By Forum member Darren James, Partner, Commercial Disputes, Mills Oakley
Many people have already been severely affected by the public health emergency caused by the novel corona virus (officially designated as COVID-19),.
Our thoughts and prayers go out to the families of the 3,400 people who are reported to have died following COVID-19 infection.
Quarantine and associated measures put in place to manage transmission between people and across communities and borders have already caused widespread interruptions that to labour and supply chains.
Many businesses affected by these interruptions are seeking to manage their risks by seeking to make force majeure or frustration claims to delay, suspend or terminate their contractual obligations.
This new frontier of the COVID-19 infection has developed quickly and its impacts are extending across the globe.
Recent business impacts
In the space of only the past few weeks, the business impacts of COVID-19 have been severe.
- a record 3,325 force majeure certificates were issued by the China Council for the Promotion of International Trade (CCPIT) across 30 industry sectors, for business who have not been able to meet obligations under contracts worth a combined figure of 270 billion RMB;
- some of China’s largest businesses, including China National Offshore Oil Corp (CNOOC) and a large copper smelter, have invoked force majeure in contracts with suppliers and refused to take delivery of cargo;
- a number of Singaporean construction companies who rely heavily upon Chinese labour have been reported as actively looking at issuing force majeure notifications on government infrastructure projects because quarantine restrictions have restricted the availability of such labour;
- Korean car manufacturer, Hyundai, has suspended car production at its plants in South Korea because of disruption to the supply of component parts;
- the cargo arm of global IAG, which owns British Airways, Iberia, Aer Lingus, Vueling and Level, has cancelled all cargo services to and from mainland China;
- exporters of fresh meat, seafood and other comestibles have large quantities of product stuck at Chinese ports awaiting the return of sufficient workers to the docks; while other exporters have product stuck on container ships sitting in floating offshore quarantine zones pending the expiry of quarantine periods or the relaxing of crew change-over restrictions;
- construction businesses in South East Asia who rely heavily upon the availability of Chinese workers are actively looking to issue force majeure notifications because they cannot repatriate workers who returned home for Chinese New Year celebrations; and
- Europe’s largest regional airline, Flybe, which operates almost 40% of UK domestic flights, spectacularly collapsed into administration following a sharp fall in flight bookings because of COVID-19.
7 things for Australian businesses to watch out for as the impacts of COVID-19 spread further
The physical spread of the COVID-19 virus from China to other major parts of the world, with whom Australian businesses have major trading relationships, means that the virus’s impact on Australian businesses will, for the foreseeable future, continue to grow.
Below are 7 things for Australian businesses to watch out for, and some basic steps that they can take to manage their risks in the face of this threat.
1. Delay, suspension or termination of contract obligations due to force majeure or frustration
Businesses in Australia can expect to see an increasing number of their trading partners who are or become affected by COVID-19 measures seeking to delay, suspend or terminate contract obligations on the basis of force majeure or frustration.
Just because a trading partner asserts force majeure or frustration because of COVID-19 related matters, or presents a force majeure certificate issued by a foreign authority (such as the CCPIT) in connection with COVID-19, does not mean that that trading partner can lawfully delay or suspend performance of their contractual obligations or terminate their contracts. More is very likely to be required.
Some trading partners may seek to use COVID-19 to opportunistically bring contractual arrangements to a premature end, so that they can, in turn, take advantage of better trading or price conditions in a falling market or a market likely to be affected by a future oversupply.
Delay, suspension or termination claims on the basis of force majeure or frustration are infrequently straight forward. Businesses whose trading partners purport to assert such claims need to proceed very carefully after obtaining commercial legal advice.
Trading partners will not be the only businesses seeking to delay, suspend or terminate contract obligations. Disruptions to supply chains and labour markets is likely to leave some Australian businesses in a position where they need to look at availing themselves of these rights. Businesses who can see this risk arising should get commercial legal advice about what their legal options and abilities are.
2. Calls on payment and performance security obligations
It is not uncommon for businesses to guarantee that they will comply with their payment or performance obligations under commercial transactions. Such guarantees are often backed up by bank guarantees, deposits, performance bonds or letters of credit, which can be unilaterally drawn down in specified circumstances.
