Posts

Force majeure clauses and COVID-19

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on September 17, 2020.


By Phillips Murrah Attorney Kendra M. Norman

Kendra Norman Web

Kendra M. Norman represents individuals and businesses in a broad range of transactional matters.

Force majeure clauses are common clauses in contracts that allocate risk between parties and release a party from liability or obligations during unforeseeable or unpredictable events that are out of the party’s reasonable control.

These events can generally be referred to as acts of God or can be specifically listed in the agreement, often including events like war, strikes, riots or government actions. However, it should be noted that there is not a specific set of events that come under the definition of “acts of God” – this often depends on the context of the contract and the jurisdiction.

Force majeure clauses are ever-evolving and the language used has been influenced by events around us. Before 9/11, most force majeure clauses didn’t include terrorism as a force majeure event. This spurred litigation between parties regarding whether terrorism was an act of God that should be covered by the force majeure clause to excuse performance. Now, terrorism and terrorist attacks are often specifically set forth in force majeure clauses.

The conversation about force majeure clauses now revolves around whether the COVID-19 pandemic qualifies as an act of God and how this will affect contracts. As always, this depends on the type of contract, the language set forth in the contract, the context of the contract, the intent of the parties, and the governing law of the contract. Therefore, this determination is highly fact-specific and depends on several factors.

It is possible that COVID-19 could be considered an act of God in some contracts, or it could fall under force majeure clauses that contain specific references to disasters, national emergencies, government regulations or generally acts beyond the control of the parties. With the extraordinary potential consequences from COVID-19 yet to be determined, businesses should begin ascertaining whether their material contracts contain force majeure provisions and how such provisions may affect their rights and responsibilities going forward. However, given the widespread impact of COVID-19, it is possible that parties may be more likely to negotiate amendments to agreements that have been impacted by COVID-19 rather than forcing parties to rely on and litigate force majeure clauses.

Nevertheless, going forward, those entering into contracts should consider whether adding more specific terms such as epidemic, pandemic or infectious disease as force majeure events will be advantageous for them in the future.

Kendra Norman is an attorney with the law firm of Phillips Murrah.


facebook iconPlease follow us on FACEBOOK!

Does COVID-19 constitute a material adverse effect?

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on August 6, 2020.


By Phillips Murrah Attorney Travis E. Harrison

Travis Harrison

Travis E. Harrison is a transactional attorney who represents individuals and both privately-held and public companies in a wide range of transactional matters.

In addition to a vast human toll, COVID-19 has wreaked havoc on businesses, markets and supply chains. With infections still spreading, businesses have suffered cash and liquidity constraints and anticipate such suffering to continue.

The pandemic also presents unique risks to parties in acquisition agreements, such as risks concerning the financial viability of the target company. Parties often address these risks by including material adverse effects, or MAE, clauses.

Generally speaking, an MAE is an event, circumstance, change or effect that presents a material threat to the business of the target company. MAE clauses account for this possibility and allocate risk among the parties.

Such clauses are frequently used as conditions to closing and qualifiers to the seller’s representations. If the target company suffers an MAE as defined in the agreement, the clause allows the buyer to unilaterally terminate the deal without being considered in breach of contract. The seller can qualify representations made about the condition of the target company, making it more difficult for a buyer to assert a breach. Also, exclusions to the definition of an MAE are identified, such as industrywide market conditions.

One increasingly common issue is whether COVID-19 constitutes an MAE. The following questions may help determine the answer and assist parties in the negotiation stages:

  • Are there MAE exclusions such as epidemics, pandemics and natural disasters?
  • Has COVID-19 resulted in unique issues for the target company that are disproportionate to other companies in the same industry?
  • Is the buyer obligated to use certain efforts to close the deal notwithstanding events that affect the financial condition of the target company?
  • What other limitations apply to an MAE? For example, can events only occurring after executing the agreement qualify as an MAE?
  • Have the parties contractually shifted the burden to the seller to prove that an MAE has not occurred?

While these questions may provide guidance on the issue, establishing whether an MAE has occurred is a highly fact-intensive issue that depends on the unique circumstances involved and the specific language used in the acquisition agreement. It should also be noted that buyers have faced a significant burden in court to show that any event meets the criteria of an MAE. As more parties litigate the issue, the courts will play an important role in establishing precedent that will shape how parties negotiate acquisition agreements.

Travis E. Harrison is an attorney with the law firm of Phillips Murrah.

