As the novel coronavirus (COVID-19) pandemic causes health and social impacts on a previously almost unfathomable scale, for businesses too it is a bewildering and overwhelming time. Social distancing and other governmental measures to preserve health and safety, and slow the spread of the virus, are causing immediate and profound adverse economic effects for enterprises of all sizes.
This Emergency Guide seeks to address some key commercial legal issues for Australian businesses, with particular focus on NSW. It does not seek to cover the Government stimuli packages in response to the crisis.
The guide has been prepared on a fast-track basis to help Australian businesses grapple with a many-faced and complex health, social and economic environment.
Below we cover:
A. GENERAL LEGAL
B. SOCIAL DISTANCING MEASURES AND OTHER RESTRICTIONS
C. BUSINESS CONTRACTS
D. EMPLOYMENT
E. OTHER MATTERS
On 30 January 2020 the World Health Organization (WHO) declared the outbreak a Public Health Emergency of International Concern
(PHEIC) with respect to the novel coronavirus (now known as COVID-19). This is the 6th time WHO has declared a PHEIC since the International Health Regulations came into force in 2005.
For more information, see: https://www.who.int/emergencies/diseases/novel-coronavirus-2019
In Australia, ACT, Victoria, South Australia and Western Australia have all declared a State of Emergency with respect to COVID-19. This means that the relevant government has increased powers to enact controls and penalties in the public interest.
The national response to the COVID-19 epidemic is being led by the newly formed National Cabinet. Created at the Friday Council of Australian Government (COAG) meeting in March 2020, the “wartime” National Cabinet is charged with to co-ordinating and delivering a consistent national response to COVID-19. It is comprised of the nation’s first ministers – the Prime Minister, the State Premiers and the Territory leaders. It consists of five Labor and four Liberal members.
Cabinet status has also been given to two key co-ordinating arrangements – the chief medical officers group, known as the Australian Health Protection Principals Committee (AHPPC), and the National Co-ordinating Measure (NCM). The NCM operationalises the National Communicable Disease Plan and is managed through the Department of Home Affairs’ Crisis Coordination Centre (CCC). The CCC in turns co-ordinates the federal, states and territory whole-of-government responses to non-health issues related to COVID-19.
On 13 March 2020, leaders signed the ‘National Partnership Agreement on COVID-19 Response’, a 50-50 shared funding deal between the Commonwealth and the states and territories to provide the Australian health system the capacity to assess, diagnose and treat people with coronavirus in a way that minimises the spread of the virus in the community and protects the most vulnerable.
As part of the deal, the Commonwealth will deliver an immediate $100 million advance payment for the health system to the states and territories.
E.g. How can the Government force my restaurant to close?
Further to the meetings of the National Cabinet, State and Territory Governments have begun issuing orders under the relevant state public health legislation.
In NSW, under section 7 of the Public Health Act 2010 (NSW) (‘Public Health Act’), the Health Minister may take any action or make any Orders considered necessary to deal with general public health risks and the possible consequences.
Examples of Orders issued by the Minster so far include the immediate cancellation of outdoor gatherings of more than 500 people, and indoor gatherings of more than 100 people under s 7 of the Public Health Act. However, this is changing almost daily.
These include measures, some of which have been enacted in NSW by Orders under section 7 of the Public Health Act:
As at midnight on 30 March:
Restricted Services are services which have had their operations restricted in NSW under section 7 of the Public Health Act These have been defined by the NSW Premier as:
As at 25 March
There are also currently restrictions around other activities including:
As at 30 March:
Essential Services are services which have been identified by the NSW Premier as ‘essential to society’ and not to be subject to the restrictions that apply to Restricted Services. These have been defined as:
E.g. We sell furniture or clothing
The NSW Premier has advised that if your business is not listed as either an Essential Service or a Restricted Service, you may continue to operate on an unrestricted basis. For example, shopping centres remain open.
However, it is still recommended that businesses allow employees to work from home where possible to ensure social distancing is respected (if so, make sure employees complete a working from home self-assessment to to make sure that their work environment is safe and appropriate).
This rule requires there to be four square metres of space for each person on the premises.
The four-square metre rule does not apply to Essential Gatherings (discussed below – including office buildings).
These are activities that are regarded as essential to the functioning and wellbeing of the country. They include:
These are not subject to the rules that apply to Non-Essential Gatherings discussed below.
On 20 March 2020 the NSW Minister for Health and Medical Research, Brad Hazzard MP, made an Order under section 7 of the Public Health Act 2010 (NSW) to prohibit:
Under the Order, Non-Essential Gatherings are suspended (until midnight on 18 June 2020) to reduce the risk of spreading coronavirus (COVID-19) and to give both businesses and people time to fully understand social distancing requirements.
As at 30 March 2020, additional rules have been applied to non-essential gatherings, most notably that they cannot exceed two people.
For example, if we cannot retail fashion garments, can we terminate our wholesale agreement to buy fabric?
There is currently no blanket right under Australian common law for a purchaser to stop paying under a contract because a public emergency such as COVID-19 has occurred.
The right to terminate will depend on:
These matters are discussed below in this Emergency Guide.
