Financial Services Essential; Force Majeure And More For Payments And Crypto In Covid

First, we wish you and your team the best of health and safety at this difficult time. 

While keeping a distance from people, getting up close and cozy with digital payments is the order of the day.

1. Financial Services are an Essential Service. If you wish to confirm the local legal status of your payments or crypto business, please refer to our list of all state-level banking department orders to the effect that payments are an essential service. These state-level updates mirror action taken at the federal level, including the Federal ReserveCFPBCSBS and CISA.

3. Stimulus for Payments Businesses. The Coronavirus Aid, Relief and Economic Security (CARES) Act, of March 27, 2020 provides $2 trillion in funds for the economy, some of which are accessible to payments businesses.  There is $349 billion in low-interest, forgivable loans for small business and 1099s may be eligible for up to 39 weeks of benefits.The Green Sheet has published an article discussing this topic as it relates to ISOs.

2. New York – Financial Services in the Empire State.  Our thoughts are with New Yorkers who are right now weathering the eye of this storm. New York Governor Cuomo instituted Executive Order 202.6 on March 18, 2020. The Executive Order extends the provisions of Executive Order 202 which declared a state of emergency in New York state. Under E.O. 202.6, any essential businesses in the state will not be subject to the mandated restrictions including work from home mandates and reduced work forces in order to limit the spread of Covid-19. “Banks and related financial institutions” have been included in the enumerated essential business and services in E.O. 202.6. The guidance includes banks, insurance, payroll, accounting and services related to financial markets. Businesses may also apply to be deemed essential by the Empire State Development Corporation.Since it is not explicit that money services businesses qualify as essential services, it is recommended that any money service business operating in New York state apply to be deemed an essential service. 

The application is a one page form, where the applicant must include:
Contact information
Number of employees 
Description of business
Description of why business fits within the parameters of E.O. 202.6

E.O. 202.6 can be found here.
The application form can be found here

Executive Order 202.9, dated March 21, 2020 gives powers to the Superintendent to promulgate emergency regulations for the period of the emergency that the fees for using ATMs, overdraft and credit card late fees may be restricted or modified to take into account the financial impacts on New York consumers and the safety and soundness of the licensed or regulated entities. 

3. Force Majeure Clauses in Payments and Crypto ContractsSadly, because of the Covid-19 pandemic, some participants in the payments industry will be unable to meet their contractual obligations. The purpose of this newsletter is to give some guidance to people on either side of that terrible turn of events.  Specifically, I want to discuss force majeure clauses that are the clauses that are most likely to apply to a pandemic-caused contractual default.

Force Majeure Clause

The force majeure clause in contracts is usually buried in the general provisions at the end of the agreement and is rarely negotiated or even read. The pandemic has suddenly given great importance of force majeure clauses. Case law borne out of this pandemic will be cited for decades to come.  

A typical force majeure clause in a payment processing agreement reads as follows:

“Force Majeure.  No Party shall be liable for any default or delay in the performance of its obligations under this Agreement if such default or delay is caused, directly or indirectly, by an Act of God, fire, flood, earthquake, conditions or events of nature, war, terrorism, riots, pestilence, civil disturbances, work stoppages, equipment failures, power failures, governmental orders, or any other similar cause or event beyond the reasonable control of the affected party (provided the non-performing Party is without material fault in causing such default or delay).”

The key legal question when facing a force majeure clause is to determine whether it relieves the party of default for non-performance. In other words, but for the force majeure event, would the failure of the party place them in default. For example, without a tornado, I would have delivered the garden shed you ordered. Because of the tornado, I can’t.

Force majeure clauses in contracts are included to allow one or more parties to an agreement to not fulfill their obligations should certain circumstances arise. The event contributing to the application of the force majeure clause should not only be unforeseeable, but also beyond the control of the parties. Unforeseeable here, means unforeseeable at the time the contract was entered into. As in the typical clause example above, force majeure clauses outline the types of situations where the clause may excuse non performance. Since such clauses are a construct of the parties, the meaning and scope shall be those given by the parties in creating the agreement. Where clauses are lacking or where there is room for interpretation, courts will apply common law principles. 

What if the force majeure clause does not list ‘pandemic’?

Many drafters of force majeure clauses include “catch-all” phrases to extend the provision to non-enumerated situations by including words such as “other” etc. Courts tend to apply the ejusdem generis (Latin for ‘of the same kind’) theory when determining if a given situation fits within the catch all phrasing. Ejusdem generis dictates that when general terms follow an enumerated list of two or more items, then the general terms must apply only to items of the same class as those enumerated. The potential application of ejusdem generis to a force majeure clause must be kept in mind not only when drafting such clauses, but also when formulating argumentation to either defend or argue the non-applicability of a force majeure clause. 

When analyzing force majeure clauses, courts will often ask three questions:

  • Is the event in question a force majeure event (as defined by the clause)? 
  • Was the event beyond the reasonable control of the party evoking the clause?
  • How does the event affect the obligation the party is seeking to be excused from? 

Case Study 1: ISO can’t make minimums because of Codiv 19

Taking an extreme but illustrative example, if an ISO has focused on selling merchant services to amusement parks, and all amusement parks are closed by order of the state, even if the force majeure clause in the ISO agreement does not expressly mention pandemics, generic wording on factors beyond the control of the ISO would likely support the ISO in being relieved from its liability for minimums. Most ISOs, however, do not sell to only amusement parks, and will face a challenge of proving that the circumstances are a force majeure, in particular given that online sales are surging right now.

Case Study 2: Crypto platform inoperable because of Covid-19.

Suppose key officers (e.g. CIO, CCO) at a crypto wallet or exchange were all out of action because of Covid-19 for an extended period of time. Suppose as well that, despite having (often legally required) disaster recovery and business continuity plans, those plans were ineffective because other key personnel were out of commission. The crypto business grinds to a halt.  Customers will be frustrated because they are not able to get support or possibly access their assets. Here, a court might look to the crypto operator to have had a more robust disaster recovery plan.  Assuming the problems are not caused by infrastructure (e.g. Amazon down) or orders to close by the state, the crypto business will have a harder time arguing that they were legally relieved of their obligations on account of force majeure. The reason for this is that, in this case, the causes are not external to the business. 

Cases decided on the basis of the Covid-19 pandemic will be studied in law schools for the next 100 years. I hope none of our readers are the basis of that new law.

Community Service: Pro Bono Advice on Force Majeure Clauses

As our way of giving back to the payments and crypto community that sustains us, we will provide free review of any force majeure clause in payments or crypto.

4. Stay Healthy and Safe, Electronic Payments and Crypto Surge (?), Atlas Team Publishing Tools to Help

Our whole team is actively researching solutions for the financial services sector for these difficult time and we will share all useful information as and when we collate it. (Regular readers know how much we love listscharts and more lists). In the meantime, stay healthy and safe in anticipation of (hopefully) a surge in electronic payments and crypto after Covid-19 like none of us could have ever imagined – when the crisis is over.

Adam Atlas Attorneys at Law is licensed in New York and Quebec.