COVID-19: Know the Limits of Your Agreements and Act Accordingly
By Steven D. Weber Managing Partner, Stark Weber PLLC | July 26, 2020
You are a hospitality industry operator feeling the impact of COVID-19 (coronavirus). Your bookings are down. The hotel you serviced for years may no longer require your services. The destination draw you depend upon for your hospitality industry livelihood is closed. Meanwhile, your landlord is calling you for rent payments; employees and contractors are concerned; and your vendors are looking for payment. Does the coronavirus afford you relief from the financial crush that your hospitality industry business may be feeling? It is time to pull out your agreements, examine the language contained within, and evaluate your options.
First, examine your options even if you do not have formal agreements governing your hospitality industry business. An agreement may take many shapes and be contained within emails, text messages, other documents and a combination of one or more of such things. Not all hospitality operators have access to sophisticated legal counsel. Sometimes determining the terms of agreements requires sifting through emails or text messages between parties.
In some cases, agreements are oral, and in some cases oral agreements can be enforced. If you do not have any formal written agreements governing your hospitality business, then the coronavirus might serve as a lesson and reminder for you to be ready for the next time that your hospitality business encounters an unexpected situation. The coronavirus may be a once in a generation event (or not), and even large and sophisticated hospitality operations may have been caught unprepared. That does not mean that the coronavirus, through a second wave, or some other event, will not impact your business again in the future.
Learn from how your hospitality industry business was impacted by the coronavirus so that you are prepared for the next unexpected impact on your business. The coronavirus will not likely be the last unexpected impact on your business and all hospitality operators should consider taking steps to protect their business through written, formal, contractual agreements, whenever possible.
One of the primary questions with respect to the coronavirus is who will bear the burden of performance in response to the coronavirus. Future written agreements should take into account that there may be another situation where the burden of the unexpected event needs to be decided. Contact experienced legal counsel and speak to legal counsel about your business' needs. Having a formal agreement that governs your hospitality operations never guarantees that you will achieve your intended result, but it may mitigate the risk of an unfavorable outcome. Taking steps toward achieving your objectives in the face of an unexpected event is often more desirable than not doing anything and letting the chips fall as they may.
Second, if you do have formal, written agreements regarding your hospitality business, then you may have already heard about a "force majeure" clause. A "force majeure" clause is a contractual clause that may excuse contractual performance under certain circumstances. When an event occurs that impacts a party's contractual performance, that the party did not cause, then that party should examine any "force majeure" clause or any other language of the contract. A "force majeure" clause is not always titled as a "force majeure" clause.
Whether the event excuses performance is often governed by the relevant contractual language and parties should review the entirety of their agreements to determine whether there is a relevant provision. Even if your contract has a "force majeure" clause, it may not apply to a situation like the coronavirus. The "force majeure" clause may be limited to identified situations and may not be extended to unnamed situations. In some contracts, the scope of the "force majeure" clause may be vague and it is unclear whether it covers the coronavirus.
In still other contracts, there may not be any identified "force majeure" clause but there may be some other language of the contract or perhaps unwritten, intent of the parties that was meant to govern in a situation like the corona virus. It is only through examining the language of a specific contract that a party can hope to determine its rights. Even with a "force majeure" clause that applies to a situation like the coronavirus, the other party may not agree with the interpretation and litigation regarding that clause may be costly. When deciding whether to enforce any rights under an agreement, hospitality parties should consider the cost of enforcing those rights versus the benefit to be obtained from litigation.
Parties should also consider whether there is any provision governing the shifting of attorney's fees and costs for bringing any action to enforce the terms of an agreement. Litigating over an amount owed may not be worth the risk of potentially owing the other party an even greater amount in the case that you lose. Consulting with an attorney experienced in the issues, and asking about your rights while examining the language of your agreement, is the first step.
There has been much written regarding the use of "force majeure" in terminating contracts for events. Hotel and venue owners should be wary of a similar, but less common, concept: the doctrine of impossibility. In some circumstances, contract law may excuse performance if the performance becomes literally impossible. In other words, if it becomes impossible to fulfill the contract, a party may, in some situations, walk away without fulfilling its obligations. This is closely related to the concept of force majeure but may occur even without a force majeure clause.
Instead, the doctrine of impossibility usually comes from case law and can be used with many contracts, if the situation is right. While currently many hospitality operations are thinking about the effects of coronavirus, the same principles may apply in the instance of a law or ordinance protest or event that renders a hospitality operators' business impossible. If the language of the contract is appropriate, then a proper clause may allow a client to back out or even recover deposits or obtain other relief.
When reviewing the doctrine of impossibility, courts may consider whether the event that is making performance impossible was foreseeable and whether any of the parties chose to bear the burden of that event. With respect to existing agreements for your hospitality operation, you wish to consider what are the situations that you have no control over and whether your agreements adequately protect you from those situations by placing the burden of performance or non-performance on the other party.
Fortunately, even in the face of the impossibility doctrine, there are some ways to mitigate the risk of impossibility or unexpected situations. First, some courts have recognized the enforceability of "hell or high-water clauses." In short, these clauses may sometimes require payment regardless of performance by the other party. Be careful, though – these clauses may not be enforceable in all jurisdictions and should be very carefully worded.
In some cases, hospitality industry operators draft written agreements without legal consultation. Doing so may lead to unanticipated results because even if the parties, without legal counsel, intend a specific result, a court may find a provision is unenforceable and the parties may be left with an unanticipated result.
Hospitality industry operators may also want to consider whether it makes sense to include a clause that extends the date of any event in the face of an unexpected situation. Hospitality operators should ask their legal counsel whether it makes sense to draft any contract such that the client has the option to extend the date of the event or a date is automatically extended. Including such a provision may obviate the need for protracted negotiations later regarding who bears the burden of an event and prevent litigation when there is no clause on point. Adding such a clause may also make performance technically possible, negating the effectiveness of the impossibility argument and leaving room for performance, even if it is not done on the originally anticipated timeline.
Again, hospitality operators should speak to their counsel with respect to drafting any such language rather than drafting agreements themselves. An extension clause that is drafted too loosely may give a party the ability to reschedule years from now or on a date that presents a conflict. Drafting language in agreements should only be done with counsel and with clients that have an understanding of their anticipated results. Unfortunately, even language drafted by counsel can have unexpected results and courts may not enforce that language as originally anticipated.
The coronavirus has presented an unprecedented situation. If you are a hospitality operator who is struggling in response to the coronavirus, then you are not alone. The coronavirus has made millions of hospitality players aware that they need to account for situations that go beyond their control, and those situations are not limited to events like the coronavirus.
Consulting with legal counsel may allow a hospitality player to mitigate the risk of an unexpected event. It may be through a "force majeure" clause, the impossibility doctrine, a "hell or high-water" clause, an extension clause, some other clause, or a combination of many clauses together. Hospitality player would be well advised to examine their existing contracts and evaluate their options in the face of the coronavirus and before they are impacted by other unexpected events.
HotelExecutive retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.