With COVID-19 at the forefront of the global agenda, the ThinkHouse team has brought together eight experts from across the firm for a virtual panel Q&A covering the key aspects in-house counsel needs to consider in relation to COVID-19.
Our speakers have discussed a variety of issues that in-house counsel are likely to be facing currently. We have detailed the start time in the recording of each topic for those of you who might want to start with a particular issue.'
Please note this virtual panel was recorded prior to the updated guidance on the Job Retention Scheme being announced. Please view our latest employment insight for the most up-to-date information.
Michael Luckman: Well welcome to potentially the most unusual ThinkHouse special to date, you may be seeing before you a rogues gallery of experts pulled together to address some of the many issues falling out from the impact of COVID-19 and the government's messages to address it. From this you will learn two things, the depth to which the current environment is impacting people and business and the sparkling range of wall paper and wall colourings that our lawyers possess, only be grateful that you cannot see their pyjamas. Fingers crossed you have got a dangerous mix here of lawyers and technology so that is a dangerous combination so please be patient if the odd wheel falls off here and there.
COVID-19 is a deeply concerning crisis of the highest order. People's health and lives are at stake and against that backdrop legal seminars might appear pretty secondary.& I am proud to say that Gowling WLG is playing a role on the front line of the crisis. Working with the engineering consortium which is increasing ventilator equipment production and advising the government on several key initiatives.
Equally COVID-19 is likely to have a major and at least medium term impact on most of our livelihoods and how businesses support their people and are managed through the crisis will determine the safe and secure futures of those people and wider society.
As lawyers we are right at the front of the careering bus as businesses seem to address and manage the risks to their and their people's futures. From securing safe and stable employment to maintaining and securing supply chains and preventing financial crisis and ensuring financial survival as we pull out of this. As Sufi wisdom has it "this too shall pass".
Right now the biggest facing many businesses is how to manage their people in this difficult economic environment. Usually a businesses most valued asset, it is equally also its most costly and businesses have to face a tricky balancing act between care and concern for their employees lives and livelihoods and hard-headed business calls to ensure there is business in which to work in the future.
These are the issues which our employment partner, Jonathan Chamberlain, is having to grapple with. Its relevance to business highlighted by the fact that our webinar on the topic of furloughing, there is a new word, on Monday and over 400 attendees followed up by over 200 questions.
So Jonathan, first question to you please. As the government retention scheme is right at the top of employer's agendas, how does it work?
Jonathan Chamberlain: I think the basic outline of the scheme is now reasonably well understood. For businesses that make employees redundant, we will come on to talk about which employees in a moment. Then instead of a redundancy the government will repay to employers, or reimburse employers up to 80 percent of the employee's wages, they will add on top of that the employer's national insurance contributions, they will also add on top of that the auto-enrolment pension contribution level. The idea being that the employees continue to have money in their pockets, they continue to remain employed so that when the upturn comes as Michael says, this too shall pass, then they can swiftly be rehired. So this is a social measure protecting society as much as it is individual business.
Now, we do not actually yet know the full detail of how the scheme is going to work. We know that the amount of wages, salary remuneration the government will pay is 80 percent capped at two and a half thousand pounds, plus the other elements that I have talked about, but a lot of the detail that we would normally expect to see in regulation just is not there. We have some fairly extensive guidance from HMRC and it is really interesting that this is being administered by HMRC and I will come back to that, I hope, later in the presentation. It is very hard for us to give definitive answers as to what this is definitely going to look like in practice, but the outline I think is reasonably well understood.
Michael: What then are the key things that employers must do to take advantage of the scheme?
Jonathan: Well if I can start off by answering that question in principle if you like because I think it really helps to drive understanding of what is going on here. A lot of the questions that we are getting are about the implications of this for the employment relationship and it is really important to understand that the government has not said very much about the implications of this with the employment relationship at all. This is if you like, a grand tax rebate scheme. Employers will have to apply through a HMRC portal to be able to get their money back. It is being administered through the PAYE system which is why it is crucial to understand that in order to make a claim in respect of an employment that you have put on furlough that somebody for whom you have got a PAYE code up and running before 28 February this year, which is the cut-off point, new hires after that date will not count, and because this is being administered through PAYE it is very easy for the Revenue to see whether someone is a new hire or not.
Now there is an exception to that, and this is a practical point, the first practical point that I want to make which is that if you have already made somebody redundant because of the impact of COVID-19 on your business, after 28 February but before this scheme was announced then you can rehire them specifically for the purpose of putting them back on furlough if you moved early, if you like, you could still take advantage of this scheme. What you cannot do is bring in new hires and then put them straight on furlough. That is not going to work.
So that is my first practical point which is 28 February is a real key date here. My second one is this, if we were to go to an employee and say, hi, we are not going to give you any work to do, you will remain an employee but we are now only going to pay you what we can claim back from the government which means 80 percent of your remuneration up to a cap of two thousand five hundred a month, then in normal circumstances an employee would turn around and tell us where to stick it and/or they would bring a claim for unlawful deduction from wages because most employers will not have the unilateral right to furlough people. As Michael said, that is becoming a verb now. The government has said nothing on this, they are leaving it to employers and employees either to invoke contractual terms which allow you to put people on furlough, and there are some manufacturers who will have those terms in their contract, but most people will not. Or, it is a question of reaching agreement with the individual employee.
Now, it is fair to say that most employees are pretty receptive to this idea at the moment because the alternative to furlough is redundancy and the whole point of the scheme is to avoid redundancies. However, it is not without complications. There are some sectors for example where there are labour shortages and it is anticipated there will be labour shortages when the recovery comes back, where employees are demanding that the employer make up their full pay before they will consent to going on furlough.
So there are a lot of complicated issues to work there, and that means the key practical point is to record the terms of the agreement that you have reached with the employee in a document that you can later point to when the dust settles down on this and we anticipate that HMRC will start challenging some of these furlough arrangements, they will look to see if they were genuine, they will look to see that for example the employee was not simply being rehired in a temporary role or coming back through an agency and it will be important for the employer to demonstrate that this was a clean arrangement that everybody understood that the employee was being put on furlough, they were to do no work for the employer whilst they were on furlough and whilst they were free to volunteer, that is about as far as it can go. There is a question mark about whether people on furlough can work for other employers, but that would require looking at individual circumstances.
So I think those are the key practical points, this applies to anybody who was on payroll before 28 February, nothing in this effects the underlying employment relationship, the rules, such as they are, are silent on that and that it is important to record the agreement with the employees in writing so we can refer to it later on.
Michael: You know very much in the eye of the storm at the moment Jonathan, what other employment issues are coming up in practice?
Jonathan: Well one of the ones I have just mentioned was employees are wondering if they can go and work for anybody else. Because of course in all of this, the supermarkets are still hiring. The delivery services are still hiring, the NHS is still hiring and what we are saying is that the HMRC guidance is not clear, it does not expressly prohibit that as an issue, but, or as an opportunity rather, that the furlough agreement should at the very least provide that the employee tells their employer when it is that they are getting work with somebody or the employer has a right of veto over that, and that right of veto extends to being able to say I am sorry you have got to leave that new job or lose your furlough pay, if when the regulations come out they make it clearer that this is prohibited. So again it comes back to making sure that that agreement is water tight.
Other issues that are coming up are around holiday. Where the rules are that holiday continues to accrue whilst people are on furlough. So that could mean that if somebody is furloughed for several months they have accrued a lot of holiday and they come back to work and they want to take that immediately, which is going to place a strain on the business at that time, or they want to be paid in lieu for it and the rules on that are changing to allow carry over for up to two years, so there could be big bills being built up.
