By Amaris Elliott-Engel, originally published in Rochester Business Journal on May 5, 2020.
Local attorneys weigh in on force majeure clauses, employment during COVID-19
The COVID-19 pandemic is so unprecedented that it is presenting a challenge to lawyers in giving advice to clients because they can’t look back at prior events for guidance on how to deal with it, says Lorisa LaRocca, a partner with Woods Oviatt Gilman LLP’s labor and employment department.
But while there is not on-point precedent to guide advice during a global pandemic about unemployment issues like furloughs and managing an entire workforce working from home or managing business relationships impacted by disrupted supply chains and stay-at-home orders, local lawyers say that the need for their legal advice is more acute than ever.
‘COVID-19 has impacted everyone’
One of the first concerns of many business owners is how to handle their contractual relationships when they are shut down or their workforces are reduced, local lawyers say.
A key provision in all contracts is whether there is a “force majeure” — or a superior force-clause that would excuse performance or delay performance in certain circumstances because of unforeseeable circumstances beyond the control of the party that can’t perform their obligations under those contracts, says Richard McGuirk, a partner in Nixon Peabody’s complex commercial disputes group.
Force majeure clauses have “been largely ignored prior to this,” says David Clar, leader of Harris Beach’s corporate practice group. “Going forward they will receive a lot more attention from practitioners on the front-end in drafting and on the back-end in breach of contract situations.”
If the contract does not have a force majeure clause, there are theories under prior court decisions that could justify not having to perform the contract or delay performing the contract called the doctrine of impossibility, the doctrine of impracticability and the doctrine of the frustration of purpose, local practitioners say.
Kate Polozie, a partner with Woods Oviatt Gilman LLP’s business and finance department, says, in order to meet the standards of those doctrines you have to be facing a scenario like a performing artist for whom it is impossible to give a concert because of current public health orders.
“Things just being more expensive or really difficult isn’t going to be sufficient,” Polozie says.
While these doctrines have traditionally been narrowly construed, Elliot Hallak, a member of Harris Beach practicing in the area of business and commercial litigation, says that may change.
“Nobody has ever dealt with a situation that has the impact this pandemic has had with a complete global shutdown,” Hallak says. “In trying to compare this current situation to some prior instances I expect courts will say this situation is much different and the impact is much greater. While courts have been reluctant in the past to relieve parties of obligations due to claimed impossibility and other doctrines, we’re now dealing with something we’ve never dealt with before.
“I expect a lot of judges, who also are living with the impact of this event, will view this as creating a true impossibility, and that parties should be relieved of obligations.”
If clients do have force majeure provisions in their contracts, how much protection they have from those clauses depends upon the language in the contract, says Richard Marinaccio, a partner with Phillips Lytle focusing on international and domestic business transactions.
McGuirk notes that some force majeure provisions are more narrow and closed-ended, and some force majeure clauses are more expansive or open-ended and include a provision referencing other events of unforeseen circumstances than those already enumerated.
Prior to COVID-19, New York courts would have wanted to see that the force majeure contractual language specifically listed the event that disrupted the contract and that the parties intended to allocate risk that way, Marinaccio says.
Force majeure clauses have been strictly construed by the courts with a laser focus on the contractual language, but “many of us have wondered if they are going to give particular leeway given the severity of these events,” McGuirk says. But he does not expect the leeway in interpreting force majeure clauses will be so liberal that courts will enforce a remedy if the contracts are silent regarding acts of God, he says.
“You’re not going to be able to make it up out of thin air,” McGuirk says.
Courts also are not going to imply cost-savings provisions providing a maximum level of cost or a minimum level of profit into contracts, McGuirk says.
McGuirk adds clients have to make sure that they follow any notice provisions that their contracts require if they are going to invoke a force majeure clause in order to avoid violating their contracts.
If parties are left without a contractual remedy because their contractual language was not on-point regarding the coronavirus, Clar says that he would not be surprised if judges and arbitrators become more lenient in favor of finding there is insurance coverage for businesses seeking insurance coverage for business interruption to their operations.
