The business impact of Covid-19

This is an extract of a longer article providing legal guidance on COVID-19, including Employment.

Directors’ duties in relation to employees

It’s worth remembering that whilst directors owe their duties to the company, not employees, the Companies Act 2006 requires that a director act in the way they consider most likely to promote the success of the company for the benefit of its members as a whole. In doing so, the director must have regard to the interests of the company’s employees. For example, were directors to be reckless as to the impact of Covid-19, there is a risk of liability.

As a practical matter, the board of a company will want to be able to demonstrate that it has considered an appropriate response to Covid-19 issues were they to impact on employees – for example, what should be done if an employee chooses to visit a high-risk area. Ensuring that these points have been considered at the appropriate level will assist in demonstrating that the directors have discharged their duties.

If I am a listed company, do I have to disclose anything?

Companies will need to monitor developments and ensure they are providing up-to-date and appropriate disclosures to shareholders both generally and when preparing year-end reports.

The Financial Reporting Council has published guidance for companies on disclosure of risks and other reporting consequences arising from Covid-19. Their guidance currently states that companies should consider whether to refer to the possible impact of Covid-19 on their business in their reporting of principal risks and uncertainties. Where mitigating actions can be taken, these should also be reported alongside the description of the risk itself.

Article 17(1) of the Market Abuse Regulations and the Disclosure Guidance in DTR2 may also be relevant, as will the usual “significant effect on price” and “reasonable investor” tests. There may well be issues in not being able to ascertain the extent of the impact on trading, and advice may need to be sought as to how long an announcement can be delayed (which is often a difficult judgement), should a trading update or other statement be required.

Am I liable under a specific contract?

This will depend on the terms of the contract. If there is a force majeure clause, the question will be whether Covid-19 is covered. Words such as “disease” and “epidemic” will be helpful. Failing that, phrases such as “act of God”, or “supervening illegality” (such as inability to move due to a lockdown) will assist, but as ever the devil is in the detail and specific facts.

Absent force majeure, parties may seek to rely on frustration of the contract. Whilst any instance will be fact-specific, proving frustration is notoriously difficult, and examples where contracts were held not to be frustrated include where the event should have been foreseen (arguably given previous outbreaks), and where an alternative method of performance is possible. That said, cancellation of an expected event (as may be the case for sporting events or conferences) has in the past successfully been used as a reason to argue that a contract has been frustrated.

What if I am organising a conference or sporting event? Should I cancel it?

There have been plenty of examples of events outside the UK being delayed or cancelled. Liability can arise for an organising company under tortious principles at common law and/or statute if an outbreak is traced to an event organised by that company and, broadly, the company fails to exercise the appropriate duty of care. Clearly, context will be extremely important. First and foremost being an understanding of likely attendees. As things stand currently, in most cases it is difficult to see liability arising for an event held in the United Kingdom.

Do I have insurance cover?

There may be insurance cover available for some of the impacts on business. These are likely to be complex issues and will require specialist consideration of the available insurance policies. Some of the more common areas of concern are set out below.

• Employees and Directors – there may be Employers Liability cover, and for any potential breach of an obligation on the part of Directors, there may be cover under a suitable Directors & Officers Policy
• Travel – where travel has been impacted, a distinction will need to be drawn between travel to destinations where there is FCO advice not to travel and a more general reluctance to travel due to the situation as a whole. Where there is advice not to travel, a key factor will be the date on which the warning against travel was made. When reviewing any travel policy, care will need to be taken to consider whether there are any extensions or exclusions dealing with ‘epidemics’
• Cancellation / Business Interruption – where an event has been cancelled, there may be event cancellation and/or disruption insurance available. Care will need to be taken in reviewing any exclusions or extensions relating to infectious diseases. It will be difficult to buy new cover now given that Covid-19 will almost certainly be specifically excluded

Perhaps the largest impact on business will be loss of profit suffered by both global and local businesses e.g. in the hospitality industry where the absence of travellers will affect businesses like airlines, restaurants, hotels etc. Although it is possible that cover will be available under Business Interruption and Contingent Business Interruption policies, there may be limitations. Although these are commonly only applicable where loss is consequent on damage to property that is not always the case. But it is probable that there will be exclusions dealing with disease-related losses.

Businesses are also likely to have difficulties with supply chain arrangements, which may be covered by Contingent Business Interruption cover even where the loss is as a result of a problem with a supplier or customer rather than within the business itself.

This article is restricted to matters under the laws of England and Wales, and should not be relied on in place of detailed advice on any specific issue.