Again, if employers do not operate the furlough properly, you can require employees to take holiday during furlough but you have to jump through certain hoops to be able to do that.
So those are the kind of things that are coming up, the sort of practical implications of working this out, the kind of questions that people are having, what does this mean for me.
Michael: Thank you Jonathan. Health and safety is obviously a big issue not only in the context of employees but also, actually the other people we are responsible for potentially are self-employed consultants we work with. Andrew Litchfield, you are our health and safety specialist partner. What legal liabilities in that field are there coming out as a result of COVID-19?
Andrew Litchfield: I think the first point to make Michael is that there is no new law as a result of the current situation we are in.& What we do have though of course, is a big new risk, which none of us knew too much about even a few weeks ago, which of course needs to be managed and people need to be protected from.
We revert back I think, to our basic overarching duty which sits on every employer, which is to ensure so far as is reasonably practicable that its employees and anyone affected by what it does, are not exposed to risk to their health and safety. So that is the Health and Safety at Work Act from 1974 and it is the basic overarching duty.
Risk is a possibility of danger so every employer has a duty to ensure so far as reasonably practicable that people are not exposed to the possibility of danger. Which of course is a challenge for everybody and for every business in the current climate. You cannot contract out of that duty and breaching it is a criminal offence by the employer.
So there are two potential liabilities that you could face as an employer. Firstly you could breach that overarching duty and commit a criminal offence as an employer, so criminal liability, and second, you could face a claim for damages by an employee or by an individual based on that duty but also in negligence that you have exposed them to the virus negligently and they are entitled to damages as a result.
But there are two other, I think, perhaps even more immediate reasons to manage the risks arising from the virus. The first is that you could suffer some brand damage. Get this wrong, and we have seen some stories emerging over the last couple of weeks or so already of certain businesses being accused of mismanaging the risk, forcing people to work in circumstances which they are considered to be unsafe and suffering brand damage and social media adverse publicity as a result.
There is a big brand driver I think to get this right and to be seen to be perceived as managing it correctly and then of course, obviously, it is just the right thing to do is it not, to keep your people safe and to keep society safe and to stop the spread of the virus any further than it absolutely needs to do.
Michael: So, what practical steps then Andrew, can businesses take to manage these liabilities?
Andrew: So in health and safety law all roads very quickly lead to risk assessments. It is a statutory requirement to do a risk assessment anyway in relation to any of the risks that we might face in the workplace and it is even more important to think about that from a COVID-19 perspective.
That requires an employer to evaluate the likelihood of that risk coming about, the consequences of it if it does come about, as against the cost of eliminating it. That is of course what everybody has been doing, the government is doing and what all employers have been doing over the last few weeks in any event. It is the reason why are we are all working from home. It is the reason why we are being instructed about social distancing, about PPE, all of these things arise as a result of risk assessments which are being done all of us all the time. Perhaps more formally by employers. It does not matter whether you are working from home as we are or whether you are still in a protected occupation so you are still working in the workplace. The importance of the risk assessment as a result of the COVID-19 risk is critical.
That will spew out measures to take to manage the risk and it needs to be done task by task, individual by individual, job by job to make sure that everything that could be being done is being done and all the appropriate measures are being taken whatever they are in relation to the specific job in question.
One thing that is worth mentioning I think that we are obviously all currently preoccupied, rightly, with COVID-19 and taking measures to protect ourselves from the risks arising from COVID-19, but the risk assessment also needs to consider whether the protection measures arising from COVID-19 themselves might give rise to other risks which they also need to be managed. So we are all working from home for example, we need to be thinking about the display screen risks, the workstation risks which might be resulting because of the fact that we are all now working in slightly different circumstances and away from our normal place of work and that could apply on a construction site just as easily as working from home, so do a risk assessment, keep those risk assessments valid and make sure that they consider other risks arising from the protection measures that COVID is generating.
Michael: This is obviously the situation now, will the steps be likely to change as the position evolves?
Andrew: Yes, for sure, if you think back, if we all think back to what we were doing two, three, four weeks ago and what we are doing today it is a huge change and we are bound to learn more about the nature of the COVID-19 risks over the coming weeks, whether that is the result of further testing, whether it is the result of learning whether if you have had it if you are immune for the foreseeable future, whether we learn about how effective PPE is and how effective the social distancing is.
So, we will learn more, it is a statutory requirement to keep those risks assessments under review at all times and as the risk evolves as we learn more about the risk it is even more important to review those risk assessments and then take steps arising from the reviewed risk assessments.
So I think we can expect everything to keep changing, everything to be kept under review, everything, even perhaps optimistically as we start to lift restrictions, what effect will they have the risk assessments need to take account of relaxing the rules just as much as they have about tightening the rules in the first place.
Michael: Thank you very much Andrew, I mean the term risk is being used a lot and of course every time you use the term risk I always think of insurance so I would like to turn to Sam Holland who is our insurance specialist partner.
What are your top tips really for clients to, when they are checking to see whether they are covered for loses for COVID-19 events?
Samantha Holland: So the first thing that clients need to be doing is digging out their policy documents as soon as possible, if necessary checking with their insurance broker to see what cover they may have and then they need to be reviewing those policy wordings really carefully and where appropriate think about getting a legal review on whether or not they are covered, it is not always that clear.
If they are in any doubt at all I would always advise that they make a notification to their insurers even if it is on a precautionary basis. They need to check that they are following any specific requirements in the policy as to the form of that notification and how they need to be making it. Then they will have protected their possession while they investigate their claim further.
And the other thing they should be doing is gathering evidence in support of their claim, working alongside their brokers and their lawyers. If they can quantify their claim earlier that might support an early interim payment from their insurers and then that will lead to an important and early injection of cash into the business at such a critical time.
Michael: Because a number of businesses have been required to close down as a result of what is going on, will they be covered under business interruption policies?
Samantha: Unfortunately Michael in the vast majority of cases possibly not. So typically business interruption cover under a UK market standard policy is only triggered by physical damage to the premises and even in circumstances where there are traces of the virus found on your premises that is unlikely to constitute physical damage for the purposes of your insurance policy.
Having said that some businesses will have purchased extensions to cover and there are two specific extensions that may help. They are firstly a denial of access cover and secondly an extension to cover for a notifiable or communicable disease, but it is really important to stress that cover will depend on the precise wording of your extensions.
So dealing with the denial of access clause first. That will typically provide cover for business interruption losses where a business is prevented by an order by the police or a government authority to close down your premises which prevents you accessing your premises. They are usually in conjunction with some sort of threat to public health or a danger to life. So it might apply here, but those clauses were generally intended to apply to very localised incidents, so a typical example would be a terrorist attack rather than a global pandemic on this scale So insurers are going to push back.
The other thing that insurers might say is well you can continue to access your premises you just cannot trade from them. So the clause is not triggered.
The second clause I mentioned was the extension to cover for notifiable or communicable disease. Now that will provide you with cover for your business interruption loss where you have had to close down your premises as a result of a disease. However some policies will generally have a list of specified diseases which are covered and obviously COVID-19 being a novel disease that is not likely to be in there.
Other policies will cover a notifiable disease and the good news is that COVID-19 has been a notifiable disease since 5 March this year. But other policies may also require you to show that someone has actually contracted the virus on your premises or within a certain distance of your premises, so that is another hurdle you may need to overcome.
