COVID-19 and Commercial Transactions: Some Emerging Legal Issues

1. PREFACE 

   By the time the World Health Organization (“WHO”) upgraded the status of the novel Coronavirus Disease (officially known as COVID-19) outbreak from an epidemic to a global pandemic on 11th March, 2020, the virus had already travelled beyond Wuhan, China, its point of original outbreak in December 2019 and crossed international borders[1]. Given the rapid rate of infection and increasing number of deaths in the wake of the unprecedented spread of the virus, various emergency measures have been deployed by municipal, local, state, national and multilateral authorities to contain the outbreak

   Besides being a public health crisis, COVID-19 continues to trigger severe social and economic consequences for individuals, corporates and governments across the world. Specifically, markets and industries are reacting negatively to the pandemic. Global stock and commodity prices (especially crude oil) have plummeted to unprecedented levels in recent weeks, with grave multiplier effects on economies. The general consensus is that this trend is not expected to reverse anytime soon, given the impact of current border closures, international travel restrictions, and lockdown of large swaths of movements of persons in many cities, countries and regions of the world.

   The sudden collapse of industrial and commercial activities is, in many respects, unforeseen. This may also not have been within the reasonable contemplation of most entities, investors, industry & financial market players; who are parties to existing commercial arrangements across several jurisdictions. To date, a sizeable number of domestic and international contractual obligations have been frustrated while many others face possible and imminent performance crisis. 

   This article analyses the key socio-economic consequences of COVID-19 and offers legal options for mitigating its impact on the operations of commercial entities, as well as technical guidance on including provisions in future commercial agreements, against any similar unforeseen pandemic.

2. KEY ISSUES FOR COMMERCIAL ENTITIES AND TRANSACTIONS 

   Massive disruptions in global supply chains are affecting commerce in every sector and jurisdiction. In the circumstances, business organizations are confronted with existential risks for which many do not have contingency plans in place, and which are affecting how they can deliver on their contractual obligations. For enterprises such as manufacturing (production & assembly plants), construction, mining, marketing and consultancy firms with operations largely dependent on imported raw materials, semi-processed or finished products, as well as imported services (skilled labour & expertise); the various responses to COVID-19 worldwide (particularly in the most affected economies) have either crippled their operations or adversely affected the international value chain for their products.

   We have considered a few enterprises/contractual arrangements below:

   1. Financing  

      The COVID-19 outbreak will likely have a negative impact on the ability of many companies with existing loan/debt financing obligations to meet their obligations to their lenders/creditors. The need to assess the impact of the COVID-19 outbreak on obligations under relevant financing agreements is now of significant importance. For instance, have provisions relating to material adverse change/event been triggered? Are the representation and warranties made by the borrower still accurate? Will there be need to seek waivers or extension of time to comply with obligations?

   2. Employment  

      One of the side effects of the various measures against COVID-19 is the inability of several employees (especially those whose work require physical delivery) to perform their duties for lengthy period. The liability of employers to still pay salaries in such circumstances is now in question. Indeed, several employers may be unable to meet their salary obligations to their employees due to possible challenges in receiving payments from clients by reason of non-delivery of services. Thus, the ability of employers to terminate the services of the employees under current circumstances have come up for discussions. Can the employers convert the period to paid or unpaid leave? Can an employer implement a reduction in salary without the consent of the employees?

      Also, several employers currently allowing their employees to work remotely do not have provisions in their contracts of employments or staff handbook governing such work-from-home arrangements. Can accidents occurring whilst working from home be considered an occupational accident? Can an employee who refuse to come to work due to high level of anxiety be penalized? 

   3. Aviation, Shipping & Logistics   

      The restrictions on international air travels and the closure of land and coastal borders in many countries have grounded business for many enterprises in the transport sector. This has resulted in many impromptu cancellations of flights and trips along international air, water and land routes. There have also been consequential implications for enterprises expecting delivery of shipments, consignments, cargoes, and arrival of expatriate workers from foreign countries. This also holds for business entities, persons, and business executives travelling for previously scheduled business meetings and conferences across international borders. The determination of the party to bear the losses or liabilities arising under the relevant contracts is now a major consideration for parties.

   4. Tourism & Entertainment  

      With lockdown placed on major cities across the globe and directives to maintain the WHO-recommended social distancing protocols, COVID-19 outbreak has had serious toll on global tourism and entertainment. In the circumstances, legal questions arise as to the status of previously scheduled events and paid bookings for hotel accommodation and event venues; particularly if the pandemic persists for a period longer than envisaged.

1 As at Wednesday, March 25, 2020, there were about 440, 359 reported cases in more than 150 countries with death toll reaching 19,753, according to the World Health Organization. These numbers are expected to increase by the day.