The Coronavirus Outbreak, Global Events and your Business

INTRODUCTION

Covid-19, or the “Coronavirus” - a challenging public health emergency in China, and globally, posing a severe risk to human life.

The Chinese government has implemented strict and sweeping quarantine restrictions in an attempt to control the outbreak, resulting in the associated shutdown of part of the Chinese economy. The impact on the global economy is starting to become apparent with far-reaching consequences.

Irish businesses should be asking what they can do to minimise the impact of global events on their ability to perform under their own contracts with their customers, and their rights with respect to suppliers.

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WHAT THIS MEANS FOR YOU AS AN IRISH BUSINESS:

The Coronavirus outbreak, whether contained in China or as a global pandemic, has the potential to materially impact supply chains into which your business is integrated, resulting in:

1. Delays in performance from your own suppliers

2. Delays in your own ability to perform your own contractual obligations to your own customers

3. Material falls in demand for goods and services, meaning someone is going to be left with either too much or too little product, and

4. A requirement to consider employee welfare and business continuity on a reduced workforce

The supply chain, which your business forms part of, may be impacted: • because of the inability of a factory

to manufacture product;• the inability of a logistics company to

move product; or • the direct intervention of a

government body imposing movement restrictions on goods and/or people.

All Irish businesses need to:• consider which party to your

commercial transaction is responsible for satisfactory delivery of product, and who is responsible for the

product at the various points in transit (for example supplier to deliver to dockside or buyer’s premises);

• reviewtheirownspecificcontractualarrangements with their suppliers and their customers (considering firstandforemostthetermsofthe delivery of the product, often commercial contracts feature predefinedcommercialtermssuchas the internationally recognised “Incoterms”predefiningtheresponsibilities of each party with respect to the tasks, costs, and risks associated with the transportation and delivery of goods);

• review their insurance arrangements to understand the parameters of insurance cover and whether such insurance cover addresses any gaps and exposures arising under their own contractual rights and obligations in relation to third parties;

• focus your contract review on the concepts of “force majeure” and “business continuity/disaster recovery; and

• conduct a risk assessment into the business’ ability to manage a potential exposure of outbreaks such as the Coronavirus and ensure the business has a business continuity plan in place (guidance on business continuity produced by Ibec can be found here).

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TIP 2: FRUSTRATION AS A FALL BACK

• “Frustration” will be ‘inserted’ into a commercial contract as an implied term under Irish Law where a supervening event makes it impossible for a party underthatagreementtofulfilafundamental obligation under that contract.

• Valid frustration essentially means that acontractceasestohaveeffectasthefacts on which the contract had been established no longer exist.

• The threshold for frustration to apply is high as the qualifying event cannot have been within the range of the parties’ contemplation at the outset of the contract.

• Notably, the Coronavirus outbreak may not be seen by Irish Courts as a truly unforeseeable event given similar outbreaks in recent years, for example the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, the Bird Flu epidemic in 2005 and the Swine Flu pandemic in 2009.

• Relying on the frustration argument to avoid your obligations under a contract should be a last resort.

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TIP 1: ALWAYS BE AWARE OF A “FORCE MAJEURE” CLAUSE IN YOUR MATERIAL CONTRACTS

• A force majeure clause relieves a party from its obligations to perform the contract in certain extreme circumstances such as an epidemic or a pandemic.

• If a contract contains a robust force majeure clause then the party whose performance obligations have been affectedbytheforcemajeureeventshould be able to avoid or mitigate their performance obligations under that contract without penalty or liability.

• Irish law does not imply a force majeure clause into commercial contracts, therefore whether your contract contains one will be a question of fact, meaning you need to check your material contracts to see whether you are protected (or frustrated!).

• Although the term force majeure is very commonly used, it has no recognised meaning in Irish law and so whether the Coronavirus outbreak and/ or any resulting Government restrictions are covered by a force majeure clause in your contractwillbedeterminedbythespecificwording of your clause.

• A valid force majeure clause may allow a reasonable extension of time for performing contractual obligations and remove any penalty for a failure to perform.

• In order to avail of the clause typically the affectedpartyisrequiredprovidenoticewithin a certain period of time, and steps, where possible, must be taken to mitigate any impact such as the implementation of “business continuity/ disaster recovery” plans or procedures.

TIP 3: AVOID DEPENDENCY ON A SINGLE SUPPLY CHAIN AND MITIGATE RISK

Businesses should ensure:

• that they include provisions in contracts that allow them an appropriate length of time to remedy any alleged breach (a period of time which comfortably allows you to source an alternative supplier), and, if appropriate, provisions permitting an alternative product to be supplied to the end customer in substantially the same form; and

• that they consider reviewing their insurance arrangements to provide for business disruption as a result to the outbreak of a virus or other unforeseen global event, especially if suppliers are predominantly based in one region.

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TIP 4: BE WARY

TIP 5: BE PREPAREDFOR DISRUPTION TO YOUR WORKFORCE

• Be alert to any change in supplier behaviour such as a failure to (or repeated delays in) delivery or a loss of communication;

• Monitor carefully government and local regulatory bodies statements and reports with respect to the supplier or the local industry; and

• Site inspections of supplier premises and mandatory reviews of supplier policies are useful to include in contractual relationships to ensure a supplier’s commitment to appropriate standards and providing a consistent high-quality product.

Irish businesses need to consider:

• the potential for global events, such as the Coronavirus outbreak, to impact their workforce; and

• whether a clear plan is in place to keep the business operating in the event of an outbreak: maintaining travel schedules of employees and reviewing these regularly; employees showing symptoms sent home and directed to the appropriate healthcare providers; requiring colleagues to work from home where they show symptoms or come into contact with someone who has avirusfordefinedperiods(ensuringemployees have adequate support andequipmenttofulfiltheirduties);offeringflexi-work(especiallyforsupplychain employees); increased cleaning schedules, hand sanitiser stations; and, reduced client meetings and halting all business travel abroad.

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Leman Solicitors represents Irish businesses on a rangeof commercial matters, both domestically and internationally.

For more information please visit www.leman.ie.

For further details on how we can protect and grow your business, please contact our Head of Corporate, Dominic Conlon, on 01 639 3000.

Leman Solicitors, 8-34 Percy Place, Dublin 4. Tel: +353 1 639 3000 or visit www.leman.ie