The unprecedented current climate has raised unique and challenging issues for litigation. With the widespread quarantine orders and subsequent impact on commerce, everyone needs to prepare for the resultant effects on lives and businesses.
Contractual obligations may be significantly affected by the ongoing situation, employers may be navigating the difficult landscape of protecting employees and managing business needs, and you may be wondering if your insurance policy will cover losses associated with the Covid-19 pandemic.
Here are some basics you need to know about the legal issues associated with this pandemic and how you can prepare yourself for what’s to come.
Covid-19 has already significantly disrupted the supply chain and service-based industries. As a result, manufacturing, shipping, commercial leases, and revenue in general have taken a hit. Many commercial agreements will be difficult, or even impossible, to adhere to in the current climate. So what are the options for parties whose agreements have been disrupted?
The legal principles of force majeure, impossibility of performance, impracticality of performance, and frustration of purpose may apply.
Force majeure is a contractual defense, applicable when the contract has a specific force majeure provision. There is no set definition of force majeure, as it must be interpreted from the contractual language. However, most of these provisions contain broad language excusing performance as a result of an “unforeseen event” outside a party’s control. Some common “unforeseen events” included in force majeure provisions are “Acts of God,” “Acts of Government,” and occasionally health crises.
This broad language is likely to cover delays in fulfilling contractual obligations, or even complete nonperformance, caused by the coronavirus because the outbreak involves an Act of God, the subsequent quarantines and shelter-in-place orders involve an Act of Government, and the WHO and the CDC have declared Covid-19 a pandemic.
The party claiming that the force majeure provision allows for delay or nonperformance must establish a causal connection between the unforeseen event and the failure to fulfill obligations. This generally requires that the party failing to comply must show that there was no alternative method to fulfill their obligations. It is not sufficient to simply claim that the unforeseen event made it difficult or more expensive – such an excuse will not justify nonperformance.
If the contract does not contain a force majeure provision it is still possible that Covid-19 will provide an excuse for nonperformance. Performance may be excused by legal principles justifying alternation of parties’ contractual terms after formation of the contract, the availability of which will vary from jurisdiction to jurisdiction.
For example, impossibility of performance occurs when the contractual duties of one or more parties cannot be fulfilled due to circumstances out of their control. This principle must be taken literally – the defense only applies when it is literally impossible to complete performance. Common examples of this defense include when a party to the contract dies or when major weather events, like tornadoes and hurricanes, prevent completion.
The defense of frustration of purpose is available when the purpose of the contract has been eroded so completely that, as both parties understood, without it, the transaction makes little sense. Courts generally limit the doctrine to instances where an unforeseeable event renders the contract valueless to one party. The event frustrating the contract’s purpose must not have been foreseeable by the nonperforming party. As with impossibility, this doctrine would not apply where performing under a contract would merely cause some degree of financial hardship.
Absent circumstances making performance impossible, the doctrine of impracticability may be available. See Restatement § 261 cmt. d. (“Performance may be impracticable because of extreme and unreasonable difficulty [or] expense…[or a] severe shortage of raw material or of supplies due to…unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether.” (emphasis added). As with the defenses explained above, general inconvenience or financial hardship does not rise to the level of impracticability. Instead, this defense applies when the nonperforming party can show that an unforeseen event has caused an extreme and unreasonable difficulty in a manner that renders performance impracticable and that nothing the employer is capable of doing will allow the employer to perform.
Commercial parties have an imminent need to prepare for or against these defenses. Going forward, all contractual notice provisions should be carefully scrutinized to determine whether COVID-19 triggers any notice requirements, and contractual provisions should be drafted with these potential effects in mind.
INSURANCE COVERAGE FOR BUSINESS LOSSES
Business interruptions resulting from Covid-19 may force commercial entities to turn to their insurance provider for coverage. Typically coverage would apply if the policy includes “business interruption insurance.” You must carefully review your policy to determine which losses will be protected and to what extent.
Generally, business interruption coverage applies when the policyholder sustains “direct physical loss of or damage to” insured property by a covered cause of loss. There is no set definition for what constitutes a “physical loss,” and it will differ from jurisdiction to jurisdiction. In the event of a claim for coronavirus-related business interruption, certain insurance carriers may dispute whether this “physical loss” requirement has been met.
However, some jurisdictions have declared that when a building is rendered “inhabitable,” though technically still intact, there was a physical loss. The determination of whether “physical loss” has occurred will require a close examination of the particular facts of each case.
It is certainly possible that, when Covid-19 slows down, personal injury lawsuits will arise against employers alleging that adequate precautions were not taken. It is important to carefully evaluate actions with respect to the workplace going forward.
If your workplace remains open, consider increasing safety and cleaning protocols. You may want to postpone large gatherings, encourage sanitation and disinfection by individuals, and have an emergency preparedness plan in place if any employees show symptoms of Covid-19. Careful attention must be paid to the existing standards of equal treatment and accommodation to avoid litigation connected to the issuance of Covid-19 policies in the workplace.
Finally, the pandemic has introduced a wave in cyber-crime. Encourage your employees to avoid clicking on links in unsolicited emails, to use caution when opening email attachments, to refrain from sharing personal or financial information over email, and to verify the authenticity of organizations seeking donations.
These are unprecedented circumstances and the legal minefield surrounding Covid-19 may be difficult to navigate. If you need assistance,our attorneys can help. Contact us today to discuss your situation.