Global tourism and hotel revenues are being severely affected as a result of the outbreak of the novel coronavirus (Covid-19) in late 2019. Local governments are putting in place travel restrictions, and some airlines are suspending flights on certain routes. Some hotel brands have waived cancellation and rebooking fees for guests who are due to be travelling to or from Greater China, South Korea, Japan or Italy during the period to 31 March 2020, and this may very well be extended. What else should hotel owners, operators or franchisors consider and what can be done about the resulting downturn in revenues?
Protecting staff and guests
As well as continuing to follow both World Health Organisation (WHO) and relevant local government guidelines, they will want to consider general duties to use reasonable care to ensure that properties are safe for both staff and guests, including potential occupiers’ liability issues if the premises themselves become unsafe.
Occupiers and employers 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 and what is reasonable based on the level of risk in that particular country. In doing so, it may be necessary for occupiers and employers to put in place policies around when staff members may and may not work and screening staff and guests for high risk factors to safeguard the health safety and welfare of all staff and guests. Is it possible to reduce risks for any staff who are higher risk because of pre-existing health conditions, pregnant employees or otherwise compromised immune systems? Depending on the circumstances it may be appropriate to consider introducing other screening measures, for example, determining whether staff members or guests have visited 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. Hotel managers and employers should be 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.
Be careful that particular communities and visitors are not targeted or discriminated against. Well-publicised anti-harassment and/or equal opportunities policies and training should reduce the incidences of harassment and give the business a potential defence in the case of any harassment by individual staff members. Be mindful also of indirect discrimination risks when asking staff members to restrict their travel or to work from home or self-isolate after travel to a particular area. While this may be justified, any such requests should be considered carefully in light of Government guidance.
Contractual protections
Does the impact of the outbreak constitute 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. Under English law there is no statutory meaning of force majeure and the English courts generally construe force majeure clauses narrowly. Each contract will have a different definition of the term.
- Is “outbreak of disease”, “epidemic” or “pandemic” (or similar) included or indeed excluded? If such wording has not been specifically referred to, any disruptions or contractual issues may still constitute a force majeure, depending on the wording.
- Are there local or national government decisions or actions, political interference or changes in law that might fall within the scope of the force majeure definition? For example, government regulations that require a hotel to close.
- Are there specific notice requirements in relation to an event of force majeure? Failure to comply with these may prevent the affected party from relying on force majeure or from claiming relief in respect of the force majeure event.
- Are there other relevant exclusions, for example general economic downturns or conditions? This might prevent reliance on force majeure where the property is only indirectly affected by a downturn in travel and not directly affected, for example by quarantine or infection.
- Even if “outbreak of disease”, “epidemic” or “pandemic” is included within the definition of force majeure, the contract may only allow suspension to the extent that such force majeure prevents one party from performing, rather than simply making it financially uneconomical to do so.
- Similarly, must the triggering event ‘prevent’ performance? If so, performance of the contract must be legally or physically impossible and not just difficult or less profitable. Wording such as ‘hinder’ or ‘delay’ would be helpful if it can be shown that performance is significantly more arduous.
- Is it possible to 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.
- Can it be shown that the impacted performance is solely due to the Covid-19 outbreak? If there are other factors force majeure will not apply. 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.
- Are there any relevant statutory controls on force majeure? The concepts of reasonableness, fairness and transparency may be relevant if contracting on standard terms of business or the contracts are consumer contracts.
If force majeure applies, 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.
Regardless of whether 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.
Insurance
Are any losses recoverable under available insurance cover? Check policy wordings carefully as cover for losses will depend on the precise terms of the insurance. Key considerations include:
- Is the outbreak a direct trigger of loss?
- Are there specific exclusions in relation to epidemics or pandemics? In event cancellation cover, it common for policies to exclude losses arising from communicable diseases leading to quarantine or restrictions on movement and/or travel advisory or warnings being issued by national bodies. In such cases the fear or threat of such restrictions will usually also be excluded.
- Is there any physical loss or damage to the insured property which could be claimed under business interruption insurance typically requires physical loss or damage to the insured’s property? Disease at the location, contamination and pollution may be covered under property policies but the terms may be restrictive with sub-limits applied.
- Does the policy include a ‘notifiable disease’ extension? If so, there may be cover in the event of the compulsory closure of premises or restriction of access.
- Loss of attraction insurance, which provides cover for tourist attractions and hospitality venues for loss of income following a defined event, would not normally cover an epidemic or pandemic as physical damage to nearby property is required.
- Employers’ liability insurance will usually indemnify employers for disease related claims where the disease arises out of and is in the course of employment and in the UK an approved policy may not contain terms limiting the insurer’s liability where the insured employer has not exercised reasonable care.
- Public liability insurance may also respond where it covers accidental death or injury to non-employees. In these cases, there will, however, be significant causation issues in establishing that the infection was caused either by a person’s employment or an insured event.
- Non-employers’ liability cover may exclude deliberate or reckless acts by the insured that could reasonably be expected to cause injury or damage. The burden of establishing recklessness will usually be on the insurer and is a higher hurdle than negligence. Whether an insured has acted recklessly may depend on whether it has complied with government guidance or requirements and whether actions taken are in line with similar businesses in its sector.
The situation is fast changing and businesses should both examine their own contractual situation with their suppliers, customers and insurers, as well as keeping a close eye on government and WHO advice to ensure their policies and procedures are regularly updated in line with official guidance.
Written by Thomas Page, Global Head of Hotels and Leisure, CMS and Michelle Kirkland, Senior Associate, Hotels Group, CMS. Thomas is part of the Inner Circle, a group of industry leaders and innovators we have brought together to help us contribute to debate in the sector.