By: Sarah Zomaya
At the time of posting, the coronavirus has surpassed SARS with a death toll of over 3,000 people. International governments and organizations are working together to curb this outbreak, but businesses also have a duty and commercial interest to help. Companies have the ability to impact their employees’ behavior, in addition to their high-level communications infrastructure, putting companies in a strong position to respond to an outbreak.
Business owners should not wait and hope the coronavirus doesn’t spread in the U.S., rather business owners need to prepare and figure out how to operate during a time of outbreak. “Companies that protect their assets, employees and communities will be rewarded with increased economic resilience, competitive market advantages and greater social relevance…companies that respond slowly will find themselves increasingly at odds with customers, investors and workers.” This post will cover managing employees, maintaining a clean supply chain, and avoiding contract liability due to the disease outbreak.
In an increasingly globalized market, many companies have employees travelling or living in foreign countries. Companies should ban or limit travel to and from China and other infected areas. For example, Amazon has banned employee travel to and from China and is requiring any employees recently in affected regions to work from home for two weeks before returning to the office. Apple has similarly restricted travel and is deep-cleaning stores and shutting down retail stores and corporate headquarters. Google and Microsoft are requiring all employees in China to telecommute. Similar to these tech giants, all companies should develop a plan to protect employees during disease outbreak.
To further prepare and protect employees, companies should compile information on the coronavirus to educate employees and help them avoid infection. Make sure the information is from a credible source (like this CDC guide), because of the growing amount of misinformation on social media. Additional suggestions for protecting employees include giving out free masks and sanitizers and increasing the office cleaning schedule.
Next, disease outbreaks can have a significant impact on global supply chains. And with no end in sight, companies should map out their supply chains to determine whether they are at risk. Foxconn, the world’s largest electronics manufacturer and largest iPhone supplier, was forced to shut down production. If Foxconn can’t assemble the iPhones, Apple can’t sell them. Many predict Apple will report reduced sales and production, explaining, “[t]he supply chain of these high value consumer electronics products is so tight and efficient that disruptions are felt quickly, and there’s limited ability to catch up once you get in the hole.”
Additionally, companies are typically familiar with immediate suppliers, but the locations and operations of any second-tier suppliers and subcontractors may be less clear. Understanding how disease outbreak can impact your supply chain is crucial, and that includes how the outbreak affects your customers. While there is a very low risk of infection in the U.S., the fear of infection could reduce foot traffic, decreasing retail and entertainment sales. One more important note, you cannot catch the coronavirus when receiving packages or mail from China.
Finally, what liability will a business have if it cannot perform a contract due to the disease outbreak? Fortunately, most boilerplate contract language includes a force majeure clause, excluding liability for events beyond a party’s reasonable control. If a business cannot perform a contract due to the coronavirus, the force majeure clause will likely kick in and shield the business from any liability. Most force majeure clauses likely will not specify protection in the event of a pandemic, epidemic, or disease outbreak. However, most force majeure clauses do cover natural disasters, “acts of God,” government acts, or “other circumstances beyond the parties’ control.” Such provisions would likely apply if the coronavirus causes a party to breach a contract.
If a party invokes the force majeure clause, they typically must show no alternative means of performance were available. If a party breaches a contract because it is more expensive or less convenient due to the outbreak, the force majeure provision likely will not apply. For example, during the SARS outbreak in 2003 some courts found the force majeure clause did not apply because the government acts only partially impacted the business and did not “directly or radically trigger the non-fulfillment.”
As a practical note, parties should also confirm the notice requirements under the contract are met with regard to the force majeure clause.
Absent a force majeure clause there is no implied protection, but a party may assert the doctrine of “frustration” and avoid liability. Frustration allows a party to set aside a contract if an unforeseen event makes the contract impossible to perform, at no fault of either party. The standard for a frustration argument is high and requires more than a contract becoming too expensive or difficult to perform.
Notably, the China Council for the Promotion of International Trade (CCPIT) is providing “force majeure certificates” to businesses in China. If a business in China can prove it is unable to perform a contract due to the coronavirus, the CCPIT will issue a force majeure certificate, absolving the breaching party from liability.
While we hope we never have to experience the effects of a disease outbreak, businesses cannot risk doing nothing. The occurrence of epidemic events has been on the rise over the past 30 years and with our globalized society, that number is only expected to grow.
“Business leaders who are aware of the changing nature of commercial infectious disease threats are better able to position their organizations to avoid exposure, respond effectively and support global health security for the good of communities.”
Sarah Zomaya, at the time of this post, is a third-year law student at Penn State’s Dickinson Law. Following graduation, Sarah will practice corporate transactional law at Morris, Nichols, Arsht & Tunnell. Sarah is currently serving as Vice President of the Business Law Society and as a Comments Editor for the Dickinson Law Review.
Sources:
https://www.nytimes.com/2020/01/29/business/china-coronavirus-economy.html
https://www.natlawreview.com/article/coronavirus-and-force-majeure
https://www.entrepreneur.com/article/345759
