The COVID-19 (or coronavirus) pandemic sweeping the world has caused massive disruption to economies and supply-chains.
A pragmatic and practical response to the pandemic is necessary.
We suggest the following steps be undertaken for your business now:
- Review regulatory requirements your business may be a risk of not meeting due to the coronavirus pandemic: many businesses will find themselves in the position of being unable to (or seriously hampered in) practically meeting regulatory requirements which, but for the coronavirus pandemic, would have been achievable.
If you find yourself facing this sort of dilemma we recommend early and transparent engagement with regulators now to foreshadow the problem (for example, disruption to your suppliers is preventing or will prevent the performance of physical works you are required to complete by a certain timeframe under an approval or similar regulatory requirement). You should provide cogent evidence of why the coronavirus pandemic will prevent your performance of the obligation, and preemptively seek relaxation of the requirement, an extension of time to deal with the uncertainty, or other guidance from the regulator.
We expect it is likely regulators will be sympathetic to genuine cases of disruption from this extraordinarily unforeseeable event, though you should equally expect regulators to be alert to any opportunistic attempts to unfairly avoid legal obligations.
- Review of key legal contracts: a review should be undertaken now of key contracts that your business has with third parties which have the potential to be disrupted or not capable of being complied with due to the developing severity of the coronavirus pandemic in order to gauge both:
- your potential exposure to third parties; and
- any opportunity to stem commercial losses by the exercise of positive rights under those contracts.
Key clauses for review in this regard include: extension of time clauses, force majeure clauses, suspension clauses, termination provisions and any other clause that seeks to contractually deal with the concept of ‘frustration’ of the contact or inability to perform it. In certain circumstances, ‘change in law’ provisions may also be relevant to analyse.
In doing so, remember that each contract must be interpreted according to its terms and as a whole. A clause should not be read in isolation from the balance of the contract.
In the event of any ambiguity, for contracts governed by Australian laws, regard can be had to the surrounding circumstances of the contract at the time of entry into it in order to aide its proper interpretation. Legal advice should always be sought in the absence of clear rights before any step is taken to exercise unclear rights.
If the contract does not deal with the situation at all, then consideration should also be had to, and advice sought about the common law principle of frustration of contract. This principle needs to be carefully applied to the particular contract and facts and circumstances of your situation.
Be aware that some contract clauses that might provide you with relief in this situation may require the giving of a notice as soon the event preventing or affecting performance arises, so your proactive review of contracts now is important to ensure you are aware of and exercise any rights on a timely basis.
- Pragmatic dealings with contractual counterparties: the strict legal position under each contract (referred to at 2 above) is important to understand, however the reality is that the law is often a blunt instrument and many contracts may not properly contemplate an event as extraordinary as the current coronavirus pandemic, or, if it does contemplate it, sensibly allocate the commercial risk about responding to it.
For this reason, it may be sensible to engage early with your counterparties where delay, disruption or difficulty in performance is likely, in order to seek to mutually agree a sensible response to the situation.
This may involve communication that expressly reserves both parties’ legal positions under the contract while engagement is had on a ‘without prejudice’ basis to discuss, understand or collaboratively consider the potential impact the coronavirus could have on the anticipated performance of the contract and to sensibly agree a way forward. Agreement, if reached, may involve formal amendment to the contact, to deal with the unprecedented situation via a deed of amendment or similar legal document to modify the contract to better deal with the impact of the coronavirus and specify the agreed commercial implications for the parties.
The range of potential agreements is diverse. A possible agreement could be as simple as an agreed suspension of the performance of the contract for an agreed period of time with each party to bear their own costs in the interim until the situation abates or a long stop time period expires following which if the situation has not improved either party can terminate without ongoing liability to each other. The scope of possible agreement is largely open to the parties, which is why it is sensible to pursue without prejudice discussions with an open and pragmatic mind.
A commercial resolution, controlled by the parties, may be the most cost and time effective at this time rather than an alternative of formal disputation through legal proceedings or lengthy commercial uncertainty arising from one party asserting perceived contractual rights and the other party disputing that party’s entitlement to do so, leaving the parties in state of uncertainty until a decision maker resolves the dispute.
Legal advice should be sought before any communications are entered into with third parties of the kind described above to ensure that the method and content of communication does not prejudice your businesses’ rights under its contracts or amount to an anticipatory breach of contract, however this important practical and pragmatic approach to this issue should not be discounted at this time – more control and more certainty is needed right now, rather than less.
- Monitor exposure to counter-party insolvency given shifts in regulatory landscape for bankruptcy and insolvency: the Australian Government has also just now announced several temporary proposals to assist business.
First, the Australian Government is temporarily increasing the current minimum threshold for creditors issuing a statutory demand on a company under the Corporations Act 2001 from $2,000 to $20,000. The statutory time frame for a company to respond to a statutory demand will be extended temporarily from 21 days to six months. These time frames will also apply to individuals under the comparable provisions of the Bankruptcy Act 1965.
Second, the Government has also proposed to provide relief for company directors from personal liability when the company is trading while insolvent in the ordinary course of business for a certain period of time – at this stage, six months.
These new polices are a welcome development designed to attempt to avoid businesses folding prematurely during an expected challenging period of cash flow for businesses over (at least) the next six months. It is important notwithstanding and especially in light of this development that businesses pragmatically audit and carefully monitor counter party solvency risk and make appropriate judgements around maximum exposures/credit limits to counter parties to transactions. These announced relaxations will increase the risk of counter-parties trading whilst technically insolvent and therefore the risk of non-recovery of debts
Whilst it might be appropriate for larger businesses to do some heavy lifting through this challenging time, by, for example, paying suppliers early and offering favourable credit terms to keep smaller business ticking over, sensible judgement about commercial exposures will be necessary to do so sensibly.
We hope you and your colleagues remain safe at this time. That, above all else, is the most important priority.
The above commentary is general in nature and is not to be relied upon as legal advice for any particular matter. Any party seeking to use information contained within this post should first seek specialised professional advice. Merlehan Group and its personnel do not accept any liability for any errors or omissions in this post.