In the latest edition of The Wright Toolbox:
- Moving Forward – What Does Stage One of the Reopening Plans Look Like for Employers? – read now
- Does COVID-19 Give Rise to an Impossibility Defense? – read now
Moving Forward – What Does Stage One of the Reopening Plans Look Like for Employers?
While Georgia has been the focus of many news stories for its early, aggressive actions to reopen its economy, the data and models suggest that many states will be able to begin reopening their economies throughout the month of May. However, reopening will be moving in phases and is not simply going to be a free-for-all where everything goes back to normal. First, the reopening plans are contingent upon the availability of expanded testing capabilities, contact tracing to determine who may have been infected by individuals who test positive, availability of personal protective equipment (“PPE”) and medical capacity to ensure that a second surge would not lead to a worst-case scenario. Second, reopening plans are focused on slowly returning to normal, in most cases in three phases, through a gradual lifting of restrictions.
The Federal Government has issued guidance on what Phase One will look like for employers in its Guidelines for Opening Up America Again. Through all phases, employers are directed to continue to implement and follow policies promoted by federal and state authorities related to social distancing and protective equipment, use of temperature checks, sanitation and disinfecting practices, limited use and disinfection of common and high-traffic areas, business travel. In Phase One, employers are still encouraged to promote telework, whenever possible. Instead, employers are directed to return their employees to work in phases, not all at once. Common areas where employees are likely to congregate or socialize should be closed and, if that is not possible, strict social distancing protocols should be implemented for those areas. Non-essential travel is discouraged. The takeaway for employers? If you are going to reopen, you need to ensure that your policies and procedures still follow CDC guidelines for cleanliness, sanitation and social distancing. Employers who reopen without adequate protections in place for their employees risk restarting a surge of cases and possibly negligence claims against the company.
Remember, though, that all of the stay-at-home orders were implemented by the states, so these phases will be implemented by the states based on their own unique circumstances and timelines. Maryland, for example, has issued the “Maryland Strong: Roadmap for Recovery” utilizing the federal government’s guidelines. In addition to those essential businesses that were permitted to stay open already, Stage One calls for lifting the stay-at-home order, and involves business, community, religious, and quality of life improvements. Examples of changes that could be implemented in this stage include:
- Reopening of small shops and certain small businesses that were previously classified as non-essential
- Curbside pickup and drop-off for non-essential businesses
- Elective medical and dental procedures at ambulatory, outpatient, and medical offices
- Limited attendance outdoor religious gatherings
- Recreational boating, fishing, golf, tennis, hiking, and hunting
- Reopening of car washes
- Limited outdoor gym and fitness classes
- Outdoor work with appropriate distancing measures
- Some personal services
Stage One is notable for what is not included. Schools and daycares are not included in the types of businesses that should reopen, so employers will still need to be flexible with employee schedules and allow the use of leave under the Families First Coronavirus Response Act. Some non-essential businesses will be permitted to reopen, but not all, and social distancing will still need to be followed for those that reopen. It can be expected that individuals in indoor public spaces will still need to wear masks and stores will continue to use PPE to protect their employees. Bars and restaurants will likely still be limited to takeout and delivery services until Stage Two. While it is a reopening, Stage One is more reminiscent of the initial responses to Covid-19 than the pre-pandemic economy.
As we move forward through the phases of reopening, we will continue to monitor the federal, state and local responses to COVID-19. Please visit our resources page for additional information as we move, hopefully, to a return to normalcy.
Does COVID-19 Give Rise to an Impossibility Defense?
by Tom Moran
Any business finding itself in a contract that it cannot complete due to COVID-19 should consider asserting an impossibility defense. Unlike a force majeure defense, which relies on the particular language of the contract, and specific case law interpreting the clause, impossibility is a common law defense. This means that even if notice provisions or other conditions precedent for relying on force majeure were not complied with, an impossibility defense may still be available.
The rationale behind the impossibility defense is that one party should not bear the entire risk of nonperformance when an unexpected event renders performance impossible. In other words, when the parties make a basic assumption when forming a contract, and that assumption falls through, the law will not punish the nonperforming party if it was not at fault. In this situation, performance will be excused.
