23 March 2020
Just as families around Australia are prepping to weather COVID-19, so are countless businesses, including SME’s working in the WA Defence space. Getting your business ready for a concurrent pandemic and recession is a daunting task.
You do not need to go through this alone. This brief note provides an overview of the dynamic situation, the legal problems that may arise for businesses, and how you can take positive steps to overcome them.
The situation
The COVID-19 pandemic will touch every aspect of Australian society. It is already having a significant impact on businesses. The nature and extent of that impact is changing on a daily basis.
At the time of writing, Government policies include a ban on non-citizens and non-residents entering Australia; 14 days’ mandatory isolation for those returning from Australia; 14 days’ mandatory isolation for anyone who has come into contact with a confirmed case. Further, non-essential outdoor gatherings of more than 500 people are banned, as are indoor gatherings of more than 100 people. Most recently, it was announced that no more than one person may occupy every 4 square metres indoors. These policies are necessary to flatten the curve, yet make business as usual impossible.
Meanwhile, businesses are taking a variety of approaches to ensuring that they fulfil their duties of care to their employees. Some have already transitioned to a work-from-home model. Others, like Bennett + Co, are trialling a split-shift system, with a rotation of teams working from home. Still others are doing their best to take appropriate safety precautions, including social distancing, while employees continue to attend their workplaces. Each of these approaches comes with considerable challenges. Maintaining historical levels of productivity is becoming increasingly difficult. For many, keeping doors open is already impossible. Mandatory ‘go home’ orders, like that just implemented in California, are likely on the horizon.
The health crisis is interwoven with an economic crisis that is emerging as the most significant downturn in a century. Decisive action by the Reserve Bank of Australia, including our nation’s first experience with quantitative easing, may help stem the bleeding. Government assistance, including tax relief; and a recent move by Australian banks to defer small business loan payments; should be welcomed. Further stimulus is on its way.
The situation is changing rapidly. Businesses are advised to stay informed by utilising the latest Government advice on the situation, including the Australian Government’s webpage on ‘Coronavirus information and support for business’.
Contractual relationships will be tested
As the effects of COVID-19 ripple through the economy, many businesses will see impact to their supplies of raw materials, equipment and labour. Businesses’ ability to perform their contractual obligations will be tested.
The situation will affect a myriad of contracts, including:
- primary contracts with Primary or subcontractor;
- ASDEFCON;
- supply chain;
- DISP membership;
- employment contracts;
- leases—of premises as well as plant and equipment;
- joint venture agreements; and
- various other critical commercial contracts.
Inevitably, questions will arise as to what rights parties have under these sorts of contracts. Who should bear the burden of any losses sustained as a result of coronavirus impacts? The answer will turn on the legal issues arising in the particular case.
Prep for the inevitable legal issues
In prepping for the worst the following legal challenges may loom large.
Frustration
In certain cases, the COVID-19 pandemic could be characterised as a ‘frustrating event’. In contract law, the doctrine of frustration may apply where the circumstances in which contractual performance is called for are radically different to the circumstances originally contemplated by the contracting parties when they made the deal.
Basically, frustration may occur in cases of unforeseen disaster—potentially, in cases like the one you are in.
Where a contract is ‘frustrated’ in this legal sense, the contract is discharged. Essentially, this means the contract comes to an end. What that means in practice turns on what has actually happened under your contract—whether, for example, the contractual obligations were already partially performed before frustration. This is an issue on which businesses must get expert advice.
Force majeure
The doctrine of frustration may not apply where contracting parties contemplated the risk of an otherwise frustrating event in an express term of their contract.
A ‘force majeure’ clause is such a term. These clauses stipulate the consequences of a particular event—a calamity, force or circumstance beyond the parties’ control—for the parties’ contractual obligations.
The operation of force majeure clauses turns on interpretation of the terms of the particular contract. It is another matter for expert advice.
Other issues
Questions are also likely to arise around the following issues:
- Penalties for delay and non-performance;
- Termination or suspension of contracts;
- Suspension of payments;
- Consequential losses;
- Requests for delay and extension;
- Liability to employees – personal leave, use of annual leave, and termination payments;
- Triggering of default events under loan facilities and finance agreements and associated securities;
- Disclosure requirements under contracts; and
- For listed companies, disclosure requirements under the Corporations Act.
Given the current economic climate, advice on insolvency, and directors’ safe harbour provisions, may also be necessary.
The businesses on the front foot are the businesses that will survive
To survive this crisis, each of us must prepare and adapt. Businesses are no different. The issues outlined above may pose existential threats to your business.
All businesses should review all of their critical contracts, and even contracts that don’t appear at this stage to be mission critical, to identify any existing or likely future issues likely to be triggered by the impacts of the coronavirus.
By getting on the front foot early, any problems that are identified can be addressed with clients or suppliers in a constructive and proactive way. Through a proactive approach, businesses can ensure that they comply with all notice and disclosure requirements in light of existing or anticipated contractual events triggered by the virus.
More importantly, the application of common sense, and a willingness to engage constructively with clients and suppliers, where disputes do arise, can avoid most problems and in particular the need to resort to the dispute resolution mechanisms in relevant contracts. Litigation through the courts is an absolute last resort – especially now.
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Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.
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