But in all honesty even if a client is able to get a claim home under those extensions to cover the limits are generally much lower. The excesses are higher and they are still going to have to prove their loss and that is another challenge for our clients unfortunately.
Michael: Well Sam I am not going to let you off that hook actually, you have teed that up nicely. How is it that clients are actually to prove their losses?
Samantha: Well it is not going to be straightforward. So some clients will be looking to claim their financial loss as a result of the impact COVID-19 has had on their business, so that will typically include loss of profit for example.
Any statutory claim is going to have to satisfy the 'but for' test which was set down by the High Court in the Orient Express case after Hurricane Katrina. So that means that the business has to show that it would have suffered the loss but for the closure of its premises and not, for example, as a result of the issues affecting the wider area. So in other words it is going to have to compare its actual position with the position it would have been in if its premises were open but in circumstances where the rest of the UK population is socially distancing themselves from everybody else and staying at home. You can already see Michael how that is going to be quite difficult to do.
Other clients, landlords in particular are looking to see if they are covered for loss of rent. That will depend in part on the wording of their lease. If a tenant has the benefit of a rent setter clause which applies in a non-damage scenario such as this. Then it is possible that they will be covered if they can get their claim home under their extensions to cover.
But if a landlord has just decided to grant a rent concession to their tenants then that is not likely to be covered because it is not a fortuitous loss, it is just the landlord deliberately deciding not to enforce their strict legal rights under the lease.
That then leaves us a really big grey area which is what happens if your tenant just refuses to pay their rent and they are fighting their inability to access the premises as a result of the COVID-19 restrictions as the reason for that. It is possible that some landlords might be covered for that scenario but that will depend on the particular circumstances of each case and again on their precise policy wording. We can expect to see quite a lot of disputes I think around that area coming up the tracks.
Michael: Presumably clients may also be facing third party claims, what is the position there?
Samantha: Yes, that is right, so most UK businesses will be maintaining public liability cover which, as you know, is the policy that will provide them with cover in the event of third party claims, personal injury or property damage. So that is the right policy to turn to for example if one of your customers alleges that they became ill and exposed to the coronavirus on your premises.
I sound a bit like a stuck record, but cover again depends on the precise wording of your policy. Usually bodily injury is defined in those policies as including diseases but there might be limited cover for things like emotional distress for example, if a customer alleges they are exposed to the virus on your premises and is subsequently found not to have developed COVID-19 as a result.
Michael: I am just left wondering whether the modern alternative of a stuck record is a buffering download, I do not know [laughing]. How does client protect their position when it is coming up for renewal?
Samantha: Well we are already seeing the impact of this. A lot of clients who are renewing their policies on 1 April are facing some challenging discussions with their insurers. So clients can in short expect some push back. There is already talk of property damage and business interruption insurers trying to modify their denial of access clauses to make it clear that they are intended to respond to global pandemics along these lines and you can expect your liability insurers to try and exclude cover for COVID-19 claims.
In addition clients can expect to be asked more questions on renewal around COVID-19 issues, particularly those that are operating in the higher risk sectors, so health for example or retail. One important point that I wanted to make was if a client has directors and officers liability cover which is the policy that provides it and its senior management with cover for claims made against its directors and officers, they will need to check that cover is up to date and robust as possible. Bearing in mind that the decision that their management are making now around these issues may well ultimately be criticised at a later date by shareholders or regulators or insolvency practitioners and I know we will talk a little bit about director's duties later on in this session.
But in summary clients need to use their broker wisely to leverage the best possible cover they can. It will be difficult if there is a whole market approach and perhaps think about getting a lawyer to give their wording a once over and make sure they understand what it is covering them for.
Michael: Thank you Sam. The life blood of most of our businesses in operational terms are the multitude of large and small contracts that keep their businesses ticking over day to day. Regulator members and attendees of ThinkHouse will know the famous double act now of David Lowe and Andrew Smith who bite large chunks out of each other as they debate contractual issues, usually on stage, I just wonder whether now they are a bit more remote they might be a bit safer from each other now.
So Andrew and David and presumably now with COVID-19 all contractual bets are off are they not?
Andrew Smith: Thank you Michael, I do not know how it appears on your screen but I for the first time in my life can look down on David Lowe which is always an advantage I think.
So the way we are going to deal with this is I am going to deal with it from the disputes and the risks side and David is going to deal with it from the contractual drafting side.
So in answer to your question, I do not think all contractual bets are off, these are difficult times, but as with all English Law contracts, you have got to read the contract, it is what the contract says. You need to look at what your obligations are and then fit them to the facts. So it will not be one size fits all.
David Lowe: We have to remember that the court cases going back for several centuries have always dealt with difficult situations whether it is the closure of the Suez Canal or the commencement of World War I, there are cases that arise from that, contracts still exist, still apply, still enforceable and Andrew says you just have to read the terms of them.
Michael: So when will parties be relieved of their obligations under the contract?
Andrew: Well for COVID-19 there are three basic ways. One would be frustration the other would be force majeure and the third is supervening illegality. So frustration is the concept where performance of the contract has been rendered impossible or goes to the heart of the bargain by a supervening event. Force majeure is a contractual term where it is contemplated by the parties that a supervening event will have occurred and the contract will provide for what then happens in those circumstances and then third, the supervening illegality, that is kind of how it sounds which is a law has been passed that renders performance of the contract illegal.
David: What is interesting about COVID-19 is normally as a person who drafts contracts I will be saying do not rely on supervening illegality, because who knows what that is going to be, do not rely on frustration because as you will hear from us that is typically a very narrow and high bar, normally you would rely on a force majeure clause and if your contract has a force majeure clause you then read that carefully and that is because of the challenges with frustration and illegality that is why most contracts have a force majeure clause in it.
What is interesting about COVID-19 is it is so massive, its impact that actually it is more likely to cause truly frustrating or truly supervening illegality in a contract and therefore might actually be an option, unlike normal force majeure.
Michael: Is there any debate over whether COVID-19 is a force majeure event?
Andrew: There will be quite a lot of debate but it all depends on the wording of the force majeure clause. Some clauses in certain contracts do actually specifically relate to pandemics and endemics so they actually do envisage such an event. Others talk about such things as acts of God which normally most people think of as sort of geographical events such as flood or lightning strikes or whatever, but in theory at least, although I am not aware of anything that has truly tested it, the work at a more microscopic level might be an act of God.
David: So you need to read your clause. Some clauses, many clauses, typically refer to something outside the reasonable control of the parties, but some clauses just have a specific list of events. It might list terrorism but it might not list epidemics, in which case there is going to be immediately a dispute as to whether COVID-19 would count.
Also we need to bear in mind that actually COVID-19 itself is rarely actually the event that has had an impact. We are all working from home not because we all have COVID-19, we are all working at home because of the measures introduced by the government and the risks that have arisen. So that is the actual event and so you have to ask yourself what has actually caused this force majeure event, what has actually stopped me providing these services. Is that a force majeure? So if you are a retailer and the issue is about whether or not you can open your shop, well that is going to be clear because you look at the government legislation that says that if you are non-essential shop you have to close, therefore that event of shop closure is the force majeure event that happens to have been caused by COVID-19.
Michael: So as a contract drafter and as a contract breaker if I can term you that Andrew, what practical steps can clients take to establish the positions they want to adopt?
