The short-notice shutdown of non-essential businesses has left many owners and managers with unanswered legal questions. Given the enforced lockdown poses a greater risk to smaller businesses with cash flow challenges, smaller capital reserves and no legal team, we thought we would get some expert legal advice to help anyone in this position manage their employees, customers and suppliers. It could be some of the most important legal advice you receive (and the only time it comes without an invoice).
The legal issues surfaced by the Covid-19 pandemic cover contract law, employment law, property law, insurance law and company law. We can’t cover them all, so we’ve focused on the most common legal questions likely to arise during the lockdown and beyond for product businesses. Importantly, we’ve tried to collate advice that applies globally, but you’ll need to be aware of specific local legislation before relying on the information in this article.
Legal questions covered in this post:
- I haven’t received parts or products from my suppliers, can I cancel my contract?
- Is there any way I can minimise my liability if I can’t fulfil my customer’s orders?
- Is there anything else I can do to manage my contracts and relations?
- How do I renegotiate my existing supplier contracts?
- I have business interruption insurance, can I claim?
- Do I need to pay my staff in full during lockdown or can I ask them to use some of their leave?
- Can I direct employees to take annual leave during the lockdown or when we reopen and we’re finding there is less work coming our way?
- Am I expected to top up the government subsidy to ensure employees are paid in full?
- Can I restructure my businesses during the lockdown?
- Can my staff refuse to work if they are worried about Covid-19 or feel unsafe?
- Can my landlord still charge rent if I don’t have access to the building?
- Can I negotiate a rent holiday?
- Tips for negotiating with your vendors during Covid-19
- Stakeholder communication during a crisis
An important note before we start
Please do note that we’re not legal professionals ourselves. What we’ve done in this article is collate guidance from independent (and seriously good) lawyers. They’ve asked us to mention that you shouldn’t rely solely on the information contained in this post. So if you need help beyond the suggestions provided, then reach out to one of the lawyers below who have kindly offered to answer any of your questions personally.
Manage your contractual relationships in these trying times.
Contract Law Questions: Managing agreements with suppliers and customers
The global measures to stop the spread of Covid-19 have huge implications on contractual relationships for product businesses. Supply chain disruptions mean your suppliers can’t deliver to you and you can’t fulfil your customer orders. So, can you cancel your contract with your suppliers? And where does that leave you with your customers? As always, it will depend on the individual contract, but we asked Barrister Steve Keall to explain the avenues parties to a contract could use to seek relief.
I haven’t received parts or products from my suppliers, can I cancel my contract?
Whether a contract can be cancelled in any particular case depends on the terms of that contract. Many supply contracts will be recorded in a written agreement and it is very likely that the agreement will say when it can be cancelled. Generally in a supply contract it will be either a breach of a material term or an unremedied breach. For example, where it is agreed that a supplier will send 100 widgets a week and they don’t, the customer could say to the supplier to put that right or remedy it within 2 working days and if the supplier does not, the customer would have the ability to cancel the contract. That is what we might refer to as Common Law positions — the law of the land that is not dealt with by legislation. The common law position on the cancellation of a contract is similar across the UK, Australia and New Zealand.
The point to note is that the fact of the pandemic does not alter the parties’ contractual obligations if the contract remains in existence. If for example, your supplier can’t deliver the product, that’s on him, the obligation on him (subject to the terms of the contract) is in that sense, absolute. It is simply something that he must do. If he does not, he is in breach, subject to the terms of the contract.
Is there any way I can minimise my liability if I can’t fulfil my customer’s orders?
A supplier may be able to argue that the contract has been frustrated as a result of Covid-19. Frustration is another Common Law concept that is much the same in the UK, Australia and New Zealand. Whether a contract has been frustrated depends on whether it has become impossible to perform – or performance of it has become radically different to what the parties to the agreement contemplated when they entered into it. Whether a contract has been frustrated will depend on the individual case. There is no universal answer.
Frustration won’t come into play if the possibility of the thing that has now happened was contemplated in the agreement. The possibility of widespread illness may be catered for in commercial agreements. If a contract is frustrated it is at an end. It’s obliterated. Note, the threshold for frustration is high and there are no recent examples of the remedy being permitted by the courts.
The second option for suppliers is force majeure. That is a written contractual provision in some agreements which broadly intends to apply to ‘acts of God’. The provision will stipulate the contractual consequences of the act of God. For example, if that act happens the contract may come to an end, be postponed or adjusted.
Is there anything else I can do to manage my contracts and relations?
Even though we’re in the midst of a pandemic lockdown, contracts are upheld, and you have an absolute obligation to perform your obligations. However, here there is a clear case for compromise in appropriate cases.
