Coronavirus cancellations mean revenue loss, potential liability
Litigation lawyer Vanessa L. Miller first took notice of the coronavirus spread in Wuhan, China, in early January. A partner at Foley & Lardner in Detroit, Miller knew that many automotive clients relied on that region for parts manufacturing.
“We didn’t know how widespread the coronavirus would be, obviously, but once it hit Europe, it was likely already in other locations. It was a matter of a domino effect,” says Miller.
Miller’s attention soon turned to conferences and trade shows.
“The number one question that we were receiving was whether there was an obligation for event organizers to cancel in order to ensure the safety of the attendees,” she says.
By early March, she counted 445 conference cancellations; now, she knows of none that are going forward as events go virtual, postpone or cancel.
The designation of COVID-19 as a pandemic by the World Health Organization on March 11 affected tens of thousands of business and consumer contracts. In short order, music festivals, theater, sporting events, university classes and travel were canceled, followed by the closure of restaurants, bars, gyms, “nonessential” businesses and government shutdowns of borders and cities.
Lawyers were suddenly swamped with questions about contractual provisions for delays or cancellations, and they found themselves immersed in force majeure provisions, common law doctrine and specifics on business interruption tucked away in insurance agreements.
‘An act of God?’
The first stop for lawyers is the “force majeure” (French for superior force) clause. Although the clauses vary from contract to contract, the essence of force majeure is to excuse or delay performance because of unanticipated circumstances outside the parties’ control.
The clauses may specify certain types of events—war, terrorism, or a labor strike, for example. Not all clauses mention “pandemic,” “disease” or “quarantine,” but “an act of God” or “circumstances beyond the parties’ control” are typically included.
“That broad catchall is what a lot of organizers are pointing to—that this was absolutely a circumstance beyond the parties’ control,” says Miller.
Most litigators agree that an overarching phrase in the force majeure clause will support delay or cancellation for the coronavirus, although one easy-to-overlook point is that the clauses typically require the canceling party to give notice.
Even if the force majeure clause is weak or nonexistent, contracting parties can turn to common law principles of impossibility of performance, impracticability of performance and frustration of purpose to excuse or delay performance, says Matthew V. Wilson, a partner at Arnall Golden Gregory in Atlanta. Co-chair of his firm’s sports and entertainment team, Wilson specializes in the music industry, representing festivals and venues, as well as artists and promoters.
Hundreds of thousands of people in music have been affected by cancellations or postponements of events ranging from South by Southwest in Austin, Texas, to Coachella in Indio, California.
“Common law doctrines would allow a party to cancel or delay or avoid performance based on the fact that the county or the city or the state said ‘no gatherings.’ This is a common law fallback that the parties can use,” says Wilson.
Facing the fallout
All of these concepts become muddied, of course, if a party uses the pandemic as an excuse for poor or already failing performance or other bad faith activity. But the invocation of force majeure or common law doctrines even in good faith circumstances is only the beginning of legal and business concerns.
While force majeure and common law theoretically return parties to their precontracting positions, the practical ramifications may be quite different.
“The ancillary issue is what happens to monies that have been paid. This is where we’re anticipating there will probably be a lot of legal fights down the road,” says Wilson.
In the music festival situation, for example, artists are paid deposits in advance as a portion of the guaranteed performance fees; venues pour cash into advance preparations. While Wilson believes that most in the interconnected music world will seek negotiated solutions, he recognizes that some smaller venues may suffer extensively.
Disappointment can set in for businesses after a Covid-19 cancellation when they turn to a review of insurance coverage.
“People will be looking to see whether insurance could provide compensation for the losses that are going to be incurred here,” says Don Hayden, a commercial litigator at Mark Migdal & Hayden in Miami. “Most of the insurance clauses for business interruption have a specific exemption for pandemics. So people are, unfortunately, not going to be able to recover for business interruption for the most part.”
Other types of insurance, such as event cancellation insurance, may also exempt pandemics or offer coverage, unless a pandemic or disease rider has been purchased.
“I don’t know that you are going to see a lot of recovery out of the insurances. The losses are going to be insurmountable in some cases,” Hayden says. Already calls are coming in from clients who are considering bankruptcy, he says.
Addressing Consumer Losses
One dividing line in the invocation of force majeure clauses arises between business and consumer contracts.
“If it’s a commercial contract with a force majeure clause, the parties have negotiated over these issues; they decided what should be included,” says Kent J. Schmidt, a partner in litigation at Dorsey & Whitney in Costa Mesa, California.
Consumer contracts are on a different footing, and the force majeure clause may not resolve individual concerns. Many travel and hospitality businesses are placing consumer satisfaction above the bare contract terms and offering future incentives or refunds to retain their relationships.
At least one class action already filed on March 11 in California Superior Court in San Diego County argues that the contract cancellation policies conflict with consumer protection laws. In Douglas v. EF Institute for Cultural Exchange Inc. a plaintiff who paid $3,800 in advance to a high school tour company is demanding return of the deposit.
The tour company canceled under reasons specified in its contract for “unforeseeable events … including but not limited to, acts of God … public health issues or quarantine … or any other reason that makes [the tour] impossible or commercially unreasonable,” and specifies that the company can retain the monies paid for application to future student tour travel.
“The class action contends that it is a contract of adhesion, that it is fundamentally unfair, that it constitutes an unfair business practice, illustrating the fact that it’s not a simple breach of contract claim,” says Schmidt.
Even in the world of force majeure and unforeseen events, COVID-19 marks an era of significant challenges.
“I don’t think we’ve seen anything like this. Not with SARS or other viruses that occurred earlier,” says Miller. “We’re all seeing that this event is unprecedented, and it’s having unprecedented impact.”
Cynthia L. Cooper is a journalist and lawyer in New York City.