Andrew: I think from a breaker point of view I think that the answer to that question is if you think you have a situation where you think that there has been a force majeure event or a frustration of the contract the first thing to do is look at the facts, what, as David was just saying, it is not COVID-19 itself, what has caused you to be unable to perform your contract and that is going to be key and then you compare that with the contract.So a bit like Sam was saying you need to get the policy out, you need to get the contract out and you need to give it a really good look. Compare what is preventing you with what the contract says.
Of course you should just see whether the government has made your performance of the contract illegal because ironically, although very tough, that makes it easier to prove, and then when you have got your contract out should look to see if there is a force majeure clause, not all contracts have them, some do. If it does it means that frustration is less likely to be relied upon because the way the courts will look at it the parties have turned their mind to a supervening event and they have set out what they will do when one occurs. If there is no force majeure clause then you are going to have to rely upon frustration if you can. I would say this, you need to get some legal advice, this is a big call, to say to the other contracting party that you cannot perform the contract, you need to be certain of the reasons why and you need to set it out as best you can because the consequences of just doing it half-heartedly can be quite large in terms of breach of contract.
David:And on reading that clause be aware that many clauses have express requirements to notify immediately or quickly, so you cannot just sit around, the longer you leave it the more challenging it is going to be to call a force majeure. There is an implied obligation on the parties whatever your clause says, to use reasonable endeavours to overcome the force majeure, so you cannot just go ha-ha, sit on your hands and do nothing for the next three months, you need to actually think about what could you do to overcome it.
The other thing to watch out for is it is not just about the force majeure clause. At the moment I am finding leaping too quickly to go to their force majeure clauses in their contracts and not stopping to think about what about the rest of the contract. For example, if you have a contract under which you pay somebody to make deliveries for you, as and when you ask them too, well if you do not need them to make any deliveries then you probably do not need to pay them anything. So it does not really matter if it is a force majeure or not, you did not have a contractual obligation to pay them anyway.
So I am encouraging people to look at the payment mechanism, look at the cool off, look at the termination clauses, do you need to go down an argument as to whether or not it is a force majeure or not and weigh-up the alternatives.
Michael:And this question, probably for David alone, though I will check in with you Andy afterwards. If you were drafting a force majeure clause now, specifically from scratch, what lessons might you have learned from what is happening now and how it is playing out to get the perfect clause drafted for the future?
David:Well actually, there is learning from hindsight and then actually about what you do about COVID-19 now we know it is out in the world, so there are two separate issues there.
Lessons learned, I think this emphasises why a well drafted force majeure clause that uses phrases like reasonable control sets out when you should notify, sets out the consequences, those clauses are working well. OK there is a bit of debate about exactly what they mean but they are well structured and they provide good signposts to everyone involved.
The clauses that are not working well are the ones that are one line long. Do not refer to reasonable control, do not really tell you what happens next, worst of all are those where there are no force majeure clauses at all because then you are in to this debate about well is it frustration and leafing out old, very old cases to work out if it is frustration what that means. I mean there are plenty of disputes going to be coming on those contracts that do not have force majeure clauses and I think people will be glad of those that have got decent force majeure clauses will be glad that at least they are not having those arguments, they will be having a narrower set of arguments.
Michael: Andy anything to add?
Andrew: Well unusually for me, no. I think David has said it all and even though I want to take lumps out of him, I do not think I can.
Michael: [laughs] maybe that is something for later, I do not know.
David: Michael, can I just add one thing?
Michael: You many add one thing David!
David: In drafting a force majeure clause today a really massive thing that has now changed is you cannot today say that COVID-19 is something you did not reasonably anticipate, and therefore if you are entering a contract today you cannot then enter the contract today and then call force majeure tomorrow and go oh this COVID-19 stopped me. The courts are using force majeure clauses to protect people against things they could not reasonably anticipate.
So if you are entering a contract today, you are going to have to specifically deal with the impact of COVID-19 and we are starting to see various people starting to draft wording about if in the course of their contract if COVID-19 impacts and what that means. The problem is that the clauses I have seen so far remind me very much of actually the Brexit clauses we saw in that they are very broad, very vague, very sweeping and you sort of read them and go well this allows the supplier to at any point in the next 12 months to decide to stop supplying and have no liability at all.
So I think we have got some distance to go before we settle on what are fair clauses dealing with COVID-19 risk in future contracts.
Michael: Both of you have probably seen quite a few examples of how all these arguments are playing outAre there any you can share, sparing their names of course?
Andrew: Well there have been a number of different cases in relation to both force majeure and frustration. Indeed, as David said, Brexit has been the last sort of in thing for that kind of debate. Instead of going through the facts of every one of the cases, I can tell you what the result were which is pretty much every case of the last few years has ended with the court saying that there was no force majeure event and/or no frustration and one of the reasons for that is as Sam was talking about, a sort of but for test, so there may well have been an event but it did not cause the failure to perform the contract.
The courts are very keen at the moment, well have been up until COVID-19 I would say, to keep the parties in the contract to their bargain. I have to say, I do think, as David hinted at earlier, we are in a very different world now, as I am sure we are all feeling, but in terms of the courts and the way it looks at frustration and force majeure, it might have breathed the new life into these concepts and I think the court might be a little bit more flexible in the future than it has been up until now.
David: Some of the examples I have seen, one of them is a client who plays a small part in a large industrial process, if they do not do their part the industrial process will shut down and cost £14m a day and there is a gang of eight people working shifts day and night to do this small job, and so the question was asked of me well what happens if they all have to stay at home due COVID-19?
To which my reaction was well there is nothing with COVID-19 preventing you from sending people to this factory to do this task, yes they are going to need to be taking advice from somebody like Andrew Litchfield about how they can do that safely in the current environment and social distancing and so forth, but you can still send people there.
COVID-19 yes it is having an impact on people but it is not at the point where the whole population is unable to leave their houses, so I am saying I think you are going to struggle to find that a force majeure has happened and actually therefore client you need to take steps to work out how you can manage the risk. If you think there is a chance that 25 percent of these people might not be able to get to work then maybe you need to think about recruiting extra people so that you can keep this process going, especially because of the huge liabilities that can arise.
So that is on a supply side. On the customer side, again seeing lots of people claiming force majeure when is it really. So I have got a client with a major company with a back office outsourcing arrangement with a major supplier, the people involved are all household names.The supplier could quite easily do the tasks required from home. OK there is a bit of a mobilisation of equipping people to work from home, but they have not really covered themselves in glory, in fact it is the customer who supplied the laptops to allow the people to work from home so that service could continue.
So we are already getting into a bit of scrap about whether the business continuity plan that the suppliers are contractually obliged to have and to apply, has actually been applied and whether this is actually a force majeure event because you could have anticipated this and you certainly should not take days and days and days to flip over to home working, and so I am sure people like Andrew Smith are going to be dealing with those kind of disputes for some time.
I think overall the impression I get is that force majeure is harder to show than people realise it is and I think we are, as Andrew has just said, I think the courts are going to be quite careful to keep force majeure or frustration as a narrow concept going forward and people might well be surprised in the disputes as they cannot use it as a kind of get out of jail free card that some people think it is.
Michael: I have been very pleasantly surprised at how resilient certainly our own systems have been with the remote working where we have gone from 10 miles to 110 miles almost overnight and my sense is that a number of, well most of our clients actually are doing a really good job at keeping on business as usual in terms of certainly the sort of legal elements of their business where that kind of stuff can be done remotely but at some point at the end of any negotiation a contract needs to be signed of course, what thoughts have you got on how you can just get to that final hurdle in the race with the contract and get our contract signed off when offices are in lockdown.