Where attempts are or may need to be made to delay, suspend or terminate contractual obligations, consideration needs to be given to the steps that you or your trading partners might be able to, or seek to, call or draw down upon a performance guarantee or bond previously given. In some circumstances it may be necessary to bring, or defend, an urgent application to stop the call or draw down occurring.
3. Sale and purchase transaction withdrawals and failures
Businesses looking to sell or buy assets may find, as market conditions continue to deteriorate because of COVID-19, that asset sales and purchases might be more difficult to close and complete.
Some prospective purchasers may simply pull out of negotiations because of changed market conditions or uncertainties. Other purchasers may not be able to complete on sale transactions and may breach their contractual obligations because, for example, they cannot get finance or their finance falls through. Others may complete transactions, but then look to rescind them afterwards or sue for damages on the basis of claimed representations (especially if what they bought is worth less than what they paid for it at the time of completion).
Businesses engaged in the sale or purchase of assets during these turbulent market and business conditions need to actively consider their legal and commercial risks and seek to structure their bids and transactions appropriately.
4. Re-financing refusals and draw-down stops
With increased volatility and uncertainty in the market-place, businesses who need to re-finance existing facilities because they are about to expire, or because they wish to take advantage of recent interest rate movements, may experience difficulties.
Businesses with scheduled facility extensions should plan to be subjected to particular scrutiny by financiers during the course of re-financing activities. Those wishing to shop around in the light of recent interest rate movements should pay particular attention to the terms and conditions of offers and make sure that offers are accepted strictly in accordance with those terms and conditions, and also that all conditions that need to be satisfied before funds are advanced are strictly satisfied.
Businesses who have partly drawn drown loans may find that their financiers implement ‘draw stops’ to prevent further draw downs unless and until they are provided with further information to be satisfied of the risks associated with that draw down.
5. Market and investor disclosures, regulatory prosecutions and class actions
Businesses listed on the ASX or other exchanges are subject to ongoing market disclosure obligations.
These businesses are going to need to rapidly and constantly assess developments in relation to COVID-19 and their business as they occur, to ensure that their disclosure obligations are complied with.
ASIC Chairman James Shipton recently announced that ASIC is checking whether listed companies are disclosing material impacts to profits because of matters associated with COVID-19.
Non-disclosure, as well as inadequate disclosure, of information to markets under and in accordance with disclosure obligations, can lead to actions by the ASX and ASIC, as well as high profile and expensive shareholder class actions.
6. Workplace transmission
Businesses need to ensure that they put in place effective strategies to manage and respond to transmission risks within their workplaces with a view to protecting and ensuring the safety of personnel, contractors and customers.
Businesses who do not do so adequately, or at all, may be subjected to prosecutions by workplace safety authorities and/or suits by affected persons.
Businesses should also seek to understand the strategies put in place by significant trading partners to manage COVID-19 transmission and containment. This will help to identify those trading partners and the associated supply chain parts most at risk, and assist to identify the areas where the most effort should be focussed to put arrangements in train to maintain supply chain integrity.
7. Appointment of receivers, administrators and liquidators
In Australia, a great number of businesses are already struggling in a sluggish economy that continues to be ravaged by floods, bushfires and consistently weak retail spending.
The impacts of the virus, both in Australia and abroad, may well be the final straw for some businesses or their lenders.
Directors and officers in these businesses should seek early and ongoing advice about their duties and obligations (including insolvent trading), and also about potential personal liabilities (including for tax),
Even very healthy businesses could come under significant and unexpected stress if, for example, a key trading partner collapses. It pays to ensure, therefore, that all interests that ought to be registered on the Personal and Property Security Register have been validly registered. Consider also whether you wish to change your trading terms to minimise your commercial risk of non-payment.
This article is of a general and informational nature. It does not constitute legal or professional advice by the author or by Mills Oakley, and must not be relied on as such.
This article originally appeared at Darren James’s Linkedin page. It has been republished with permission. The original version can be viewed here.
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