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COVID-19’s impact on business lets buyer walk away from hotel deal

Companies in a variety of industries are experiencing economic woes from the many ways the novel coronavirus has weakened formerly solid commercial enterprises. From hospitality to entertainment, restaurants to retail – COVID-19 has driven the customers home and kept them there.

What effect will this have on unfulfilled or ongoing contracts between business entities when one or both find themselves weakened from the blows the pandemic has dealt to their bottom lines?

Coronavirus caused business interruption

On Nov. 30 in what is seen as a major ruling, the Delaware Court of Chancery released a 200-plus page, complex opinion in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC. Broadly, the court held that although a Korean company (“Mirae”) had agreed in 2019 to buy 15 American luxury hotels from a Chinese company (“Anbang”) for $6 billion, it could get out of the deal because Anbang did not do business “in the ordinary course” up until the April closing, which was a contractual requirement for the acquisition.

During that time, instead of business as usual, Anbang shut down two of their hotels, curtailed restaurant operations and other services, and laid off over 5,000 people because of the impact of COVID-19 on the business. Anbang’s deviation from the ordinary course of business allowed Mirae to legally back out of the transaction.

The court also said that another requirement for closing – that the buyer procure title insurance with specific provisions tied to a complex, problematic history of publicly filed fraudulent deeds – was not met, but that this was not the buyer’s fault and so provided another basis for terminating the purchase.

The judge ordered that Anbang refund the multimillion-dollar deposit on the sale to Mirae with interest and pay its legal fees.

Had it gone through, the deal would have transferred ownership in California of Loews Santa Monica Beach Hotel and the Westin St. Francis in San Francisco as well as of other major hotel properties across the country.

Mirae-Anfang dispute outcome may be a bellwether

According to views expressed in an article in Bloomberg’s The Quint, the outcome in the Delaware case may “pave the way for other firms to walk away from deals they say were crippled by COVID-19.” Some COVID-related contractual disputes have settled or been renegotiated, while some are winding their way through courts.

Bloomberg quotes academic experts who note that contractual language is often key – how is an ordinary-course-of-business clause worded or is the agreement recent enough to include negotiated terms dealing directly with the pandemic? Or, as the American Bar Association (ABA) Business Law Section points out, is there a “force majeure” clause that would allow a contractual party not to perform based on uncontrollable circumstances such as the coronavirus?

The ABA explains that in addition to the contractual language, there may be state law defenses to contract noncompliance, depending on the jurisdiction, such as impossibility, impracticality or frustration of purpose based on the impact of COVID-19 on the business conditions at issue.