On 12 March 2020 the Government announced that the UK is moving to the “delay” phase of managing the coronavirus outbreak. As such, it is now inevitable that businesses across the UK, across a wide range of sectors, will experience some level of disruption. The manner in which businesses feel the impact will depend on a number of factors, including the flexibility of their working practices, the size of their workforce, reliance on international travel and their vulnerability to interruptions to supply chains.
As well as investigating the contractual implications of the outbreak, many businesses have already been developing strategies for their workers and client base in order to preserve business interests, protect staff and ensure business continuity.
We consider below some of the relevant legal issues and risk management strategies. Our analysis below focuses on the position under English law but similar considerations will be applicable in other jurisdictions and our partners in the EuropFides network are already advising on these issues in a number of jurisdictions.
You can find more information on our EuropFides network here.
What protections might be built into my business contracts?
Businesses should carefully examine their contractual rights and obligations. The most obvious place to look will be any “force majeure” provisions or business continuity / disaster recovery obligations.
A force majeure clause is a provision that can relieve a party from its obligations in certain extreme circumstances. Force majeure does not have a definitive legal meaning and whether this pandemic or any restrictions arising from it will be covered by such a clause depends on the contractual wording which will usually include a list of the types of events covered. These generally have the characteristics of events outside the parties’ control.
As well defining the “event”, consideration must also be given to what effect the event has on contractual performance. It will be more difficult to show that an event has “prevented” performance compared to a material “delay”. Businesses relying on force majeure should also ensure that they comply with any notice or mitigation provisions.
The result of relying on force majeure will (again) depend on the wording of the clause but it may lead to the party being relieved of its obligations or of its liability for delay in performance.
In the absence of a force majeure clause, the doctrine of “frustration” may be available. This applies if an event, for which neither party is culpable, occurs. The event must make it impossible (commercially or physically) for a party to fulfil a fundamental obligation of the contract. Alternatively, it must radically transform the obligation. Where frustration does apply, the contract is void, meaning neither party has to comply with future obligations. The standard for establishing frustration is high.
Could my business be insured for the disruption caused by the coronavirus outbreak?
At times like these, it is always advisable for businesses to check available insurance. Falls in revenue and issues such as travel disruption costs and additional expenditure on contingency arrangements will be unwelcome.
Unfortunately, most traditional coverage for business interruption requires physical damage. Those policies which extend further will require a careful analysis of the contractual wording relating to the “insured peril”. This might include disruption caused by, for instance, the suspension of public services after a notifiable disease has been discovered but the precise policy wording will be key, including whether Covid-19 falls within the definition. Any exclusions will also need to be considered.
It should be noted that “communicable disease” and “epidemics” are often excluded in standard policies.
Will there be any implications to my business’ funding arrangements?
Facility agreements very often include financial covenants that require borrowers to provide information about their business. If a business is experiencing significant temporary impact from the fall-out of the pandemic, it must consider whether this could trigger any event of default or a stop on drawing down additional funds.
Facility agreements also include warranties which are repeated throughout the term of the facility and whether or not impact of the coronavirus outbreak constitutes a material adverse change under a warranty or a condition precedent will be down to contractual interpretation.
Whilst modifications to the manner in which a business operates (or the fact that its location becomes acutely affected) may not be a material adverse change, any resulting material financial difficulties will be. To be material, the case law suggests that it must not be temporary, and it must significantly affect the party’s ability to perform its obligations. The jury is still out on how temporary this outbreak will be but, more importantly, a temporary pandemic can have permanent effects.
Are there any specific impacts on my business’ liability for tax that I should consider?
If performance of a contract is cancelled, the supplier will (arguably) no longer be making a vatable supply. If parties have negotiated the terms of the cancellation (or contracts include a liquidated damages clause in favour if the supplier) it may well be that payments become re-characterised as compensation. If that is the case, they will be outside the scope of VAT. However, it is important to remember that the nature of the anticipated supply will be highly relevant to determining the liability to account for VAT.
If, for instance, the supplier has complied with the contract, but the customer will not accept the supply, output VAT will still be due. In contrast, payments to a supplier who will not be performing the contract, are likely to be viewed as compensation payments and outside the scope of VAT.
Businesses would also be wise to consider disruption to their tax compliance. Some businesses will experience issues with liquidity (cash flow). If they do, HMRC do operate a Time to Pay facility on a case-by-case basis. There may also be disruption to tax compliance as a result of staff shortages, IT issues, closure of HMRC offices and the suspension of negotiations. If a business office is closed, it would be wise to advise HMRC via email that electronic communication will be required as post will not be checked. This may assist in defending any penalties but there are no guarantees that this will be effective.
If my business is reducing face to face meetings or staff are home working, is it possible to electronically sign contracts?
Signing simple contracts is certainly an acceptable practice under English law. The signing of “deeds” is more complicated but still possible if certain requirements are met. The principle issue with deeds is the requirement for a witness to be present. The prevailing view is that the witness must be physically present at the time of signing.
On that basis, we would advise that deeds are not executed via remote “witnessing” (for instance via FaceTime or Skype).
It should be noted that certain documents always require a wet-ink signature. These include documents that require registration at H.M. Land Registry and documents upon which stamp duty is payable.
What practical tips do you have for businesses at this time?
Measures which our corporate clients should consider include:
- Inserting provisions in new contracts that specifically deal with the pandemic (such as force majeure clauses).
- Checking the terms of existing contracts for protections and considering the amendment of key existing contracts (if possible).
- Conducting or updating existing pandemic risk assessments, including working practices.
- Checking insurance arrangements.
- Checking whether payments being made for supplies are vatable.
- Informing HMRC and any other relevant governmental or regulatory body of office closures.
- Considering whether documents really need to be executed as a deed or can be signed as a simple contract. Unless the document must be signed as a deed or requires a wet-ink signature, an agreement that is supported by consideration can be signed electronically as a simple contract, meaning that a witness is not required.
- Maintaining dialogue with clients and customers regarding any changes to working practices to ensure that they are aware of any changes and, if possible, that services will not be affected or where disruption might be experienced.
- Ensuring proper training and providing regular information on the virus to staff including government hygiene advice and dispelling misconceptions.
- Reviewing working systems and policies and ensuring that policies are up to date in relation to matters such as home-working.
- Ensuring that businesses have sufficient resources to deal with home working (such as checking that members of staff have access to equipment and, if not, renting / purchasing additional equipment).
To discuss any matters relating to the above or any other commercial or corporate requirements, please contact Greg Vincent, Partner in the Corporate and Commercial Team on 0208 971 1033 or by email on [email protected]