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COVID-19 and Commercial Contracts: Is it Time to Modify?

The coronavirus (“COVID-19”) pandemic will likely create hardship for parties attempting to perform under many types of commercial contracts. Significantly, contracts requiring travel and/or involving the provision of goods and services are likely to be substantially impaired or impacted.

What to Do Now?

Inflexibility and hard line approaches may lead to disputes and expensive litigation. Global pandemic on the scale of COVID-19 has not occurred in over a century. For the modern business world and the United States legal system, this is truly a case of first impression. In order to avoid uncertainty, communication with counterparts regarding modification of existing obligations, may be prudent and lead to reasonable, mutually acceptable adjustments to the parties original deal. 

Nevertheless, you should carefully review the material terms and conditions of your existing agreements to ensure you are informed as to your rights, obligations and likelihood of breach or timely performance.

Communicate and Modify

Now may be the best time to modify existing agreements. Following an honest assessment of each unique situation, parties are encouraged to cooperatively determine a path forward. Communicate with your counterparts and willingly work towards a mutually beneficial arrangement. Reasonable business partners will understand that the current pandemic was likely not within the contemplation of the parties when they entered into their agreement. Any such modification must be reduced to writing, signed by both parties and incorporated into the original contract.  

Common terms to modify:

  • Contract duration
  • The goods/services involved in the contract
    • Adding or subtracting goods/services covered in the contract
  • The payment terms
  • The delivery terms

Before negotiating modification, consider the following:

  • Identify changes you feel are necessary and appropriate
  • Note any contract provisions that seem unfair or unnecessary
  • Note the date, time, and location when you chose to make modifications to the contract
  • Determine the justification for modification (i.e. workforce, government directives, supplies, shipping restraints, etc… simply citing COVID-19 likely not enough)
  • Try to predict how the changes might affect all parties' contract rights

In the event a party to a contract alleges it cannot perform as a result of COVID-19, the contract may provide guidance concerning legal rights and obligations. Most commercial contracts address the parties’ rights in the event of situations occurring outside of the control of either party. Most commonly, parties may be forced to interpret and/or rely on a ‘force majeure’ clause. Generally, a ‘force majeure’ clause relieves one party from performing a contractual obligation under certain circumstances that would make performance impractical, impossible, or even illegal. Pandemic may be a defined term, but more likely, the ‘force majeure’ language will not be so specific.  However, parties should be careful of claiming a force majeure event prior to experiencing an actual delay or other impact.

The Contract Matters

The extent to which COVID-19 excuses or extends contractual obligation(s) is a fact-specific determination that will depend on the nature of the obligations and the specific language of the contract. More specifically, in the context of COVID-19, parties will want to take the following steps:

  • Read the contract;
    • Determine the extent to which the contract provides for suspension or termination of performance;
    • Identify key provisions of contracts that may be affected by COVID-19 (e.g., representations/warranties, covenants, delay rights, termination rights, conditions, ‘force majeure’ clauses);
    • Identify notice requirements that have been or may be triggered;
  • Determine the extent to which COVID-19 prevented the party asserting an inability to perform;
    • Consider whether there are alternative means to perform contractual obligations or proactive steps that can be taken anticipating the potential future effects;
  • Determine whether the party asserting COVID-19 as a justification not to perform had the ability to mitigate its effect and the ability to perform.
  • Analyze the potential consequences of a material breach and/or default;
  • Manage communications with your counterparts, while coordinating internally to ensure a consistent approach; and
  • Regularly review and update relevant regulations (e.g., local, state, national directives on health and safety) in real time to determine whether they require steps or decisions that may affect contractual commitments.

In these uncertain times, Brennan Manna Diamond is here to provide clarity and comfort. Feel free to reach out to a BMD professional for guidance as you work through your analysis.

Explosive Growth in Pot of Gold Opportunity for Bank (and Other) Cannabis Lenders Driving Erosion of the Barriers

Our original article on bank lending to the cannabis industry anticipated that the convergence of interest between banks and the cannabis industry would draw more and larger banks to the industry. Banks were awash in liquidity with limited deployment options, while bankable cannabis businesses had rapidly growing needs for more and lower cost credit. Since then, the pot of gold opportunity for banks to lend into the cannabis industry has grown exponentially due to a combination of market constraints on equity causing a dramatic shift to debt and the ever-increasing capital needs of one of the country’s fastest growing industries. At the same time, hurdles to entry of new banks are being systematically cleared as the yellow brick road to the cannabis industry’s access to the financial markets is being paved, brick by brick, by the progressively increasing number and size of banks that are now entering the market.

2021 EEOC Charge Statistics: Retaliation & Impact of Remote Work

The U.S. Equal Employment Opportunity Commission (EEOC) released its detailed information on workplace discrimination charges it received in 2021. Unsurprisingly, for the second year in a row, the total number of charges decreased as COVID-19 either shut down workplaces or disconnected employees from each other. In 2021, the agency received a total of approximately 61,000 workplace discrimination charges - the fewest in 25 years by a wide margin. For reference, the agency received over 67,000 charges in 2020, and averaged almost 90,000 charges per year over the previous 10 years.

Ohio’s Managed Care Overhaul Delayed – New Implementation Timeline

At the direction of Governor Mike DeWine, the Ohio Department of Medicaid (ODM) launched the Medicaid Managed Care Procurement process in 2019. ODM’s stated vision for the procurement was to focus on people and not just the business of managed care. This is the first structural change to Ohio’s managed care system since the Centers for Medicare & Medicaid Services' (CMS) approval of Ohio’s Medicaid program in 2005. Initially, all of the new managed care programs were supposed to be implemented starting on July 1, 2022. However, ODM Director Maureen Corcoran recently confirmed that this date will be pushed back for several managed care-related programs.

Laboratory Specimen Collection Arrangements with Contract Hospitals - OIG Advisory Opinion 22-09

On April 28, 2022, the Department of Health and Human Services, Office of Inspector General (“OIG”) published an Advisory Opinion[1] in which it evaluated a proposed arrangement where a network of clinical laboratories (the “Requestor”) would compensate hospitals (each a “Contract Hospital”) for specimen collection, processing, and handling services (“Collection Services”) for laboratory tests furnished by the Requestor (the “Proposed Arrangement”). The OIG concluded that the Proposed Arrangement would generate prohibited remuneration under the federal Anti-Kickback Statute (“AKS”) if the requisite intent were present. This is due to both the possibility that the proposed per-patient-encounter fee would be used to induce or reward referrals to Requestor and the associated risk of improperly steering patients to Requestor.

Property Owner Protection from Tax Valuation Challenges

New legislation provides significant new protections for commercial property owners against challenges to valuation primarily by local school boards and prohibiting side agreements to avoid tax valuation changes. The Ohio Legislature has approved House Bill 126 which will go into effect July 2022 but will effectively apply to the 2023 tax valuation year.