Lord Bethell in introducing the Coronavirus Bill 2020 into the House of Lords said the Government was ‘buying time’.
‘Business owners will also need to look at all the steps they can take to buy time for themselves and prevent their business failing because cash flow dries up,’ says Heidi Sawtell, a commercial solicitor with Talbot Walker, ‘This is a fluid situation with many proposed changes to rules and regulations continuing to come from the Government.’
She provides brief answers to some of the questions being asked about the impact of the coronavirus on businesses.
You should check the Government website for the latest guidance in conjunction with this article, as the guidelines on the coronavirus (COVID-19) are changing daily.
Q1 – Can you pause existing contracts?
Where a business has been negotiating a contract and the terms have been agreed but the contract has not been signed, it is free to withdraw. Correspondence headed ‘Subject to contract’ will make this clear, but it is not always necessary to have this qualification to benefit from this protection.
Business owners will need to take advice on the terms and conditions which apply to a particular contract they would like to pause. Usually contracts provide that goods or services are provided for a price, for a period of time and that if the price is not paid or insolvency intervenes, the contract is brought to an end. It is not usual to see in a contract that they are suspended for a period of time, let alone an indefinite period, while the coronavirus pandemic dampens down.
Businesses have a number of routes through this. Firstly, they can seek a moratorium with another contracting party, and this may be agreed to especially where a pause will have benefits for both sides. In some sectors, this request may meet with initial resistance if the other side is waiting for a specific direction from the Government to close down or halt operations before it is in a position to agree to that request.
There may be some specific provisions available to businesses seeking a pause. For example:
• unincorporated businesses with vehicles or plant on finance may be able to take advantage of the Consumer Credit Act 1974 which prevents a creditor or owner from entering ‘any premises’ to take possession of goods subject to a regulated hire-purchase, conditional sale or consumer hire agreement ‘except under an order of the court’; and
• for regulated hire purchase agreements, a creditor will need a court order to repossess goods where more than one-third of the total price has been paid.
Your solicitor can help you document the terms of an agreed moratorium.
Q2 – What assistance will a force majeure clause in our contracts provide?
The force majeure expression is normally used to describe a contractual term by which a party is entitled to cancel a contract or is excused wholly or partly from performance of the contract, or is entitled to suspend performance, or to claim an extension of time for performance upon the happening of a specified event or events beyond their control.
Contracts negotiated and signed this year may include something about coronavirus, but they are likely to be in a minority. For the remainder, businesses will need to take advice from an expert solicitor as to whether the contract terms they have signed could allow them to escape from liability under the contract relying on force majeure.
Where a contract contains words such as ‘or any other causes beyond our reasonable control’ then a business will be on stronger ground. However, contracts often contain wording such as ‘while every effort will be made to carry out this contract’ and where they do businesses may not immediately be able to rely on force majeure.
Some business contracts may use terms such as ‘rendered uneconomic’. Where they do, and if the coronavirus does turn out to render uneconomic the performance under a contract, then that could provide an escape route from a contract.
Q3 – Can we walk away from contracts claiming they have been frustrated?
It has yet to be determined whether the coronavirus pandemic, the measures that governments have taken to try to contain it, and the resulting economic chaos, are such that business contracts previously entered into in good faith are no longer valid because they have been frustrated. However, the initial omens on this do not appear good.
Q4 – Should we tighten our credit control processes?
Businesses will find that many people or businesses will struggle to pay their bills in full and on time, and this will worsen the longer the lockdown and the global pandemic persists.
Businesses should review their credit control policies to allow for greater flexibility. Taking a hardline approach may not yield much if there is no cash available. Any debt recovery action will stall in county courts as they also adjust to the pandemic.
Q5 – What data security measures should we put in place for homeworking?
Most businesses (whether they have been ordered to close or not) have reduced or run down their physical presence. Those workers who already do this on a regular basis are likely to have encrypted devices where their data is backed up by their employer on a regular basis. Many workers will have access to sensitive or confidential data.
Where employees work from your office, their phone calls may be recorded but those working from home using their own mobile phone or landline will not have their calls recorded.
In the panic to close workplaces in late March 2020, not all employers who sent their staff home have had data security at the front of their mind. Businesses will need to think about this and ensure they have adequate controls, policies
and procedures in place as soon as possible.
Q6 – What additional risks do we face because of online fraud?
Not all employees sent to work from home will be assiduous in their duties. Some, with extra time on their hands, and with no-one breathing down their necks, may decide to defraud their employers. The temptation to do this will increase the longer the lockdown continues and the more the cash in the bank is used up. Businesses will need to ensure they continue to monitor movements of money, look out for bogus invoices and keep their audit or risk teams running.
Fraudsters love a crisis because it presents them with many new opportunities to exploit. They may try and test the resilience of a business hoping that, with offices closed and most staff working from home, a transaction or order which would normally be declined gets through.
Sophisticated fraudsters may decide to clone the website of a legitimate enterprise and divert business or money away from it.
Q7 – What does the Coronavirus Act 2020 provide in relation to business premises?
The Coronavirus Act 2020 gives powers to the UK Government in relation to ‘events, gatherings and premises’ with the latter including any ‘vehicle, train, vessel or aircraft’ or any ‘tent or movable structure’ and any offshore installation.
The Act also gives sweeping powers to close premises or restrict entry to premises. It provides for criminal penalties for breaches being a fine of up to £5,000 per offence and that a director as well as a limited company can both be prosecuted. These are strict liability offences with no defence.
Q8 – What does this mean for our corporate governance and business continuity planning?
The Government has announced that businesses can apply to Companies House for a three-month extension for filing their annual accounts. Board meetings should continue as usual even if they take place by telephone or video conference and additional meetings may need to be scheduled.
A key person in any business could contract the virus and die, so companies should have a succession plan in place to deal with this and consider obtaining key person insurance.
Remember that the Law of Property Act 1925 provides that a deed or instrument is valid only if the company’s seal is affixed to the instrument ‘in the presence of and attested by’ two members of a company’s board.
Q9 – Will insurers rely on Act of God clauses to avoid paying out claims?
In the 2001 film ‘The man who sued God’, Billy Connolly played the role of a fishing boat owner whose boat was destroyed when it was struck by lightning. His insurers refused to pay out on his total loss claim alleging that it was caused by an ‘act of God’. In 1876 in Nichols v. Marsland the Court of Appeal ruled that where there had been extraordinary rainfall which had caused ornamental ponds to fill up, burst their banks and flood neighbouring land, then this had been caused by an act of God allowing the pond owner to wriggle out of liability.
It remains to be decided by the courts whether any losses caused to business by coronavirus can be avoided in whole or part by such an allegation. Some businesses are likely to want to make a claim on any insurance they carry in an endeavour to recover their losses. It is likely that insurers will try and avoid paying out on claims relating to coronavirus by claiming that it was caused by an act of God. Businesses in this situation will need to seek expert legal advice at the earliest opportunity.
For advice on any company, commercial or contractual issues, please contact Heidi Sawtell on 07572415957 or email heidis@talbotwalker.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published on 1 April 2020..