Impact on the food and drink sector and other key industries

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Impact on the food and drink sector and other key industries

This information was provided on 18 March 2020

Our Y30 partner, Irwin Mitchell, have provided the following update for the food and drink sector and other key industries.

On Monday 16 March 2020, Prime Minister Boris Johnson announced that the UK had entered the ‘fast growth’ stage of the spread of Coronavirus (Covid-19) and that, without drastic action, new cases could double every 5 to 6 days. The Prime Minister therefore urged the public to stop all non-essential contact, travel and socialising. This is the case for anyone who doesn’t have symptoms. For those who do, the Prime Minister asked that they and others in their household isolate for 14 days, meaning not leaving the house even to shop for essentials.

This update comes following a weekend of British consumers stockpiling canned, dried and other long-life food and drink products, as well as cleaning products, toilet rolls and other day-to-day household items. This behaviour was by no means limited to the UK as the virus has spread around the world.

During this time, it is going to be vital for both our economy and society that we, as businesses, continue to provide for and sustain our society. The Food & Drink sector is of course key to this but so are a huge range of wider consumer products and other businesses. To help these businesses, we have set out below a number of factors which should be considered to get us through to the other side.

Workforce absences, and health & safety

Businesses should consider how they will continue to operate with reduced on-site staffing levels, as it is estimated that 1 in 5 employees could be off work with Coronavirus this year. Please see our further guidance on HR and Coronavirus issues by clicking here.

In view of staff absences, businesses should be reviewing their food / health & safety processes to ensure that they are sufficiently robust and allow the business to continue to function in view of the anticipated staff absences, so as to keep employees and consumers safe.

This is all the more important against the backdrop of the importance of minimising any unnecessary strain on the NHS so that it can focus on the crisis. As such, businesses tolerance of risk in this respect should not be increased.

Supply chain management and contractual issues

Businesses should be risk assessing all areas of their supply chain, with particular regard to key supply, distribution or logistics contracts. Generally speaking, performance of these contracts may become difficult due to the knock on effect of restrictions and staff absences, and any problems therefore need to be anticipated and planned in advance by both contracting parties working together.

In this context, the following is a list of contractual provisions which businesses should review and, if possible, negotiate or re-negotiate if they are no longer fit for purpose.

  • Force majeure clauses

A force majeure clause seeks to exclude the liability for one or more parties to a contract for events which are beyond their reasonable control and render the party’s (or parties’) obligations legally or physically impossible.

These often become mere boilerplate clauses which lack focus and, as will likely be seen in the coming months, this approach can result in significant difficulties for a party which becomes unable to perform its obligations under the contract. This is because there is no recognised legal definition of “force majeure” and it is not a term which is implied into contracts by either statute or common law. As such, it must be an express term in the contract and its drafting will become critical to its interpretation. In addition, there must be a causal link between the force majeure event and the result, being that the party is unable to perform. It is simply not enough for performance to be too expensive or difficult.

For the purposes of Coronavirus, consider whether the force majeure clause makes reference to infections, diseases, epidemics, pandemics, quarantines, border-closures, travel restrictions, lockdowns or port closures. If not, would it be possible to negotiate and amend the clause for all contracts which have not yet been entered into?

The effect of triggering the force majeure clause is also a relevant consideration. Often this will result in the termination of all or part of the contract. Whilst the Coronavirus may not be over as soon as we had hoped, it may be short-lived in the grand scheme of a contract. It is therefore worth considering whether triggering the force majeure clause is a commercially sensible move.

  • Notice clauses

If a party is unable to perform its obligations, the contract will usually have a clause which prescribes how notices under the contracts are to be served. This is important for both the party who is unable to perform and wants to issue a notice of force majeure, and the other party who may wish to serve notice to terminate in order to procure performance from elsewhere.

  • Waivers and variations

Parties who choose to accept non-performance during periods of disruption caused by the Coronavirus need to be careful that any acceptance does not amount to a waiver of their right to terminate should the non-performance continue. Similarly, parties need to be careful that any negotiations or agreements formed during the crisis do not amount to a formal variation to the contract in the long-term.

  • Indemnities and liquidated damages clauses

Parties need to be cautious of any indemnities they have provided in their contracts and any obligation to pay liquidated damages for non-performance.

Ultimately, if any form of dispute ensues, it is vital that businesses firstly maintain good records and audit trails, and secondly modify and substitute where possible and consider whether there are alternative sourcing opportunities so that they may mitigate any losses.

Please see our further guidance on contract cancellation and force majeure clauses by clicking here.

Reputation

The Coronavirus is, for modern times, an unprecedented global crisis and likely to affect everyone and every business. Consumers are likely to be unsympathetic to a company perceived to be acting unreasonably in the face of the current crisis. As a result and in the context of social media backlashes, the consequences of mistakes could be exaggerated more than ever which is a risk which needs to be borne in mind.

Against the backdrop of social media and the potential for immediate reputational damage, businesses should also consider cash flow and what bank and Government grants and loans are available, as well as at what point they are required to notify their insurers and whether there are any time limits in place for this.

Finally, just like the Government’s advice around hand washing, prevention is better than cure. If businesses have any concerns or are likely to face new challenges, please do contact us and we will help. We are all in this together.

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