Coronavirus outbreak – effects on workplaces and commercial contracts

The coronavirus (COVID-19) outbreak is increasingly affecting everyday life and the operation of businesses. The situation is changing by the day and so are the measures imposed on the workplace, affecting operations and the performance of commercial contracts. In this newsletter we address topics related to policies and measures imposed in the workplace in order to cope with the coronavirus, and some implications of the coronavirus outbreak for interpretation of commercial contracts.

Part 1 – Workplace policies and measures

Most important actions to take now

The employer should arrange for, and urge all employees to take, all preventive measures as recommended by the Norwegian Institute of Public Health (Folkehelseinstituttet) at all times to avoid exposure to or infection by the coronavirus.

In the current extraordinary situation, several measures are available for employers to protect the workforce and prevent diffusion of the coronavirus in the business, in particular with basis in the employer’s right to manage the employees. This could potentially include temporary changes in work task and work place. Business specific measures could also be agreed with employees.

The employers could limit the presence of people in the office and agree home-office/remote work with employees who can reasonably work from home in a limited period of time. In addition, the employer could require the employees to inform about their past travels, business or private, to areas which are or become listed by the Norwegian Institute of Public Health as risk areas, in order to monitor and assess the risks.

Travel policies and restrictions

The employer may prohibit all business-related travels in general or to areas with widespread transmission of the coronavirus, and areas that reasonably might become such risk areas, until further notice. Other business-related travels, whether national or international, should in any event be limited to what is absolutely necessary.

An employer may generally not prohibit employees from private travels domestic or international, but the seriousness of the situation could allow for exceptional instructions also in this regard, especially to key personnel whose presence or absence is critical to the business operations. This could also apply to private attendance to events, including sport events, concerts, festivals or any other event with many attendees or crowded places. It should be clearly stated that if an employee becomes quarantined because of non-compliance with instructions given by the employer or carelessness, may run a risk of not being entitled to salary payments from the employer while absent from work, or having to take holidays during the period of quarantine or home isolation.

Seminars, conferences, events and crowded places etc.

The employer may prohibit business-related attendance to seminars, conferences, external meetings with many attendees or other crowded places in until further notice. Moreover, the employer may impose that special consideration shall be made with regard to business-related presence at public transport, airports, etc.

Temporary lay-offs: amendment regulations likely to be introduced 13 March 2020

An employer may temporary lay-off (Nw: permittere) personnel in whole or part due to a unpredicted incident like the outbreak of the coronavirus. The Norwegian Government has notified that it intends to propose immediate measures in order to mitigate the adverse effects the coronavirus has on Norwegian businesses. A Proposition to the Norwegian Parliament is expected to be submitted on Friday 13 March covering several fields, including possibly a reduction of the number of days employers are obliged to pay salary to employees that are temporary laid-off. For the time being the employer financed period is 15 days from the lay-off is effectuated.

Part 2 – Interpretation of commercial contracts

Agreed contractual mechanisms for cancellation, termination etc.

Many contracts have provisions which give the parties the right to terminate the contract, cancel a delivery etc., with a certain notice, sometimes subject to a legitimate cause. The coronavirus outbreak may be such a cause. The effects of termination/cancellation will often also be provided for in the contract. If no such provisions have been agreed, the starting point is that the parties remain bound by the contract and have to perform the contract in accordance with its terms. In some cases, a delivery may be cancelled in accordance with the cancellation right prescribed by customary law, but such cancellation will as a starting point require the cancelling party to compensate the other party for its loss of profit.

Force majeure as extraordinary basis for non-performance

In addition to agreed mechanism for cancellation, termination etc., the party affected by the coronavirus outbreak may also invoke force majeure as basis for exemption from performing its obligations under the contract.

What is force majeure?

Force majeure is French for “superior force” and is used to describe events that make the performance of the contract impossible or unreasonably burdensome. Typical force majeure events include war, riots, natural disasters, blockades etc., but whether such events constitute force majeure in relation to a specific contract must always be assessed individually in each case. Statutory regulation of such events can be found in the Norwegian Sale of Goods Act (1988) sections 27, 40 and 57, where the conditions are that the event must have been an obstacle beyond the party’s control that could not reasonably have been taken into account at the time of the agreement or been avoided after the agreement was entered into. A force majeure clause is usually also found in commercial contracts, but the threshold for an event to be categorised as a force majeure event will vary according to the wording of such clauses (“impossible”, “outside the party’s control”, “unreasonable” etc.).

The Norwegian Supreme Court has stated that the decisive factors with regards to whether a circumstance constitutes a force majeure event is that the event was unexpected and extraordinary, that it was caused by external forces and that the event was beyond the control of the parties (HR-2016-1235-A). It is generally assumed that extensive epidemics can constitute a force majeure event, depending on the circumstances.

