Navigating Business After Coronavirus (COVID-19)

Everyone is ready to get back to business and for business to get back to normal.  However, it appears that we are going to have a new normal in the business world.  At first, we will likely see businesses taking action to replace lost income or minimizing expenses.  This may take the form of applying for stimulus money, filing coverage claims against insurers, litigating force majeure or pursuing collections.  However, there are other litigation concerns that may not be on the forefront of a business owner’s mind.  COVID-19 may challenge the very concept of what duty a business owes people/entities with which it interacts.

The CARES Act and the Paycheck Protection Program

The recent stimulus bill that was signed into law is referred to as the CARES Act.  Within the CARES Act is the Paycheck Protection Program (“PPP”), which should provide needed relief to many small businesses.  Generally, the CARES Act allocated $349 Billion to forgive certain Small Business Association (“SBA”) Loans if certain criteria are achieved.  Businesses in the hotel and food services industries, as well as others, may not need to satisfy SBA’s affiliation standards.  Small businesses with fewer than 500 employees may be eligible.

PPP loans are generally eligible for forgiveness if 75% of the forgiven amount is expended on payroll and employers maintain or rehire employees so that salary levels are restored by June 30, 2020.  Such restoration of salary relates to changes in employment between February 15, 2020 and April 26, 2020.  The amount of loan forgiveness is graduated based upon the level of full-time employees, salaries or wages.  The maximum loan amount is 250% of 2019 payroll for a period of eight weeks, with a cap of $10 Million.   Loan applications are made through the SBA and loan payments can be deferred for six months with no personal guarantees are collateral being required.

Litigation in the Post COVID-19 World

The COVID-19 virus has caused incomprehensible financial loss throughout the United States and the rest of the World.  Litigation is merely a formal determination of allocation of risk.  As businesses and people evaluate their losses incurred as a result of COVID-19 they will also seek legal counsel to help evaluate whether some or all of their loss can be shifted to someone else through litigation.  Businesses will evaluate whether any of their loss is covered by insurance.  Businesses will review their contracts to determine if the pandemic triggered any clauses that may relieve them of contractual obligations.  Individuals will seek compensatory damages, loss of income and pain and suffering against businesses they feel unnecessarily exposed them to the virus.  Businesses and individuals will litigate whether fees have to be paid when a service is unavailable due to COVID-19.  Whether the injured must bear the loss caused by a pandemic or whether all or a portion of that risk should be allocated elsewhere will take many years to work out.

a. Insurance Coverage

If your business purchased Business Interruption Coverage or Civil Authority Coverage, the businesses losses, or a portion of the losses, may be covered by insurance. [1]  Coverage may be afforded via Business Interruption Coverage, Contingent Business Interruption Coverage or Civil Authority Coverage.  Business Interruption coverage generally insures for interruption to your business as a result of direct property damage to the insured real property.  Contingent Business Interruption coverage generally insures for losses incurred due a disruption in the supply chain.  Civil Authority coverage insures for losses suffered due to a state, county or municipality ordered closure.  Determination of coverage is dependent on the specific language in the policy.  Many of these policies have exclusions which exclude coverage for epidemics or pandemics.  Even if the insurer initially denies coverage, litigation to determine coverage may provide a path to restoring lost revenue.

b. Force Majeure

In an effort to mitigate expenses businesses can seek deferment or renegotiation of leases or contractual obligations disrupted by COVID-19.  Some national companies have made headlines by announcing that they will seek deferment or renegotiation of leases with their landlords.

However, if a party to a contract is not willing to defer or renegotiate a contractual obligation disrupted by COVID-19 then a determination of whether the contract contains a force majeure clause is necessary. A force majeure clause is a contractual clause that fully or partially excuses performance of contractual obligations upon the occurrence of an event that is outside of the control of the parties.  What is excused and whether the force majeure clause is triggered depends on the specific language of the clause.  Sometimes the clause contains an exhaustive list of events that trigger the clause, such as war, acts of terrorism, hurricanes, etc.  Sometimes the list may be non-exhaustive and may cover acts of God, including but not limited to, war, acts of terrorism, hurricanes, etc.    If the force majeure clause contains a non-exhaustive list and the terms epidemic or pandemic are not included in the non-exhaustive list then litigation may be necessary to determine whether COVID-19 triggered the clause.  An example of a typical force majeure clause is below:

Force Majeure.  Neither party shall be liable for any damages arising out of compliance with any law, ordinance, regulation, ruling, order or other governmental action or arising out of acts of God, fire, flood, war, sabotage, accidents, labor disputes, shortages or failure to supply materials or equipment, interruption of or delay in transportation, or any other similar circumstance beyond the control of the party.

Litigation of force majeure clauses may be one of the most prevalent types of cases litigated.  Tenants will attempt to shift risk to Landlords.  Suppliers will attempt to shift risk to purchasers.  Event promotors will attempt to shift risk from cancelled events to purchasers.  All of these cases will depend on the specific language of the force majeure clause.

c. Impossibility of Performance

There will also be a host of claims when it is impossible to provide the goods or services contracted for but the contract doesn’t contain a force majeure clause.  By way of example, a class action lawsuit have already been brought against a prominent University for failing to refund the cost of room and board.  Another class action lawsuit has been brought against a national fitness chain for failing to refund monthly membership fees while the gyms were closed.  In both of these examples government had ordered the shut down of these businesses.  Traditionally, if a service or a good isn’t provided it would be a breach of agreement to retain the funds associated with the service or a good.  However, these are unprecedented times and litigation may result in the modification of these traditional legal principles.

d. Personal Injury Cases

Lawsuits against cruise lines alleging that the cruise lines knew of the danger of leaving port when some cases of COVID-19 were reported and failed to adequately protect passengers and crew from being exposed to the virus.  The lawsuits against assisted living facilities will follow.  Will these lawsuits be filed against other businesses if an infection can be attributed to a certain business?  What if an infection is attributed to a grocery store that remained open as an emergency business?  A duty under negligence law can be created by a statute, by administrative code or potentially by a government guideline.  If a business doesn’t follow government guidelines relating to sanitation or social distancing it may create exposure to liability.

Our World is Forever Changed

I recently had a client tell me that he/she wasn’t going to attend a deposition that was being requested by opposing counsel in person.  A year ago that would have been a preposterous position.  That being said, the client is at risk and attending a deposition may expose the client to an unnecessary health risk.  The point being, what was preposterous a year ago may be completely reasonable today.  The COVID-19 virus will spur much litigation and some of that litigation may very well change legal concepts that we all thought were well established.

[1] See https://www.jimersonfirm.com/blog/2020/03/are-business-losses-from-coronavirus-covered-by-insurance/ for more detailed information on insurance coverage.

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