As governments across the world shut down cities and businesses, lawyers are poring over contracts, researching case laws and statutes to advise their clients whether they can legally excuse performance of their contractual obligations on grounds of force majeure – a common clause in contracts that frees parties from obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, epidemic etc. occurs. These circumstances are sometimes described as Acts of God.
Just this week, New York Post reported that a Brooklyn Jewish school sued a hotel for refusing to refund a $2.3 million deposit for a Passover trip that was canceled over coronavirus concerns. The hotel declined to make the full refund despite a clause in the contract that provides for 100% refund in the event of cancellation for disease outbreak.
Many other lawsuits will follow as a result of the pandemic . For example, as many commercial properties have fallen into disuse because of state and local orders mandating closure of non-essential businesses, landlords may have to resort to litigation to get rents from tenants who will argue that they did not use the property during the emergency order and are therefore not obligated to pay rent. Even essential services that remain open will struggle to pay rent as revenue has decreased, in some cases, by as much as 95%. Cheesecake Factory, one of the biggest restaurant chains in the U.S., foreshadowed what is to come when it made headlines last months by announcing it has written to its landlords that it will not be paying rent for any of its 294 restaurant locations in the month of April due to “tremendous financial blow” to revenue dealt by the ongoing coronavirus crisis.
Some local governments have taken steps to mitigate the fallout and hardship caused by the pandemic on its citizens. Los Angeles City, for example, approved a temporary ban on evictions, and for renters who are unable to pay because of the pandemic, waived late fees allowing them to make up late payments for up to a year after the expiration of the emergency order.
Small businesses that do not have the clout of Cheesecake Factory to negotiate a release from their contractual obligation, and people who live in cities that have not offered protections like the one ordered by the city of Los Angeles, may find themselves facing lawsuits for contracts breached during the pandemic.
While our first impulse when there is a breach of contract is to file a lawsuit, this may not be the time to do so. Because we live in an ever-increasing connected world, a delay by a supplier of raw materials from China -where the outbreak first occurred – could cause a delay by a manufacturer of summer wears in Los Angeles who has a contract to supply the apparel by May 1 to a store in Canada. The ripple effect caused by the delay from China will inevitably cause delay in delivery of the finished product in Canada. That is where mediation comes in. Recognizing the timeline and effect of the crisis on businesses all over the world, considering the need to continue business relationships with long-time partners once this is over, and the need to avoid legal costs are factors that should motivate people and businesses to consider mediation. Another factor to consider before filing a lawsuit is that winning a lawsuit can sometimes be like winning the battle and losing the war as 80% of judgments in the U.S. are not enforced. Losing parties either hide their assets, appeal cases – sometimes as a delay tactics – or declare bankruptcy denying the victors the “spoils of war.”
This article is timely because sometimes parties do not know other alternatives to litigation. Once, both parties whose case settled within two weeks of coming to the agency I work, which offers free mediation services for a particular industry, told me they wished they had come to the agency first before wasting over a year and hefty attorney fees in lawsuit. It has also been my experience that sometimes parties are reluctant to settle after a protracted lawsuit as whatever concession they may have agreed to make in the beginning have been expended on attorney fees. So the earlier one takes advantage of mediation, the better.
Mediation is better than litigation in that in mediation both parties emerge winners as a mediator often acts as a facilitator, helping parties brainstorm creative solutions to crisis by assisting parties understand the other’s concern which can easily be addressed through a mutually beneficial solution.
For example, in a mediation session, a commercial renter whose business was shut down as a non-essential service may explain to the landlord that paying three months rent for a period when there was zero revenue will lead to the business’s bankruptcy or eventual closure. The landlord, on his own part, may explain that he stands the risk of losing the property if he defaults in his mortgage payment three months straight. In this scenario, if the landlord pays utilities for the business and did not have to do so for three months thus saving on maintenance cost, parties can agree that the tenant pays only the equivalent of the landlord’s mortgage which may be less than half of the actual rent. A solution like this is a win-win for parties.
The above solution contrasts with what will happen in court where a judge will be saddled with the difficult task of interpreting the parties’ contract and reaching a decision that may be biased based on whether the judge himself is a renter or a landlord in his personal life. Unlike in mediation, in Law, there seems to be no middle ground – except when equitable principles are applied – and one party must be declared winner over the other. Even judges do realize this shortcoming of the judicial process. During one settlement conference I attended in the midst of a lawsuit, a very experienced judge, encouraging parties to settle prior to trial, pointed out the unpleasant truth that the end of the judicial system is not necessarily justice but to bring finality to a dispute. In essence, a judgment issued by the court, may not in fact be just.
It is more important now than ever to use the services of a mediator to resolve disputes because courts, closed during the pandemic, will be faced with backlog and slew of new filings once they resume hearing. Also consider this: Most attorneys charge a 40% contingency fee. So even if you win a COVID-19 lawsuit and are among the lucky 20% able to enforce the judgment, except attorney fees is awarded, you may still end up with only about half of your damages which you may have well received timely if you settled your claim with the other party without involving a lawyer.
If you are in the Los Angeles area and wants to consider mediation, please contact Office of the Los Angeles’ City Attorney Office for their free mediation service. Please note that I do not work for this particular agency but benefited from their mediation training several years ago.
Anne Mmeje, an attorney, works as a mediator in public service.
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