Paul Cook asks whether it is the beginning of the end of unreasonable legal clauses.
Covid-19 has impacted people and businesses in many ways. While there have been some positives, such as dolphins appearing in the Bosphorous and pollution levels decreasing, for most, the impact has been adverse.
Event delegates, planners and event service providers of all types have been affected. Large or small, local or global, profitable or charitable, organisations everywhere have been on a mission to survive. For an industry that is about bringing people together, the sector has suffered more than most.
For many businesses, the first place they looked when the virus took hold was to their insurance providers. They believed that losses from the pandemic would be covered and they would be provided with some form of recompense.
But, for many seeking help, there was none to be found.
Insurance policies have exclusions on them, things such as fraud and war are automatically excluded. So too, are losses due to a communicable disease. And that is a big problem as Covid-19 is a communicable disease.
However, the Communicable Disease Exclusion (CDE) is nothing new. It has been in place for a number of years. If you look at other communicable diseases, such as foot and mouth disease, avian flu or SARS you would discover that losses from them, will also not have been paid.
Is it reasonable, however, for insurance companies to use their exclusions at the time of a global pandemic? Clearly some exclusions such as fraud will always apply. However, for communicable diseases is there room for some adjustment?
In the UK this is being put to the test. The Financial Conduct Authority (FCA) is presenting a major legal case against various insurers, on behalf of hospitality and event venues which are fighting for a pay out.
Venues in the UK across the hospitality and events spectrum have struggled to receive recompense from insurance policies, after Covid-19 caused widespread cancellations and disruption.
The FCA is combining a large number of these cases into one major group action lawsuit.
The aim is to combine a broad spectrum of policies into one representative case, which will go the High Court. If this case wins, the trickle-down effect could potentially see many more similar, individual policies pay out for hospitality and event venues.
The stakes of the case are high for both the hospitality/events sector and the insurance sector.
There is also pressure in other countries on their insurance providers to help alleviate the Covid-19 impact.
In the USA, Thomas Keller, a famous restauranteur, has taken on the insurance companies because none of them were paying out on business interruption claims. The suit, filed by attorney John Houghtaling, requests that the court make a legally-binding decision on whether Keller’s policy allows him to recover business losses sustained in connection to the outbreak. The lawsuit was filed in California.
On the East Coast, a bill being drafted in the state of New Jersey could change things dramatically for certain property insurers in respect of business interruption losses due to the Covid-19 outbreak. If approved, the Draft Bill would take immediate effect and essentially void any virus exclusions such policies may have.
In Australia similar arguments with insurance companies are in play. A number of businesses could be saved if insurers paid out because the business interruption was caused as a result of government shutdown. However, it’s not that simple: some policies exclude loss by pandemic. Also, there is a small issue of loss due to quarantine being excluded.
In China, the position is different. Insurance companies in China are promising to cover business losses from the coronavirus pandemic. Since February, dozens of insurers have rolled out new policies or expanded existing ones to provide compensation when workers contract Covid-19.
The FCA case in the UK is being expedited in order to reach a conclusion as quickly as possible. A timeline for the case, is that it is expected to go to court on or close to 20 July. A best-case scenario for pay outs if the case won, would be late August or September, although exact times are difficult to predict. Matt Brewis, Director of General Insurance at the FCA said “The FCA’s motive is one of speed.”
Regardless of whether insurance companies are pressured by regulators, authorities or politicians to pay Covid-19 losses, the question remains as to whether insurance clauses are too onerous. If they are, because, that’s how they always have been, maybe now is the time to revisit them.
For the time being, let’s park the insurance discussion and move onto another favourite. The force majeure clause.
Force majeure clauses are contractual clauses that alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.
In English and Scottish law, force majeure is a creature of contract. It differs from some other legal systems where it is a general legal concept, where courts may declare that a particular event, such as a pandemic like Covid-19, is a force majeure event. And that is the basic problem.
Force majeure is used and interpreted differently across the globe. But, even if the clause was agreed universally, how relevant is it in a global pandemic?
With little guidance from many governments across the globe as to what organisations should do to keep their businesses going, the only thing they could do to survive was to make every effort to keep the cash coming in and cut expenses. The way in which they did this, highlights to what extent legal clauses were used or abused. Let us take a look at three instances.
One venue in Croatia decided not to charge their client any cancellation fee, despite losing a substantial amount of money. The venue felt that building a long-term relationship was the best way to go and put their trust in the fact that, hopefully, the client would come back to them next year.
Then we have a venue in Paris that decided to take a hard stance, despite their own country being under lockdown. Management argued that they didn’t need to refund any deposit monies to the planner as the event could still go ahead. However, this couldn’t happen and 24 hours before the event was due to take place the venue agreed it needed to be cancelled. The venue offered the client the option of the same rates for 2021 or they would refund the monies. According to a clause in their contract, the venue has up to 18 months to refund the payment.
At the other end of the scale, there was a venue (we are reliably informed) that had agreed a contract with a client. The client went to a site visit to discuss additional items and in the meeting confirmed what they wanted. The meeting took place just as the coronavirus was beginning to have an impact. Seeing a problem, the venue promptly charged the client for all the extras the next day even though the revised contract had not been signed off.
A tangled web we weave
Covid-19 has highlighted the extent to which the business supply chains are truly interwoven.
In the short term, and purely for survival, what can organisations do to stay afloat? At the moment they can throw respective contract clauses, legal arguments and insurance definitions at each other, in the hope of securing a payment.
Clearly there needs to be a better solution for the future. Other waves of the coronavirus could be coming and, surely, will be another pandemic at some point in the future.
International borders get in the way of contracts especially in a global events sector. Different countries have different legal systems, insurance differs across the world and force majeure clauses end up adding to the confusion.
This prompts us to ask just how relevant are some of these clauses today and whether they still work for a society that is so connected and so inter-dependent?
Could contracts between parties be just that? No territorial jurisdiction, but reference to independent arbitration if disputes need sorting out?
Is this the beginning of the end of unreasonable legal clauses? If it isn’t then maybe it should be. What else could be a better catalyst for action, other than a global pandemic that has stopped business and society around the world in its tracks?