Yes, provided your current supply contract is not on an exclusive basis, or has been terminated. If you have entered into an exclusive arrangement to acquire products or services, and the agreement has not been terminated, you should vary the existing agreement to remove exclusivity.
In complex contracting situations you may also need the co-operation of the existing supplier to hand over or migrate services to the new supplier. If your existing contract does not contemplate this, you may be able to negotiate a co-operative arrangement between you, the old supplier and the new supplier.
Is the coronavirus an ‘act of God’?
Force Majeure clauses contemplate that certain circumstances may prevent the performance of contractual obligations, and provide a framework by which the affected party can be excused.
Such events are acts beyond a party’s reasonable control, such as so-called ‘acts of God’ (e.g. bushfires) or acts of humans (e.g. war, terrorism or strikes).
The party seeking to rely on the Force Majeure clause will need to show that the coronavirus pandemic was ‘not reasonably contemplated’ by the parties when entering into the contract and that COVID-19 has caused the performance of the contractual obligations to be beyond the party’s reasonable control’.
Also note that some Force Majeure clauses will expressly exclude the obligation to pay money from the operation of the Force Majeure clause.
Careful analysis of the wording of the specific language of the Force Majeure clause is required.
Yes, you can terminate provided that the contract unambiguously states that you can terminate a contract without having to assign a reason (such as breach by or insolvency of the other party).
The enforceability of such a clause will depend on whether the drafting is clear and unambiguous, so that it can be validly effected.
You also need to take care to issue the termination or suspension notice validly under the process outlined in the contract, or it may not be binding.
If there is no right to terminate or suspend the contract ‘without cause’ or ‘for convenience’, consider whether there are other contractual grounds to terminate. Has the other party breached a clause or are they potentially insolvent? If so, the contract may allow you to terminate for an event of default.
However, if no termination rights exist in the contract, you should take advice from a lawyer as to whether you can fall back on your general rights under the common law. Such common law termination rights can arise where there has been:
The renunciation or repudiation of the contract by the other party.
E.g. a Restricted Service supplying goods has been ordered to close.
If it has become “impossible” to perform the contract, the legal doctrine of “frustration” may apply:
‘…whenever the law recognises that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.’[1]
Typically, the party seeking to claim their performance has been ‘frustrated’ needs to show that:
Legislation in NSW states that where a contract is frustrated and the whole or part of the performance to be given by a party has been received before the time of frustration, the performing party shall be paid an amount equal to the value of the performed obligations.
Courts have not typically found frustration where performance is merely postponed. Also, issues such as severe weather or a shortage of materials have not usually been found to reach the necessary threshold.
The sole remedy available for frustration is the automatic termination of the contract from the moment the frustrating event occurs. This means that anything that happened before termination remains valid, but from the moment of frustration, neither party is contractually bound to perform the contract further.
You should exercise caution in terminating contracts on the basis of frustration. If a Court does not find that the occurrence constitutes a frustration event, the party who has terminated may be found to have repudiated the agreement and be liable for damages.
E.g. a Restricted Service supplies goods to another Restricted Service and both need to close.
Yes. In the extraordinary circumstances presented by COVID-19, it is possible both parties may wish to be released from their contractual obligations. In these circumstances, the parties should communicate openly and in good faith, and document a contract variation or a termination and release agreement.
Care needs to be taken to avoid triggering repudiation or other breach of the contract. We recommend that you take legal advice before signalling to the other side that you cannot fulfil the contract.
E.g. where we are a Restricted Service that has been ordered to close and cannot supply
You should consult the terms and conditions of the contract. Does it provide for termination if it is illegal to proceed with the contract?
In any event, it may be that performing the contract is illegal or unenforceable. Generally, courts will not assist parties seeking to enforce an illegal contract, and such illegality will render the contract void. However, this is qualified by complexity. For example, is the illegal aspect essential to the bargain between the parties, and should the counterparty be deprived of the benefit of the contract?[2]
Specific legal advice should be sought.
E.g. a PR event to launch a swimwear brand
First, consult the terms and conditions of the event agreement. Does it provide for termination for convenience or Force Majeure? Does it have a clause that says that it will terminate if it is illegal to proceed with the event?
Companies are subject to requirements under the Australian Consumer Law (ACL), which generally requires companies to provide refunds in the event of a cancellation (even if the terms and conditions stipulate otherwise).
Further, where an event is cancelled as a result of COVID-19, the ACCC has issued guidance that patrons should receive ‘a refund or other remedy, such as a credit note or voucher, in most circumstances’.[3]
It is important to note that the ACL applies not just to contracts with consumers, but to business contracts with a value of less than $40,000.
Care needs to be taken to avoid triggering repudiation or other breach of the contract. You should take legal advice before signalling to the other side that you want to terminate the contract, even where it as a result of a legal requirement.
The answer to this depends on whether the work stoppage is the result of a cause for which the employer “cannot reasonably be held responsible”.
If this is the case, subject to the employer having an enterprise agreement or a contract of employment that provides for this situation, under section 524 of the Fair Work Act (Cth) the employee can be stood down without pay for the period of the stoppage.
