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Coronavirus Threatens to Flood Courts With Contract Disputes

March 25, 2020, 5:01 PM

The coronavirus pandemic has left companies across an array of industries wondering what to do if they can’t perform the services they are contractually obligated to provide.

Health-care attorneys and others who specialize in contract resolution say they’ve been getting this question from clients a lot in the past week as federal and state leaders have taken increasingly restrictive measures to stop the spread of the new coronavirus.

But even contracts that planned for unforeseeable circumstances may not absolve a company from all liability. That’s why attorneys expect to see contract breaches become a major source of litigation when it’s back to business as usual.

“It’s going to be a huge mess,” said Allen Briskin, senior counsel at Pillsbury Winthrop Shaw Pittman LLP, who represents health-care providers, payers, and others who serve the health-care industry. “Not only have most of us not planned for a pandemic in the practical sense, we haven’t planned for it in a legal sense.”

Force Majeure

Some contracts have force majeure clauses that excuse a party from performing its obligations when an event beyond its control prevents it from performing its contracted services.

“But the thing about force majeure is it’s not some overarching legal concept that applies to all contracts,” Briskin said. “How force majeure affects you is based upon the way it’s written in your contract.”

And companies may be dealing with the disruptions of a multiple of contracts at one time.

“Any health system, health plan or health-care provider participating in managed care significantly is going to have tens if not hundreds of these contracts,” Briskin said. “A large health system probably has a few 100 managed care contracts. They enter into these things with a multitude of payers.”

The health-care industry isn’t the only sector dealing with a disruptions of services.

Attorneys say a multitude of companies have found themselves unable to perform services because their employees are sick, at home with kids, or prevented from coming work due to a state order. Manufacturers that receive parts from China have also been affected, as well as any company that planned an event with more than 10 people present.

“We fully expect to see a significant increase in bankruptcy in the coming weeks resulting from this because businesses are simply not able to work and generate revenue,” said Zane Gilmer, a partner at Stinson LLP who specializes in securities, banking, and compliance.

Force majeure provisions may help some companies avoid having to pay damages for breach of contract. Attorneys, however, say the provisions and level of protection can vary dramatically from contract to contract.

The provision generally allows a contract to be suspended or discontinued when there’s an “act of God” or some extraordinary event, but attorneys say it’s unclear if a pandemic fits in that designation.

“We just don’t have law yet on whether, for example, Covid will qualify as an act of God,” said Lisa Richman, a partner at McDermott Will & Emery, who co-chairs the firm’s international arbitration and dispute resolution group. “Given the widespread nature it’s certainly possible, but again that’s not something that’s been tested yet so it’s just an open question.”

Courts have interpreted the term to mean an extraordinary act of nature and something truly beyond a party’s control, Richman said, adding that some of them refer to weather-related events but there is very little jurisprudence on what qualifies.

Taking Action

Some companies have already started notifying those they contract with that they’re invoking force majeure.

“Entities and individuals are taking this very seriously and are taking actions to protect their rights flowing in both directions,” Richman said. “Are clients considering sending out notices or in some instances sending communications to their contracting partners? Yes, and we’re helping them with that.”

Briskin has already seen a notice from one major health system, though he declined to name which one. Preemptive letters like that stem from “an ignorance about what force majeure really is in some law departments,” he said.

“You look at that and say what does that even mean? The hospitals are still open, they’re still treating patients,” he said.

Companies can’t legally declare force majeure until they’re facing a specific breach of contract, Briskin said, explaining that it’s a legal concept that comes into play when contracted parties are fighting about money.

“It’s not like you can just say ‘force majeure’ and declare a snow day for yourself and be relieved of all your external obligations,” he said.

Contract Check

Sending out notices too soon could actually do more harm than good in some situations.

“There are requirements for the party that’s invoking force majeure to provide timely notice,” Gilmer said. “There are repercussions, however, if you do it and you’re wrong.”

Companies that invoke force majeure before they know they are unable to perform their contractually obligated service could breach their contract by doing so.

“If it turns out you can perform the contract, you may have caused your counterparty extra damage by telling them you could not perform the service, thereby forcing them to go out into the market and find a substitute for you when that was unnecessary,” said Sharon Markowitz, a partner at Stinson LLP, who specializes in force majeure and financial services litigation.

Attorneys say it’s important for companies to read their contracts carefully and understand that other factors will determine their liability.

“Your contract is the starting point, but not the ending point,” Markowitz said. “There are common law doctrines and statutory doctrines in the uniform commercial code, which may apply if you don’t have a force majeure provision or may even supplement a force majeure provision in a contract.”

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Brent Bierman at bbierman@bloomberglaw.com

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