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Coronavirus crisis: Risk management and dispute resolution advice

business_analytics_supply_chain Print publication

27/03/2020

Walker Morris has recently provided practical advice for employers and for businesses concerned about the impact of the Coronavirus/COVID-19 on their supply chain and contractual arrangements generally.

The outbreak has been declared a pandemic and countries across the world are taking unprecedented steps to restrict travel and movement. Walker Morris’ Head of Commercial Dispute Resolution Gwendoline Davies pulls together some of the key legal and commercial issues facing businesses in these extraordinary times, and offers an essential checklist of risk management and dispute resolution advice.

What are the key areas of impact for businesses?

  • Supply. Manufacturing closures in China and, increasingly, elsewhere across the global trade network, as well as travel restrictions, border checks and delays and labour shortages as a result of illness and isolation are starting to impact supply arrangements, not least in respect of logistics and inventory.  The supply of essential services (such as IT support, cleaning and maintenance and other outsourced services) may also be impacted as the outbreak develops.
  • Customers. Businesses need to consider both customer expectations and customer demand. Are supply issues or the prevailing economic climate likely to impact a business’ ability to honour its commitments to customers; and/or how is any fluctuation or drop in customer demand over the coming weeks and months likely to affect cash flow and longer-term financial viability.
  • Workforce. Businesses need to consider their duty of care to employees (and, potentially, to visitors). Failure to do so could expose the business to employment contract claims, negligence actions, health and safety/regulatory claim and/or could invalidate insurance policies.
  • Continuity. Whether and to what extent a business can continue to trade or operate will differ across industries.  Where possible, businesses will need to consider remote working and corporate governance, and reducing travel.
  • Commercial. Businesses should assess the likely impact of Coronavirus-related disruption/default on their commercial plans, commitments and short- and long-term financial viability.  Will projects or investments need to be delayed or should investment/shoring-up be deployed urgently to help the business to weather events as they unfold; what will be the impact on cash flow and working capital; where do commercial and contractual arrangements incorporate tolerance and flexibility, and where are the pressure/breaking points; where can savings be made; and is there a genuine risk of insolvency, either for the business or any of its counterparties?

What can businesses do?

As businesses become increasingly concerned about the impact of the Coronavirus on their commercial arrangements and financial viability, whether or not contracts or common law remedies allow the flexibility to renegotiate, or the ability to terminate, commitments will be key; as will the ability to avoid or mitigate disputes.

The following checklist of legal and practical advice should assist.

  • Undertake a review of all key contracts and ascertain the existence and terms of any force majeure provisions which may excuse one or more parties from contractual performance. Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should ensure compliance with any notification or other requirements, and any time-scales, specified within the particular contract, and should keep records of all relevant factual and economic evidence as the effects of the virus unfold.
  • Where force majeure does not apply, businesses should take specialist advice as to whether the common law doctrine of frustration may assist to effectively terminate a contract.
  • Parties should check their various insurance contracts. In some cases, invoking or receiving a force majeure or a frustration claim can impact insurance policies.  In particular, parties should ascertain any notification requirements.
  • Consider commercial, reputational and regulatory risks, alongside legal issues. For example, in such exceptional circumstances, parties may wish to be flexible about restructuring deals or debts so as to preserve relationships, even where there is no legal right or obligation to do so.  Parties may also wish to liaise with customers, counterparties, regulatory bodies, etc. to provide reassurance as to the safety and resilience of the business/products/services/staff.
  • Businesses should also ascertain the existence and implications of any other contractual provisions which may provide flexibility and/or commercial assistance.  These might include (non-exhaustively) break clauses to terminate contracts or leases early, forfeiture clauses, insolvency provisions, price adjustment clauses, variation/no-oral modification clauses [1], and material adverse change clauses.
  • Commercial disruption, uncertainty, financial hardship, and contractual default can all prompt disputes. Businesses should therefore review contractual arrangements to ensure that they understand the extent of their, and their key counterparties’, obligations and liabilities.  Key clauses in this context include any guarantees, indemnities or performance bonds, limitation/exclusion of liability clauses [2] and any endeavours obligations [3].
  • Where possible and financially feasible, parties should consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage. Again, parties should also keep clear records of all factual and financial evidence upon which they might wish to rely in the event of any dispute.
  • Where disputes do arise, parties should check whether the relevant contract contains any mandatory dispute resolution provisions. An effective dispute resolution clause requires the parties to follow a pre-agreed route to resolution, which can prevent any potential secondary dispute about whether and how the primary issue should be resolved; minimise the scope for any tactical game-playing (thereby helping to preserve commercial relationships); and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.
  • Businesses should ensure that they keep open communication channels with staff, suppliers, customers and other key counterparties. Dialogue can minimise disruption or discord within a business and can often avoid or effectively resolve disputes, saving both commercial relationships and cash.
  • Businesses should monitor the outbreak and government advice carefully, and should take proportionate action to protect employees and visitors. Businesses should note that what might be disproportionate action in respect of one individual may actually be proportionate in the case of another.
  • In terms of continuity, as well as considering technical and operational matters such as remote-working and reduced travel, business should give some thought as to whether physical presence is necessary for any essential testing/inspection/surveying (depending on the particular business/industry) or whether alternative desk-top processes/procedures could be deployed in these exceptional circumstances. Particular consideration should also be given to whether physical presence is required  for the signature, witnessing and execution of different documents.  Electronic execution of documents is a complex and fast-developing area, and specialist legal advice may be required.

How can Walker Morris’ Commercial Dispute Resolution team help?

Whilst the factual context of the Coronavirus crisis is unique and the scale of disruption may be extraordinary, the legal and practical implications of an adverse event on a business are not.  Walker Morris’ Commercial Dispute Resolution experts are experienced in helping businesses to successfully navigate uncertain times and sometimes even seemingly devastating incidents.  Whatever the particular circumstances and concerns for your business, Walker Morris’ specialists have the legal, technical and commercial expertise to be able to provide essential advice and assistance, whether it be from a risk management (‘prevention’) perspective, and/or to help with the resolution (or ‘cure’) of a dispute.  Please do not hesitate to contact us.

 

[1] See our earlier briefing for further information on variation/anti-variation provisions

[2] See our earlier briefing for further information on limitation/exclusion clauses

[3] See our earlier briefing for further information on endeavours clauses

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