February 20, 2020 - Since the first reports of cases of an acute respiratory syndrome resulting from a novel coronavirus in the Chinese Wuhan municipality at the end of December 2019, steps taken worldwide in response to the rapidly evolving epidemic have had a ripple effect throughout the business world, wholly apart from the human crisis or even tragedy for those directly affected. Supply chains to major manufacturers have broken down, leaving companies with no choice but to suspend production. Companies struggling to meet contractual obligations are invoking force majeure provisions, and the China Council for the Promotion of International Trade (CCPIT) has issued more than 1,600 certificates to exporting companies seeking to avoid liability for an estimated $16 billion in contractual obligations as of February 19, 2020. The Chair of the SEC directed the agency to monitor corporate disclosures; shortly afterward, Tesla announced that "the coronavirus outbreak may have a material adverse impact on its business". Other companies have followed.

Consider taking the following steps to address the ongoing impact of the COVID-19 on your business:

  • Contracts: Review business contracts and open lines of communication with suppliers and customers about delays and non-performance to try to work out a resolution to reduce future litigation/arbitration risk.
    • Review contract terms. A force majeure provision may relieve both parties from their performance obligations where, due to circumstances beyond their control, performance is impossible, impracticable, or illegal. Seek advice as to whether force majeure arguments will withstand legal scrutiny under the specific terms of the company's contracts.
    • Document the specific government restrictions (e.g., travel ban, quarantine policies) that have caused the delay or non-performance. Note that diminished profit generally is not a valid basis for invoking force majeure provisions.
    • Determine whether your supplier has been issued a force majeure certificate by the CCPIT, or, if you are exporting from China, whether to seek one.
    • Take reasonable steps to mitigate the impact of the outbreak. Even where valid force majeure arguments exist, the party invoking the provision still has an obligation to mitigate potential damages.
    • Maintain open lines of communication. There are significant legal risks for both parties because of limited court precedent from prior outbreaks, such as SARs and swine flu. Accordingly, in many cases, it may be in the interest of both parties to find a mutually acceptable solution.
  • Insurance: Review your insurance program for potential coverage, including but not limited to business interruption coverage. Document losses contemporaneously and thoroughly. Consider changes to your program for future events.
  • Disclosures: Determine whether and how to update your SEC disclosures to address material risks to your business, including in risk factor, business and MD&A disclosures.
  • Employee Safety: Review safety programs and action plans to ensure they are up to date. Review employee travel policies on an ongoing basis, and be prepared to update them as the landscape changes. Monitor local government actions closely, including travel bans and quarantine policies. Review the Interim Guidance for Businesses and Employers to Plan and Respond to Coronavirus Disease 2019 (COVID-19), issued by the U.S. Centers for Disease Control in February 2020 for strategies to prevent workplace exposure, and to prevent stigma and discrimination in the workplace by maintaining employee confidentiality, and ensuring that determinations of risk are not based on race, ethnicity or country of origin.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.