‘Surviving The Storm’ – New Kira Systems Study

Introducing a New Downloadable Analysis of Liquidated Damages Provisions in Chapter 11 Bankruptcy Filings by Kira Systems

As the novel coronavirus (COVID-19) pandemic continues to devastate economies worldwide, we’re seeing a wave of Chapter 11 bankruptcy filings. These filings, which provide protection to companies as they reorganise their businesses so creditors may be paid over a period of time, have surged 26% in April (up from the 444 filings in April 2019).

The economic impact has been far-reaching as the list of companies filing for bankruptcy continues to grow. The travel, hospitality, and entertainment industries are at a complete standstill, with even large companies like Hertz, Cirque du Soleil, and airline Avianca Holdings SA seeking bankruptcy protection. Farming experienced a 23% increase in bankruptcies compared to last year.

The retail and fashion industries have also been deeply impacted (the number of retail filings for the year to date is already closing in on the total number of filings during 2019). In fact, the last few weeks have seen legacy behemoths like J.C. Penney and Neiman Marcus commence Chapter 11 proceedings alongside more specialised retailers like Aldo and J.Crew. Unsurprisingly, the effects are expected to ripple through to mall owners and real estate investors.

As part of a Chapter 11 reorganization, a debtor may assume or reject its executory contracts, as well as any unexpired leases. And, since the remedies set forth in the contract may determine the amount of damages the non-debtor party may claim, it’s important to understand what those remedies are with respect to liquidated damages.

As a result, companies that can quickly and accurately identify these clauses in their contracts will be able to make earlier, and better-informed, decisions on whether to assume or reject certain executory contracts as Chapter 11 debtors. 

Because of the significance of liquidated damages in rejected executory contracts, we reviewed and analysed 119 intellectual property, service, supply, and distribution agreements to determine the prevalence of liquidated damages provisions. 

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Using Kira’s built-in ‘Liquidated Damages’ provision model, we were able to automatically identify which agreements included liquidated damages provisions. Within eight hours, we were able to identify every document containing liquidated damages language, and also analyze variations in their drafting.

Our findings include:

  • The prevalence of Liquidated Damages Provisions in Commercial Contracts
  • Variations in Liquidated Damages Provisions    
  • Our review and analysis of the language used in the contracts within our sample sets (and what that means for you or your clients)

An excerpt:

[Our] data indicates that, despite the potential for liquidated damages provisions to add certainty to contracts in which it is included, it remains unpopular, and possibly even under-utilised.

Generally, a liquidated damages provision is enforceable if it specifies an amount that is not unconscionable, not an illegal penalty, and not in violation of public policy (the actual damages resulting from a subsequent breach would be difficult for the parties to estimate, and the amount is intended to compensate the non-breaching party for the breaching party’s failure to perform, rather than as a penalty). Although there is variation in how different jurisdictions approach liquidated damages, when these provisions are carefully considered and drafted, the clarity they can provide may justify their inclusion in agreements going forward if the facts and circumstances warrant.’

‘Companies that can quickly and accurately identify these clauses in their contracts will be able to make earlier, and better-informed, decisions on whether to assume or reject certain executory contracts as Chapter 11 debtors,’ Jennifer Tsai, Legal Knowledge Analyst, Kira Systems

With the coronavirus pandemic accelerating the path to bankruptcy for more and more businesses each day, reviewing and analyzing key contract provisions should be on companies’ high priority lists, whether they are in distress or dealing with distressed companies. Liquidated damages provisions can provide contract parties with added certainty with respect to determining the monetary remedies a party may be entitled to if the other party breaches the contract, especially in the Chapter 11 reorganization context. 

Download our study to learn more about how distressed companies and non-debtors may benefit from the certainty and efficiency these clauses provide, saving all parties time, money, and effort during critical times.

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