Some LEGAL ISSUES to consider during the Coronavirus Pandemic
Following is an informative conversation between StrategIQ® Financial Group’s CEO, Chad Hassinger, and Executive Vice President and General Counsel, Markus R. F. Sleuwen.
Chad: Many of us have been following attentively with much concern the health-related developments related to the Coronavirus Pandemic and the financial repercussions from the same. Some of us probably have not been as focused on the legal implications and repercussions from this Epidemic. Of course, many are aware that the federal government has been busy passing laws that relate to the current Pandemic. Could you please highlight a couple of these?
Markus: The federal government has enacted two major laws: the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). There is a general belief that the federal government will be required to pass an additional substantial assistance package in the form of another major legislation, the extent and scope of which will depend on the development of the pandemic over the next two to four weeks. Many expect the process of passing the next package to be more much more difficult than the CARES Act. Every industry that was left out of the CARES Act is lobbying hard to be included in the next package.
The FFCRA temporarily requires most U.S. private employers with less than 500 employees and public employers with at least one employee to provide paid leave to employees for certain COVID-19-related reasons and expands the Family and Medical Leave Act (FMLA) to provide employees paid leave under the FMLA to care for a child as a result of school or child care closings due to a public health emergency. While employers are responsible for funding the paid leave, employers will be able to take tax credits for the paid leave provided to employees under the FFCRA. According to the U.S. Department of Labor (DOL), the paid leave provisions of the FFCRA will take effect on April 1, 2020, and expire as of Dec. 31, 2020.
A recent informative article about the FFCRA can be viewed by clicking on this link: https://www.natlawreview.com/article/emergency-legislation-families-first-coronavirus-response-act-updated-march-26-2020
The CARES Act contains provisions dealing with:
- Keeping American Workers Paid and Employed, which includes paycheck protection and loan forgiveness, and small business contracting relief.
- Assistance for American Workers, Families, and Businesses, which includes unemployment insurance and tax relief.
- Supporting America's Health Care System in the Fight Against the Coronavirus, which includes provisions related to medical supplies, health care coverage, and paid sick and family medical leave.
- Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy, including relief to airlines, financial institutions, and sectors critical to national security.
- Coronavirus Relief Funds
- Emergency Appropriations for Coronavirus Health Response and Agency Operations
A recent informative article about the CARE Act’s emergency loan provisions can be viewed by clicking on this link: https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final.pdf
Chad: Many of us will be impacted by these federal laws. They certainly provide substantial relief to many individuals, strong financial support to our health care system and a massive line of support to the financial markets. Are there other legal issues that we all should be mindful of.
Markus: Yes. There are a number of legal issues that may not be on some people’s radar but I feel are important to keep in mind.
People are parties to many contracts. Contracts may include agreements with employers (employment contracts or employee sponsored/provided benefits), companies and/or equity holders of such companies (subscription, partnership, operating, shareholder or similar agreement), trusts, insurance companies (health, life (whole, term, IUL, annuity), home, car, travel, purchase protection or liability insurance policies) financial institutions (banks, custodians, credit card companies or investment advisors), utilities (gas, electric or water) or other service providers (internet, cable tv, phone (mobile and home/office), streaming companies (video or music). Some agreements are not with any third parties, but include important legal provisions, including wills, powers of attorney and medical directives.
Steps to Take Now:
Our advisors often remind clients to review those contracts that directly relate to the investment advisory services that SFG provides to make sure that they are up-to-date. In this time of heightened concern about adverse health repercussions, including a more elevated risk of death, it is a good idea to review again the beneficiary designations relating to all accounts (insurance companies or financial institutions), but also to review your wills, powers of attorney and medical directives (or, if you do not have these in place, or if you have adult children that do not have these in place, consider putting these in place immediately).
It is important to monitor how the outbreak may affect performance of contractual obligations. Here are a few practical steps that people may take:
If your performance may be affected, take reasonable steps to minimize the likelihood that any such performance problems occur or discuss them with your counterparty. If you anticipate performing some but not all of your contracts, be careful prioritizing which ones to perform and which ones not, keeping in mind applicable laws and relevant contractual provisions.
If your service providers are exposed to the effects of the outbreak (including the potential for insolvencies or bankruptcies), line up fallback alternatives.
Review your insurance policies to determine whether they cover the epidemic or its consequences, paying attention to applicable notice requirements. Also, if you are employed or are a leader of a business that employs others, consider contacting your HR department or insurance provider to determine whether company provided insurance (health, life or disability) (1) is subject to any exclusions that may be related to the Coronavirus epidemic or (2) may be enhanced (even if only temporarily) to provide higher limits/benefits (especially if the cost of such higher limits/benefits is relatively minimal – if the employer is not willing/able to pay for such higher limits/benefit, employees are likely to appreciate being given the option to pay themselves for such additional coverage).
Identify the force majeure provisions in you contracts and ensure that you satisfy any required notice requirements, including applicable notice periods.
Keep detailed records of how the Coronavirus epidemic and its consequences are impacting your performance – this may be useful in a later dispute over liability. For the same reason, be cautious in how you refer to the effects of the outbreak in any oral or written communications.
Consider whether force majeure, material adverse change, change of laws, frustration or the other principles can be used as leverage to negotiate a sensible commercial solution to the difficulties caused by the current epidemic.