David: Yeah actually I could have foretold that we were going to have force majeure questions, but I have to say I was not expecting the number of electronic signature questions and of course that makes sense, because all of a sudden people are working at home and are not in the office to do a wetting signature - or certainly not as easily.
So I am seeing a lot of questions about that, the good news is that under English law for normal contracts, just normal contracts not deeds, English law is very supportive of all kinds of ways of signing documents.
Firstly bear in mind that a normal common or garden contract actually does not need to be signed it. It is just that a signature is a nice bit of evidence to show that the parties have agreed to it, and so therefore you can be pretty relaxed within your corporate controls and that is the main issue so how do you control what is signed or committed to by your company in this virtual world, and so that might be using an online signing platform such as a DocuSign.
Or it might simply be carrying on signing, by printing off signing, scanning, back in or it might simply be an email going - I agree to this attached contract, everyone can find their own ways through how best to manage that risk in their organisation.
And of course people should ask themselves whether everything really needs signing.
I am talking about contracts, but of course many organisations have lots of pieces of paper that need signing.
Now is the time actually to challenge whether what does that, does it really need signing.
The tricky area are deeds, because there are various complicated and archaic rules about deeds and how that fits in an electronic world.
We are all at the moment internally debating a recent court case which was all about a badly executed deed where the court found the deed was not validly executed. There is no surprise on the facts that this deed was not binding, but what was alarming is some of the commentary from the judge which suggested that the standard Law Society guidance on signing deeds remotely may not be enforceable, and therefore people should, where they are signing deeds electronically, should seek specific advice as to whether they are effective the process they have. No, obviously most contracts are not deeds so that is a specialist area but it is one to keep an eye out for.
Michael: Well thank you David and Andrew for a quick canter through contracts.Of course another area where good process and form is important and COVID-19 causing some problems is corporate governance and so I would like to turn now to Charles Bond who is one of our corporate partners in London, I mean as an example, how does a company hold an AGM when the country is in lockdown.
Charles Bond: Hi Michael, yeah it is a good question and it has been asked quite a few times recently, partly because we are now moving in to the AGM season for public companies, most of them will have the year end at 31 December and have to hold their general meeting within six months thereafter.
So by the end of June so a lot of companies tend to have those around about now or certainly over the next couple of months so it is a problem for a lot of companies that they have been grappling with.
A lot of the various stakeholder groups have been putting out guidance so the picture is becoming a bit clearer but there seem to be three things that people can do depending on where they are in their AGM season.
If you haven't yet posted your AGM notice then it is probably worth delaying doing that until the picture is a little bit clearer, as I say you have got until the end of June to hold that meeting so people might want to just consider waiting and seeing what happens, there are a couple of issues with that partly because some companies might want to in this, although it sounds a bit strange in this environment to declare dividends, most companies are either deferring dividends or even cancelling interim dividends that may have been previously declared.
So that may not be such an issue but there are some companies out there who are still paying dividends and may want to do so not wait until June to do that.
The other issue is that companies are also cash constrained - as we would imagine at the moment and if they need to raise new funds - which we will come to a little bit later I hope - then in those circumstances, they need to have the relevant annual share authorities in place to do that, and so, if there is any risk that those authorities might expire in the near future then it is probably advisable that they have their general meeting to refresh that authority sooner rather than later, so that is one course of action is to delay your AGM.
If you have already sent out the notice of annual general meeting then you can, if the power is given to you in your article, to postpone that you can notify your shareholders that it is going to be postponed to another place and time.
Some companies though don't have the power to postpone in their articles so for those companies all they can do is actually adjourn the meeting at the time it is meant to be held that may be because nobody actually turns up there is an automatic adjournment provision in their articles or it may be that just two people turn up as a quorum on the steps of the building where the meeting is meant to happen and adjourn it to a later date and time and generally if you are going to adjourn it for more than say a month then you should be refreshing the notice to your shareholders.
So those are the three things that companies are all looking at at the moment.
If you do decide to go and hold the AGM then there are some obviously things to worry about, first of all the social distancing and the government guidelines that unless the business is absolutely necessary there should not be more than two people in a gathering clearly does not work for an AGM and I think most people take the view that attendance at an annual general meeting is not essential work, so most people who are going ahead with their general meetings are saying that there only will be two people present and that will normally qualify for a quorum under the provisions of the articles as long as one of them holds, well each of them holds shares either themselves or as a proxy for another shareholder and companies.
If people do attend, they can and do have the power to turn people away, so most companies who are holding their general meeting are now including a set of cautionary wording on the general meeting notes just explaining that people should not turn up to the meeting - they may not be allowed entry, and in fact most people are being persuaded to submit their proxy vote well in advance to make sure those are counted.
Some companies have also started looking at how you could deal with this rather than as a physical meeting, and so there has been a big debate about different types of meetings - hybrid meetings, for example, which are both physical and electronic meetings, whereby people can attend and vote electronically that is a hybrid meeting, or a purely virtual meeting where the whole meeting is done essentially online.
Many companies have the ability to have hybrid meetings in their articles but very few have the ability to have a virtual meetings, and that is partly because the law is a little bit unclear around that because the companies act says a company has to notify the place at which the meeting is being held and if you are having a virtual meeting then there is no specific place.
So all the commentators are saying that virtual meetings are probably at this stage are not permissible, but it may be that we have had some.
A couple of days ago, a recent announcement by the business secretary saying that they are looking at changing the legislation and it may be that they are going to introduce the concept of the virtual meeting to say that is indeed possible under the companies act.
Other companies are taking the view that they are going to have the meeting and there will just be two people present and that they will do a webcast of the meeting so people can at least tune in to it and hear it and potentially submit questions in advance to the chairman which he may be able to answer on that webcast. But again a lot of the commentators are saying this is a unusual situation, companies should, if they do hold their general meeting, think about other ways to engage with stakeholders later in the year when there is a possibility of doing so, and possibly having some alternative form or shareholder meeting later in the year. But whatever happens I think the current situation probably changed possibly for the good the way that general meetings are going to be held in the future.I think more and more people will be looking at more validity of online ways to hold their annual general meetings.
Michael: Presumably there are public company issues around filing accounts as well now.
Charles: Yes so there has been some flexibility there as well from the government generally main market listed companies have to get their accounts in four months after year end so there would be they would have to the end of April to do that.
It is clear from the guidance that has been issued by the FRC that there is going to be significant challenges with homeworking for auditors to sign off on those accounts in that type of timescale so there has been an additional two month extension for main market companies to get their filings done.
Companies on the junior market the A market, they generally have to get their accounts in within six months of year end and they have been given an initial three months to get their accounts in and so accordingly Companies House have also said they will now accept later filings at three months after the normal timescale but in each of those cases the company has to actually apply to the relevant authority for that extension although those extensions are being accepted on a fast track basis.
Michael: The world obviously or most of the world obviously now know about COVID-19 but what sort of announcements do you think that public companies and perhaps other companies need to be making about COVID-19.
Charles: I think, well clearly the world is aware of COVID now so a company does not have to announce anything about that in particular, but the normal rules apply.
So again the FCA have said that companies should be aware that they have to continue to comply with the market of use regulation if COVID is creating a significant impact on their business, or their results of operations then they do still have to announce that just as they would in a normal market environment so they do continue to have to comply with their normal disclosure obligations.
They have recognised of course that often those disclosures are determined by disclosure committees which are part of the board of directors of a public company and they may have a little more trouble getting together more frequently, but overall the pressure is still on companies to make sure they are making the correct announcement.
