Small Problems Waiting To Happen

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Here’s some light reading for the Labor Day holiday. Let’s all be futurists today.

If you’ve been awake, you know that GAAP (Generally Accepted Accounting Principles) is on the way out and IFRS (International Financial Reporting Standards) is on the way in. The cut-over date isn’t yet set, but the change is inevitable. Also, it looks like there may be a “US Flavor” of IFRS, but that isn’t settled yet.

The differences between GAAP and IFRS are beyond the scope of Ruminations and beyond the ken (one’s range of knowledge or sight) of this writer, but the fact of a near term abandonment of GAAP triggers some thoughts. While we are at it, I’ve always felt a little uncomfortable seeing a GAAP accounting requirement in leases and contracts when the reporting party uses cash basis accounting because GAAP applies only to accrual basis accounting. Since no one who does leasing or administers leasing really knows that, it apparently doesn’t make a difference.

My thoughts have nothing to do specifically with GAAP or IFRS, but with the general topic of changes in the world that document drafters and the parties they represent have no control over. Here is an example. Early in the 20th century, long term agreements (think – leases) sometimes included a “gold clause” as a hedge against inflation. They were invalidated by the Gold Reserve Act of 1934 and then reinstated for contracts executed after October 1977. Did those long term contracts make any provisions in the event gold clauses were invalidated?

Interest rates in loan documents are often based on an “index” above an independent interest rate standard such as the 10-year Treasury Note. Some used the 30-year Treasury Bond (often called long-bonds). What were parties to do when no 30-year Treasury Bonds were issued during the four and a half year period from November, 2001 through February, 2006?

As has been written previously, draftspersons are still calling for “All-Risk” insurance policies, but no one has been able to comply with that requirement since 1983, when that form and that policy designation disappeared.

The United States Postal Service is in financial trouble. It is expected to bear a $9 Billion annual loss this year. The need for its services has been disappearing for years. When it is disbanded (don’t jump – I’m just speculating), how will notices required to be sent by certified mail be sent?

Will there always be a Prime Rate? Will there always be a Wall Street Journal?

It doesn’t take a lot to draft around these issues, but who is doing that? It requires three skills: understanding the way the “thing” (GAAP, an Insurance Policy, etc.) works; recognizing the impermanence of things we take for granted; and formulating a way to substitute a reasonable equivalent.

These are not earth-shattering problems, probably only minor annoyances – that is, until there is no 30-year Bond.

Thoughts?

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Comments

  1. Ira, interesting post.. I think the parties to a lease and courts will simply default to what is available at the time. Today, most folks add “overnight delivery” to a notice provision as an alternate to certified mail. Even if they don’t and the nice fellow who delivers my mail goes away, UPS and FedEx will simply satisfy the notice provision. If the notice gets there and it can be proven, then the purpose is served no matter what the lease says. Same with GAAP vs IFRS, measurement standards such as CPI indexes (possible altrnates have already been written for years), Moody’s, Prime Rate, T-bills and the Wall Street Journal (there’s always the NY Post). Just please don’t take away my landline phone – I’m a Luddite when it comes to texting.

  2. Elliot Warm says:

    Ira – I don’t have any universal answer to the use of terminology or provisions that may become inapplicable, but a draftsperson can provide some protection. For example, sometime after the cessation of use of the terminology of “all risk” insurance, I was awakened a bit to the concept of terms becoming moot, and I started using in my form leases language as to the tenant acknowledging the intent that the insurance as required under the lease be the broadest form then commercially available, irrespective of the terminology for such insurance at a given time. I have also for more years than I can count seen the type of provisions for CPI clauses where there is reference to a reasonable successor index “as selected by Landlord.” As to “prime rate,” the same type of clause can apply – start with, say, the Wall Street Journal, and allow use of another prime rate reasonably selected by the landlord in the event of demise of that publication (a not-so-unlikely occurrence considering who owns the Journal at present). A tenant may negotiate the language, but presumably there will be some standard as to what will be used as a replacement in any of the applicable circumstances.

  3. Also, with no USPS, what happens to service of process via return receipt requested?

    Actually, whether or not there is a Post Office, In North Carolina, the Rules of Civil Procedure now let you serve via certain IRS-designated UPS and FedEx private delivery services. Your jurisdiction’s Rule 4 may have a similar provision. To see how it works in NC – and why you might want to use it – you should click here: http://deondarzasimmons.com/serving-a-lawsuit-with-ups-or-fedex/

  4. Ira, I agree with Elliott as to clauses that provide for successor indexes. I see it less often with insurance.

    But even when the changes are known, many lawyers are slow to adapt. In addition to all risk coverage (now special form), what about new leases that still call for comprehensive general liability insurance, a product that was discontinued decades ago?

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