Is the Coronavirus a Force Majeure that Excuses Performance of a U.S. Law Contract?

David Marmins, my incredibly talented partner, has written a great legal update on whether the coronavirus is a force majeure event in U.S. contract law. This is essential reading for any Irish or Northern Irish company with contracts governed by U.S. law.

This is the update:

The coronavirus is causing a true Friday the 13th nightmare scenario for many companies today. In mid-March, the country began ardently practicing social distancing and self-quarantining to a degree never seen before, and many businesses are immediately facing an uncertain future.

One coronavirus-related question real estate litigators are getting often today is whether force majeure (“superior force”) or “Act of God” clauses justify the suspension of performance of their duties under contracts. The answer depends on the specific contract language, local law, and the causal connection between the pandemic and the parties’ ability to perform their contractual obligations.

What Is a Force Majeure Clause?

Black’s Law Dictionary explains that a force majeure clause “is meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.” Force majeure clauses allocate risk between the parties when an unanticipated event makes performance impossible or impracticable.

While state laws vary, every jurisdiction respects parties’ right to contract. So, disputes over application of force majeure clauses start with the specific language used in the contract. A force majeure lease clause may contain a list of specific events that constitute a force majeure; it may be vaguer to include anything out of the parties’ control; or the clause may define specific events and then include broad “catch-all” language such as “for other reason whether of a like nature or not that is beyond the control of the party affected.” The following comprises an example of such a clause:

If either party is delayed or hindered in or prevented from performing any term, covenant or act required hereunder by reasons of strikes, labor troubles, inability to procure materials or services, power failure, restrictive governmental laws or regulations, riots, insurrection, sabotage, terrorism, act of the public enemy, rebellion, war, act of God, or other reason whether of a like nature or not that is beyond the control of the party affected, financial inability excepted, then the performance of that term, covenant or act is excused for the period of the delay and the party delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay.  Nothing in this Section, however, shall excuse Tenant from the prompt payment of any Rent or the obligation to open for business on the Commencement Date.

Generally speaking, the more specific the clause, the more limited application it has – if the actual occurrence is not on a long list of specific events, it is not likely a force majeure. Most clauses specify that they are only invoked when performance becomes impossible; some have more liberal language requiring only the hindrance or delay of performance.

The Coronavirus Outbreak and Force Majeure Clauses

As it pertains to the coronavirus, any broad force majeure clause language should apply since March 11, when the World Health Organization declared it a pandemic. It is unlikely any court would decide that any private party has caused the coronavirus (though, a few years ago, an Idaho Court did determine that there were questions of fact whether an egg-producer for a grocery chain contributed to an outbreak of avian flu; which outbreak allegedly prevented it from fulfilling its contractually obligated output of eggs, see Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc.2017 WL 3929308 (N.D. IO 2017)). And, many force majeure clauses specifically include “epidemic” or “pandemic” in its laundry list of qualifying events. See Aukema v. Chesapeake Appalachia, LLC904 F.Supp.2d 199, 206 (N.D. NY 2012) (“term ‘force majeure” as used herein shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents or repairs to machinery or pipes, delays of carriers, inability to obtain materials or rights of way on reasonable terms, acts of public authorities, or any other causes, whether or not of the same kind as enumerated herein, not within the control of the lessee and which by the exercise of due diligence lessee is unable to overcome”) (emphasis added). Even without that specific reference, the coronavirus should qualify under most force majeure clauses due to the government-imposed travel bans and quarantines.

Most courts require the party claiming force majeure to show that the event was not foreseeable and directly caused the failure to meet its contractual obligations. While this is often a close call in weather-related natural disasters—the geographic scope and actual impact on the stream of commerce of a storm is often debatable—a pandemic resulting in mass closures of all public events and schools should not be a close call. This is not a normal risk of doing business. The law does require the mitigation of damages, and many businesses can continue to operate at some, if not full, capacity.

As in any contract matter, strict compliance with the technical requirements of the contract may be necessary for a party to invoke a force majeure clause. Typically, a contract requires prompt notice of a claim of force majeure. Several courts have refused parties’ force majeure claims when they failed to provide adequate notice under the contract. Seee.g.Three RP Limited Partnership v. Dick’s Sporting Goods, Inc., 2019 U.S. Dist. LEXIS 22534, at *14 (E.D. OK 2019), quoting Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1168 (W.D.Okla.1989) (“‘failure to give proper notice is fatal to a defense based upon a force majeure clause requiring notice’”).

Questions regarding force majeure clauses are one of many issues that arise during challenging times for commerce, but with vigilant adherence to their contracts and applicable law, parties can navigate these troubled waters successfully.

