Novel Coronavirus (COVID-19) – “viral” consequences for business.
11 / 03 / 2020
The spread of the virus is not limited to the appalling consequences faced by (now) millions of people who are either very seriously ill, sick, trapped, locked-down and/or extremely anxious. The consequences are now affecting the potential viability of businesses as well.
Employers are having to consider the virus’s implications on: business travel (restrictions having a possible effect on commission payments), events, medical checks for employees returning from both business trips and holidays (compulsory?); holidays and last minute cancellations – reimburse holiday costs and/or reschedule the holiday; issues arising due to self-isolation – government guidance and business risk; sick pay (statutory or enhanced?); health and safety obligations as an employer and as an employee; school closures – (extended) dependence leave?; alternative business arrangements – home working (especially for vulnerable people); what to do about third parties visiting offices/work premises e.g. clients and contractors; and, what is the position of those in multi-occupancy offices? What are your “neighbours” doing? What is the attitude of the Landlord? Could refusals to allow access give rise to discrimination claims (direct or indirect)? We have given some guidance on these issues: https://wedlakebell.com/coronavirus-considerations-for-business/
In tandem with having policies to cover the “people issues”, what else should businesses be doing?
Undoubtedly, businesses should be reviewing the terms of the various contracts that they have with third parties, with particular reference to force majeure clauses. Businesses should also be reviewing the various policies of insurance that they have – travel insurance, private medical and business interruption insurance.
Force majeure is an event that occurs that is outside the control of the parties to a contract and is of such a nature that it releases the parties from their contractual obligations or materially changes those obligations.
Unlike many of the civil jurisdictions in Europe, the English common law does not recognise force majeure as a legal concept. Under the common law, parties have the freedom to contract, so the ability to bring force majeure claims is wholly dependent upon the express wording of the particular contract. Furthermore, a party attempting to rely on such a clause, will usually have to show that its performance of the contract is legally or physically impossible. If performance if merely more difficult or expensive, this will not be enough.
Businesses should also consider what would happen if they have to close their premises. It is highly likely that landlords will be forced to close shopping centres and other retail and leisure areas. Tenants may also be forced to close their own offices for health reasons.
Leases do not tend to contain force majeure provisions and instead rely on provisions for insured and uninsured risks. These commonly provide that, if a building is destroyed or damaged by an insured risk or possibly an uninsured risk, the rent will not be payable during the period of closure. Importantly, this would not cover a tenant in the event that a landlord closes a centre for health reasons as, in that circumstance, there would be no damage to the building.
Tenants could therefore find themselves in a position where they are paying rent but unable to use their premises for trade or otherwise. In the case of retail tenants, the situation could be worse as they may have provisions forcing them to keep open and obliging them to pay liquidated damages where a store is closed. It seems unlikely that landlords would enforce such provisions in these circumstances but they are likely to insist that the rent is paid.
Furthermore, it is unlikely that leases will contain provisions allowing tenants to end the lease where the premises have to be closed temporarily, so it is possible that tenants will be tied into lengthy leases which oblige them to pay rent even though they cannot use the premises. It is possible, but unlikely, that the common law doctrine of frustration would apply. This automatically terminates a contract where performance under the contract is impossible or illegal and where other factors apply. The limits of the doctrine are narrow, however, and it is unlikely that this would apply where a closure of a premises is only temporary.
Business Interruption Insurance
Businesses that cannot mitigate their losses e.g.: by having workers work from home/agile working – businesses dependent on “just in time” supply chains, retail and events, which depend on footfall and sports which rely on merchandise, food and drink sales – should review their insurance policy wording in connection with business interruption insurance (BII).
As with force majeure, the ambit of BII is wholly dependent on the wording of the policy, both the coverage wording and the exclusions.
Following SARS, many BII policies expressly exclude contagious disease cover. So, counterintuitively, the Government’s announcement, which was designed to be helpful to the business community, that Novel Coronavirus is a “notifiable disease” may result in insurers being able to repudiate cover under the terms of a BII policy.
Even if the BII policy covers notifiable diseases, it is likely to be the case that the policy will only cover losses that arise from the date of the Government’s declaration.
If there are closure orders (e.g.: for schools, hospitals, theatres etc.) and/or orders restricting public movement, as there are now in China and Italy, the losses arising from such orders may well “fit” within the policy wording of any BII cover.
However, if a business suffers because workers are not coming into work, resulting in (significantly) reduced productivity or customers are just not turning up to the business’s outlet, so the business’s ability to sell is (significantly) compromised, then, making claims for these “contingent” business interruption losses will again be dependent upon the BII policy wording and how it relates/deals with e.g.: the third party business that the policy holder’s business is dependent upon.
As is completely right, the current focus is on the human cost of Novel Coronavirus. However, businesses should, in tandem with assisting their people, be reviewing the fitness and ability of the business itself to survive the market disruption caused by the virus.
A really important part of the business’s ability to survive, is the insurance cover that it has. In relation to any business interruption insurance cover, the interpretation of the specific wording of the policy documentation is key. Undoubtedly, the devil will be in the detail.