The outbreak of the coronavirus is now a global health emergency. Naturally, this affects all aspects of society. It also places an increasingly heavy strain on individual businesses, causing significant legal issues and challenges.
How best should your business prepare for disruption? How can business mitigate any potential legal risks which arise as a result of the coronavirus outbreak? We explain in outline form below.
Existing contracts will need to be reviewed on force majeure provisions and on whether the current situation is sufficiently covered. When negotiating new contracts, businesses should examine whether and how the coronavirus outbreak could impact the parties’ obligations, and they should include any necessary wording to deal with this.Contracts based on Anglo-Saxon systems often contain a broad notion of force majeure and those contracts may provide protection (for example, for a supplier that faces delivery restraints).
If any of your contracts do not provide force majeure protection, the law governing the contract will dictate what constitutes force majeure. In our experience, this varies across each jurisdiction. For example, the threshold for successfully invoking force majeure under Dutch law is high, and case law shows that invoking force majeure is often an uphill battle.
If you believe there is a case for invoking force majeure, consider the remedies that are available. The affected party may want to know whether it is relieved from its obligations or whether it can (or must) explore alternatives – for example, pursuing alternative sourcing for a purchaser or selective distribution for a supplier, to ensure continuity in their supply chains.You can also explore whether other legal remedies could provide relief, such as unforeseen circumstances (clausula rebus sic stantibus) or, in the Dutch context, the principles of reasonableness and fairness.
The virus outbreak and the subsequent measures to contain its impact do not necessarily affect common finance documents. Frequently used material adverse change (MAC) clauses are unlikely to be invoked because of the possible repercussions, while the chances of succeeding are generally considered minor.
Supply chain disruption becomes especially serious in the case of a single source critical supplier: a timely search for alternative suppliers is key. Contingency planning and restructuring may become necessary to prevent or mitigate supply chain disruption. Supply failures may lead to customers suspending payments to suppliers, or may trigger performance bonds or bank/parent guarantees being drawn. This may impair cash flow.
Hiccups in the supply chain may ultimately result in breach of financial ratios and may trigger discussions with lenders. Insufficient supplies from China (or other affected countries) may require the fair and equitable distribution of limited products over existing customers; this requires careful planning.
M&A agreements sometimes use the term "material adverse effect" (MAE) to refer to a transaction closing condition or as a qualification of certain warranties. Whether business interruptions caused by the coronavirus would constitute an MAE depends on how the term is defined in the relevant agreement. A careful review of the definition is therefore necessary to assess whether an MAE applies.
Employers may become liable for damages incurred by employees in the course of their work duties. If an employer sends an employee to an identified "coronavirus-risk area" or keeps an employee in such an area, and the employee then contracts the virus, the employee can try to seek damages from the employer based on breach of the employer's duty of care. Damages may be substantial, particularly if the employee dies as a consequence of the coronavirus.
Whether an employer can be held liable depends on all of the specific facts and circumstances, which may differ per employer and employee. To mitigate the risk of potential liability as much as possible, it is important to thoroughly assess the potential exposure before deciding to send an employee to or keep an employee in an identified "coronavirus risk-area". That assessment should include an analysis of the specific need to send an employee to the area, any negative travel advice issued by the Dutch government for certain areas, and details of possible precaution measures to be adopted.
Some employers have taken out insurance to cover the risk of employer liability for damages incurred by employees as a consequence of a breach of the employer's duty of care. Check the insurance policy and determine whether the insurance provides coverage if an employee is sent to or kept in an identified "coronavirus risk-area" and incurs damage as a consequence of the virus.
The question may arise whether an instruction to an employee to travel to or stay in an identified "coronavirus risk-area" for work, can still be considered a reasonable instruction that an employee must comply with. The answer to that question will depend on the specific facts and circumstances of each case. Employers should consider if it is reasonably to instruct an employee to travel to or stay in an identified "coronavirus risk-area".