COVID-19 AND U.S. BUSINESS INTERRUPTION INSURANCE COVERAGE

My wonderful colleague, Rebecca Kolb, has written a terrific client alert, below, on whether, and how, business interruption insurance in the U.S. could cover COVID-19-related losses. Irish and NI companies with US operations certainly have a lot on their plates right now, but this alert is essential reading:

 

Everyone is facing an unknown future with COVID-19. One question for clients is whether the impact of business interruption from the virus can be covered by their insurance policies. Having some of the loss covered by insurance could actually be the difference in a business making it through this uncertain time or facing bankruptcy. But whether coverage exists is not an easy question and requires a close examination of the coverages a business has. And, even if there is coverage, some requirements for invoking that coverage may require rapid action. Notice requirements may be be within thirty days (or less) of the interrupting event—a fairly short window when balancing other considerations that come with managing a response to a pandemic.

What is business interruption coverage and when does it generally apply?

Business interruption coverage will generally cover lost revenue and unavoidable continued business costs and is usually under the commercial property coverage part of a policy. It provides for coverage when there is “direct physical loss of or damage to” insured property. Government efforts to contain COVID-19 may also invoke a “civil authority” provision in a business interruption policy, which may apply when a government restricts or prohibits access to the insured property based on physical loss or damage.

The policy language is typically along the lines of:

This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.

Thus, the requirements are: (1) physical loss or damage, (2) to insured property, (3) caused by a covered peril, (4) resulting in quantifiable business interruption loss, (5) during the period of time it takes to restore the damaged property.

Can COVID-19 be physical loss or damage?

Whether exposure or potential exposure to COVID-19 at a property falls within the requirement of physical loss or damage is likely to be a hotly contested issue. Already, one business out of New Orleans has sued its insurance provider to have a court rule on whether closures from the pandemic could qualify. Some courts have already determined that physical loss can occur without structural or tangible changes to a property, such as through contamination. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418 WHW, 2014 WL 6675934, at *4 (D.N.J. Nov. 25, 2014) (ammonia contamination that rendered the premises unsafe constituted direct physical loss under business interruption coverage); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997) (asbestos contamination was direct physical loss under “all-risk policy”). And other courts have indicated that the threat of harm which renders property unsafe could be enough to trigger coverage. See, e.g., Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477, 493, 509 S.E.2d 1, 17 (1998) (the threat of rocks and boulders “crashing down at any time” on a property after a landslide would qualify as direct physical loss); Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 39, 437 P.2d 52, 55 (1968) (the saturation of the ground around a property rendered the premises unsafe and would qualify as direct physical loss).

When could “civil authority” coverage apply?

Generally, “civil authority” coverage applies when there is a forced closure by a civil authority. This typically happens through a government order barring access to the insured property based on physical loss or damage. In addition to the considerations regarding physical loss, there are questions of whether the government guidance in a particular area rises to a forced closure.

If the government has not ordered the closure of a particular business, and merely discourages the population from visiting that business, it may not be enough to invoke civil authority coverage, though that still depends on the policy language. This has already led to substantial commentary from, for example, the United Kingdom’s hospitality trade organization, UKHosptiliaty, given the British government’s decision to only strongly advise its citizens to avoid restaurants, rather than order that they be shut down.

What about other bars to business interruption coverage?

There are several potentially applicable standard exclusions that could separately bar coverage for a COVID-19 business interruption, some specifically adopted by the industry to address pandemic concerns after the last SARS outbreak. For example, the Insurance Services Offices, Inc., or “ISO,” is a company that creates template forms that insurance companies often use for their policies. In 2006, the ISO forms for business interruption coverage added an exclusion to specifically bar coverage for virus pandemics. But some states seem to be looking at legislation that would negate the exclusion. New Jersey, for example, has proposed legislation that would require business interruption coverage for COVID-19 even if there is a specific exclusion in the policy for influenza pandemics.

Are there other potential policies or coverages that could apply?

Depending on the type of business, there could be several other types of insurance that could apply in the wake of this pandemic. Under a commercial property policy, there could also be dependent property/contingent liability coverage. This coverage may apply if a supplier or another business has a business interruption from physical loss that impacts the insured business.

Other potential policies that may apply are:

  • Event Cancellation policies (which are available to companies in the event business)
  • Loss of Attraction coverage (which can apply for destruction of an “attraction” nearby the insured property)
  • Supply Chain policies (which are similar to dependent property/contingent liability coverage but may not require physical loss from the supplier business)
  • Commercial General Liability policies (which may apply to loss suffered from bodily harm)
  • Director & Officers policies (which may apply in the event of a lawsuit based on company actions in response to COVID-19.

Conclusion

Insurance policies exist to mitigate the effects of unanticipated economic harms. COVID-19 certainly qualifies. But clients should carefully review existing policies to take advantage of any existing coverage and, equally as important, to give proper notice to their insurers of potential claims.

US Aluminum/Steel Tariffs and Irish/NI Companies

Several Irish and NI companies have asked me whether the recently-imposed US tariffs on aluminum and steel would impact their products–products that use/incorporate aluminum and steel. Much of the confusion stems from how the tariffs were developed and publicized. The bottom line is that US steel/aluminum tariffs should not impact most Irish or Northern Irish companies.