The specific issue that the lockdown throws up for business owners is cash flow. The fact of the restrictions doesn’t mean your good business idea has suddenly become a bad business idea and it doesn’t mean that your 100 customers are in effect 10 customers. What it does mean is that you haven’t got the same money coming in and going out.
That necessitates business owners looking carefully at the circumstances and showing leniency. I generally recommend that affected business owners have an honest conversation about supply and their ability to pay.
If you can’t pay debts or negotiate payment arrangements then they’ll need to get advice from their accountant, lawyer or an insolvency practitioner.
How do I renegotiate my existing supplier contracts?
Assuming the issue is likely to be economic — about cash flow — you’re probably looking to regulate that one issue. You can only really negotiate on two things. The amount payable and the date payable. However, if you do agree to a contract variation, document it. Good business is keeping things simple and documenting it. In most cases, an exchange of emails will be satisfactory.
I have business interruption insurance, can I claim?
There’s only one kind of insurance that is relevant, which is business interruption. Insurance that pays out when business has been interrupted. Generally business interruption is linked to actual physical loss and damage to property. With the pandemic and restrictions associated with the pandemic, it’s impossible to argue there has been physical loss to property. This could be open to question where products have spoiled. In that case, there might be an argument, the physical change might be construed as damage.
I have come across cases where the insurance policy responds where there has been a direction from a government body (for example, a council) that people may not access their properties for a period of time. For example, a District Council says people in a particular part of town, can’t go into their premises until a gas leak has been fixed.
There’s an interesting legal question about whether that type of direction trumps the rest of the policy which may well have an exclusion of liability of infectious disease. It would make sense for people to speak to their broker or lawyer.
Dealing with your staff in good faith during Covid-19.
Employment law questions: Your employee’s rights, wage subsidies and restructures
Employees are the heart and soul of your organisation. They’re the greatest source of competitive advantage and the greatest contributors to a positive company culture. Therefore, it’s important that you deal with your staff in good faith — even though you might be wondering how you can pay them at the moment. We asked Mere King from Buddle Findlay to answer the most common employee pay and leave questions arising out of Covid-19.
Note: Mere’s answers focus primarily on New Zealand law and circumstances.
Do I need to pay my staff in full during lockdown or can I ask them to use some of their leave?
The answer is largely dependent on whether your business is able to continue to operate during the lockdown.
Employees not able to work during the lockdown: Where a business has been forced to close due to the Alert Level 4 lockdown, or, in cases where prior to the lockdown, an employee was directed to stay at home and self-isolate, both in accordance with the Government’s directions, the employer will not be required to pay its employees. The basis being that because the employees are not ready, willing and able to work due to the Government directed lockdown, the employer is not obliged to pay its employees. In this situation, employers should always check their employment agreements for a force majeure or business interruption clause which may allow the employer to suspend the terms of the agreement temporarily.
Employers will also need to be mindful of their obligations of good faith and seek to communicate and consult with employees on any proposed changes to their terms of employment. This would likely involve informing employees of the impact of the lockdown on its business, the impact of any relevant terms of their employment agreement (i.e. force majeure clause and whether the employer intends to invoke the clause) and discuss what options the employer is considering moving forward, with the view of reaching an agreement with employees in the first instance and failing that, the employer may need to consider whether a restructure/redundancy process is appropriate (see the advice regarding redundancies below).
Options open to an employer could include a temporary reduction in the employee’s hours and pay, applying for a Government wage subsidy, considering what paid leave is available to the employee and whether the employer is considering a direction for the employee to take annual leave (discussed further below).
Employees able and continuing to work during the lockdown period: Where a business can continue with its operations during the Alert Level 4 lockdown and where the employees are able to work from home, those employees are entitled to be paid for all hours worked, in accordance with their employment agreement. However, where there is not enough work for those employees or where the employer is unable to pay them their usual pay, then once again good faith applies. The employer should (as above) communicate and consult with employees on any proposed changes to their terms of employment. Once again, employers should in the first instance seek to reach agreement with employees and failing that the employer may need to consider whether a restructure/redundancy process is appropriate.
In respect of both categories of employees, we would recommend an employer consider whether it is eligible to apply for any available wage subsidy [details of UK, US, Irish, Canadian, New Zealand and Australian schemes are available here]
For example in New Zealand, generally an employer will be eligible if it has experienced a decline of at least 30% in actual or predicted revenue, it has taken active steps to mitigate the impact of Covid-19 on business activities and it is not receiving the Leave Subsidy (applicable to essential businesses). Any application will also require the employer to obtain the employees informed consent to apply for the subsidy on their behalf.
If an employer adversely changes an employee’s terms of employment (pay, hours of work) without agreement and/or a fair consultation process, this could result in the employer being exposed to employee claims for unjustified dismissal or disadvantage, with potential remedies including reinstatement, lost salary/wages, compensation for humiliation, loss of dignity and injury to the feelings of the employee and penalties.