“Without providing relief through the courts, there may not be any other relief available in context of a failed performance due to covid,” Clar says.
Jerry Brydges, a partner at Harter Secrest & Emery LLP practicing in commercial litigation, and Marinaccio say they are advising clients to negotiate a resolution if they can’t perform their contracts due to coronavirus whether they are a provider or recipient of services or a manufacturer or recipient of goods.
“The wrong strategy to resolve this is to litigate it,” Brydges says. “If you have cash flow problems, you’re not going to save money by going to court. The best advice is to get on the phone with your counterparty and their counsel.”
Hallak says that there is goodwill in the business community to negotiate resolutions to problems arising because of COVID-19.
“COVID-19 has impacted everyone,” Clar says.
Clar also says, in terms of future contracts, it would probably border on malpractice if lawyers are not including force majeure clauses addressing the COVID-19 pandemic.
Polozie notes that COVID-19 is now a known factor and future outbreaks can be expected. As a result, courts may say that if you did not negotiate provisions to excuse or delay performance due to COVID-19 that it was not unforeseen, Polozie says.
Brydges says that he is advising clients “to be realistic about their forecasting and about their budgets’ if entering into long-term contracts.” He notes that it is important that future contracts include provisions that provide flexibility if COVID-19 causes new problems.
Employment in the COVID-19 era
Another hot area that clients have a lot of questions about is employment, local lawyers say.
“Clients are asking a ton of questions related to furlough, paid time off, how to administer the various leave acts that have been passed by Congress and different things related to benefits administration,” says Kimberly Harding, a partner in Nixon Peabody’s labor and employment group.
While the terms furlough and layoff are used interchangeably, furloughs are unpaid leaves of absence where the employment relationship continues, while layoffs are severing the employment relationship, Harding says.
Many health benefit plans are waiving the requirement that employees work a certain number of hours to maintain their eligibility for health insurance, according to Harding and LaRocca. However, employees, whether on furlough or laid off, are eligible for unemployment insurance, Harding says.
“For the most part we are seeing furloughs as opposed to large-scale layoffs,” she says. “Our clients remain hopeful that this is a temporary situation and they can scale back up once the curve is flattened.”
Harding says she has concerns about how employees will be able to afford to pay unemployment benefits when there is not a lot of revenue and what will happen if the state unemployment fund runs out.
Kevin Mulvehill, a partner with Phillips Lytle LLP specializing in labor and employment, and Harding, both say that employers need to analyze if they are legally required to provide notice before laying off or furloughing employees under federal or state Worker Adjustment and Retraining Notification (WARN) laws, which are triggered by plant closures or mass layoffs.
Failure to do so can cause employers to be liable to pay workers for up to 60 days of pay and benefits as well as potentially facing liability for a class action, Mulvehill says.
Mulvehill says that employers need to be very careful on how they deal with employees who feel unsafe being required to work during the pandemic in order to avoid triggering claims of retaliation.
Mulvehill says that employers, if monitoring employee emails or other cyberwork from home, must have a valid business reason for doing so and that any related polices are not applied in a discriminatory fashion.
Nonexempt employees who are working outside of work hours need to record that time or that will otherwise create liability for employers, Mulvehill says.
Nonexempt employees also must take a meal break between 11 a.m. and 2 p.m. even when working from home, Mulvehill says.
LaRocca notes that employees can be eligible for partial unemployment if their hours are reduced enough, which can be a win-win for both sides.
As some employers manage their workforces from home, “every employer should have some level of written policy that explains, No. 1, this is a privilege, not a right,” LaRocca says. “The policy should explain, ‘Here are the basic parameters. Here are our basic expectations.’ You want to address things like access to confidential information of clients or health protected information. You want to make sure that employees have the appropriate firewalls in place.”
Amaris Elliott-Engel is a Rochester-area freelance writer.