This would include where a business is temporarily required to cease its operations due to government orders. If so, the employer has a right to stand down employees that cannot usefully be employed as a result.
However slightly less clear is where the Government has issued a closure order in respect of some businesses, but not others. See the social distancing sections of this Guide.
Whether a particular employee can be usefully employed is a question of fact to be determined having regard to the circumstances. As a practical matter, can the employee work from home? What if there has been no forced closure, or where work could conceivably be performed from home, but the slowdown has reduced demand for the products or services of the business?
Also note that under section 524(2), an employer may not stand down an employee under s.524 of the Fair Work Act if the employee’s enterprise agreement, or a contract of employment, provides for this. The terms may also include additional requirements that an employer must meet before standing down an employee (for example requirements relating to consultation or notice).
Instead of standing down an employee, the employer may agree that they should take paid or unpaid leave (section 525 of the Fair Work Act.
If the “stand down” rules above do not apply, unilaterally changing work hours or remuneration for permanent employees could constitute redundancy. Caution is advised. As an alternative to this, reductions in hours or salary should be by agreement between the employer and employee.
During the GFC many employers negotiated arrangements with full-time staff to work part-time or made agreements to utilise leave.
Work Health and Safety (WHS) and Occupational Health and Safety (OHS) legislation requires employers to provide and maintain a healthy and safe working environment. This would include appropriate measures to try and avoid the spread of COVID-19.
Guidelines should be clearly communicated to all staff, such as:
Failing to comply with a workplace health and safety duty is a category 3 offence, attracting fines of up to $500,000 for corporations and $50,000 individuals.
COVID-19 was declared an insurance catastrophe from 12 March 2020 by the Insurance Council of Australia (ICA).
Generally speaking, typical commercial insurance and business interruption policies may not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19.
However, you should contact your insurance company or broker on an urgent basis, and have your insurance policies legally reviewed.
The Government is currently issuing orders under the relevant state public health legislation.
On 22 March 2020, in response to the CVOD-19 pandemic, the Australian government announced a “safety net” reform package, consisting of a range of measures intended to lessen the threat of businesses being pushed businesses into insolvency and winding up as a result of the virus and its effects. The key elements of the package are:
These proposed interim measure changes do not yet have legal effect. Amendments to the Corporations Act and other legislation will be necessary to give effect to the changes. No Bill has been released, however it is anticipated that legislation will be introduced urgently and with some degree of retrospective application. Bipartisan support will be required in Parliament for these amendments.
As companies enter into unprecedented territory as a result of COVID-19, it is important to take measures to mitigate future losses.
Here is a quick checklist:
Take legal advice on your position. This includes how to communicate with counterparties, to ensure you don’t inadvertently breach the contract or relevant law, or create unintended adverse outcomes, such as repudiating the contract and opening yourself to damages.
This Emergency Guide has been prepared on an expedited basis for Australian businesses. Given the scale of the issue, it is not intended to be, and cannot be, comprehensive, nor do we guarantee its accuracy or completeness, especially given the speed with which the legal and regulatory environment is evolving. You should not hesitate to seek legal advice about your specific legal situation from qualified lawyers before relying on this guide.
Do not hesitate to contact us if you require advice about your business in light of the coronavirus pandemic. We have programs to quickly assess the legal fitness of your business, and make immediate and cost-effective recommendations.
The government is yet to announce measures that support commercial landlords.
Otherwise, Australia’s big four banks are introducing measures to ease financial difficulties caused by COVID-19. This includes mortgage and loan repayment relief measures for homeowners and business owners respectively. However, Australian banks have not yet implemented measures to support landlords of commercial leases.
As at 30 March, National Cabinet has agreed to a moratorium on evictions over the next six months for commercial tenancies in financial distress who are unable to meet their commitments due to the impact of coronavirus.
Commercial tenants, landlords and financial institutions have been encouraged to sit down together to find a way through to ensure that businesses can survive. Scott Morrison has stated that ‘landlords and tenants [need to] sit down and come up with arrangements that enable them to get through this crisis so on the other side the landlord has a tenant which is a business that can pay rent, and the business is a business that can re-emerge on the other side of this and be able to go on and employ people’
This Emergency Guide has been prepared on an expedited basis for Australian businesses. Given the scale of the issue, it is not intended to be, and cannot be, comprehensive, nor do we guarantee its accuracy or completeness, especially given the speed with which the legal and regulatory environment is evolving. It will be updated and new versions issued as the pandemic unfolds.
Please contact us if you require advice about your business in light of the pandemic. We have programs to quickly assess the your situation, and make immediate and cost-effective recommendations.
Stay well.
This article is part of our “law in the time of corona” series of business law articles.
[1] https://www.accc.gov.au/consumers/consumer-rights-guarantees/covid-19-coronavirus-information-for-consumers
[2] REW08 Projects Pty Ltd v PNC Lifestyle Investments PTY LTD [2017] NSWCA 269 [23 October 2017].
[3] David Contractors Ltd v Fareham UDC [1956] (Lord Radcliffe) cited in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