Can I direct employees to take annual leave during the lockdown or when we reopen and we’re finding there is less work coming our way?
Yes, but there are legal requirements you need to comply with.
The law requires employers to first try and reach agreement with employees about when annual holidays will be taken. Failing agreement being reached the employer can direct the employee to take their entitlement to annual holidays on 14 days’ notice. Employers need to be aware that the direction to take leave only applies to accrued annual leave entitlements. An employer cannot direct an employee to take annual leave in advance of their annual leave entitlement having accrued.
Am I expected to top up the government subsidy to ensure employees are paid in full?
As above, where a business continues with its operations during the Alert Level 4 lockdown and its employees continue to work from home, those employees are entitled to be paid for all hours worked, in accordance with their employment agreement. However, if an employer’s business operations cannot continue during the lockdown, or due to the impact of the lockdown on operations the employer is not able to continue to pay its employees their full wages or salary, or top up the Wage Subsidy to 80% of its employees’ ordinary wages, the employer may seek to reduce the employee terms and conditions of employment (pay and/or hours of work). However, the employer needs to communicate and consult with employees in good faith (as referenced above).
If an employer has applied for and received the Wage Subsidy, the terms of the Wage Subsidy do provide that for the period that the employer receives the subsidy, it must “use [its] best endeavours” to pay “at least 80 per cent” of each named employee’s ordinary wages and salary. Employers should document their ‘best endeavours” and communicate in good faith with employees about the same. At a minimum the employer should pass on the Wage Subsidy to employees.
Can I restructure my businesses during the lockdown?
There are certain legal requirements that must be met for a restructure/redundancy process to be lawful. In short, for a restructuring to be lawful, it must be both substantively and procedurally fair. For a restructure to be substantively fair, it must be for genuine commercial reasons. These reasons and relevant supporting information must be provided to affected employees. Procedural fairness requires employers to run a full and fair consultation process to inform affected employees of the potential restructuring, and seek their feedback on this before a final decision is made.
Currently, as the Covid-19 pandemic evolves, there are additional factors to consider given the impact of the disease on New Zealand. The Wage Subsidy declaration form (as at 4pm on 27 March 2020) requires that employers will retain the employees named in the application as employees for the period it receives the subsidy in respect of those employees, i.e. for 12 weeks, which commences from the date it receives the subsidy. Additionally, it states that if the employer fails to meet any of the obligations about how it must use the subsidy, or where it stops being eligible for the subsidy or any part of it, it agrees to repay the subsidy to the Government. This means that employers receiving the subsidy have in effect agreed not to make any employees redundant during the 12 week period. These requirements are intended to reflect the intention behind the scheme, namely, to keep employees in their employment and to prevent mass re-hiring once the effects of Covid-19 pass. Equally, employers are facing a higher degree of scrutiny at this time, and would attract less risk proceeding with a restructure once the lockdown is lifted and the 12 week Wage Subsidy period has ended.
The obligations on employers who applied for the Wage Subsidy prior to 4pm on 27 March 2020 are slightly different, in that the declaration form did not specifically state that employers must retain employees named in the application for the 12 week period. Therefore, such employers could proceed with a restructuring process within the 12 week subsidy period. Nevertheless, given the nature of the scheme and the risk of adverse publicity as discussed above, we would recommend that employers do not proceed with a restructuring process until after the 12 week period has ended.
Can my staff refuse to work if they are worried about Covid-19 or feel unsafe?
The short answer is yes – workers have a right to refuse to undertake work if their working conditions are unsafe. However, the threshold is high. To refuse to work under the Health and Safety at Work Act 2015 (“HSWA”), a worker must have reasonable grounds to believe that the work they are required to perform is likely to expose them (or someone else) to a serious risk to their health or safety arising from an immediate or imminent exposure to Covid-19. If a worker believes that they have been asked to work in a situation which they consider does put them or others at risk, they must first attempt to resolve the issue with their employer before refusing to work, i.e. they cannot just walk off the job without having raised their concerns with their employer. The employer should be able to explain why certain activities are required and what measures have been put in place to properly manage the risk. Where the employee has significant concerns, the employer should consider whether additional steps should be undertaken to ensure the health and safety of its workers. We also recommend consulting on any additional measures to be put in place.
In circumstances where the employer has taken appropriate steps to protect the safety of their staff, and an employee simply refuses to work, those employers may wish to treat the period as unpaid leave. However, the employer should seek all available information before doing so, including proof of any asserted medical conditions, and consult with the employee on how they propose to treat their absence from the workplace. Disciplinary action may be warranted where reasonable in the circumstances.
Communicate with stakeholders — and be kind.
