Managing the Commercial Impact of the Coronavirus: Implications for the Hospitality & Leisure Industries

“Depending on their context, countries with #COVID19 community transmission could consider closing schools, cancelling mass gatherings and other measures to reduce exposure.”   (~ WHO Director-General, Dr. Tedros Adhanom Ghebreyesus, during a briefing this week)

The coronavirus (provisionally named SARS-CoV-2, with its disease being named COVID-19) has now been documented in more than 100 countries and territories. Over 120,000 cases have now been documented across the globe, resulting in more than 4,000 deaths, with cases outside of China tripling in just the past week. In the United States, there have been more than 1,000 reported cases across at least 23 states, resulting in 29 deaths. The coronavirus has impacted domestic and foreign travel, as the Centers for Disease Control and Prevention has issued a Warning – Level 3 (Avoid Nonessential Travel) for travel to China, Iran, South Korea and Italy, and has issued an Alert – Level 2 (Practice Enhanced Precautions) for travel to Japan. The Italian government has issued a decree to quarantine 17 million people in its northern region, including Milan, Venice and Parma, with exceptions for “proven working needs” allowing some business operations to continue. In addition, many businesses have imposed restrictions on domestic and foreign employee travel. Twitter, Amazon, Salesforce and Nike, in addition to scores of manufacturers and professional service firms, are among the companies banning certain employee travel due to the coronavirus. Many colleges and universities across the globe, including in the United States, have suspended in-person classes and certain events through various dates into April, urging those on campus to practice appropriate “social distancing” in order to stop or slow down the spread of the coronavirus.  

At the center of the financial impact is the growing disruption to worldwide supply chains across many industries, including manufacturing, technology, solar, hospitality and travel, healthcare, food, fashion and apparel, to name just a few. China is the world’s second largest economy, and so the effect of the coronavirus extends – much like the coronavirus itself – far beyond its borders. In fact, according to Fortune.com, by the end of February, 94% of Fortune 1000 manufacturers had been hit with disruptions as a result of the coronavirus.¹

The hospitality industry is facing the rapid spread of coronavirus with direct repercussions.  Hospitality stocks are battered and cancellations are mounting.  In this tumultuous time, it is essential that owners, managers, operators, and suppliers in the hospitality industry understand the various legal issues that they will confront as the effects will inevitably continue.  Whether it’s safety, employees, cancellations or contracts, below are some things that you should consider now to begin the process.

Monitor Travel and Convention Cancellations. Hospitality industry participants and suppliers should constantly monitor government pronouncements to be aware of how to follow and best understand the status and impact of COVID-19.² Coordination with state and local health officials is also necessary to ensure that you are receiving timely and accurate information to guide appropriate responses in the locations where your operations are conducted.  As conferences across the country are being cancelled and companies are imposing more and more stringent travel restrictions on their employees, staying abreast of the most up-to-date announcements will help ensure that you will be able to best assess your contractual obligations.  Companies will also be greatly impacted by their location in reference to the trends affecting their business and also the source of their customers in terms of impacts of travel restrictions.  Understanding these are essential to planning for downstream impacts to your business.  Force majeure and termination provisions (discussed below) will be critical in this evaluation.  Communication with your clients who have major bookings will be helpful in understanding their intents and for your planning.  Also, if your company is in the middle of a pending transaction, then “Material Adverse Change” (MAC) clauses as well as representations and warranties will need to be reviewed to assess the potential impacts of COVID-19 on your transaction.  

Understand the Far-Reaching Impacts of a Declaration of a State of Emergency.  New York has recently declared a state of emergency.  Other states/cities may soon follow.  A careful analysis of the impacts of a state of emergency must be understood.  Many impacts are obvious, but some require in-depth analysis of what other laws may be invoked by a declaration of a state of emergency.  For instance, a recently passed New York law prohibits unsolicited telemarketing calls during a state of emergency.³

Review Contracts to Determine What “Force Majeure” and Termination Rights and Requirements May Apply.  Force majeure refers to a legal doctrine under which a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract.  Force majeure provisions can vary greatly depending on how they were drafted, but they usually cover several categories of events that could impact suppliers and customers, especially events, conventions, or other group contracts.  While most force majeure provisions are unlikely to list disease, epidemics or quarantine specifically, many include general provisions covering such things as natural disasters, “acts of God,” acts of government or “other circumstances beyond the parties’ control.”  The coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak).  Companies should carefully review the force majeure provisions in their contracts to determine whether they apply.  Parties seeking to invoke the force majeure provisions in contracts usually must show that there are no alternative means for performing under the contract, as increased costs alone often will not be sufficient to prevail on a claim of force majeure.  Companies should also understand who will be arbiter of disputes (e.g., judge, jury, expert, or arbitrator) as the expenses and time delays associated with resolving a dispute among the parties will enter into the equation of determining the best resolution.  For more information on force majeure clause analysis, please click here.  

