Volumes of articles have already addressed the wide variety of ways the COVID-19 pandemic has affected U.S. and global commerce. All manner of supply and logistics have received rare scrutiny, as industry and consumers alike face real and potential disruptions not seen in recent memory. However, when the history of Coronavirus in 2020 is written, one of the last chapters will be the ensuing litigation the virus has and will continue to spawn.
Although it is impossible to anticipate every possible situation from a legal perspective, a few areas are likely to be at the forefront of those who manage and oversee supply logistics. These include contracts with suppliers and customers, insurance coverage disputes and employment issues. Each presents its own challenges.
The foundation of supply chain economics is the timely delivery of goods and services up and down the stream of commerce. Unanticipated delays brought on by COVID-19 have resulted in an economic shock wave. Although many industries are, to some extent, governed by their own unique standards of practice regarding procurement and delivery, the language of the governing contract becomes paramount when things go sideways. The Coronavirus compelled many owners and managers to review their agreements for clauses that addressed unforeseen delays brought on by the pandemic. Those answers may be found in various contracts under the theory of “force majeure.”
Force majeure, a French term meaning “superior strength,” is usually built into contracts in one form or another. If a contract has a specific force majeure clause, it addresses those events that can potentially excuse delay or non-performance. Unfortunately, the term “pandemic” is seldom specifically contained in these provisions. Instead, they typically address natural disasters, nuclear war or other acts of God. Nevertheless, contracts should be closely reviewed as many also allow for other unforeseen factors including “legal prohibitions” preventing performance, or when a party is “by force of law” compelled to comply with orders from civil authorities. Thus, if a distributor’s warehouse or its workers were on lockdown due to a Coronavirus-related order and unable to process inventory, that may excuse performance.
Even when there is no mention of force majeure in the contract, a state’s common law may come into play under the doctrine of “Frustration of Purpose.” This simply means that fulfilling an agreement may become pointless due to unforeseen circumstances. As an example, if a freight carrier is able to complete delivery of perishable goods to a destination, but there is nobody at the docks to offload it, the original or primary purpose of such a delivery may have been eliminated, and thus, pointless to complete.
There is a caveat, however. Many contracts and state laws dictate a contract must be “impossible” to perform in order for force majeure to be invoked. Stated differently, simply because an obligation to complete an order was difficult or not profitable due to Coronavirus restrictions, this may not be enough to avoid liability.
Litigition is already underway in several parts of the country addressing not only whether the virus qualifies as a force majeure event, but whether its effects lasted long enough or became an official health crisis at a particular time that would excuse performance.
Insurance contracts are also going to generate disputes due to COVID-19. Business interruption is a common area of coverage in standard commercial insurance policies and intended to cover lost profits and costs that result from supply chain disruptions. Carriers across the globe are currently early in claims over whether there is coverage for business interruption by asserting that Coronavirus is not an “Occurrence,” The term “Occurrence” with regard to business interruption is often defined in the policy as “direct physical loss or damage to property,” which in turn results in lost profit. Each policy should be carefully reviewed to determine how the term “Occurrence” is defined, as well as whether the policy may offer or exclude other theories of coverage that might be related to COVID-19. The hospitality industry is leading the charge in suits over this question because of stay-at-home orders that compelled them to shut their doors. Even when allowed to remain open, however, many restaurants and their suppliers suffered. For example, Wendy’s restaurants continued to operate in most domestic locations with drive-thru service, but beef supply interruptions caused them to pull hamburgers off the menu, costing millions in lost sales.
Entertainment venue suppliers are also likely to be active in this area due to supply chain obstacles. Even though convention centers, casinos and arenas will eventually open, fear of the virus and social distancing rules may discourage anybody from attending sporting events or large meetings. This type of indirect damage is also the case for hotels, theme parks or other business that supplies goods and services for industries that depend on travel or significant public gatherings. So widespread is the potential storm of insurance litigation that several states have already proposed legislation to mandate business interruption coverage even when policies may have specific virus-related exclusions.
Bear in mind that whether your potential damages arise from a contract issue, or you seek to have the damages covered by insurance, there is a duty to mitigate those damages if possible.
Worker and employment issues are a prime area of risk. Worker and workplace safety-related to COVID-19 are at the center of potential supply chain disruptions. Some industries are not able to run businesses effectively with stay-at-home workers. Employers obviously need to implement any and all reasonable CDC guidelines or develop equivalent programs to protect their facilities. Even with such safeguards, disputes arise as to whether workers in essential or other businesses can be compelled to come to work if they fear for their safety.
What about worker privacy? Can regular temperature checks or medical testing be made mandatory? Can employers require workers not to appear or go home if there is a suspicion of symptoms? Is workers’ compensation or OSHA implicated in any of this? How would exposed workers prove they were exposed to COVID-19 at work vs. someplace else? These questions and more are already boiling over across the country. Workers at Walmart supply warehouses in Illinois are currently suing the retail giant related to concerns that they have been, or will be, infected under current safety conditions. What constitutes reasonable action by employers is still unfolding with no other guidance from the courts at this point other than to take “reasonable precautions.” As noted above, if a program to address COVID-19 is not in place, it needs to be implemented immediately. Documentation and verification of worker compliance may seem tedious now, but will pay dividends should litigation arise in the future.
Much like coming insurance disputes, legislators in some states are seeking to either shield employers from pandemic-related suits by employees or amend workers’ compensation statutes to deal with the problem. Regardless of the outcome in your state, a COVID-19 program now and a pandemic virus program for the future is a necessity.
It is difficult to address all the potential pitfalls of COVID-19 facing the supply and demand chain industry. Events are simply moving too fast and are too recent for courts to have established any precedent regarding disputes surrounding contracts, insurance policies or other civil litigation. At a minimum, businesses should anticipate that damages associated with pandemics will be written into contracts and insurance policies going forward. A prudent company will consult the proper legal talent to review these and other issues with an eye toward prevention rather than hope this, or future, pandemics will pass them by without incident.