Preventing Liability After COVID-19

Preventing Liability After COVID-19
01 May 2020

Businesses will gradually reopen in the coming weeks if COVID-19 infections continue to decline, but they should not regard it as a signal to return to normal. We will see the COVID-19 crisis spawn a wave of lawsuits in the months ahead as struggling businesses and laid-off employees fail to meet their financial obligations. Foreclosures will escalate, there will be defaults on leases and loans, boards will be sued when the value of securities plunge, and the inability to meet the obligations of contracts will produce a raft of litigation. Some of this litigation is inevitable – and already starting to bubble up – but businesses may still be able to limit exposure to lawsuits if they take a cautious approach in the weeks ahead.

Watch these areas for lawsuits

Workplace. The most worrisome lawsuits could be class actions filed by employees who allege they were infected by the coronavirus when employers subjected them to unsafe working conditions. Any business where employees work in close proximity or interact with customers, such as stores, restaurants, and distribution centers, could see such lawsuits. Take all reasonable measures to protect employees and pay close attention to the latest recommendations from the Occupational Safety and Health Administration (OSHA) and the Centers for Disease Control and Prevention (CDC).

Securities. Investors can be expected to file lawsuits when they see the value of their securities plunge. These are likely to be class actions that focus on whether companies did not fully disclose risks or made misleading statements. Such lawsuits always are a matter of showing what management knew and when. Executives who cashed out of their own company’s stock ahead of steep declines will be in an awkward spot.

Discrimination. We have had massive layoffs in many industries, and layoffs always generate claims that individual employees were singled out unfairly. Anyone in a protected class – race, gender, disability, and age are the big ones – is a potential claimant. Across-the-board layoffs are more defensible legally, but companies often must retain the employees who are the most essential to their operations. Approach terminations carefully, assuming you will have to defend them.

Bankruptcy. There will be a ripple of bankruptcy filings as businesses find they are upside down with debt obligations because customers have stopped ordering or paying their bills. Expect the bankruptcy courts to be overloaded and cases will take longer than usual to be adjudicated. If you are a creditor, take a hard look at where you have extended credit and anticipate defaults.

Contract disputes. We will see litigation over the nonperformance of contracts, and companies will claim government-ordered shutdowns, stalled supply pipelines, and other COVID-19 problems made it impossible to fulfill their obligations. Start reviewing contracts now to assess whether they can be read as offering relief for pandemic-caused business interruption.

Insurance. Insurance companies will field plenty of lawsuits for rejection of claims, particularly in policies that cover business interruption. Outcomes will be policy-specific, and insurance companies will have strong defenses. Businesses should not assume they will be rescued by their insurance companies.

Commercial property owners will be squeezed. Stores and restaurants that have been closed for the past few months likely have fallen behind on rent. That is understandable, but landlords may still have loan payments due at the bank, plus the other obligations that come with owning commercial property, such as taxes, insurance, security, and maintenance. Many landlords may offer to defer rent for several months but will want it paid eventually. Tenants will look for nonperformance by landlords, hoping to negate leases. Foreclosures and eviction actions will soar and don’t expect the courts to act on them too soon.

Oil and gas will be pressured. The oil and gas industry has been decimated over the past few months as supplies accumulate and prices continue to fall. Domestic producers are finding that the costs of production exceed expected returns, creating an untenable situation. Plaintiffs lawyers are circling as producers struggle and some of their issues will emerge around royalties, termination of leases, whether wells can be shut, giving notice, and whether contracted deliveries must be accepted. All this litigation will be contract-specific and, as with the contracts in other industries, the courts will be left to interpret contracts that did not address contingencies for a pandemic.

Force majeure clauses will be tested. Force majeure, the concept that acts of God, or events beyond anyone’s control, relieve parties from performing their obligations in a contract will be oft-cited as a defense for not fulfilling the requirements of a contract, especially in the oil and gas, construction, and real estate industries. These clauses usually are regarded as providing relief for businesses affected by natural disasters such as floods and storms. Creditors will argue that force majeure clauses relieve parties from meeting deadlines or performing work, but do not affect financial obligations. Whether a pandemic triggers force majeure clauses will receive a thorough test in the courts.

No playbook for Coronavirus. There is no playbook for this crisis, and we advise businesses to approach reopening with caution, regarding it as a first step toward business as usual. In the months ahead, you will need real-time advice on best practices from two groups of professionals: Health care experts and attorneys. Listen to both to keep your employees and customers safe and reduce your exposure to lawsuits.

What is written here is intended as general information and is not to be construed as legal advice. If legal advice is needed, you should consult an attorney.

Litigation Attorney Kelley B. DukeKelley B. Duke is a trial attorney who chairs the litigation practice group at Ireland Stapleton. Ms. Duke handles a wide range of commercial litigation matters, advising clients on best practices to avoid lawsuits and representing them in the courtroom when necessary. She serves as outside general counsel to several companies and is an American Arbitration Association panelist who serves as a neutral in complex commercial litigation matters. She can be contacted at (303) 628-3663 or kduke@irelandstapleton.com.