Guest Impacts.  It is likely a matter of time before a hotel operator faces the decision of whether to decline a guest or how to address a guest who exhibits signs of COVID-19.  Innkeeper laws are fairly well established in regard to public safety.  Although most hospitality assets are public accommodations, in this, like most situations, the general rule is to act, and instruct staff to act, reasonably under the circumstances.  From check-in to housekeepers, employees should be instructed to be vigilant and report their concerns.  If a guest presents with signs of COVID-19, the ability to deny service may be possible, but depending on the circumstances, it might be best to maintain a cooperative approach to avoid additional legal issues.  If your staff is uncertain about a guest, perhaps it is best to move them into a designated quarantine area, while a decision is made.  On the other hand, if it is clear that the guest is sick and they are likely to cause health risk to your employees and guests, it may be best to have such guest leave the property.  Overreacting by implementing broad-based bans and making business decisions about guests that are not based on statistical realities could result in litigation and/or liability pursuant to laws that prohibit discrimination based upon disability (perceived or real) and national origin, among others.  In any event, if an infected guest (or employee) is suspected, you should contact your local health department immediately.  You should also include in your plans a location(s) for quarantine space for guests (or employees) who are exhibiting signs of COVID-19 in order to minimize the impact to other guests, employees, and the property.  Again, advance coordination with state and local health officials will help you in planning and ensuring a rapid mobilization and response.   

Owner Concerns.  For properties that are resort condominiums and timeshare resorts, the prospect of a sick owner presents additional concerns.  While the other owners and guests of such a resort have a reasonable expectation that their safety will be protected, an owner has legal rights and protections under the Fair Housing Act and other applicable state laws not otherwise applicable to a transient guest.  How to deal with sick owners should be analyzed depending on the covenants and applicable laws and the proper approach should be integrated into the resort’s operating plan.

Restaurant Operations.  Restaurant operations are receiving a high degree of consumer skepticism.  While the same analysis applies with respect to restaurant operations as described above with respect to Guest Impacts, employee concerns (see discussion below) are heightened because the relationship with guests is more intimate and the employees are working with and serving food.  

Employment Concerns. The challenges for any business facing coronavirus or other disease outbreak involve a multitude of conflicting legal obligations.  Under the Occupational Safety and Health Act (OSHA) and similar state laws, employers have a general duty and obligation to provide a safe and healthy work environment, even when the work occurs outside the employer’s physical premises. Furthermore, under these health and safety laws, employers must not place their employees in situations that are likely to cause serious physical harm or death.  Conversely, overreacting by implementing broad-based bans and making business decisions about employees that are not based on statistical realities could get an employer sued under laws that prohibit discrimination based upon disability (perceived or real) and national origin, among others. The same analysis described above regarding sick guests applies to employees.  Properly planning for and implementing plans to deal with the coronavirus is legally and operationally complex. For more information on specific action employers should take, please click here.

Insurance. Companies should review insurance policies to determine possible coverage in the event of a business disruption and comply with all applicable notice requirements.

Create Operating and Business Continuity Plans. Planning for absenteeism, supply chain issues, and possible quarantines is an immediate need.  Hospitality providers should assemble their various teams to develop a comprehensive plan to address these issues and prepare for possible partial shutdowns of facilities.  Communicating with critical suppliers of cleaning materials, food, and other necessities should be undertaken.  As mentioned above, your plan should include advance coordination with state and local health officials.  Finally, you should contemplate the approach, products and materials, and personnel required for proper sanitization of any contaminated areas. 

For additional resources go to the American Hotel & Lodging Association’s coronavirus resource page by clicking here. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization. 

Foley will continue to keep you apprised of relevant developments. Click here for Foley’s Coronavirus Resource Center for insights and resources to support your business during this challenging time.

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¹ https://www.foley.com/en/insights/news/2020/02/uetz-quoted-fortune-impact-coronavirus-auto

² https://www.cdc.gov/coronavirus/2019-ncov/faq.html 

³ NY Senate Bill 4020 prohibits telemarketers from knowingly placing unsolicited telemarketing sales calls during a state of emergency or disaster emergency.