Arguably one of the most rapidly evolving and economically devastating pandemics in the last century, COVID-19, has placed the world on edge with overwhelming data and scientific complexities. The economic impact remains unpredictable as unemployment rates reach unprecedented levels while a significant part of the world remains shuttered with a staggered timeline for reopening.
To date, numerous lawsuits related to COVID-19 have been filed in the United States. While the more creative and frivolous claims could be dismissed during the early pleading phase, plenty of more complex, fact-based lawsuits will arise, ultimately resulting in costly and prolonged litigation for defendants.
COVID-19 has created a domino effect on the global economy, resulting in an inability of many businesses to fulfill contractual agreements with customers, vendors or suppliers. The halt in the world economy combined with stay-at-home orders affects multiple parties involved in a single project.
For instance, the inability to obtain supplies from abroad and a decrease in the labor force has delayed construction projects. A general contractor will be forced to breach a contract if it is unable to timely complete a project while a supplier will be in breach of a contract if it is unable to ship supplies for the construction project.
A force majeure provision is designed to excuse a party from its duty to perform in the event of an unforeseen and unavoidable catastrophe. However, a party relying on a force majeure provision must often demonstrate that the clause specifically refers to terms such as “pandemic,” or “communicable disease”. If not, a court will analyze whether COVID-19 falls into other categories such as “Act of God” or “governmental action” that are expressly listed in a force majeure provision.
Breaching parties must also demonstrate that the pandemic itself made performance of the contractual duty impossible, not merely more difficult or expensive. Further, these clauses typically require a breaching party to establish that adequate notice of a parties’ inability to perform was provided to the counterparty and steps were taken to mitigate the damage caused by the contractual breach.
In sum, businesses should understand the law of each state governing their contractual agreements.
The doctrine of impossibility of performance only excuses performance under the most extreme circumstances. In general, courts require a breaching party to demonstrate performance was made impossible by an unforeseen event that could not have been contemplated by the parties when negotiating the terms of a contract.
This defense will likely be used by suppliers who are unable to supply finished goods or raw materials due to a disruption in a supply chain, a venue that must cancel an event due to a government order that they close the facility or a contractor that is unable to complete a project on time due to a combination of multiple restrictions resulting from COVID-19.
Breaching parties should be mindful that the doctrine cannot be used as a defense for breaches resulting from difficulty of performance or financial hardship. Further, parties may be required to partially perform, if practicable or resume performance when normal business operations resume.
A defense premised as frustration of commercial purpose requires a breaching party to demonstrate that performance of the contract would be possible, but the purpose of the contract is defeated. This may apply to a situation where a commercial space is leased to a tenant to open a restaurant. With government restrictions forcing restaurants to close, the tenant could still lease the space but the purpose of the contract is defeated.
A properly worded contract combined with the appropriate contractual defenses may shield a breaching party from an adverse judgment and potentially large damage awards. However, contracting parties should frequently communicate with counterparties to provide notice of an anticipated breach, exercise diligence in attempting to mitigate damages and document all efforts.
Adequate notice of a potential breach allows both suppliers and buyers to mitigate their damages by providing the opportunity to decrease production, locate alternate suppliers and prevent further supply chain disruptions to other parties within the stream of commerce.
Certain industries can expect personal injury claims from individuals alleging businesses failed to adequately protect them from exposure to COVID-19. These claims will be based in negligence. Ultimately, a plaintiff will have to prove that a defendant breached a duty of reasonable care which caused COVID-19. Specifically, the court will analyze the standard of care, defined as the attention, caution and prudence that a reasonable person in similar circumstances would exercise.
Recently, a wrongful death lawsuit was filed by the family of a former employee who allegedly contracted COVID-19 from other employees. The lawsuit claims Wal-Mart failed to take adequate precautions to protect employees from exposure and further failed to warn employees that other employees had tested positive COVID-19.
Businesses should ensure that they are following federal and state guidelines related to public health and workplace safety to prevent contagion and document these efforts in order to refute allegations that they have breached the standard of care.
As of May 2020, multiple states have enacted executive orders to protect health care employees, staff, contractors and facilities from civil liability for injuries or death related to COVID-19. These executive orders will apply retroactively to claims occurring at the beginning of March, when the states declared a public emergency.
However, while the executive orders were designed to prevent claims against healthcare workers, facilities such as hospitals and nursing homes that had instances of negligent care prior to the date a public emergency was declared will not be immune from liability.
Further, hospitals and state health departments can expect an uptick in litigation by health care workers who were not provided adequate personal protective equipment or training to protect them.
Courts will be presented with unusual fact patterns and creative legal analysis by ambitious claimants in addition to those attempting to recover from significant economic losses.
Businesses should be mindful of potential claims, regularly communicate with counterparties, adhere to federal and state guidelines related to the pandemic and remain well informed of the legal standards in their jurisdiction regarding potential legal exposure and defenses.
Article by: Lindsay E. Dansdill
ldansdill@nzalaw-llp.com
Nielsen, Zehe and Antas, P.C. Chicago, Illinois, USA