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Straight Talk for Managing Your Business When "Normal" Disappears



With businesses facing a barrage of daily challenges, it becomes important to focus on key decisions that can make a difference. We address three of these key issues in this post: your contractual obligations, keeping in mind added legal obligations that might arise to creditors if your business is closed and facing insolvency, and the liability risk that might exist as businesses reopen under the new normal.

Defending Against COVID-19-Caused Breach

One of the most disruptive impacts from COVID-19 in the construction industry is on the performance of contracts. Common advice reported in legal bulletins is for you to look at your contract and see if it addresses “epidemic” or “pandemic” as an excuse for a failure to perform. These are often referred to as a "force majeure" or "Act of God" defense. This is an excellent place to start.

However, many contracts don’t specifically address pandemics or other forces of nature. Does this leave you with performing your contract or face paying damages for breach? One line of defense that is available in the state of Washington (as well as other states) is that a breach of contract can be excused by Acts of God, impossibility of performance, or acts of the other party to the contract that prevent performance. The Act of God defense exists to every contract, unless the risk is specifically addressed and excluded in the contract itself. As a result, absent a clause allocating pandemic risk, the first line of defense to any allegation of breach of contract is the assertion of the Act of God defense. Although the scope and strength of this defense remains to be litigated, it serves as a legal basis to dispute the breach and to seek a negotiated resolution of any dispute arising from the COVID-19 crisis. This should improve your hand when it comes to your bargaining position.

Related post: "COVID-19: Delays and Force Majeure in Construction Contracts."

Duty to Creditors If Your Business Is Broke

When the company crosses over into insolvency as a result of something as dramatic COVID-19, how you run your business expands to include duties to creditors. There are well-established legal tests for determining when a company crosses over into this death zone. But these are not bright-line tests that requires the filing of bankruptcy or other formal statutory proceedings. Instead, insolvency requires a fact-based inquiry, and the tests can vary somewhat from state to state.

Solvency is generally determined by reference to two tests: (1) the balance sheet test and (2) the equitable insolvency (aka cash flow) test.

When it has been determined by cash flow or by balance sheet that your business can no longer pay its bills, the business owner (its directors or members) needs to act consistently in its added responsibility to any company creditors, as well as to the shareholders. This may significantly restrict your freedom to pay bonuses or make other cash distributions to owners/members. As a result, it is always good to ask for legal help before you act.

Related post: "CARES Act Amends Bankruptcy Code to Address COVID-19 Dislocation."

Personal Injury Claims

On top of all the other disruptions, employers have to think about the potential for serious personal liability claim if someone does become infected with COVID-19 or passes away as a result of contact with your place of business. Have you taken all the necessary precautionary steps as advised by the CDC and other health authorities? This can be particularly important if you are on a project site and are subject to activities from other businesses, or if you have indemnity obligations under your contract. Are you protected by workers compensation? Does your liability insurance apply or does a virus exclusion exist? This is a good time to have this conversation with your insurance broker and make sure you have added coverage at least until this risk passes.

For additional guidance, please refer to Miller Nash Graham & Dunn LLP’s COVID-19 Coverage, Resources, and Continuing Operations page.

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