COVID-19 and its impact on your business

The 2019-nCoV Coronavirus outbreak has made it clear how globalised and connected the modern worlds is. What started in China is now making headlines as far as South America and Africa; financial markets are plummeting; sectors from manufacturing to retail to healthcare are voicing serious concerns.

It is important for all businesses to have plans in place to ensure the continuity of their critical activities.

Supply chain and commercial contracts

During a pandemic, a business may struggle to fulfil contractual obligations due to staff shortages or because their own suppliers are unable to meet contractual commitments. For example, during the 2019-nCoV Coronavirus crisis, a UK car manufacturer may be unable to fulfil a contract to supply cars as it is awaiting Chinese parts.

Businesses who think they might be affected by outbreaks such as the Wuhan virus should review their contracts and consider any steps they could take to minimise the chance of them being in breach of contract. This should include having an up to date business continuity plan with appropriate risk assessments and could also include the stock-piling of resources or taking early deliveries where necessary.

The end customer might make a damages claim for breach of contract, but if a force majeure clause is triggered or the doctrine of frustration applies, any claim might fail.

Force Majeure

Force majeure is an event beyond a party's reasonable control which could not reasonably have been anticipated or avoided. A force majeure clause excuses one or both parties from performance of the contract if certain events occur. Force majeure has no fixed interpretation under English law, so should be specifically considered in the context of each contract.

Businesses who think they could be affected by a pandemic or epidemic should review their current contracts to check if this is included in the definition of force majeure.

Any affected business should then consider the operation of the force majeure clauses. Some force majeure clauses may be triggered where the event either 'hinders' or 'delays' the performance of a contract, giving companies a breathing space. However, where a force majeure clause refers to an event 'preventing' performance, a company will have to show that performance of the contract has been made impossible (and not merely more difficult or slower) by the outbreak.

Finally, when entering new contracts businesses should consider whether to include force majeure clauses, appropriate to the type of business and locations in which it operates, that specifically include pandemics and epidemics. They should also include potential government reactions to outbreaks such as quarantine measures in large cities and the closure of public transport which might prevent a company’s employees from working and thus prevent the performance of the party’s obligations.

Frustration

Where there is no applicable force majeure clause, another avenue might be to invoke the doctrine of frustration. The doctrine says that a contract may be brought to an end where something unforeseen occurs after the formation of the contract (through no fault of either party) that has the effect of making it commercially or physically impossible to perform.

Whilst it might be possible to argue that a pandemic has frustrated a contract, the courts are often unwilling to find that a contract has been frustrated. Furthermore, frustration is permanent; both parties are excused from the contract, with no option for a temporary pause. Therefore, relying on frustration as a way out of contractual obligations should only be used as a last resort. The difficulties and unpredictability in trying to use frustration highlights why careful planning of contracts is so essential. Clauses specifically dealing with critical events such as pandemics are better than trying to use general law principles such as the doctrine of frustration.

What you should do

•  Check current contracts for force majeure clauses.

•  Carefully draft new contracts to include pandemics, epidemics and other crises that may effect the ability of your business to fulfil contractual obligations.

•  Review and update your business continuity plan.

•  Consider the terms and scope of your insurance cover, and
•  Consider whether your systems and employees could operate flexibly in the case of travel restrictions or other measures that might be taken by the public authorities.

Impact on your staff and HR policies

Earlier this week, Health Secretary Matt Hancock stated that employers should pay sick pay to employees who have received medical advice to self-quarantine. He has told MPs that "self-isolation on medical advice is considered sickness for employment purposes".

Self-quarantine and sick pay

This clarification is welcomed and deals with what was until now a grey area, with ACAS previously advising that there was no legal right to such payments. As the Health Secretary said: "That is a very important message for employers and those who can go home and self-isolate as if they were sick, because it is for medical reasons."

This guidance provides much needed clarity at a time when questions are being raised. It is important to note, however, that if an individual chooses to self-isolate without any medical guidance they will not qualify for statutory sick pay.

Staff policies

If a place of work needs to be shut down, employers should have a policy and plan in place. They will need to consider if people can work remotely, what the contact arrangements are to keep employees up to date, and other measures that will need to be taken to best ensure that a business can continue to operate.

If the workplace is required to shut down, in most cases employers will need to continue to pay their staff as normal, unless the employee can work remotely but voluntarily choose not to.

We offer this advice to employers:

• Determine what proportionate steps should be taken by the company concerning day-to-day work, such as the provision of hand-sanitisers, ability to work remotely, and other steps.
• Determine when and in what circumstances sick pay is to be paid, including the reporting framework for employees so that the policy can be applied on a consistent basis.
• Set up a central point of contact for your employees and managers, so that queries and issues can be addressed, again on a consistent basis.
• Ideally prepare a written policy detailing issues such as (i) steps to be taken by employees, such as washing hands, (ii) how and who to report any concerns regarding coronavirus, (iii) the situations in which sick pay will and will not be paid, including reporting, and (iv) travel on company business.