The practical reality of business and contractual relationships during COVID-19
During the 31 years I have spent as an attorney, I have been involved in several economic cycles and hundreds (likely well into the thousands) of lawsuits.
I most often deal with business relationships governed by complex contracts. Those 50-page contracts attempt to address virtually everything. Yet weeks into the global COVID-19 crisis, I have only seen two contracts that explicitly deal with pandemics or epidemics. One considered a pandemic a force majeure; the other, did not. That is why it is important now to review your contracts with counsel and to review your insurance policies with your insurance brokers and your counsel.
Key contractual provisions may include:
- Force majeure – An unanticipated event excusing performance; or, is this anticipated but closure is due to governmental regulation?
- Insurance – Is this an event which insurance covers or for which I should have insurance?
- Covenants – financial and otherwise – Am I obligated to make payment no matter what? Does my lack of revenue trigger a default?
- Quiet enjoyment – Is the landlord or third party required to provide?
- Hazardous materials – Is COVID-19 a hazardous material?
- Other casualty clause – Does COVID-19 constitute a casualty?
The lists of things to review will continue to grow because of the creativity of business people and lawyers. However, each list generally deals with the same general issue – How do I excuse performance today without being considered at default?
The reality is unless your contract explicitly deals with the issue, or there is a specific law or case on the issue, the risk of taking action today will not be known for years as COVID-19 cases wind their way through the courts. No doubt there will be additional upcoming legislation to deal with some of the issues.
Because the problem exists today and we will not know true legal outcomes for years to come, my experience shows the best idea is to mitigate exposure and take steps to foreclose future risk resulting form todays actions.
Here are the practical steps that I have been discussing with clients:
- Open a line of communication now. Everyone is impacted. Each side has business tensions. Each side has its unique needs. Also be sure that communications will not be used in an adverse way against you.
- Make “smart” business decisions and use “smart” counsel. Don’t threaten or flex. Try to reach a business solution that works for all. It may mean a restructuring of business terms or the relationship.
- Don’t ask now if you don’t really need. Yes, revenue is down and it may be down for the foreseeable future – but that is what virtually everyone is facing. So, if you can afford in the near term, let the other side know what is going on. Also let them know that there may be a time when you ask for a contractual modification. Or, if you can, use your strong current financial position to modify your contract. Ask for long term modifications now. Reaffirm your commitment to the relationship.
- Don’t expect swift resolution or a sympathetic ear from the courts. Current times are different and unique. However, if the financial crisis was an accurate gauge, that gauge shows that courts are unpredictable. I have seen courts refuse (via finding a way to make one or both parties loose) to enforce contracts. I have also seen institutional lenders or landlords loose political capital with judges by being too aggressive.
It always make sense to be able to show that you really and earnestly tried to resolve before going to court. Use alternative dispute resolution mechanisms like meetings or mediation now.
On the flip side, I have seen judges disregard very good defenses in order to clear cases from the system. One thing is for sure, the court system does not guaranty a result. Only you can “guaranty” a result with smart use of experienced counsel that knows and understands the courts, local practices and use of the court process. Based on my experience, smart is always better than aggressive.
- The present circumstances will change, because circumstances always change.
- If you are in a good position, use that position to your benefit.
- If you are in a less strong position, it’s alright to show you are a bit weak right now.
- No matter what, use your position to achieve concessions and perhaps strengthen your long-term relationships.
- Aggression kills. Be smart in your maneuvers.