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Novel coronavirus and the hotel sector

5 March 2020

Global tourism and hotel revenues are currently being severely affected as a result of the outbreak of the novel coronavirus (Covid-19) in late 2019.

Protecting staff and guests

The World Health Organization (WHO) Director General’s recent declaration that the Covid-19 outbreak is a “a public health emergency of international concern” has been widely reported. Many hotel brands have responded to this health threat by waiving cancellation and rebooking fees for guests who are due to be travelling to or from Mainland China, Hong Kong, Macau or Taiwan during the period to the end of February 2020. 

In addition to continuing to follow both WHO and relevant local government guidelines, hotel brands and operators will need to consider their general duties to use reasonable care to ensure that properties are safe for both staff and guests, and may additionally need to consider potential occupiers’ liability issues if the premises themselves become unsafe. The occupier will need to take reasonable steps to protect employees and visitors, although the exact steps to be taken would depend on the laws of the relevant country in which the hotel operates. In doing so, it may be necessary to consider putting in place policies around when staff members may and may not work and screening guests for high risk factors, if such policies do not already exist. Screening may include determining whether or not a staff member or guest has visited mainland China or other quarantined or high-risk areas in the last 14 days or have been in close contact with a confirmed case of Covid-19 in the last 14 days.

Additional actions that hotel managers and employers may take include providing information and briefing all employees and contract staff, including domestic and cleaning staff, on relevant information and procedures to prevent the spread of Covid-19 in the hotel setting and what to do if a guest develops the virus.

Hotel operators must also be careful that particular communities and visitors are not targeted or discriminated against. 

Contractual protections

Hotel operators, owners and franchisors should consider carrying out a review of key contracts to determine whether the impact of the outbreak constitutes a force majeure event. Depending on the wording of the contract, an event that amounts to force majeure may excuse one or all parties from performance of, or suspend performance of, their contractual obligations. For example, if government regulations were to require a hotel to close, this could be in breach of requirements in a hotel management agreement that requires the franchisee to give a certain period of notice to the franchisor before any closure, or if revenues that are reduced (because of the outbreak) beyond agreed thresholds that could otherwise trigger termination rights in hotel management agreements and leases. 

Force majeure does not have a settled meaning in English law unlike other jurisdictions where may be a statutory meaning of the term. Each contract will have a different definition of the term which will depend on the subject matter of the contract and the outcome of the parties’ negotiations at the time each contract was entered into. It is therefore important to check the exact wording, and so see whether relevant wording (such as “outbreak of disease”, “epidemic” or “pandemic”) have been included or indeed excluded. If such wording has not been specifically referred to, any disruptions or contractual issues could fall still within the definition of a force majeure event, although it is important to note that the English courts generally construe force majeure clauses narrowly. 

Other considerations will include:

  • If a health epidemic is not specifically included as a force majeure event, could it nevertheless be covered under other wording of the clause? For example, are there local or national government decisions or actions that might fall within the scope of the force majeure definition? Similarly, is there any wording relating to political interference or changes in law that could be relevant? You should also check for exclusions to force majeure clauses which commonly include financial inability to perform and general economic downturns or conditions, and which may preclude the ability to bring a claim in these circumstances.
  • Whether there are any notice requirements in relation to an event of force majeure. If notice of force majeure is to be given, it should be issued in line with the provisions of the contract. Failure to do so may result in the affected party not being able to rely on the force majeure clause or claim relief from impact of the force majeure event.
  • Whether the triggering event must ‘prevent’ performance. Where such wording is used, the English Courts have held that the party seeking to rely on the force majeure clause must be able to demonstrate that performance of the contract is “legally or physically impossible and not just difficult or less profitable”. Alternatively, words like ‘hinder’ or ‘delay’ have a wider scope and will generally be satisfied if it can be shown that performance is significantly more arduous. Ultimately, the English Courts will seek to enforce the performance of a contract and therefore a mere increase in the cost of performance will not in itself be enough to trigger the force majeure provisions under a contract, unless expressly provided for.
  • Whether the affected party can show that it has used its reasonable endeavours to prevent, or at least mitigate, the effects of the force majeure event. Force majeure relief will not often be available to assist the impact of events that could have been avoided or mitigated. 
  • Whether there are any other factors that may have impacted performance of the contract. The English Courts recently held that, while it will depend on the wording of the clause in question, it is often the case that a force majeure event must be the only effective cause of default by a party seeking to rely on the force majeure provisions. If it can be shown that other factors have prevented performance of the contract, then the non-performing party will not be able to rely on the force majeure provisions under the contract. Applying the example above, it may be difficult to show definitively that reduced revenue is solely due to the Covid-19 outbreak if there is also a general softening of the market.
  • Whether there are any relevant statutory controls on force majeure. Under English law, if the parties are contracting on standard terms of business any exclusion or restriction on liability must satisfy the requirement of reasonableness under section 3(2) of the Unfair Contract Terms Act 1977 otherwise it will be void. Such term must be fair and reasonable one to include in the contract, having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. With regard to consumer contracts made on or after 1 October 2015, any force majeure clause will need to satisfy the concepts of fairness and transparency.
  • If you are able to determine that the impact of the outbreak is an event of force majeure, usually the contract will provide that the affected party’s obligations are suspended for the duration of the force majeure event and once the force majeure event comes to an end, the contract will be ‘re-activated’, unless the parties agree otherwise. In tandem with this, once triggered, the non-performing party’s liability for non-performance or delay is removed, usually for as long as the force majeure event continues. In some instances, force majeure provisions may also provide that the parties may seek to terminate the contract if it becomes unfeasible to resume the contract once the force majeure event has ceased.

Accordingly, whether the outbreak of the coronavirus will be deemed a force majeure event, will very much depend on the wording and scope of the force majeure provision. Parties faced with business interruptions as a consequence of the coronavirus should, therefore, familiarise themselves with the force majeure clauses in their contracts taking note as to whether they include any conditions precedents (i.e. notice requirements) which, if not fulfilled, could prevent reliance on the same. 

Regardless of whether or not force majeure provisions apply, it may be possible to apply the common law doctrine of frustration. The application of this doctrine is generally narrower in scope than the application of force majeure provisions, but may still be helpful in situations where it becomes impossible to perform a contract.