Have You Updated Your Contracts to Reflect COVID-19?

If you haven’t yet updated your contracts to address COVID-19, time is of the essence...

If you haven’t yet updated your contracts to address COVID-19, time is of the essence. The ongoing pandemic has created a wide range of unique issues that can impact the parties’ respective rights and responsibilities.

For instance, do your contracts address what will happen if performance is delayed due to another government-mandated shutdown? Have you addressed the potential liability if someone contracts COVID-19 on your premises?

Impact of COVID-19 on Existing Contracts

For the past several months, businesses have been analyzing their contracts to determine how standard provisions apply to the COVID-19 pandemic. In many cases, the exercise has been akin to trying to stick a square peg in a round hole. Not unexpectedly, legal disputes have resulted from differing legal interpretation, and cases are making their way through the court system.

Addressing COVID-19 in Future Contracts and Amendments

For businesses of all sizes, being proactive in addressing COVID-19 in your new and amended contracts can save both time and money.  Below are a few areas where you may want to consider updating your existing clause language with pandemic-specific language: 

Performance Delays

COVID-19 has brought force majeure clauses into the spotlight. As discussed in prior posts, a force majeure provision may excuse performance under a contract. The circumstances include those deemed beyond their control that make performance inadvisable, commercially impracticable, illegal, or impossible. Examples include natural disasters like hurricanes, floods, earthquakes, and other “acts of God.” 

Contract parties seeking broad coverage to excuse performance via a force majeure clause should ensure that the contract expressly addresses pandemics, diseases, and resulting actions by government authorities, such as mandatory shutdowns. In addition, because most courts will not allow a party to rely on a force majeure provision if an event was foreseeable or known at the time of entering into a contract, it is imperative to define the term “foreseeable.”  Certain delays related to COVID-19 will be deemed to be foreseeable because the parties were aware of the pandemic when they executed the contract. However, others may still be unexpected.

To avoid potential disputes, performing parties should consider including language stating that they will be relieved from performance whether or not the underlying applicable event is foreseeable when the contract is signed. Performing parties should also consider the standard required to trigger the availability of force majeure, i.e. must the event “prevent” performance or simply make it more difficult? The parties should also consider what standard will apply to any required mitigation efforts, i.e. does the contract require “good faith efforts” or “commercially reasonable efforts?”

Cost Escalations

Supply chain disruptions can result in higher costs, as can complying with new COVID-19-related health and safety regulations. Your contracts should address how such expenses will be allocated and what happens if unknown cost escalations arise after the contract or amendment is executed.

Termination/Cancellation Provisions

Given the uncertainty surrounding COVID-19 and the potential for future government restrictions/shutdowns, businesses should carefully review the termination and cancellation provisions in any new contract. To potential disputes, the parties may wish to specifically address what happens if the contract is terminated in whole or in part as a result of COVID-19 related restrictions, i.e. will payments be refunded or will costs be reimbursed? These provisions are particularly relevant to industries that may be impacted by COVID-19 restrictions, such as the construction, tourism, and hospitality industries.

Liability Waivers

Liability waivers have become commonplace as businesses reopen amid COVID-19. While they may seem like a good way to limit liability, it’s important to understand that they may not always be enforceable.

With regard to customers, agreements between private parties that limit liability for either party’s negligence are generally enforceable. Liability release agreements typically include provisions under which a party acknowledges an assumption of risk and relinquishes the right to sue should injury result. However, waivers can’t protect businesses from gross negligence or willful conduct. With regard to employers, waivers can’t supersede workers’ compensation statutes. Courts are also reluctant to enforce contracts requiring employees to prospectively waive their legal rights and will construe provisions strictly against the drafter.

Finally, Republicans have introduced legislation in Congress that would shield businesses from COVID-19-related lawsuits so long as they use “reasonable” efforts to keep their customers and workers safe and comply with all health and safety regulations. While the measure has been included in COVID-19 relief packages currently being negotiated by lawmakers, its passage is uncertain.

Insurance Coverage

In light of the liability risks associated with COVID-19, it is a good time to conduct a thorough review of your insurance coverage and determine what coverage may be available in certain circumstances.

Many businesses have likely already reviewed their business interruption insurance, which provides coverage when the insured suffers a loss of income from a disruption of business operations. The availability of business interruption coverage for losses associated with government-mandated shutdowns is still an evolving issue. While many insurers denied COVID-19-related claims based on the lack of any physical loss or provisions excluding viruses/pandemics, the resulting legal disputes are still working their way through the system.

Going forward, businesses should access whether they have sufficient coverage should someone allege that they were exposed to the virus on your property. Workers who contract COVID-19 may be entitled to workers’ compensation benefits, which would generally be covered under an employer’s workers’ compensation policy. Meanwhile, customers who claim they were exposed to the virus at certain premises may also seek to hold the business accountable. These claims may trigger coverage under commercial general liability policies, which provide coverage for “bodily injury” to certain individuals.

Given that cyberattacks have increased significantly since the pandemic began, businesses should also evaluate their current insurance policies to determine if losses incurred due to cyberattacks (business interruption, website outage, privacy breach) would be covered. If you do identify coverage gaps, it is advisable to consider a cyber-insurance policy that specifically addresses these risks.

Employment Agreements  

COVID-19 has been disruptive for employers and employees alike. In the height of the pandemic, many employers were forced to cut their employees’ hours, reduce compensation/benefits, and alter job duties. Now that the dust has settled, any such changes should be memorialized in writing and signed by both parties. Employment agreements should detail the extent of such changes, as well as the expected duration.

Many employees have also transitioned to a remote workforce. Employment agreements may also need to be amended to address workers’ new obligations. Issues that may need to be addressed include cybersecurity, safeguarding confidential business data, and recording hours worked. All policy/procedures changes related to remote working should be put in writing and acknowledged in writing by employees

For employees who are returning to the office, employers should also place all new health and safety protocols in writing, such as mandatory temperature screenings, health questionnaires, and COVID-19 testing. Employers should also ask employees to sign acknowledgments that they understand and will comply with the new procedures as a condition of returning to the work site.

Key Takeaway

COVID-19 pandemic has wreaked havoc on many businesses and created a significant amount of legal uncertainty. Going forward, businesses can regain control over their potential liability by expressly addressing COVID-19 in future business proposals, agreements, and contract amendments. To achieve the best protection, we strongly recommend working with an experienced attorney who can help you address your business’s unique risks.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.