With the government predicting swine flu to worsen this autumn, directors should prepare for the impact it could have on their businesses
If your business is reliant on having sufficient staff numbers to provide services to your customers, or if you have certain key staff members who are essential in respect of certain contracts, you are at risk if a severe outbreak of the virus takes hold. Productivity could be affected by staff taking time off work to recuperate from the virus, by staff members keeping away for fear of contracting the virus and staff members who have been in contact with the virus going into quarantine. This could lead to a situation where your company is unable to perform under your customer's contracts and consequently at risk from the customer claiming against you for breach of contract.
Businesses should take this opportunity to review their contracts and, in particular, the Force Majeure terms in those contracts. Force Majeure is a standard clause that entitles a party to suspend performance of its obligations in the case of events outside of its control. Such provisions may entitle the company to suspend the performance of its obligations up to a certain length of time without incurring liability for breach of contract. It should be noted that the event must make performance of the contract impossible, not just more difficult.
Force Majeure clauses vary from contract to contract and must be checked to ensure that the specific event, in this case pandemic flu, is covered. The absence of such correctly drafted provisions could result in a business finding itself having to continue to comply with its obligations even though it does not have enough manpower to do so, or unable to perform and subsequently facing a substantial breach of contract claim.
If the contract does contain a Force Majeure term, the supplier should review it carefully to determine if it contains further obligations, such as informing the customer of the Force Majeure event and its intention to suspend services within a certain period of time. The clause may also oblige the supplier to take reasonable steps to mitigate the consequences of the Force Majeure event, such as engaging additional temporary staff. It may also entitle the customer to terminate the contract if the Force Majeure event continues beyond a certain period of time.
On the flip side, customers should look at their own supply chains and consider whether any of their suppliers could be at risk of ceasing or reducing supply. They should review the contracts with such suppliers to determine if there is a risk of the supplier suspending services under a Force Majeure clause. Even if such a clause does not exist, the supplier may be forced to cease or dramatically reduce supply, which could leave the customer in a difficult situation, particularly if it is then unable to supply its own customers. If the customer can claim for damages against the supplier, this may not compensate the customer for all of its losses and the disruption to its business. In any event, the supplier may not be in a financial position to pay damages.
Other measures customers can undertake to reduce their risk include approaching suppliers to discuss contingency plans in the event of a severe outbreak. If necessary, contracts can be amended now to oblige the supplier to follow a suitable contingency plan. If a customer has exclusive agreements with its suppliers, it may wish to renegotiate these to enable it to use other suppliers. If a customer is reliant on a small number of suppliers, it may also be worth considering expanding the network to spread the risk.
Kelvin Balmont is a senior associate at Clarke Willmott LLP
Posted 29 July 2009 : Director.co.uk
