COVID-19: Business Disruptions and Legal Implications
Published April 14, 2020
Associated Areas of law
With businesses facing unknown disruption as a result of Covid-19, the business law team at Patterson Law wishes to provide these businesses some certainty around the legal implications.
A. Contractual Performance:
Top of mind is whether your suppliers, and whether you, are going to be able to meet your contractual commitments in these challenging times. With supply chains disrupted around the globe, it’s increasingly difficult for businesses to perform their contractual commitments on time and as promised.
If you’re concerned, this might be the time to revisit your contracts with suppliers, and the contracts with your customers, to make sure you aren’t too vulnerable. A few questions to consider:
1. Can your commitments be renegotiated, given the circumstances, to realign expectations in these uncertain times?
Perhaps alternative specifications will suffice, or payment terms can be varied? Regardless of the terms of the contract, dialogue and getting ahead of potential issues might go a long way to preserving your important business relationships. This might just be a bump in the road and irreparable relationship damage would be unfortunate if it can be avoided.
2. What do your contracts say about such unforeseen circumstances outside your control?
If you’re at the point where you’re concerned about your ability to perform on your commitments, or that of your suppliers, then you should consider what your contracts might offer by way of relief. Many contracts have a “Force Majeure” clause that cuts some slack to a party otherwise in breach for reasons beyond their control. It will be important to examine the wording of this clause, to make sure it applies to the current circumstances.
The clause might specifically address relevant causes of interruption like pandemic or labour shortages. There may also be some catch-all that arguably helps in circumstances like this, temporarily relieving a party of their obligations where “…any act of God or other circumstances beyond the impacted party’s reasonable control” has prevented their performance.
The specific mechanism provided for dealing with the force majeure event will also be important to note. For instance, it might say that the impacted party has a certain period of time to remedy their default, following which the other party can terminate the agreement if they still haven’t come through.
3. Can the law generally relieve you from your contractual obligations even if your contract doesn’t?
The law might also apply to provide other excuses when looking to get out of a contract. This can apply when the contract is now either impossible to perform or if it just doesn’t make sense for you anymore.
Impossibility: The law can excuse someone from performing their obligations under a contract when their performance has been made impossible by circumstances outside their control. This might well be the case in situations where a particular individual was to provide some service, but they’re now in quarantine, or new legal restrictions, like a lockdown, have arisen that make performance impossible.
Frustration: The law can sometimes also excuse someone from their contracts if the very purpose for entering into the contract, where both parties were aware of that purpose, has been frustrated (taken away) by some external event. It’s a difficult case to make, but it might apply in circumstances like this.
4. What do your contracts say about termination and the consequences of breach?
It’s also important to look at what the contract includes by way of termination provisions. For what reasons, if any, can the agreement be terminated, and how much notice is required to the other party? Then what are the consequences of termination? Contracts often specify what must follow termination of the agreement. This might include the return of confidential information and payment for goods or services delivered up to and including the date of termination.
What are the consequences of breach if orderly termination isn’t an option? There may be considerable liability if the contract is breached. There can be limitations on liability provisions in the agreement that might limit the consequences of breach, and there might also be provisions that carve out certain breaches from these limitations of liability. These should all be considered in mapping out your options.
5. How does all this impact your insurance coverage?
Is your insurance still in place such that you’re in compliance with your contractual requirements to maintain a certain level of insurance coverage? Will your insurance still protect you in these circumstances anyway? A careful review of your insurance coverage in light of the circumstances will be needed to sort this out.
It’s possible that regular business disruption coverage won’t apply in these unique circumstances. Look for the carve outs that might leave you exposed, and what types of losses aren’t covered. If you are covered and impacted, then the insurer will likely require prompt notice and that you take steps to minimize the damage.
Many of your contractual commitments will also depend on maintaining your insurance. Perhaps the most significant of these will be your financing and credit facilities.
B. Financing and Credit Facilities:
Like with your other contracts, you’ll want to check the terms of your business financing and credit facilities. These are unprecedented times, so your contracts or the lenders themselves might provide some flexibility in these circumstances. The government has been providing support to the banks to help them pass some flexibility onto Canadian businesses. They’ve also announced plans to help keep businesses liquid through the current crisis, hopefully preventing many from defaulting on their loans and ultimately, facing bankruptcy.
More now than ever, given their current government-backed willingness to help their customers get through this, it may be prudent to keep your banks informed of your situation and what you’re doing to mitigate the effects of Covid-19. You might simultaneously want to investigate what government funds, subsidies and credit could now also be available to get you and your employees through this.
What to watch for in your loan agreements: Regardless of the source of funds, your loan agreements, and possibly other business arrangements as well, may include covenants that you’ll maintain certain liquidity ratios. As you draw on your credit facilities to make ends meet, it will be important to keep these financial covenants in mind.
There may also be certain events or actions you might take in these unprecedented times that could inadvertently trigger repayment. You’ll want to review your loan agreements carefully with this in mind. One of the terms to particularly consider will be the definition of what constitutes a “material adverse event” for the purposes of the agreement, and whether this might also trigger repayment unexpectedly.
C. Confidentiality and Privacy Laws:
With the need to increase your business’ online presence, and generally run your business remotely, it’s important to consider what obligations might be impacted by that. A couple of these are obligations to keep business information confidential, and to protect your customers’ personal information.
1. Confidentiality: It’s likely that many of your contracts include the obligation to keep others’ confidential information protected from inadvertent disclosure. Depending on the sensitivity of the information, the consequences of breach could be significant. With that in mind, it’s important to maintain the good practices you normally have in place to protect such confidential information as you transition to doing business online and remotely. This includes ensuring that remote terminal connections, hosting and data storage services are secure and you have appropriate contracts in place to help protect you from third party breach.
2. Digital Privacy: You also need to keep your customers’ personal information secure and protected from inadvertent disclosure as you do more business online and handle and store their information remotely. There’s a myriad of privacy legislation in Canada that covers different sectors’ handling of different personal and personal health information, but for most businesses in Nova Scotia, it’s the federal legislation, PIPEDA, that applies. Under this Act, you need to make sure customers know when their information is being transferred to third parties and what’s being done with it. This would include for storage, and particularly notifying them if their information is being stored outside Canada and potentially subject to foreign security and law enforcement agencies.
You also might be increasingly vulnerable to data breaches in these circumstances. There can be considerable legal repercussions if you’re found to have had inadequate data security measures in place. You also need to report a breach to the Privacy Commissioner and the individuals affected if there’s a real risk of significant harm to them.
We also cover employees working remotely and the potential impact on confidentiality and the security of information, along with many other employment issues, in our employment law team’s recent article: Employer FAQ’s Regarding COVID-19.
This document contains general legal information and was authored by Patterson Law’s Corporate/Commercial and Intellectual Property lawyers. Please reach out to us with any questions you may have. Call 1.888.897.2001