As for the tariffs, for goods entered, or withdrawn from a warehouse for consumption, on or after March 23, 2018, there will be a (i) 10% ad valorem tariff on defined “aluminum articles” imported from all countries except Canada and Mexico; and (ii) a 25% ad valorem tariff on defined “steel articles” imported from all countries except Canada and Mexico.

Under the tariff proclamation, “aluminum articles” are defined in the Harmonized Tariff Schedule (HTS) as: (i) unwrought aluminum (HTS 7601); (ii) aluminum bars, rods, and profiles (HTS 7604); (iii) aluminum wire (HTS 7605); (iv) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (v) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (vi) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70). “Steel articles” are defined at the HTS 6 digit level as: 7206.10 through 7216.50 including ingots, bars, rods and angles), 7216.99 through 7301.10 (including bars, rods, wire, ingots, and sheet piling), 7302.10 (rails), 7302.40 through 7302.90 (including plates and sleepers), and 7304.10 through 7306.90 (including tubes, pipes and hollow profiles).

The tariffs cover unfinished products that would be used an inputs for finished products, and not for products that incorporate or use aluminum or steel. There is a very low volume of imports from Ireland ant the UK under the covered tariff headings. As stated above, the bottom line is that US steel/aluminum tariffs should not impact most Irish or Northern Irish companies.

 

How to Open a U.S. Bank Account

Just back from a two-week swing through Belfast, Antrim (at a wonderful InvestNI program) Londonderry/Derry, Galway, and Dublin, meeting with companies looking to export to the U.S. One question that came up time and again: how can an Irish or NI company open a U.S. bank account?

Opening U.S. bank accounts has become harder because of the ‘know-your-customer’ requirements on U.S. banks by virtue of U.S. anti-money laundering regulations. In general (and keep in mind that some banks may have other specific requirements), in order to open a U.S. bank account, a bank will want to see (i) a certified copy of your U.S. affiliate’s certificate of incorporation/formation; (ii) your entity’s taxpayer ID number from the IRS; and (iii) a signed copy of your U.S. affiliate’s initial consent in lieu of a board meeting, which consent should include banking authorization language (see the sample consent here). The pain-in-the-neck part is this: you’ll need someone to actually go to the U.S. bank (with his/her passport and another form of ID) to open the account. The banks want to be sure that the account holders are who they say they are. Often, Irish/NI parent companies will open the account when one of their executives travels to the U.S. on other business.

Derry/Londonderry Doing Business in the U.S. Event–September 7

Related to yesterday’s post, I’m also thrilled to be speaking at a Doing Business in the U.S. program in Derry/Londonderry on the morning (8:30) of  September 7, at Invest Northern Ireland’s office there. I’ll also be using the Invest NI office for the balance of the 7th as my ‘office’ in case people need to speak about U.S. expansion. Looking forward to it, and thanks to the great help from @investNI, @investNI_USA, @derry_chamber, and @investdcsdc. Contact Invest NI’s Derry/Londonderry office for more information.

Galway Chamber Event: Doing Business in the U.S.

I’m thrilled to announce that I’ll be giving a talk, at the Galway Chamber of Commerce, on September 12 on doing business in the US. I’ll be presenting with Mary Rogers, Innovation Community Manager, PorterShed (@portershed) & Founder & CEO, Stateside Solutions (@StatesidePortal). The program will discuss the following topics: (i) Starting at the start: why expand to the U.S?; (ii) Can your product be sold in the US and/or are there any pre-sale registration or approval requirements?; (iii) Do you need a U.S. affiliate entity? Considerations on form, jurisdiction and tax impact of U.S. affiliate entity; (iv) IP protections; (v) Controlling the contract(s); (vi) Product liability concerns; (vii) Insulating the Irish parent; (viii) Labour/employment/immigration; and (ix) Conclusion: Moving forward. This event will include time for Q&A.

 

Location: Galway Chamber, Commerce House, Merchant’s Road, Galway Date: Tuesday, 12th September Start Time: 8am Duration: 1 hr 30minutes Price: Free to attend Register here

 

US Workforce Compliance for Irish/NI Companies

My partner Montserrat Miller is an expert on workforce compliance issues, including compliance with employment eligibility verification requirements (the I-9 form). She also has her own blog at http://www.workforcecomplianceinsights.com/. Compliance with US employment eligibility verification requirements sometimes slips through the cracks for Irish and NI companies with US employees. It shouldn’t, since the penalties for non-compliance are high. Montserrat can help Irish and NI companies navigate these compliance issues, and she’s compiled a list of resources at http://www.workforcecomplianceinsights.com/2017/07/11/how-compliant-is-your-company-with-the-form-i-9-requirements/. Check out the link, and contact Montserrat (or me) with any questions.