COVID-19 AND YOUR BUSINESS – HOW TO SURVIVE

  1. Introduction
  1. One of the obvious implications of COVID-19, and the governmental response across the globe, is that a party’s ability to perform or comply with its contractual obligations will be affected. It may also mean that compliance with its contractual obligations will become more expensive.
  2. To this end, there are some options available to both parties, as follows:
    1. Suspend performance of contractual obligations;
    2. Terminate the contract; and
    3. Seek to vary the terms of the contract.
  3. The following issues are also important:
    1. Whether your business interruption insurance covers is an insurable event which covers loss arising from a pandemic; and
    2. The recent changes in a creditor’s ability to recover debts from debtors.
  1. Suspension and Variation
  1. These options are predominantly determined by agreement, that is, all parties to the contract agree to delay performance to some date in the future, or to vary the contract to accommodate the current uncertainty.
  1. Termination – Force Majeure
  1. As Australia is a common law system, parties do not have a right to terminate for a “force majeure” event (a matter outside the parties control), unless the contract expressly provides for termination for a force majeure event. That is, a force majeure clause is unlikely to be implied into contracts and, as such, the event must be expressly referred to and defined in a contract.
  2. To rely on a force majeure clause, the performance of the contract must be impossible, not merely difficult, costly, or inconvenient.
  3. Whether a force majeure event has occurred will depend entirely on the words of the contract used to define a “force majeure event”. It is common for a force majeure clause to cover events such as acts of God, strikes, lockouts and other industrial disturbances, war, and hostilities. It is less likely that a clause will refer to pandemics.
  4. If the contractual definition of “force majeure event” is limited to certain circumstances which do not mention pandemics, it may be difficult to argue that a pandemic is an event that falls within the scope of the force majeure clause. If, on the other hand, the contractual definition of an event is not limited to certain circumstances (for example words such as “for any reason outside the control of the parties”) this may give broader scope to terminate.
  1. Termination – Frustration
  1. For the doctrine of frustration to apply there must be a supervening event (“frustrating event”) that arises without blame or fault of either party.
  2. The frustrating event must significantly change the nature of the contractual rights and/or obligations of the parties, being entirely beyond what was contemplated by the parties when entering into the agreement. In that respect, the event must not be reasonably foreseeable.
  3. Before a frustrating event can terminate the obligations of the parties to a contract, the contract itself must be silent as to what is to happen in the circumstances that arise.
  4. Some typical examples where a contract is frustrated include:
    1. Physical destruction of the subject matter of the contract;
    2. A change in the law rendering performance illegal;
    3. Where performance becomes virtually impossible due to a change in the law;
    4. Restraint by injunction;
    5. Non-occurrence of an event which formed the basis of the contract;
    6. Outbreak of war.
  5. Furthermore, a contract is frustrated where, beyond the control of the parties, an event occurs which would indefinitely delay performance, for example, the indefinite postponement of an event. In Denny v James B Fraser his Honour held that one ought to be able to be “free from commitments which are struck with sterility for an uncertain future period”.
  6. Frustration entitles a party to terminate the contract, and the terms of that contract cease to operate. The parties are exempt from any performance of future obligations, being those which did not become due before frustration. However, the parties remain liable for any obligations that had already been due or performed, prior to the frustration.
  7. Generally, as no party is at fault, neither party can claim damages from the other. However, the Frustrated Contracts Act 1978 (NSW) (the Act) provides parties with some relief where a contract has been frustrated. For example:
    1. Section 12 of the Act provides that where a contract is frustrated and a party to the contract has paid money, in consideration of performance of the contract, the same amount of money shall be repaid to the party who made the payment.
    2. Section 13 of the Act provides that if a party has undertaken any act for the purpose of giving performance under the contract, and as a result of the frustration suffered a detriment, the performing party may be entitled to one-half of the amount that would be fair compensation for the detriment suffered
