Commercial and legal risks that businesses are likely to face during this period

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Pandemic redefines the commercial and legal risk landscape

We are more than 60 days into the national lockdown and the number of infections in South Africa now exceeds 24 000. And we have only just transitioned from a situation where only essential service providers were permitted to operate, to a slightly softer lockdown under level 3 of the country’s coronavirus alert system. Businesses operating during these dynamic and uncertain times face serious commercial and legal risks.

One must wind the clocks back to World War II to find a time when businesses faced more disruption than presently. Business owners face macro risks related to the long term sustainability of their businesses, and legal risks associated with their ability to perform in terms of the various contracts and obligations they have. We are hard at work finding ways to mitigate the issues we have identified, learning valuable lessons in how to adjust for them; but there are many issues we may not have thought of.

An unimaginable crisis
When the government imposed a general lockdown, we entered a situation that almost no one would have thought possible. The decision caught us completely off guard. There is almost no insurance for this type of event, given that it is not caused by normal damage events such as a fire or a flood. Lockdown is not something that is mentioned in any of the usual extensions. This event is so unusual and rare that we never imagined it could happen.

A company with a strong business disaster management plan is better able to respond in a crisis such as this. It is usually too late to consider how you can provide ongoing services to clients after you enter the crisis because you face the risk of panic setting in and indecision and negativity taking over.

The difficulty in foreseeing this type of event is evidenced by the reaction of local companies to the goings-on in China, pre-lockdown. We watched with morbid fascination as the Chinese government tackled the coronavirus by restricting business activity, but few local companies sought solutions for when they might suffer a similar fate.

Fiddling while lockdown loomed
Laptops were not being urgently stockpiled. Meetings were not being hastily arranged to allow staff to consider the appropriate protocols. Questions about how staff would work from home and how they would keep productivity and morale high were not asked. Nor did businesses consider how they could assist clients with digital and electronic solutions to soften the pending blow. Even fewer considered plans that would allow their business to function when staff were unable to travel between provinces, or even within major cities.

The way to manage unforeseen risks is to have plans in place before a full-scale disaster strikes. You must make sure that the right insurance, if available, is taken out, even if slightly more expensive, to make sure there is sufficient cash flow within the business. And businesses should design products and services that can be used in crisis situations, and even benefit from them.

Look at Zoom and Microsoft Teams and the myriad cloud-capable providers that have not only survived lockdown; but thrived in this environment. Businesses that are not prepared for crisis risk entering a period when the sustainability of that business is quickly under threat.

Questions about force majeure
Legally one needs to have agreements in place that can at least mitigate some of the challenges that the current environment presents. Critical clauses that allow for non-performance in the case of force majeure would be a must, failing which the party that you contracted with would be able to claim against you for not honouring the contract.

Force majeure means that an act of nature has made the performance under the contract either difficult, or expensive, or impossible, depending on the wording of the clause. It would have the effect of suspending obligations under the contract until such time as it is again possible to perform. Without such a clause, South African contract law would oblige contracting parties to perform unless two criteria were met:

  • It is physically impossible to perform in terms of the contract; and
  • Impossibility must be unavoidable by a reasonable person.
  • This means that it must be impossible to perform, not just difficult or expensive, and that the facts that created impossibility were not brought about by one’s own conduct, but by an actual external act that one had no control of.

    In the case of a government lockdown in response to the virus, the second point would be satisfied, but not necessarily the first. That is why it is critical that any business inserts proper force majeure clauses into their contracts and agreements so that the issue of impossibility is not something the courts will decide. The contract should be worded in such a way to allow the business to regulate the issues within its own risk parameters.

    Facing catastrophic losses
    Without the protection of a force majeure clause, your suppliers may demand performance even though your finances are tight. If it is possible for you to make a payment, the court would find that performance is possible. The risk of having to make payments in the face of the current lockdown would be catastrophic for many businesses, especially if they are not able to sell supplies, or if they face collection issues themselves.

    Other risks would include labour risks and not complying with the labour law when dealing with staff in these difficult times. A business considering retrenchment proceedings or offering unpaid leave until the situation improves must make sure that they comply with labour law, failing which further expense may be incurred in committing unfair labour practices.

    Finally, there is a legal risk in not complying with the many regulations that have been gazetted since the beginning of the lockdown, which became effective on 27 March 2020. If performing essential services, businesses would need to obtain both the essential services certificate and issue the correct permits to their staff, to operate.

    Laws under lockdown levels
    A firm must understand what constitutes essential services and comply fully with all the regulations applicable to workspaces being open etc. Regulations are being eased as the lockdown eases further, introducing new obligations and reintroducing the risk of not dealing with staff, clients, and suppliers in terms of the current regulations and common law.

    Where there is a crisis, there are opportunities. If businesses plan for and mitigate their risks properly, they will have little competition in their respective markets. And if they innovate within the strict regulations, they will be able to get to the other end of the coronavirus journey relatively unscathed.

    This has been a historic event, and although it is difficult to predict when, it will almost certainly come to an end. The last risk is met by having an exit strategy to implement once we emerge from this crisis, so as not to be left behind by the competition.

    by Danny Joffe : Chairman of Klapton’s Ethics, Nominations & Remuneration Committee