Some companies may be applying suspensions of their shares especially in such a volatile market but again the FCA had said they will only look at those in the kind of very rare instance that a suspension is required normally if there is an issue then it probably needs an announcement not a suspension and they also expect senior officers and directors to make sure they are making the correct announcements about dealings so persons discharging managerial responsibilities or PDMRs as they are called still have to continue making their announcement so to some extent it is business as usual for announcements by public companies.
Michael: You mentioned early on in your piece the need for businesses potentially to ring out for emergency at capital what plans should companies be making in that regard.
Charles: Yes well I think everyone is aware that there is a kind of global cash flow problem now and this is a little bit different I think from the financial crisis we had in 2007/8 which was more a systemic crisis so there is no doubt that companies with shortfall in capital will need to go to the market to raise more financing and we are already seeing that happening with the calls we are taking from companies about how they should best go about the structure they type of capital rise they should do.That very much depends upon timing and size of capital raise.
You will probably know that a company can go to the market on what is called a pre-emptive offer or a non pre-emptive offer pre-empt offer is where it goes and offers shares to all its existing shareholders on a proportionate basis to its existing holdings and a non pre-emptive one is where is just goes and seeks new investors and dis-applies thosepre-emptive rights.
A pre-emptive offer is good in some respects in that you can raise a lot of money for a pre-emptive issue and there are no specific caps on how much you can raise under the various rules that apply to public companies the trouble is that they are quite convoluted in the fact that for a rights issue for example you would probably have to call a shareholder meeting on 14 days' notice and you also have to publish a prospectus which gets approved by the FCA and then even once you have got the shareholder approval the offer period has to go for another up to 14 calendar days so you can imagine that is at least a month's work just to be able to get the approvals you need so a rights issue I think for the very large companies that are well capitalised will probably be the way they go and that is certainly what we saw after the last financial crisis there were probably three or four times as many pre-emptive rights issues that year than there had been in previous years there are alternative structures for example what are called open offers.
An open offer is similar to a rights issue but your shareholder who does not participate does not get the difference between the offer price and the subscription price, the lazy shareholder gets no rights unfortunately so our open offers are a little bit more aggressive and they are shorter in timetable as well they only need 14 days to conclude so those can be a little bit better but institutional shareholders will always prefer a rights issue and then on the non pre-emptive side there are straight placing so companies could go straight to the market and raise funds from new investors those are great but tend not to raise as much money to replace in and they do depend on the company having dis-applied the normal pre-emption rights.
In times of need if people really need money quickly there are ways to circumvent a normal placing and the pre-emptive issues with something called a cashbox placing which I will not go into in detail but it is just a way of issuing share for non-cash consideration and in those circumstances you do not have to apply the pre-emptive rights rules you basically set up a special purpose vehicle in Jersey and you issue shares for non-cash consideration. Those I think we will see a rise in and we are already aware having spoken to the off-shore lawyers that there are five or six instructions going around the city on those types of cashbox placings and then finally you can combine these types of issues and I think one of the structures will see them combined with is convertible debt. Convertible debt offering such as convertible bonds give companies quite a lot of flexibility to raise a large amount of money and you know offering a high coupon in today's very low interest environment can be attractive to investors and if you can also make sure that the conversion of the debt is not until kind of later in the year when share prices are more stable that may well be more attractive to the company as well
So I think all of those types of new share issuings or convertible issuings are going to be attractive each company will have to look at the various options and have to decide on its merits which is best for it but I think that probably the biggest issue will be getting to the market first because the limit, there is a finite market there for cash and in certain over crowded sectors like retail or aviation for example where companies really need that money I think it will be a very crowded market place so the quicker people get to market the better.
Michael: Thank you Charles, businesses all over are feeling stress in these environments and clearly the present situation presenting these challenges for most businesses. Julian one of our partner's and expert in restructuring how do directors ensure that they discharge their duties in the current circumstances.
Julian Pallett: Well thank you Michael the short answer to that is with great difficulty, directors, we hear that healthcare works are on the front line in fighting COVID-19 and of course they are but directors have an equally important job of keeping the world turning helping to minimise the damage to the economy, protect the livelihoods of their employees and keeping otherwise businesses intact so that they are still around after we get through this.
Directors are under a broad range of obligations and duties under all sorts of statutes and regulations.
We have touched on a few of those already this afternoon, probably enough to scare most directors and most directors may be thinking the easy way out is to resign but unfortunately that will not do the job because they are still under obligation to do the best for their companies and the problem really is that even in normal times there is a tension between the general duty of directors under the company directors act to promote the interests and success of the company for the benefit of its members generally, but also to take into account a number of other factors including the interest of suppliers and customers, employees and business relationships and in the long term affect their decisions so there is already an element mentioned in directors duties.
In addition in the current circumstances directors are going to have to form a very very careful balancing act as they are going to have to take some short term decisions about prioritising critical payments, minimising discretionary spends and protecting their workforce and so on which may have a potentially detrimental effect on the long term impact of the company's financial trading position and its finance.
The other problem we have got of course is that once insolvency of the company is in doubt or insolvency is possible and for that we should read insolvency is probable and you might say that most companies at the moment insolvency is certainly possible and almost certainly probably. The directors have an additional duty will overrides all the other ones I talked about which is to protect the interest of creditors. We then come to what I think is the central issue for directors at the current time is that the governments approach to this no doubt done with the best of intentions and admittedly it is all been done on the hoof because nobody has had to do this before and nobody has had to do it at this speed before and it is a sort of almost a schizophrenic approach to the problem.
The government has made big grand gestures about putting a lot of liquidity into the market in terms of support to companies, support to their employees on furlough, VAT and tax deferrals, rent holidays and things of this nature but at the same time they seem to be expecting a lot of companies to simply go into hibernation because they are having to close their doors, they are having to shut their premises and their staff are being told they can only go out if it is essential and all the rest of it and so we have this contrast between the government saying here is a load of liquidity so you can keep paying your liabilities as they fall due but on the other hand we want you to shut up shop and also we would like you still to be around in three months or six months' time and there is an inherent tension there so that creates a huge amount of problems for directors trying to navigate their way through this minefield of potentially conflicting duties.
Charles: The government has announced I think it is extension of the rules relating to wrongful trading and a moratorium for creditors is this going to help.
Julian: A bit but not a lot unfortunately the suspension first of all of the rules relating to wrongful trading well wrongful trading is a specific concept under the insolvency legislation which enable the Courts to pass some personal liability on the directors for the liabilities they incur in certain circumstances which sort of cuts across the principal of limited liability companies and the circumstances are where directors continue to trade at a time when they know or they ought to know - as this is always judged with the benefit of hindsight that the company has reached a point where there is no reasonable prospect of avoiding insolvency
Now in the current circumstances of course, it is probably the case that certainly with hindsight in six months' time, it is going to be possible to say that a good many companies have already reached the point where there is no reasonable prospect of avoiding insolvency.
So what they are saying is, do not worry about that. We will take away that Sword of Damocles around wrongful trading so do not worry about personal liability for carry-on trading and of course that chives with what I said earlier about the government wanting directors to try and find a way through this and whole businesses together where they can but - and this is the big but - they have not suspended any of the other rules, or talked about suspending any of the other rules relating to trading while insolvent.
So first of all, directors still can be personally - and indeed criminally liable, if they trade fraudulently and that is where they incur credit knowing that they will not be able to pay it, or completely recklessly without regard as to whether they can pay it or not.
