2020-03-24
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Coronavirus: Preserving your business and protecting the nation

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Posted by Justin Byrne on 24 March 2020

Restaurants are closed for everything except take away services. Supermarkets are struggling to supply staples, but the nation still needs feeding. Most workers will be eating at home rather than in and around the workplace for some time to come. The recipe for feeding the nation has changed with immediate effect, by government order.

Whether you are a beneficiary of this change or a victim, there are opportunities to act for the good of your business and the people of this country.

You probably have contingency plans that you have put into effect. These plans will obviously differ depending on whether or not you are still permitted to open for business.

Open for business

If you are open for business, contingency plans will include:

  • Ensuring the safety of your staff and any implications for your workforce, who will be key workers;
  • Reducing the range of certain foods sold and focusing on the essential items;
  • Sourcing fresh food from suppliers whose customers are no longer allowed to open;
  • Increasing frequency of deliveries with existing suppliers and logistics companies;
  • Seeking to use spare capacity from suppliers and hauliers no longer required for the restaurant trade;
  • Seeking to use spare capacity from logistics companies and suppliers outside the food sector, in so far as their transport and other systems are suitable, or can be made suitable for use;
  • Communicating to your suppliers and customers about the change in your policies; and
  • Seeking legal advice in respect of any contracts which you may have to breach as a result of the Covid-19 pandemic.

Not open for business, at the present

If you are not open, they will include:

  • Considering your staffing, making use of the Government’s wage guarantee for staff who would otherwise be laid off and optimising your position for after the prohibition on opening is lifted;
  • Considering rent, rates and other fixed overheads and how to minimise, defer or otherwise deal with these;
  • Working with your customers or suppliers to mitigate the sudden stoppage of supply by identifying alternative purchasers for the foods;
  • Communicating any change in your policies to your suppliers and customers; and
  • Seeking legal advice in respect of any contracts which you may have to breach as a result of the Covid-19 pandemic.

Legal issues

As well as practical issues, there are related, legal considerations. Generally, you should look at:

  • How much flexibility you have within each of your contracts with other parties;
  • The requirement to mitigate any losses, by taking steps to avoid or minimise them;
  • Your rights to cancel, terminate, suspend, vary, take control of subcontracts, break exclusivity provisions and demand information as required.

In addition to the above generic points, you may also want to examine the below in further detail.

Variation provisions

Changing obligations is an important consideration for the food chain. Many companies will respond to the Covid-19 pandemic differently, and hence it is impossible to truly predict the impact it will have on your contractual relationships. Whatever happens, flexibility and agility will be key.

Seeking advice in a timely manner will give you the time that you need to make proper action plans. It is important to make sure that you have evidence about agreements between the parties. The drafting of these pieces of communication should be undertaken with care: you need to avoid inadvertently waiving your rights or varying the contract.

Force majeure

Many contracts include a force majeure clause. This is often colloquially referred to as an “Act of God” clause. It is dubbed this because it caters for events such as:

  • Natural disasters including hurricanes, earthquakes, tsunamis and volcano eruptions;
  • Wars; and
  • Industrial action.

These are just a few examples of events that could be included. In practice, the drafting of force majeure clauses may vary greatly. If it is engaged, a force majeure clause is hugely significant because it can release a party (or both parties) from their obligations under the relevant contract. The impact of this is that you may be able to get out of unhelpful contracts during this difficult time, but the same may also happen to you. However, each clause will need careful legal analysis to establish whether a pandemic would be covered by the wording. If it is not, and you attempt to terminate on that basis anyway, there may be severe legal consequences.

Frustration

In contract law, there has long been a doctrine called “frustration”. Frustration discharges parties from their obligations under the contract. It is worth noting that this can only be used in very specific circumstances. By way of example, the leading case in this area of law concerns a venue burning down. To come under this doctrine, the services or goods need to cease to exist. It is not enough to say that you cannot supply goods because they are stuck at your warehouse and you are unable to engage a delivery firm. The legal hurdle is extremely challenging to meet.

Most contracts will include express termination provisions. If these are tackled in the wrong way, you may well face a dispute. Similarly, if you simply do not supply your goods or do not pay your suppliers, then you may be in wilful default.

Illegality

Contracts can also be declared void if they are illegal. This includes where, although there is no law prohibiting activities that have to be performed under the contract, the activities are against public policy. This is a complex area of law, and it is most likely that, if the contract was illegal, the force majeure clause will apply, if there is one, or the contract will have been frustrated.

Conclusions

Now is the time for cooperation, not confrontation. There are a range of legal options and practical issues to consider when addressing Covid-19 related supply chain issues. A thorough analysis of both can help to determine and implement the most appropriate solution.

About the author

Justin Byrne

Consultant

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

Justin Byrne

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

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