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Author: Douglas-Jones Mercer
Date: 19 March 2020
The coronavirus pandemic is causing panic and confusion amongst businesses and consumers alike. The effects will be wide ranging and potentially catastrophic for numerous reasons – and the economic implications will remain long after the virus pandemic is over.
These economic implications will inevitably bring about legal issues for businesses. Businesses will need to weigh up their economic and legal obligations with their moral obligations not just to employees, but to the wider community.
1. Insurance – will they pay out?
Many businesses will have business interruption insurance, however that does not mean you are entitled to recover any losses suffered as a result of the pandemic. You should check with your insurers for specific details, but many business interruption policies are linked to damage to property. If your business has to close because of a case of Covid-19 at your premises, there could be an argument to say that contamination constitutes ‘damage to property’ but it is not clear whether insurers will accept this.
While some policies include a non-damage extension (meaning they might cover in events other than property damage), it could be that, unless the police or relevant authority force your business to close or lockdown, your insurance policy may not pay out. Many businesses are finding themselves in this predicament (particularly in the hospitality sector given the most recent announcement) and we may well see business closures as a result. Some extensions specifically exclude cases of flu or flu like illnesses including Covid-19. Lots of small business do not have the cash reserves to survive prolonged periods of no or limited trading and unless further government action is taken (see section 3 below) then they will struggle to maintain overhead payments during the pandemic.
2. Contractual issues – circumstances outside of your control
Most contracts (whether business to business or business to consumers) include provisions which allow you to terminate or suspend your obligations where you are forced to do so. The effect of this clause will depend on its precise wording. You may be able to suspend your contracts for a period of time which would allow you to essentially pick up where you left off when you are able to resume business as usual.
Other clauses may be worded to allow you or the other party to terminate the contract. This terminates all payment and performance obligations as well (other than payment for goods/services already provided). While this may not be the preferred scenario, it will still protect you from continuing obligations to provide goods or services, particularly if your workforce is unable to work from home or is affected by employees falling ill and having to self-isolate.
It is important to note that, irrespective of the inclusion of a ‘force majeure’ clause, customers may still be able to terminate a contract if performance of the contract becomes impossible (for example, in a lock down scenario).
Other implications may be price fluctuations or performance issues in the supply chain which would affect the contract in ways other than performance. For example, if prices increase parties may be happy to continue with the contract but may need the ability to pay in instalments or pay in arrears rather than in advance.
You will always have the option of agreeing an alternative solution with the other party. Whether that comes in the form of delaying the start of a contract, altering the substance of the contract during the pandemic or provisions for payment.the impact on their ability to pay lenders. There is some assistance available from the government as follows:
- ‘time to pay’ tax suspension. SMEs have the availability to suspend debt collection. These agreements are made on an individual basis. During the coronavirus outbreak, the 3.5% interest will be waived. You can call HMRC on 0800 0159 559 for more information.
- Business rates relief – businesses in England in the retail, leisure and hospitality sectors will not be charged business rates for properties below £51,000 rateable value in 2020-2021. Business rates are devolved in Wales but Welsh Government has matched this support for the same businesses in Wales.
- 700,000 smallest businesses will be eligible for £3,000 grants to help with business costs.
- The government will guarantee loans to businesses adversely affected by the pandemic. The Coronavirus Business Interruption Scheme will replace the Enterprise Finance Guarantee Scheme, where lenders provide funds to risky businesses in the form of loans, overdrafts or secured lending. The Government, through the British Business Bank, will guarantee up to 80% of each loan (and waive the 2% per annum charge) for loans of up to £1.2million.
You can read more about government support for businesses here:https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses
Many are calling for an approach similar to the Italian government, which has placed the country in lockdown but has also ordered a suspension of mortgage and loan/finance payments until the lockdown is lifted. This enables people to stay home from work without pay, and not have to worry about making several months mortgage payments without receiving income. As well as assisting the general public, this of course means businesses don’t need to continue paying employees despite a downturn in trading and revenue.
At present however there are no indications as to whether or not the UK government will take this approach. However, some financial institutions are already proposing supportive measures for their customers. For example, Lloyds Bank Group (including Halifax and Bank of Scotland) have confirmed there will be no fees for missed payments on credit cards, loans and mortgages. There will be payment holidays available on mortgages and loans if needed and emergency access to fixed term savings. RBS and Natwest are allowing deferred mortgage and loan payments for up to three months, closing fixed savings accounts with no charge, refund on credit card cash advance fees and temporary increases in credit card limits. Banks such as Barclays, TSB, Santander and other financial institutions are implementing similar policies.
This note was written by Georgia Power, a Solicitor in DJM’s Corporate and Commercial Department. Georgia has expertise and experience in varied transactions involving SMEs and drafting commercial contracts (including clauses such as those mentioned above). You can contact Georgia on email@example.com or on 01792 656518.
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