5-1-20 As seen in the Rochester Business Journal - Local attorneys weigh in on force majeure clauses, employment during COVID-19

Posted on May 01, 2020

By AMARIS ELLIOTT-ENGEL - Rochester Business Journal

May 1, 2020

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 Mari-naccio, 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 ma-jeure 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 Marinac-cio say they are advising clients to negotiate a resolution if they can’t perform their contracts due to coro-navirus 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 Repay 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 if their hours are reduced enough. 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 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.

Lorisa D. LaRocca

Katarina B. Polozie