Small businesses cope with COVID-19

Coronavirus (COVID-19) is the pandemic of a lifetime. In Washington, DC, until the last few days, everything looked normal. The extreme low tide lured everyone out onto the dry cove to collect seashells as the beachgoers glance up to see the impending tsunami on the horizon heading straight for them. The government seems utterly unprepared.

Coronavirus affects small businesses

Teeramet Thanomkiat © 123RF.com

How has this affected small business clients? In short, from all accounts, it will be devastating. This blog outlines some of the major legal issues affecting small business clients as the tsunami is about to rocket onshore.

Force Majeure clauses

You remember that provision in your agreement regarding force majeure. Force what, you asked. It is from the French (surprisingly, not Latin) and means superior force. These provisions conjure up the idea that if there is a war or some “Act of God,” you may be excused from performing your obligations under a contract.

You probably thought that unless you delivered your products to Eastern Ukraine, chances were slim to none that these provisions would ever come into play. Until now…

Whether you or the other contracting party is off the hook depends on the specific language in your agreement. You can ask your small business lawyer how the particular contract language in your agreement applies to the facts and circumstances of your relationship with the other party. And keep in mind that the law is different in different jurisdictions.

Impracticability and frustration of purpose

Even if you don’t have a force majeure clause, you or the other party may argue that you should be excused from performance based on other legal theories such as impracticability or frustration of purpose.

A party to a contract may be excused for impracticability (or related theory, impossibility) if after the execution of the contract an unexpected event occurs that makes performance commercially impracticable and the party should not bear the loss from the occurrence of the event.

If you think that this rule sounds amorphous, you are not the only one. One law professor commented: “The few cases that do discuss [commercial impracticability] developed muddled and inconsistent rules, leading to an unpredictable and confusing doctrine that fails to serve its intended purpose.”

Frustration of purpose will excuse a party from performance if an unexpected event occurs makes one’s performance lose its essential purpose and a party should not bear the loss from the occurrence of the event. Frustration of purpose focuses on what the purpose or aim of the contract was. Impracticability focuses on the performance of one of the parties. Both theories may come into play if a party is trying to avoid performing its obligations because of the coronavirus.

Get out your agreement and check the wording of your particular agreement. Whether you are the vendor or the recipient of services, call your small business attorney and see what your options are. There will undoubtedly be numerous lawsuits that will probe these issues.

Material adverse effect in mergers and acquisitions

Are you in the middle of an acquisition of a business? Did you intend to purchase a restaurant and signed a purchase and sale agreement in January? And then the coronavirus pandemic hit and the restaurant is now closed for anything other than take-out.

You may rely on one of the theories in the previous sections to excuse your performance. But in the M&A context, there usually is a specific provision regarding a material adverse change or material adverse effect (terms which are sometimes used interchangeably).

In acquisition agreements, usually your M&A attorney will include a provision giving the buyer the right not to close on the deal if the seller’s business experiences a material adverse change from some baseline date, such as the date of the execution of the purchase agreement, to the scheduled date of closing. It would be hard not to think of a more material event that a pandemic such as the coronavirus.

Related article: Selling a Small Business: Not as Easy as You Thought

These provisions are hotly negotiated, and disputes frequently arise. Unlike force majeure, the triggering event need not be an external meteorological event or act of war, but can be tied to quantitative thresholds such as financial results, industry-based circumstances or changes in the law.

Business interruption insurance

Most small businesses have some form of a general liability insurance, which insures against losses from things like theft or damage to property. And your broker probably offered you an endorsement that extends the policy’s coverage to business interruption losses. Now that the coronavirus has closed down your business, can you collect on your business interruption insurance.

The underlying policy does not cover your business for economic losses. The general liability policy will not cover your losses when you cannot continue to operate your business.  Now this is where you need to look at the rider for business interruption insurance. There usually is a catch, possibly fatal, that the coverage does not extend beyond that which is covered in the underlying policy.

If you run a restaurant and your property is damaged because of serious water damage because of heavy rains, your underlying policy covers the property damage and business interruption insurance would cover your losses due to lost revenue.

But in general if the losses are unrelated to property insurance such as coronavirus, then whether there is coverage depends on the specific policy language. The coronavirus is not unlike other losses or damage to property, such as fire or flood; nevertheless, there are still some arguments that you can make to try to prevail on the insurer to cover your losses. Each policy should be carefully reviewed with your small business lawyer.

Labor issues

The government is furiously trying to find ways for small businesses to retain their workforce. On March 18, 2020, the president signed into law legislation to provide paid sick leave to workers affected by the coronavirus.

Employers are to receive tax credits when workers receive paid sick leave because of the coronavirus. All employers with fewer than 500 employees must provide certain job protection and paid and unpaid leave for eligible employees.

This new legislation will need to be carefully analyzed to determine how it will apply to your small business.

Business loans and guarantees for small businesses

As I am writing this blog, Congress is debating an unprecedented stimulus package. Reports are that the Small Business Administration (SBA) will administer a whopping $300 billion for business interruption loans. This amount is over a tenfold increase from SBA’s flagship lending program in fiscal years 2017 and 2018. Stay tuned for the details.


We have explored only some of the numerous issues that will arise from the coronavirus health emergency. This crisis will spur numerous disputes and test many old theories of recovery. The courts are waiting to resolve these disputes once they re-open their doors.