Coronavirus – Legal Risk Mitigation and Prevention Kit
The spread of the coronavirus dominates the headlines: The WHO declared the coronavirus outbreak a public health emergency of international concern. The Austrian Foreign Ministry has issued a travel warning for China; this has an impact on Austrian companies related to China. In the meantime, cases of disease have also occurred in Austria. Not least because of the relatively long time span of the ongoing situation, a closer look is worthwhile: how best should businesses operating in this market environment prepare for disruption, how can potential legal risks be identified and prevented?
Coronavirus as a force majeure event
In order to avoid disputes about possible liability issues, international contracts often contain force majeure clauses. Typical legal consequences attached to the occurrence of a force majeure event are notification obligations, termination rights, release from performance obligations and exclusions of liabilities. Whether the spread of the coronavirus and the associated (state) restrictions can be qualified as a force majeure event typically depends on the concrete contractual definition of the force majeure event. Existing contracts should be reviewed on force majeure clauses with a focus on whether the current situation can already be qualified as a force majeure event. In the affirmative, businesses should evaluate whether mutual rights and obligations (in particular information and warning obligations) are triggered and whether, from a strategic point of view, they should take any steps covering mutual performance failures.
Even contractual relationships without an explicitly agreed force majeure clause could be affected by the spread of the coronavirus. Whether the spread of the coronavirus may have an impact on contractually agreed obligations must be assessed in accordance with the underlying law of the contract. Under Austrian law there is no generally applicable definition of the term „force majeure“ and no generally applicable principle according to which force majeure releases from performance obligations. In most cases, therefore, recourse must be made to existing legal institutions (subsequent impossibility and frustration of contract) as well as general principles of Austrian civil law.
Contracting parties who are not themselves in breach of the contract must bear in mind that they could be subject to an obligation to mitigate damages. In the case of interrupted global supply chains, this could eventually also include an obligation to try to source for an alternate party to ensure continuity of supply chain; further, supply bottlenecks (of products from China) may require a fair distribution of limited products among existing costumers.
If new contracts are concluded, businesses should consider to what extent the services to be provided under the contract could be affected by the coronavirus outbreak and already make preventive contractual arrangements.
In the context of M&A transactions, MAC (material adverse change) clauses can be agreed in purchase contracts. A MAC-clause usually gives the buyer the right to withdraw from the purchase agreement in case of a „material adverse change“ (or „material adverse event“) between signing and closing. A MAC clause can also be included in the warranties given by the seller. The decisive element of the MAC clause is always the definition of „material adverse change“ or „material adverse event“, i.e. the definition of the event which is to be understood as material in the sense of this clause. Here, too, specific contracts must be reviewed focusing on whether current events or disruptions caused by such events at the level of the target company are covered by a MAC clause. In this context, when drafting a new contract, focus should be on covering the current scenarios.
Operational restrictions resulting from the coronavirus could also interfere with existing financing: for example, delivery failures may lead to customers no longer making payments to their suppliers, which in turn could affect the supplier's cash flow and lead to payment difficulties. Furthermore, operational risks could make it temporarily difficult, if not impossible, to maintain agreed financial ratios. Forward-looking contingency planning, timely review of existing financing agreements and, if necessary, timely discussions with the financing banks are therefore advisable.
Business trips to China
As employers, businesses have to protect their employees from infection as good as reasonably possible. It is therefore not advisable to travel to regions for which the Austrian Foreign Ministry has issued a travel warning or which for other reasons are associated with a particularly high risk of infection (employees could usually refuse such business trips). Considering the occurrence of the coronavirus in more and more countries, it is therefore worth considering whether envisaged business trips are necessary or whether telephone or video conferences would suffice. In any event, if business trips are deemed required, businesses should check any travel warnings issued in relation to the area and consider taking any possible precaution measures for the trip (such as eg protective masks and gloves).
Hemma Parsché, associate
Note: This newsletter only provides general information and in no way constitutes legal advice from BINDER GRÖSSWANG Rechtsanwälte GmbH. The newsletter cannot replace individual legal advice. BINDER GRÖSSWANG Rechtsanwälte GmbH assumes no liability of any kind for the content and accuracy of the newsletter.