  1. Real Property Leases
  1. Real property leases generally do not contain any force majeure provisions. On the other hand, it is common that a tenant will be required under the lease to report any case of infectious diseases to the landlord, and to comply with any directions or orders by the landlord or public authority. Therefore, if a tenant’s business is closed by a public health order, it would be difficult for the tenant to claim rental relief.
  2. Some leases also contain a clause allowing rent abatement if the leases premises is unusable by the tenant. However, to what extent a tenant can claim relief under these provisions, depends on the wording of the abatement clause. For example, some rent abatement clauses are only linked to physical damages to the building or premises.
  3. If the lease premises are within a shopping centre, and if the shopping centre is closed, the tenant may be protected by the retail leases legislation in the relevant jurisdiction. For example, Section 34 of the Retail Leases Act 1994 (NSW) provides that if the landlord inhibits access of the tenant to the shop, the tenant is entitled to reasonable compensation. However, this also depends on whether the landlord has acted reasonably to prevent the closure and to make the decision, and whether the landlord is following an order or direction by a public authority.
  4. In absence of any express provisions or legislative protection, the tenant may still have a right to claim against the landlord for breach of the covenant to provide quiet enjoyment of the premises, and the implied obligation not to derogate from the grant.
  1. Business Interruption Insurance
  1. The purpose of this coverage is to protect businesses from loss arising from a disaster or emergency (insurable event). The usual trigger for an insurable event is when insured property sustains loss as a result of the insurable event.
  2. As with force majeure, the terms of the insurance policy will dictate what events are covered as insurable events. It will depend entirely on the wording of your insurance policy as to whether pandemics are an insurable event. That is, if a pandemic is not included as an event, it is unlikely to be covered by the insurance policy.
  3. Accordingly, close consideration needs to be given to the wording of the policy.
  1. Changes to Australian Insolvency Regime
  1. On 22 March 2020, the Australian Prime Minister announced a “shield” and “flexibility” in relation to personal bankruptcy and corporate insolvency, as follows:
    1. The minimum amount for which creditors can:
      1. Issue a creditor’s statutory demand for payment of debt (against a company) will be increased from $2,000 to $20,000;
      2. Issue a bankruptcy notice (against a person) will be increased from $5,000 to $20,000;
    2. The time to comply with either demand (i.e. a creditors statutory demand or bankruptcy notice) will be increased to 6 months instead of 21 days; and
    3. There will be protection for directors against personal liability for trading whilst insolvent.
  2. These changes will be in place temporarily for 6 months from 25 March 2020. Further, the changes will only apply to bankruptcy notices and creditor statutory demands issued after 24 March 2020.
  1. Financial Relief for Businesses
  1. At present, the Government have released three economic stimulus packages, aimed at assisting businesses affected by COVID-19.
  2. The first stimulus package, announced 12 March 2020, included the following:
    1. Increases to the instant asset write-off’s and accelerating depreciation deductions;
    2. Payments of between $2,000 and $25,000 for small to medium-sized businesses making less than $50 million in turnover;
    3. Assistance for small business employing trainees and apprentices by supporting 50 per cent of apprentice/trainee wages for 9 months, from 1 January 2020 to 30 September 2020.
  3. The second stimulus package, announced on 22 March 2020, included the following:
    1. A boost to cashflow of up to $100,000 to eligible small and medium sized businesses, and not-for-profits that employ people, with a minimum payment of $20,000, to keep the business operating, paying rent, electricity and other bills and retaining their staff;
    2. Increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020;
    3. Temporary increase in the threshold at which creditors can issue a statutory demand on a company, and the time that companies have to respond to statutory demands they receive;
    4. Introduction of a 15-month investment incentive that will accelerate depreciation deductions for businesses with turnover of less than $500 million. This means eligible businesses will be able to deduct 50 per cent of the cost of an eligible asset on installation;
    5. A guarantee of 50 per cent to SME (small medium enterprise) lenders to support new short-term unsecured loans to SMEs.
