Coronavirus – the potential impact on businesses

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With much of the world currently battling against the Covid-19 pandemic, it’s understandable that businesses and their staff are nervous. Unfortunately, we expect most businesses, large and small, to experience economic challenges. This raises several issues for consideration, encompassing contracts, employment law, insolvency and directors’ responsibilities, to name just a few.

Is your contract protected? 

New and existing contracts between businesses will come under scrutiny. Provisions such as force majeure and adverse material changes could be triggered in various commercial contracts which cannot be adhered to by a party due to the current crisis.

Force majeure provisions usually set out specific unforeseen circumstances that may prevent a party from fulfilling its obligations under the contract. The wording of such clauses should be carefully reviewed to establish whether the Covid-19 pandemic may be covered.

Some force majeure provisions are limited in time so that, after a certain period, a party may have the right to claim compensation or terminate the contract.

During this challenging period, parties should discuss any such difficulties and try to reach an amicable agreement to minimise the disruption caused by the pandemic. Of course, the defaulting party should make sure it has utilised all necessary measures in attempting to perform its duties under the contract before claiming a force majeure relief.

Adverse material change provisions are usually included to provide a party an escape route where there is detrimental change in circumstances. Such provision would often be included in any lending documents. Some businesses may find themselves in such a situation amid the Covid-19 crisis and in the wake of measures imposed by the government.

If no force majeure provisions are included in the contract, common law recognises in limited circumstances, the doctrine of Frustration, where an unforeseen change in circumstances renders the performance of the contract impossible or radically changes the obligations of the parties as they intended when entered into the contract.

Where the doctrine applies and the contract is rendered frustrated, the parties will be relieved from their obligations and liabilities under the contract (in other words, the contract will terminate). However, the bar for such claims is very high. Merely having difficulties in performing the contract would not render the contract frustrated and an unsuccessful claim may give raise to the other party claiming termination and damages for a repudiatory breach.

Whilst it may be possible that the measures taken by the government to combat the spread of the coronavirus amount to a frustration of a specific contract, the facts and circumstances of any such contract and situation will need to be carefully reviewed and professional advice should be sought before any such claim is made.

Are Covid-19 disruptions insured?

It’s important to check insurance policies and their wording carefully, to ascertain whether the situation is covered. If so, make the necessary notices to the insurer in a timely manner and ensure that any business decisions are in line with the policy provisions.

During a pandemic such as this; employers have a duty to protect their employees’ health and safety. Most businesses are regulated and will have health and safety policies and business continuity plans to deal with issues of remote working, office closures, structure and flexibility. These will help maintain commercial operations whilst safeguarding the health of employees. Consideration should be given to those employees who are ill or quarantined and their rights concerning statutory sickness pay.

Sadly, it’s inevitable that some businesses may feel the impact of Covid-19 more than others, for example, travel and hospitality related businesses. Obtaining professional advice at an early stage may prove invaluable for those anticipating cashflow difficulties or balance sheet insolvency.

The issues covered above are only snapshots of issues our clients may be facing and is not exhaustive. This difficult time may also bring opportunities during and after the crisis, and thinking outside the box may be beneficial.

As always, we are here to help if advice is needed or you have concerns and, together, we will weather the coronavirus storm.