Secondly, misfeasance? Breach of director's duties? They are still going to be liable for that and things like preferences, giving preference to certain creditors over others or transactions under value. All those rules will still apply. So the directors still need to be aware of their obligations and duties in relation to trading while insolvent or potentially insolvent and guard against falling into any of those other traps while they do so.
Moratoriums is a more difficult one. We already have the possibility of a moratorium under an administration, which prevents creditors taking action against a company when it is in administration. Clearly, at the moment, first of all the government does not want thousands or millions of companies to go into administration. They want companies to survive.
Secondly, actually from a practical point of view, it is going to be very difficult for insolvency practitioners to run many administrations?Getting staff out on the ground to man premises. To get control of records. To get control of business. It is going to be very very difficult. For some of the reasons we have already talked about today.
The moratorium that they are talking about now.There are two types of moratorium and in the case of both we yet have no real detail.
The first is a very specific moratorium for COVID reasons. Now the idea of this is that companies will be able to in some way file that they have gone into a moratorium to protect themselves against credital action in the short-term because of COVID-19.
That could be quite a useful tool because that will help this idea of putting companies into some kind of holding pattern for at least a few weeks or maybe two or three months or so whilst people find a way through this mess. We do not know the detail of that yet.
The second is a more formal kind of moratorium. Something short of administration which has been on the stocks for some time and the government is talking about bringing that forward now, but again we do not know all the detail and when that may happen. But again, it is quite difficult to envisage how, in the current circumstances, we could put thousands of companies in the UK into formal moratoriums with the way in which businesses are operating at the present time.
So it is very difficult at the moment to see quite how that will work.
Michael: So looking at the short term, if you were a director just focussing on carrying on business, what would be the key things you would be focussing on?
Julian: Well, I think there are a number of things directors can do just to get some structure to the way in which they respond to these very difficult circumstances and the rise to some of the challenges we have already talked about this afternoon.
The first thing is, absolutely stick to the principles of good governance. Hold regular board meetings and do not treat them as a mere formality. Make sure you have good collective decision making and base it on good, up-to-date factual evidence. Trading results, forecasts and make sure that that is reviewed continually and you review your decisions and update your decisions on the basis of the changing circumstances.
The next thing I think is really important is that directors must be aware of the available support, both in terms of the things on offer from the government - business interruption loan scheme, the liquidity support for larger companies, VAT and tax deferrals. The furlough scheme we talked about earlier. Rate holidays for business rates and things of that nature and various forms of grant.
Directors should really go out there and find out what is available and make sure they understand the terms and whether it is appropriate for their business. Also in terms of support, professional advice. I mean we would say this would we not. But actually, different companies have different degrees of internal capabilities to deal with something like this but in all cases it will not be wrong for directors to reach out and take appropriate support from lawyers, from accountants and other professionals to help them navigate through and make robust and responsible decisions.
Third thing is engage with stakeholders. I mentioned earlier that there has not been much intervention by the government to change rights, private rights in terms of contract. So things like leases, rent payments, cotractual payments - we have already talked earlier today about the problems under contract.
Engage with your stakeholders because it may well be that it is not in their interest not to reach agreement with you about deferring rents or deferring loan payments or reducing contributions to pension schemes in the short term. They may have a mutuality of interest in seeing the business survive. But in order to get to that point, you need to engage with them and make sure that you keep them on the same page so they go with you on the journey.
Insurance we talked about. Simon has talked a lot about insurance. Make sure you know where you are with your insurance. That it is up-to-date and that you have got your directors and officers insurance in place when you think about director's duties. That is clearly very important and then, I think the audit trail.Make sure you keep notes. Keep minutes of your meetings.
Keep notes in your decisions and the reasons why you take decisions that obviously the advice you take and all the rest of it, because inevitably a lot of this will be looked at some time in the future with the benefit of hindsight. And whilst I am pretty sure that the courts are not going to be taking directors who have acted honourably and properly in the interests of their stakeholders and employees and the wider community to task, they are going to be looking out for cases and sadly there will be cases, where people abuse the situation or act dishonestly and they will be looking out for that. So directors should keep the audit trail. Both in terms of formal board minutes but also notes, memorandums of meetings, decisions and so on.
Michael: For some businesses, if feels a bit specious to talk about the longer term, but is there anything directors ought to be thinking about now for the longer term?
Julian: Well, yes I think a number of things. Clearly we all hope to get through this and to come out the other end. At some point directors can be planning meaningfully for what that is going to look like. But as we go through this, I think first of all, directors should - as I mentioned earlier - keep things under constant review, keep adjusting their decisions, changing direction if necessary in response to changing circumstances. We have all seen things move very quickly in the last few weeks and none of us could have predicted three or four weeks ago, where we are today.
Secondly, do plan ahead based on what you know today. Based on the information we have got, the latest forecasts, the latest trading results, your latest cash forecasts. And also what you are able to agree with your third parties. Any deferrals and so on.
But do remember that if you defer tax, if you defer rent, defer VAT, it is going to catch up with you at some later point so you need to be planning ahead for that wave that is going to come later on which will hit liquidity. Even if you manage your liquidity now, you have got to be thinking about how you are going to be managing it in twelve months' time as well.
And also plan ahead when we come out of this, we probably will see in many areas a bit of a mini boom and classically this is where businesses do fail because they need additional working capital, otherwise they will run into risks of over-trading and then the other things I think directors need to think about is as we get into that kind of period, there will be increased counter-party risks. So not only do you have to protect your own business, you will need to think about the downside risks of your suppliers and your customers failing and that will be bad enough during this period, but as we come out that could be even worse, so plan ahead for that.
And then I think also think about how you can rebuild relationships. Inevitably some of the short-term decisions I mentioned earlier there is this balancing act between decisions you have to take in the short-term just to survive but the potential for longer-term damage to relationships with employees, with customers, with suppliers, with financiers and so on. So managing those relationships for the future is also very important.
And do not make assumptions. I mean I think the one thing we have learned more than anything so far in all of this is, do not assume anything so be prepared for the unexpected, so far as you can.
Michael: Thank you Julian. I mean, government and government policy has clearly been very much to the fore of late and I would like to turn now to Bernardine Adkins - very much the Gowling darling of the BBC I would like to say and perhaps Sky as well - it seems to have rubbed off, as you are sitting there in front of your library as many a BBC economist has been doing over the last few days. But there has been a fair amount of commenting confusion in the mainstream media about state aid, including even the suggestion that proposed support for industry from a UK government might be illegal under EU state aid rules. Is that fake news?Or what is the truth Bernardine?
Bernardine Adkins: Yeah. Fake news Michael. The Commission has moved extraordinarily fast in terms of giving guidance and clarity to what will be permissible state aid and from early on , the commissioner in charge of state aid, Margrethe Vestager said that we recognise that it is absolutely appropriate for governments to be giving public support. And really, what the Commission has done, is stood back to allow member states to do what they need to do and in that context they have issued what they have called a temporary framework. Already before that they had rubber-stamped Denmark paying, what seems like chicken feed now, just €12 million.
The temporary measures - they have been agreed with the member state - 19 March and essentially, the Commission have been very clever. It says, we have here what is called exceptional circumstances. And only, I think to my knowledge, twice before have they ever earmarked something as exceptional circumstances warranting state aid of this nature - the Icelandic volcano and for 9/11 vis-à-vis insurance and aviation.
