Ordinary Course Disputes Pandemic.
Ordinary Course Disputes During Pandemic (COVID-19 Context)
🔹 1. Introduction
The COVID-19 pandemic created unprecedented disruption in business operations worldwide. This led to a surge in disputes over “ordinary course of business” covenants, especially in M&A transactions.
👉 Core issue:
Whether actions taken during the pandemic (closures, layoffs, cost-cutting, borrowing, etc.) were within the “ordinary course of business” or constituted a breach of covenant.
🔹 2. Nature of the Problem
Ordinary course covenants typically require:
- Business to be run consistent with past practice
- No material deviations without consent
During the pandemic:
- Businesses had to take extraordinary measures
- Many actions were necessary but unprecedented
⚖️ This created tension between:
- Strict contractual compliance
vs - Commercial necessity in crisis
🔹 3. Key Legal Questions
Courts had to determine:
❓ (1) Are pandemic-driven actions “ordinary”?
❓ (2) Should “ordinary course” be judged:
- Against past internal practice, or
- Against industry-wide response?
❓ (3) Does necessity justify deviation?
🔹 4. Judicial Approaches
🧭 Approach 1: Strict Interpretation
- Focus on company’s past practice only
- Pandemic does not excuse deviation
🧭 Approach 2: Flexible / Contextual
- Consider industry norms and crisis response
- Allow reasonable deviations
🔹 5. Important Case Laws (At Least 6)
🧑⚖️ 1. AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC
🔍 Facts:
- Hotel business shut down operations and altered practices during COVID-19.
⚖️ Held:
- Actions were not in the ordinary course.
📌 Principle:
- “Ordinary course” means consistent with past practice, not what is reasonable in a crisis.
👉 Landmark case for strict interpretation.
🧑⚖️ 2. Snow Phipps Group, LLC v. KCAKE Acquisition, Inc.
🔍 Facts:
- Company made operational adjustments during COVID-19.
⚖️ Held:
- Actions were within ordinary course.
📌 Principle:
- Courts consider industry-wide responses and practical realities.
👉 Represents flexible approach.
🧑⚖️ 3. Akorn, Inc. v. Fresenius Kabi AG
🔍 Relevance:
- Though pre-pandemic, heavily relied upon during COVID disputes.
📌 Principle:
- Ordinary course compliance is a strict contractual obligation.
🧑⚖️ 4. Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd.
🔍 Relevance:
- External disruptions (labor unrest) affected operations.
📌 Principle:
- External events can disrupt ordinary course but do not automatically excuse breach.
🧑⚖️ 5. IBP, Inc. v. Tyson Foods, Inc.
🔍 Held:
- Temporary business fluctuations do not amount to breach.
📌 Principle:
- Focus on overall continuity, not short-term disruptions.
🧑⚖️ 6. Hexion Specialty Chemicals, Inc. v. Huntsman Corp.
🔍 Held:
- Buyers cannot escape deals without clear breach.
📌 Principle:
- Prevents opportunistic termination during crises.
🧑⚖️ 7. In re: The Walt Disney Co. Derivative Litigation
🔍 Relevance:
- Emphasizes good faith and business judgment.
📌 Principle:
- Crisis decisions may be protected if made in good faith.
🔹 6. Key Principles Emerging from Pandemic Cases
🔑 (1) Past Practice vs Industry Practice
- Courts are divided:
- Strict view → past practice only
- Flexible view → include industry norms
🔑 (2) No Automatic Excuse for Crisis
- Pandemic does not automatically justify breach
🔑 (3) Consent Requirement is Crucial
- Many agreements require buyer consent for deviations
🔑 (4) Good Faith Matters
- Courts consider whether actions were:
- Necessary
- Reasonable
- Taken honestly
🔑 (5) Anti-Opportunism
- Courts prevent buyers from using minor breaches to escape deals
🔹 7. Practical Examples
✔ Likely Within Ordinary Course:
- Temporary cost reductions
- Following industry-wide shutdown norms
❌ Likely Outside Ordinary Course:
- Permanent structural changes
- Major asset sales
- Radical departure from prior operations
🔹 8. Interaction with MAC (Material Adverse Change) Clauses
- Buyers often invoked:
- Ordinary Course Covenants
- MAC Clauses
👉 Courts generally:
- Apply stricter test for MAC
- But more enforceable standard for ordinary course covenants
🔹 9. Drafting Lessons from Pandemic
Contracts now often include:
- Pandemic-specific carve-outs
- “Except as required by law or emergency” clauses
- Explicit reference to industry practices
- Clear consent mechanisms
🔹 10. Critical Analysis
✔ Strengths of Judicial Approach:
- Protects contractual certainty
- Prevents abuse by buyers
❌ Challenges:
- Strict interpretation may penalize necessary actions
- Lack of uniformity across cases
🔹 11. Conclusion
Pandemic-related disputes transformed the understanding of ordinary course covenants.
👉 Key takeaway:
- Courts balance:
- Strict contractual compliance
- Commercial reality in crisis
However:
- Trend shows increasing importance of precise drafting
- Parties must anticipate extraordinary events explicitly
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