Possible force majeure scenarios

With regard to the corona virus, one can imagine different scenarios on how it may affect the performance of the contract. As mentioned under Part 1 above, the employer may impose restrictions on its own employees, which may or may not be required or advised by governmental authorities. If employees contract the virus, a question that may arise is whether the performing party was particularly vulnerable due to insufficient planning and organisation of its work, and/or is obliged to hire new people in order to make up for loss of production. And if the production altogether has to be shut down, does the performing party have to buy substitute goods or engage subcontractors to not be in breach of contract? Sometimes the parties have agreed that subcontracting is not allowed, or that the goods must be made by specific persons. Will the performing party be allowed to subcontract or buy substitute goods should the corona virus prevent personal performance? Or what if border restrictions either prevents delivery of the goods, or delivery of raw material to make the goods? All these scenarios need to be assessed based on the regulation in the contract and the particular circumstances in each case.

Obligations or restrictions imposed by governmental authorities, or voluntary efforts in accordance with governmental advice, which impairs the performance of the contract are generally more likely to constitute a force majeure event than efforts or restrictions imposed by the performing party by its own initiative as a preventative measure. In the latter situation, it is more difficult to argue that the non-performance or delay was beyond the control of the party or could not be overcome.

Effects of force majeure

The effects of a force majeure event will vary with the obligation and hindrance in question, and the specific contract. Sometimes, especially in building contracts or other production and manufacturing contracts, the delivery time may be suspended for as long as the force majeure event is in effect.In other cases, the performing party will be exempted from a duty to deliver altogether and will not be liable for damages.

However, other adverse effects will often also be associated with a force majeure situation. Will a supplier have to refund prepaid amounts to its customer if the supplier is unable to make the agreed delivery? May a party cancel a delivery from a sub-supplier which it in principle is able to receive, but which it no longer is able to utilise because of a force majeure situation? Such issues are, as a starting point, not subject to the rules on force majeure. Instead, the solution must be found in the contract or in other sets of rules in the background law.

In should also be noted that the clear starting point is that a party which halts its delivery due to force majeure, even if the party is exempt from liability for damages, cannot require payment until the delivery is actually made, unless otherwise agreed. Difficult issues of contract interpretation may arise in case of agreed amortisation schedules and provisions on prepayment during manufacturing. Customary law can only to a certain extent solve the various legal issues arising in such scenarios, and the solution must be found after an interpretation of each individual contract.

Other possible contractual grounds for non-performance or adjustments to the contract

In addition to ordinary contractual mechanisms for cancellation etc., and force majeure as basis for extraordinary non-performance, the coronavirus outbreak may also give basis to invoke other contractual provisions, depending on the contract and the circumstances in each case.

  • Customary rules on frustration and revision of unfair contract terms may, in principle, provide for agreed terms to be adjusted or set aside, but there is a high threshold for these rules to apply.
  • Measures imposed by governmental entities related to the coronavirus outbreak may trigger “change of law” clauses, entitling the party to terminate or renegotiate the contract where laws and regulations are changed.
  • The contract may include renegotiation clauses, often requiring that there has been a material adverse change in either party’s general situation or circumstances under which it operates.

Entry into of new commercial contracts under the current circumstances

In order to invoke consequences of the coronavirus outbreak as a legitimate reason for not performing under a given a contract, it is generally required that the outbreak was unexpected and unforeseeable at the time of entry into contract. When entering into new contracts under the current circumstances, this condition is unlikely to be fulfilled should the performance be hindered by events related to the coronavirus outbreak. It may thus be advisable for the parties to explicitly set out in the contract their expectations with respect to the further development of the coronavirus outbreak, and the consequences of deviations from such expectations.

For contracts with public counterparties, however, the situation will often be more complex. Public contracting authorities are usually required to enter into contracts in accordance with the rules on public procurement, meaning that the contract must be awarded through a tender procedure or other competitive procedure. In most instances, these procedures do not allow bidders to negotiate the contract terms presented by the public counterparty as part of the tender procedure, creating a “take it or leave it” situation. In particular, reservations against provisions on liability and allocation of risk will often require the public contracting authorities to reject the bid from a tender procedure. The best course of action is therefore usually to convince the public contracting authorities to amend the terms (with effect for all bidders) before the deadline for submitting bids, in order to ensure that all potential bidders are able to submit competitive bids. If that is not possible, each potential bidder must carefully consider whether they can accept the inherent risk based on the proposed contract terms. They should also take into account that they will be bound by their bids for a potential significant period of time while the public contracting authorities are conducting the procedure, assessing the bids and making its award decision.

 

 

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