This means that the Commission has no discretion. It is absolutely - if state aid falls into that, it simply has to waive it through. All a member state has to do is to demonstrate that it is within the perimeters of the need to address the disturbance as a result of those exceptional circumstances and it is waived through. The Commission still needs to see it.
The Commission indicated for certain sectors specifically affected by COVID-19 they will fall into those circumstances such as travel, tourism and to obvious areas and hospitality.
Now the other areas it is much more fluid, the Commission has a discretion whether to clear the aid and that is in respect to where they say this sort of aid is to remedy serious disturbance and historically the Commission rarely used that particular label but since Lehman Brothers that really did open the floodgates. Since before that we had pre-made decisions. Since Lehman Brothers we have had 400 decisions under that label and so now the Commission has indicated it has basically set out the basis upon which it will waive through specific measures and so far, it has waived through about ten different applications from ten different member states and the numbers are eye-wateringly high.
The UK is included in that initial wave. I mean 654 million - that sounds high. That is just small and medium enterprises. That is the UK government clearance so far. But if you compare it to Germany, for example offering €1 billion per company in the form of subsidised interest and there is France also with subsidised loan offering 3 hundred billion and getting clearance for that, the numbers are pretty huge.
So I would say to companies, if you are in recipient of state aid right now, it is imperative to keep proper records. Things are moving really fast and in later months and years people may look back and try to work out who said what to who, is this legal, is this illegal. It is imperative companies keep good records. Whoever is in charge of the record-keeping, if they leave or move on, that role is passed onto somebody else because that is obviously an experience companies have had in the past of not maintaining those records.
And also watch.Keep an eye on what is happening. This is a moving landscape. With Lehman Brothers I think the Commission issued three differing communications as they gained in learning as to how they would use their discretion.The situation is different here. It is actually less complex. With Lehman Brothers, the crisis there - there was a systemic problem with the banks and there was a worry about moral hazard - if we give them more money on top of their mistakes, there is a problem there.
Here this is very different situation so it may be much more straight-forward but that is certainly what I would do, to say to companies is - keep records, monitor the situation.
Michael: What does seem to be good news is that there is some easing of UK competition laws. Certainly most notably in relation to groceries and the supermarkets, is competition compliance once less thing for business to have to worry about now?
Bernardine: I wish I could say yes Michael, but you would not accept a competition lawyer to say that. Yes it is true that the CMA have issued a communication. But they have basically said, we are not - our priorities are that we are not going to investigate where companies co-operate together. If it is something that is necessary and appropriate to address a possible shortage. If it is in the public interest, if it is to the benefit of consumers, if this is something that is critical that has arisen because of COVID and if it is temporary. So you can see straight away, there is lots of wriggle room there for the CMA if it sees something it does not like. But what we have also seen, which is, I think largely good news for supermarkets is, again exceptional circumstances. What was as a few months ago, some very very obscure part of the Competition Act Schedule 3, Clause 7.
Who knew. The dust has been blown off it and the government has issued three statutory instruments. One of which is directed to retail - grocery chains and suppliers to that grocery chains. Essentially setting out circumstances of when they can co-operate together, to address the shortages and demands and challenges currently facing the sector. Which includes, logistics provide us to supermarkets for refrigeration for example.
So their co-ordination is things like, co-ordination of stocks and supplies, co-ordination as to how you should limit purchases, so how many toilet rolls can people buy or pasta packets. They can co-ordinate on that and opening hours. But still remains a total no-no is around co-ordination on costs and pricing. And again, this needs to be limited. They need to inform the CMA of what the nature of that co-operation is. Mercifully it looks pretty light as well.
So again, I am afraid it is not a carte blanche but obviously permission but within certain careful boundaries so people - again I would recommend monitor, document, tread carefully.
Michael: What about the old chestnut of abuse of a dominant position. Do businesses need to be wary of that as well?
Bernardine: Yes, absolutely more so than ever because the old standard that I always call the Mickey Mouse approach to competition law is, first find a market then look at market share and worry if you are over 40%/50%. In this exceptional circumstances, the whole dynamic changes. Now you are looking at a situation about market power. Where one supplier has a power over another. This position of a French notion of partenaire de obligatoire - an obligatory training partner. So in circumstances of scarce supply, somebody can have absolute reliance upon a supplier and we can see that already.
For example, with respect to tests with the base of a chemical reagent. Reagents, there are now a serious shortage of those. So there you could see the situation of dominance kind of rise as a result of this crises. And both European Commission and the CMA and other authorities have indicated, we are watching suppliers. If they become into dominance as a result of these challenging circumstances, we are going to keep an eye on price gouging. Is there somebody - are there any people who are now excessively pricing or unfairly refusing to supply or behaving in disproportionate and discriminate fashion.
We are watching and that is an area where people, if they are in that situation. Either having that dependence or conversely, being in that situation of market power. They need to tread carefully or if you are on the wrong side of that relationship, do something about it. Get onto the Competition Authorities because all of them have clearly indicated that they want to move fast vis-à-vis such abuses.
Michael: I cannot think of a conversation with you Bernardine over the last couple of years I would say where the 'B' word has not come up - obviously not Bernardine,but Brexit. What on earth is going to happen to the transitional period.
Bernardine: I think this is just a warning to people. I think the rational person would say, surely we are not going to have the end of the transitional period coming in December.
Surely we all need time to negotiate this beautiful free trade that we are going to get at the end of this situation. Because at the moment we are in this fiction. We have left the EU and so everybody is playing let us pretend we are still in the EU and all of that. The music stops in December. And so far, all the signals from government and the politicians are that the music will stop in December.
And I do warn industry, no matter what people might be saying, of the lobbying that is going on, that seems to be still the clear signal. So I would say to industry, painful though it is to hear, despite the dissipation of COVID, people still need to prepare and I will do a quick shout-out for myself and Ursula Johnson who is our head of customs. We have done a webinar on - basically how to prepare for Brexit from your back bedroom. Because there is a lot that in-house counsel can do remotely and there is an awful lot of money that they can save their internal client if they start to get systems in place now.
So I am sorry to say, there is absolutely still no room for complacency on this because we may get a really skeletal free trade agreement. The bare bones for December and then there is an awful lot of things that are kicked into the long grass following forward. But all the indications are that the government wants it to happen in December.
Michael: Well, Bernardine you obviously have not absorbed the BBC's rules about on screen advertising there about your own seminar, but thank you very much for your quick canter there.
Now to the audience. I hope you have found the review of some of the key issues arising from the COVID-19 crisis, both interesting and practical. I would like to say on my behalf, a big thank you to all the speakers who have taken the time out to deliver the presentation. I certainly found it very interesting and every one of them is still with us and doing their very best to look very interested in what everybody has said throughout the entire hour and a half. We have done an incredibly good job.;
Please feel free to circulate - which is not really a webinar - but this recorded seminar and if you are interested in more detail, please contact your Gowling WLG client partners or even directly, the rogues you have seen today who will be happy to discuss their topics in more detail.
Our Gowling WLG website landing page, the headline item there provides access to our online COVID-19 resource hub which addresses these issues and indeed a much wider range of issues connected to the crisis.
If you are able to find time, please provide us with feedback to how this has gone. We are considering additional events and we may do it in this format as this crisis unfolds. Including those based on sectors and perhaps how businesses might prepare as we see the crisis coming to an end.
Until that point, from all of us here, we wish you well. May you and your loved ones stay safe and goodbye.
"Read the original article on GowlingWLG.com".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.