  4. The third stimulus package, announced on 30 March 2020, is in relation to employment and is discussed below.
  1. Supporting your employees
  1. Employees can be stood down without pay under the Fair Work Act, if they can’t be usefully employed because of a stoppage of work for any cause which the employer can’t reasonably be held responsible. If your business is closed because of a public health order (eg. gymnasiums, restaurants and recreational centres), it would constitute a stoppage of work.
  2. However, if your business is closed because of a reduction in business, the Fair Work Commission is of the view that a reduction in the available work, for whatever reasons, does not represent a stoppage of work in satisfaction of s524. A stoppage of work means work being consciously halted for some reason and ordinarily for some identified period of time.
  3. As employers are also obliged to ensure that the workplace is safe for its employees under Workplace Health and Safety legislation, if you feel that you can no longer ensure your workplace is safe from COVID-19, and it is safe for your employees to work from home, you may direct your employees to work from home or an alternative location. McLachlan Thorpe Partners have developed a checklist to prepare employees to work from home. You may use this checklist as a guideline to develop your own policy addressing particularly safety, privacy, data security, working hours and other issues which are relevant to employees working from home. Guidelines for employees working from home during COVID-19 outbreak.pdf
  4. The Federal and State governments are introducing a range of subsidies and support packages for businesses, to enable them to support their employees, and prevent employers from standing down their employees without pay.
  5. The third stimulus package announced by the Government is built around a handout to employees, that is paid via their employer, called the JobSeeker Payment.
  6. The payment is intended to provide wage subsidies to businesses that are significantly affected by COVID-19, to relieve the financial burden on the business and prevent further unemployment. Although the Jobkeeper payment is not yet legislated, the guidelines that will be introduced are as follows:
    1. Affected businesses with receive $1,500 per fortnight per employee to help pay the wages for six months;
    2. Even if you earn less than $1,500 a fortnight, you will still receive the full payment if you’re eligible;
    3. The ATO will make payments to the employers monthly in arrears, but the first payment will be sent in the first week of May 2020. This payment will be backdated to 30 March 2020, so that employers can start paying their employees immediately;
    4. To be eligible for the JobKeeper payment the following conditions must apply to an employee:
      1. Currently employed by an eligible employer, and that employer has registered for the JobKeeper payment;
      2. Employed as at 1 March 2020;
      3. Full-time, part-time, or long-term casuals (a casual employed on a regular basis for longer than 12 months as at March 1, 2020);
      4. At least 16 years of age;
      5. An Australian citizen, holder of permanent visa, protected special category visa holder, a non-protected special category visa holder who has been residing continually in Australia for 10 years or more, or a special category (subclass 444) visa holder;
      6. You are not in receipt of a JobKeeper payment from another employer;
    5. If you have been stood down since March 1, you will also be eligible for the JobKeeper payments, as long as the business will or can re-hire you. If there is no chance of you being re-hired, such as, your employer can’t reopen their business under the lockdown restrictions, then you will need to apply for the JobSeeker payment.
  7. Furthermore, the NSW Government have announced payroll tax will be waived for businesses with payrolls of up to $10 million for three months. In addition, the Government will bring forward the next round of payroll tax cuts by raising the threshold limit to $1 million in 2020-2021.
  8. Unions and employee associations are applying to the Fair Work Commission to increase award flexibility. This may effect things such as when an employer can direct an employee to take annual leave. It is important to regularly check updates on the Fair Work website to see how any changes to the Award and Employee entitlements may effect your business.

If you require further assistance, please contact:

Andrew Thorpe, Partner, athorpe@mtpartners.com.au

Chao Deng, Senior Associate, Accredited Business Law Specialist, cdeng@mtpartners.com.au

Tarrek Naji, Senior Associate, tnaji@mtpartners.com.au

Disclaimer:  This article is intended to provide general information only, and is not to be regarded as legal advice.  Formal legal advice should be sought in relation to particular transactions or circumstances.

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