Last week, Gov. Andrew Cuomo instituted New York State on P.A.U.S.E. (Policies Assure Uniform Safety for Everyone), ordering 100% of the non-essential workforce to stay at home. While necessary to fight the novel coronavirus, known as COVID-19, the governor’s recent Executive Orders will have significant legal consequences for those businesses in contractual relationships.
This is also a fraught period for businesses with state and federal laws changing daily. However, in the midst of all of this uncertainty, businesses must keep an eye to the future and the potential contractual implications of the COVID-19 crisis. By taking a proactive approach now, companies may be able to reduce or avoid future contract litigation stemming from this crisis.
Businesses should immediately take the following steps:
- Create an inventory of contracts that could be affected by COVID-19;
- Review the terms of each contract paying special attention to force majeure, notice and default provisions;
- Determine whether the parties to each contract will be able to continue performance of the contract; and
- Begin taking steps to mitigate any losses if it is anticipated that the contract will not be performed.
Crucial to a review of any contract will be an analysis of the force majeure provisions of the contract.
Put simply, a force majeure clause excuses a party’s nonperformance of its obligations under the contract due to extraordinary circumstances beyond the parties’ control which make performance impossible, illegal, commercially unreasonable or impractical.
Although force majeure clauses are common, in New York, their applicability to business interruption due to the coronavirus will depend heavily on the specific language used by the parties in the contract. New York courts interpret force majeure clauses narrowly. “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987).
Force majeure clauses often include notice provisions and contractual prerequisites, which must be adhered to in order to invoke the force majeure defense. Any notice requirements and prerequisites outlined in the force majeure clause should be adhered to with specificity as a failure to follow the requirements of the contract will likely lead to an inability to use the force majeure clause. Conversely, those businesses seeking to enforce a contract should be on the lookout for the nonperforming party’s failure to abide by any preconditions required by the contract to defeat application of the force majeure clause.
During this early period of New York State on P.A.U.S.E., companies should also try to mitigate the effects of the recent Executive Orders on their contracts. New York courts generally require parties to a contract to attempt to mitigate the risk of nonperformance of the contract. For example, if a supplier in New York State can no longer produce its product because it is deemed a nonessential service, the non-breaching party should attempt to procure product from an out-of-state supplier still allowed to do business. Even if the non-breaching party is unsuccessful in procuring another source for the product, the attempt to minimize losses will be highly relevant in future litigation.
A review of all business interruption insurance policies should be included in the inventory and review of contracts. These policies are intended to cover lost revenue, fixed expenses (rent, utility, etc.) and/or expenses related to temporary operations in an alternate location. In the wake of the SARS epidemic, many insurers expressly excluded viral or bacterial outbreaks from standard business interruption insurance coverage. Additionally, business interruption insurance usually requires physical property damage. However, companies should thoroughly examine their policies to ascertain whether losses due to the COVID-19 pandemic may be covered.
If you believe you are entitled to business interruption coverage, ensure compliance with all requirements including providing timely notice to your carrier of a claim.
Although legal services were not included on Gov. Cuomo’s list of essential services, attorneys are continuing to provide representation to their clients remotely from home. Businesses should keep in close communication with their legal advisors and consult with counsel for questions regarding how the COVID-19 pandemic may affect their contracts and the potential consequences if either party is unable to perform.
The courts may be shut down for now, but interpretation of force majeure clauses will be a hot legal topic in the coming months.
Jillian K. Farrar is an attorney of Underberg & Kessler LLP and member of the firm’s Litigation, Health Care, and Creditors’ Rights Practice Groups. She focuses her practice in the areas of commercial litigation, health care law and litigation, and creditors’ rights litigation.