CARES Act and independent contractors – How businesses can mitigate risk related to CARES Act unemployment claims

By Phillips Murrah Attorney Martin J. Lopez III 

Below is an expanded version of a Gavel to Gavel column that appeared in The Journal Record on May 14, 2019.

attorney Martin J Lopez III

Martin J. Lopez III is a litigation attorney who represents individuals and both privately-held and public companies in a wide range of civil litigation matters.

Businesses should identify and mitigate risk related to CARES Act independent contractor unemployment claims

In response to the COVID-19 national emergency, Congress has taken the extraordinary measure to allow independent contractors, gig-workers, and self-employed individuals access to unemployment insurance benefits for which they are generally ineligible. This article is geared towards businesses that regularly use independent contractors who may file claims for unemployment insurance benefits—discussing the risks involved and how businesses can mitigate those risks.

Background Regarding Relevant CARES Act Provisions

On March 27, 2020 President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Among other provisions, the CARES Act significantly expands the availability of unemployment insurance benefits to include workers affected by the COVID-19 national public health emergency who would not otherwise qualify for such benefits—including independent contractors. This increased accessibility to unemployment insurance benefits theoretically provides an avenue for a state unemployment agency to find an independent contractor applicant to be an employee. Such a finding introduces the risk of the state unemployment agency assessing unpaid employment and payroll taxes for those a business previously treated as independent contractors. Tangentially, such a finding could serve to establish or bolster independent contractors’ claims in wage and hour litigation.

To qualify as a “covered individual” under the Pandemic Unemployment Assistance (“PUA”) provisions of the CARES Act, a self-employed individual must self-certify that she is self-employed, is seeking part-time employment, and does not have sufficient work history or otherwise would not qualify for unemployment benefits under another state unemployment program. Further, the self-employed individual must certify that she is otherwise able to work and is available for work within the meaning of applicable state law, but is “unemployed, partially unemployed or unable or unavailable to work” because of one of the following COVID-19 related reasons:

  • The individual has been diagnosed with COVID-19 and is seeking a medical diagnosis;
  • A member of the individual’s household has been diagnosed with COVID-19;
  • The individual is providing care for a family member or member of the individual’s household who has been diagnosed with COVID-19;
  • A child or other person in the household for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID-19 public health emergency and such school or facility care is required for the individual to work;
  • The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of the COVID-19 public health emergency;
  • The individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • The individual was scheduled to commence employment and does not have a job as a direct result of the COVID-19 public health emergency;
  • The individual has become the breadwinner or major support for a household has died as a direct result of COVID-19;
  • The individual has to quit his or her job as a direct result of the COVID-19 public health emergency;
  • The individual’s place of employment is closed as a direct result of the COVID-19 public health emergency.

If the individual meets the above criterion, she is a “covered individual” and is eligible for unemployment assistance authorized by the PUA provisions of the CARES Act. Such assistance was available beginning January 27, 2020 and provides for up to thirty-nine (39) weeks of unemployment benefits extending through December 31, 2020. Covered individuals’ unemployment benefits are calculated state-by-state, according to each state’s conventional unemployment compensation system. In addition, under the PUA provisions of the CARES Act, covered individuals may receive an additional $600 for each week of unemployment until July 31, 2020.

What Businesses Can Do to Protect Themselves

To counteract the risks discussed above, I recommend a business implement the following best practices when responding to a claim of unemployment by an independent contractor:

  • respond proactively to unemployment claim notices for independent contractors;
  • state clearly in the response that the relevant individual-claimants were independent contractors and not employees of the business;
  • affirmatively state that each independent contractor claimant was an independent contractor to whom the business occasionally (or routinely) provided work, but that it is unable to provide the same volume (or any) work to the individual at present because of the COVID-19 national emergency;
  • specify in the response that the individual’s eligibility for unemployment benefits must be entirely predicated on the PUA provisions of the CARES Act allowing for independent contractor participation in the program; and
  • provide the claimant’s independent contractor agreement to the state unemployment agency.

In providing this information and documentation to the state unemployment agency, the business will be able to demonstrate its independent contractor relationship with the individual. Together with the fact that these individuals’ eligibility to receive unemployment income rests exclusively on relevant CARES Act provisions, the business should be well-positioned to avoid the typical risks that can result from a successful unemployment claim by an independent contractor.

Martin J. Lopez III is an attorney at the law firm of Phillips Murrah.