Commercial contracts often contain “force majeure” clauses, excusing a party from performing in certain circumstances or even allowing for termination of the contract without liability where such party is prevented (or hindered or delayed) from performing its obligations due to, for example, acts of God, flood, drought, natural disaster, war, or other any other cause beyond such party’s control. Many force majeure clauses do not expressly identify epidemics, pandemics or contagious diseases as force majeure events. In such cases, it is necessary to explore, as construed under the law applicable to the contract, whether the epidemic and its consequences fall within the scope of the force majeure clause, or whether it is worded sufficiently broadly to comprise events of a comparable nature to those expressly mentioned in the provision.
Here are some things to look out for:
Does the clause expressly state that an epidemic, pandemic or contagious disease constitutes a force majeure event? The World Health Organization has declared that the Coronavirus outbreak is a “Public Health Emergency of International Concern”.
Has the epidemic resulted in events that are expressly stipulated in the clause, such as shortage of labor or raw materials or strikes?
Does the provision contain general (rather than specific) language, for example, a reference to “any cause beyond the control of the party”? Can this be construed under the applicable law as including the Coronavirus epidemic or its consequences?
Material Adverse Change:
Loan and acquisition agreements often contain material adverse change clauses (MAC clauses). Such provisions allow banks in loan transactions to call a default if there is an adverse change in the borrower's position or circumstances; and allow purchasers in acquisition transactions to walk away from the acquisition before closing if events occur that are detrimental to the target company. For example, a loan agreement may allow a lender to call a default if there is a "material adverse change in the borrower's ability to perform its obligations under the finance documents", and/or in the "business, operations, property, financial condition or prospects" of the borrower.
Whether the Coronavirus epidemic has triggered or will trigger the MAC clause in your contract will involve similar considerations as those mentioned above, including the precise words used in the clause (for example, are there references to operational disruptions or financial prospects), and how the clause is construed under the law applicable to the contract.
Change of Laws:
Certain contracts – such as long-term contracts – may also contain a "change of law" clause, which entitles either party to terminate the contract (or possibly, use best efforts to re-negotiate it), if a change in the applicable law makes it impracticable or impossible for a party to perform its obligations under the agreement.
If the Coronavirus epidemic leads to laws being passed that, in an attempt to curb the epidemic, restrict a party's ability to perform its contractual obligations (such as travel restrictions, quarantine measures, government-mandated factory closures or supply chain blockages), such change of law provisions could become relevant.
Apart from the contractual provisions, some legal systems also contain general principles which excuse parties from strict compliance with obligations where it is impossible (or, possibly, difficult) to do so. These principles may apply even if contracts are silent as to such a right.
For example, a contract may be discharged for frustration, where something occurs after the formation of the contract that makes it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation. But, the threshold for establishing frustration is high, and where there is a broadly drafted force majeure clause or one which captures the present situation, parties may be better off relying on such a clause. Generally, the frustrating event must not be an event anticipated or provided for in the contract, must not be caused by the party seeking to rely on it and must be an outside event or extraneous change of situation.
In the present situation, disputes may arise over whether the disruptions make performance impossible, or a radically different obligation, or if they merely form part of the risks that the parties had agreed to allocate under the contract. Much turns on the length and intensity of the events in question, and whether these can be overcome with time, or not.
For example, a contract for the supply of goods or services may be frustrated if the extended holiday or travel restrictions have rendered it impossible for the supplier to deliver the goods or services by a certain date and where "time is of the essence". On the other hand, there likely is no frustration if the disruption is relatively limited.
Chad: Thank you for sharing this valuable information. You have given us lots of things to consider and multiple suggestions to follow-up on.
Markus: You are very welcome. One last item… if any reader of this article is a client of SFG and needs a recommendation of a lawyer to provide assistance with any legal matter, contact your advisor and ask for a recommendation.
THIS INFORMATION IS FOR GENERAL INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND IS NOT SPECIFIC TO ANY INDIVIDUAL'S PERSONAL CIRCUMSTANCES. WHILE IT HAS BEEN DERIVED FROM SOURCES BELIEVED BY THE AUTHOR TO BE ACCURATE, THE AUTHOR AND STRATEGIQ® FINANCIAL GROUP, LLC ("STRATEGIQ®") MAKE NO CLAIMS, PROMISES, OR GUARANTEES ABOUT THE ACCURACY, COMPLETENESS, OR ADEQUACY OF THIS INFORMATION, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS AND OMISSIONS IN THIS INFORMATION. THIS INFORMATION DOES NOT CONSTITUTE, IS NOT INTENDED TO REPLACE OR SERVE AS A SUBSTITUTE FOR, AND SHALL NOT BEEN RELIED UPON AS, LEGAL OR TAX ADVICE TO ANY PERSON, AND MAY NOT NECESSARILY REFLECT THE MOST CURRENT LEGAL DEVELOPMENTS. THE VIEWS AND OPINIONS EXPRESSED IN THIS DOCUMENT ARE THOSE OF THE AUTHOR AND DO NOT NECESSARILY REPRESENT THE VIEWS OF STRATEGIQ® OR ANY OF ITS OFFICERS, MEMBERS OR AFFILIATES (OTHER THAN THE AUTHOR).
INVESTMENT ADVISORY SERVICES ARE OFFERED BY STRATEGIQ® FINANCIAL GROUP, LLC, AN INVESTMENT ADVISER REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION.