the answer is no? Are you out of luck? Not necessarily. There is a doctrine called “impossibility of performance.”

Simply stated, the impossibility of performance doctrine is a form of judicial “gap filling” when a contract between parties fails to allocate risks occasioned by unforeseen events.

It is to be used sparingly. But it has been around for a long time. To go back to the beginning, a court in 1863 said “in contracts in which the performance depends on the continued existence of a person or thing, a condition implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.”

While I wouldn’t go so far as to say “no force majeure clause, no problem,” under our current circumstances there are things you can say and do.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

On April 23, 2020, Hair Cuttery (corporate names Creative Hairdressers, Inc. and Ratner Companies) filed Chapter 11 bankruptcies. CHI has over 800 salons nationwide, with over 10,000 employees. Last year, even though it had over $440,000,000 in revenues, CHI was having difficulties (such as being in covenant (nonpayment) default with it primary secured lender). So, last year, it was working on ways to raise capital or refinance its debt. CHI was actively looking for a buyer, but was unsuccessful.

Starting in March, due to the coronavirus, CHI had to start closing its salons. By the third week of March, all of the salons were forced to be closed, with most of its employees furloughed. Due to lack of revenues, CHI was unable to pay all of its employees. CHI continued to search of investors, so that once the salons could reopen, there would be an operating company. Prior to the bankruptcy filing, CHI had entered into an asset purchase agreement where CHI will sell the majority of its assets. CHI will now seek approval of an expedited sale process to keep the business as viable as possible.

The primary lessons to be learned is the work done before CHI filed: (1) having the buyer in place (with the asset purchase agreement) and (2) having an agreement for the buyer to provide financing (called debtor-in-possession financing) during the bankruptcy.

Since these cases were just filed, it is unknown how the Court will rule. However, CHI can be viewed as a template for both companies in financial distress and companies that may be interested in purchasing otherwise viable businesses.

For companies in financial distress, it is important to be proactive. If you think selling the assets of the company makes sense, now is the time to speak with professionals in that area (whether it is M&A people, business brokers, attorneys, financial consultants, etc.). You may decide to look for a buyer and then file, or you may decide to file, then look for a buyer. Regardless, now is the time to be having those conversations.

If you are a company with cash, now is a good time to look at purchasing companies at a greater discount that would have existed a year ago. However, keep in mind that, just like to purchaser of CHI, a purchaser will need to be prepared to provide short term funding that may include paying compensation to employees and other important debts. Then, it makes sense to have the seller file a chapter 11, with an immediate sale under Section 363 of the Bankruptcy Code.

This week I will be writing an article on Section 363 of the Bankruptcy Code. Keep watching this space, or send me an email (address below) and I will make sure to send it to you.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

In the new reality where we find ourselves, many people have reviewed their contracts to see if there is a “force majeure” clause that will excuse performance until life returns to normal. What if your contract doesn’t have that clause? The next step is to rely on the doctrine of “impossibility of performance.” This is a form of judicial “gap filling” when a contract between parties fails to allocate risks occasioned by unforeseen events.

Is there any other legal “jujitsu” that you may be able to use? How about something called the doctrine of “frustration of purpose”? This is when an unforeseen event undermines the principal purpose for entering into the contract. Here is an example that will explain it simply. You lease a storefront to sell something. You expect customers to come in to your store so you can pay your landlord. Now, you have had to shut the doors. No customers, no money. Clearly, both you and the landlord expected that you would have customers. The purpose behind the lease has been frustrated.

Frustration of purpose is what is known as an “affirmative defense.” It won’t prevent the landlord from suing you, but you will find a sympathetic ear with any judge listening to why you didn’t pay, particularly if you were current when you had to close the doors.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

Force Majeure – sounds powerful, sounds foreign. Many businesspeople aren’t familiar with this lawyerly term. Should you shrug your shoulders and move forward or pay attention?

People often ask me about boiler plate clauses in contracts. They ask—are they necessary? (sometimes). Are they just there so an attorney can make more money? (despite
public opinion, not really).

Force Majeure is one of those boiler plate clauses in all properly drafted contracts.
Businesspeople can go entire careers never having to worry about what it means, let alone having it enforced. And then one day, something big, like Covid-19, happens that is outside of the control of both parties to the contract. Now Force Majeure may be the most important part of your contract.

We’re now living in a world where we have no idea if our customers are going to be able to pay us and, let’s be honest, we may have no idea if we can pay (or for how long) our vendors and staff. Your customers do need to pay you, correct? You have to pay your vendors and staff, surely? Whether you do or don’t have to pay (or get paid) depends on what is in your contract. I am talking about the force majeure clause. In its most simple terms, force majeure means unforeseeable circumstances that prevent someone from fulfilling a contract.

Here is an example of a force majeure clause in a contract:

Neither party shall be liable in the event that its performance of this Agreement is prevented, or rendered so difficult or expensive as to be commercially impracticable, by reason of an Act of God, labor dispute, unavailability of transportation, goods or services, governmental restrictions or actions, war (declared or undeclared) or other hostilities, or by any other event, condition or
cause which is not foreseeable on the Effective Date and is beyond the reasonable control of the party. In the event of non-performance or delay in performance attributable to any such causes, the period allowed for performance of the applicable obligation under this Agreement will be extended for a period equal to the period of the delay. In the event that the performance of a party is delayed for more than 6 months, the other party shall have the right, which shall be
exercisable for so long as the cause of such delay shall continue to exist, to terminate this Agreement without liability for such termination.

Most of the time, a force majeure event will effect one of the parties to a contract. In the current climate it almost assuredly applies to both parties That means the contract is essentially at a standstill.

So, you need to go over all of your contracts and figure out if you are or are not subject to force majeure. You’d hate to be in a situation where your vendor is asking you to pay, but your customer who is supposed to pay you doesn’t have to pay you. While you’re doing this review, you want to be sure all of your contracts contain force majeure clause that is most beneficial for you.

At some point we will be out of this morass and life will return to normal. It is very likely that there will be quite a few lawsuits filed based on the failure of one party to perform. A force majeure clause is what is known as an “affirmative defense.” Simply stated, that means “yes, I did what you said, but I don’t owe you because of….” In this case, the reason why the money would not be owed would be because of something contemplated under the force majeure clause.

Are there other options if your contracts do not contain force majeure clauses? Most likely. You should contact your attorney to discuss how best to handle this situation.

Force majeure – the clause that we never pay attention to until something bad happens and then it’s too late.

Keep in mind one thing—there are other things that can help you if your contracts do not have a force majeure clause. Next time—impossibility of performance.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

0o1a7779-2248Most people think the term “attorney’s fee clause” or provision just applies to attorneys. Nothing could be further from the truth. The correct way to think about the attorney’s fee clause or provision is in the context of any contract you might have written for yourself or your business.

Any legal dispute you have with someone or a business means there’s going to be attorneys involved. In situations where there are attorneys, you’re going to see attorneys’ fees. Whenever you’re having a contract prepared, you need to address the possibility that a legal dispute is going to arise at some point between the contracting parties. As a result, you need to make sure there’s a clause or provision in the contract that addresses who is going to pay for the attorneys’ fees.

It’s common to have a provision that requires the losing party in a dispute pay the attorneys’ fees and costs. These provisions are commonly written as follows: “The prevailing party shall have the right to collect from the other party its reasonable costs and necessary disbursements and attorneys’ fees incurred in enforcing this Agreement.” The most common costs include filing fees. Filing fees may consist of fees for serving summons, complaints or other court papers. The costs might include transcription services by a court reporter or photocopying of court papers and exhibits. It’s important to note that court costs are typically paid by all parties to a dispute but if you include an attorney’s fees provision in your contract, this can make the losing party to the dispute also responsible for the court and other costs.

One thing you have to be careful about with these provisions is that in a relationship where one party to the contract is in a stronger position, they will often put in a provision that means one party to the contract pays all fees and costs and that party is usually the party that is the weaker in the agreement. Even as this is unfair, it’s not unheard of so it’s important to watch out for this.

Preparing contracts is no simple matter and it’s important to have them prepared by experts who can look out for your best legal interests. At Bovarnick & Associates, LLC., we specialize in preparing contracts for our clients. If you’re in need of a contract, whether it’s for your business, property or personal matter, we can take care of it for you. Just give us a call at 215.568.4480 or email us at info@rbovarnick.com.

Robert M. Bovarnick, Esquire

Bovarnick and Associates, LLC
Two Logan Square, Suite 2030
100 N. 18th Street
Philadelphia, PA 19103
(215) 568-4480
(215) 568-4462 (fax)