The impossibility defense typically sets a high bar for a company that wants to avoid its performance under a contract. Most jurisdictions put an emphasis on upholding the bargains made between private parties. You should expect that without compelling circumstances, courts will uphold the terms of the contract wherever possible.
A classic example is a contractor that agrees to provide security services at a particular building. If that building burns down due to an accident that was not the fault of the owner or the contractor, the contract is impossible to perform and can be cancelled without penalty to either party. Over time, this principle has evolved to include situations where performance is not just physically impossible, but commercially impracticable. So, if the security system provided by the contractor requires the use of a particular rare metal, and a global shortage of that metal occurs such that it can only be obtained from one particular mine on the other side of the world, at 1,000 times the price, performance may also be excused.
The elements of a successful impossibility defense are:
- An unexpected occurrence of an intervening act
- The occurrence was of such a character that non-occurrence was a basic assumption of the agreement; and
- The occurrence made performance impracticable
For contracts that were in existence before approximately February 2020, the COVID-19 pandemic will almost certainly be considered “unexpected”. However, new contracts will need to specifically address who bears the risk of nonperformance in the event of a pandemic. If a contract is entered into with the knowledge we have now and it can’t be performed later due to virus-related issues, it may be at the risk of the party who can’t perform if they did not address the virus in the contract.
As for the “intervening act,” simply stating that you are having problems fulfilling your obligations because of the virus is not going to satisfy this requirement. To be “intervening” an event has to specifically hinder the performance of a duty arising under the contract in some way. For example, if a government-ordered lockdown prevents employees from going to a jobsite where presence on the premises is necessary (such as in construction or factory work), that would qualify as an intervening event. A contract cannot compel you to do something illegal, or violate a government order, even if it is later found unconstitutional. If half of your workforce gets sick with COVID-19 and you experience a slowdown in productivity as a result, that may constitute an intervening event, depending on your company’s ability to work with a reduced workforce, remote work, and other potential factors.
The second factor asks whether, given the nature of the contract, the parties could have been expected to account for it at the time they signed it. Some jurisdictions refer to this as “foreseeability,” but in the Fourth Circuit, where I practice, it has moved away from this language because the human imagination can make just about any far-fetched scenario foreseeable. For most contracts, a world-altering pandemic would have been outside the reasonable scope of the parties’ anticipation prior to this year, so for most claims at this time this requirement will be met.
The last factor is impracticability of performance. This is going to be the most contested factor in the vast majority of COVID-19 claims. It is heavily fact- and contract-specific. Again, mere impossibility is not the only situation that will satisfy this factor. It can include changed circumstances where the costs of performance due to the unforeseen event would be excessive and unreasonable. If you are relying on increased costs to claim impossibility, the costs need to have increased to such a degree that they defeat the purpose of the contract.
An important point tying into this concept is the duty to exhaust all alternatives. If there is an indication that you may not be able to perform a contract, you should not simply rest on your laurels. The best practice is to give notice to the other party of the issue as soon as possible, and begin exploring your alternatives. In a construction contract, this may mean looking into alternative suppliers or replacement materials. In commercial contracts, you may need to adjust quantities, prices, or times of delivery. Always document your efforts to investigate these alternative means of performance, even if they don’t end up bearing fruit. Proof of these efforts may persuade a court that you did everything you could to avoid terminating the contract, but you had no choice.
Finally, when terminating a contract with the eye toward asserting an impossibility defense, you should decide whether your situation involves permanent impossibility or temporary impossibility. Where the purpose of the contract is only temporarily frustrated, then a delay equal to that period of time is preferable to a full termination. Unless it would be materially more burdensome to resume performance of the contract than it would have been had there been no frustration, then you will be expected to perform once the situation is resolved. Someday, hopefully soon, the COVID-19 crisis will be behind us and businesses will open back up. Where possible, you should assume that the inability to perform is temporary and that the contract will resume when that occurs.
If you are in Virginia, West Virginia, or the District of Columbia and have questions on whether your duty to perform under a contract can continue in the face of COVID-19, please contact Tom Moran at (804) 362-9434 or firstname.lastname@example.org.