Property law questions: Rent options for landlords and tenants
Both landlords and tenants are severely impacted by the mandated lockdown periods. Tenants without access to their buildings could suffer a double financial below; being unable to access their building to generate revenue while still paying their rent in full (although read on for potential relief options).
For landlords, tenancy agreements may include rent relief provisions if tenants cannot access the building, and if not, it is highly likely that tenants will ask to negotiate a rent reduction or holiday. If rent relief is afforded (by contract or negotiation), the landlord will still bear the brunt of the building’s fixed outgoing costs (insurance, rates etc.). Is it fair that the landlord bears this cost? Or is a reduction a sensible business solution when the alternative is business failure and the potential difficulties of finding new tenants?
We believe the best solution for both tenants and landlords isn’t a legal principle but a human principle — kindness. We should all heed the advice of our country leaders and community footpaths and offer support. If you’re a tenant, ask for a rent holiday (more on this below). If you’re a landlord, offer a rent discount or holiday to your tenants who are impacted.
We asked Brent Norling of Norling Law for some legal and pragmatic advice for dealing with commercial rent during the lockdown.
Can my landlord still charge rent if I don’t have access to the building?
If offices and other commercial buildings are left inaccessible, there may be a reprieve for tenants. If the deed of lease contains a ‘no access in an emergency clause’, the tenant would not be liable for a proportion of rent and outgoings from when the tenant became unable to gain access until that inability ceases. In the present circumstance, it is highly arguable that there is an emergency.
If tenants do not have a standard lease agreement that includes the provision, they could still rely on the doctrine of frustration (see contract law section above). The doctrine of frustration of contract allows parties to be relieved of their legal obligations where contracts have become impossible to perform. Frustration occurs where neither party has been the ‘defaulting party’ regarding their contractual obligations but it has become incapable of performing the contract due to the circumstances.
Can I negotiate a rent holiday?
Absolutely. We highly recommend that tenants and landlords work collaboratively during this period to ensure they both come out of lockdown commercially viable. In many cases, the commercial relationship can continue once the dust settles as the reality for most landlords is that they are likely to experience difficulty in finding replacement tenants.
Non-law suggestions: Payment plans and communication strategies
The silver lining of this unprecedented time is that we’re all impacted. Every business has rapidly changed their plans, re-prioritised and reallocated resources. The upshot of which is a collective understanding, a supportive network and a realistic approach to business challenges.
So, simply pick up the phone. Explain to your customers that you can’t deliver. They’ll get it. Ask for payment relief and negotiate payment plans. Your suppliers don’t want to see you fail. And be honest with your staff about the decisions you’re considering.
During this time — in fact, at any time when cashflow is tight — we recommend over-communicating to your customers, suppliers and staff. You’ll be respected for front footing
difficult conversations and remembered for your transparency.
Tips for negotiating with your vendors during Covid-19
One of the most important points to remember when you’re negotiating with your vendors is that they’re hurting too. Start the conversation by asking how they are. Show some empathy and talk openly about the challenges of doing business in the new normal.
Next, start to collaborate. It could be hasty to cancel your orders immediately or ask for a one-sided payment plan. Find out if there is a way to manage your orders, delays and services that works for everyone. For example, product businesses could reallocate stock, ignore season or donate products.
If you must ask for a discount, extension or payment plan the best strategy is to offer something in return. Ask your suppliers what commitment you can give them in return to make the agreement easier.
Stakeholder communication during a crisis
Fulfilling every order or even providing your customers with a consistent level of service is simply not possible at the moment. Accordingly, it’s important that you manage your customer expectations so as to not completely erode their long term confidence in you.
We recently published our recommendations for managing supply chain disruption and how you should communicate with your customers when you can’t deliver. The advice was specific to Covid-19 but we believe the principles of good communication apply to any situation where you need to manage customer expectations. We also think the principles apply to supplier and staff communication too. Simply put, our advice is to communicate clearly and communicate often.
Here’s how we recommend communicating to customers, suppliers or staff during a crisis:
- Determine what your stakeholders need to know and anticipate their follow-up questions. Consider what they need to know now and later.
- Determine the method of communication. We’re firm believers that you should always communicate in the way your stakeholders communicate with you.
- Explain how the crisis will affect them. Be concise. Be clear. Stakeholders will want to know how they’re impacted so they can respond appropriately.
- Provide proactive solutions to redress the situation. Don’t wait for your stakeholders to ask, suggest alternatives and help mitigate the impact on them.
- Set communication update expectations. How often will you update them and how can you set an internal cadence to achieve these updates.
Perhaps the best example of clear communication can be seen by our governments in their daily Covid-19 briefings. Generally, they’re presenting the most up-to-date information that people need to know, clearly and quickly. We could all take inspiration from their approach.
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Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.