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2020 has brought in an unprecedented challenge in COVID19 to our personal and professional lives. In corporate context, the year is likely to test the preparedness of businesses across the globe.
2020 has brought in an unprecedented challenge in COVID19 to our personal and professional lives. In corporate context, the year is likely to test the preparedness of businesses across the globe. Most companies are now contemplating a come-back strategy for resuming operations. As we help our portfolio companies think through their strategy going forward, we have listed below a few areas of potential concern and recommendations to navigate them:
Contractual Fallouts – ‘Keep your end of the bargain ’
The pandemic brought the whole world to a standstill and several businesses had to be shut down, albeit temporarily. Legal jargon such as “Force Majeure” and “Act of God” suddenly gathered an audience.
Question 1: What is Force Majeure and does a pandemic like COVID19 qualify as a Force Majeure event?
Force Majeure covers an event or an occurrence that can be neither anticipated nor controlled. A Force Majeure provision protects a party from liabilities attributed to it’s failure to perform contractual obligations, due to events outside of its control. To seek refuge under Force Majeure, it must form a part of your contract, and the contract must spell out instances that qualify as Force Majeure. Companies need to assess if their key commercial contracts have a Force Majeure clause and what kind of relief is afforded thereunder
Two tests are extremely important in the wake of COVID19; to successfully invoke Force Majeure (a) whether a pandemic or similar event is captured under the definition of Force Majeure events, and (b) if the performance of a contract is actually and practically impossible. Meeting both these tests is imperative. However, given the temporary nature of COVID19, it is more likely that there are practical hindrances or financial difficulties in performance of contracts, rather than actual impossibility. Therefore, it is unlikely that the current pandemic will afford parties any wriggle room unless the contractual tests are well met in the eyes of Law.
Question 2: If parties do not have a force majeure clause in their contract, do they have any other recourse under Law?
If Force Majeure clause is not a part of your contract, parties have recourse under the “Doctrine of Frustration”. If performance of an act becomes impossible or unlawful, after a contract has been executed, and such impossibility is due to an event which the party undertaking the performance could not prevent, then the contract is said to be ‘frustrated’. The test is that the ‘impossibility’ should upset the very foundation of the contract. Frustration renders a contract void and therefore is an extreme measure when compared to Force Majeure.
Question 3: How should parties approach the current crisis from a contract management perspective?
Force Majeure is an exception to the rule, and not a rule in itself. The best way forward for companies is to reach an amicable settlement with the other party. Since everyone is sailing in the same boat, there is willingness to renegotiate the terms, in a manner that is fair to both. Invoking Force Majeure or Frustration may prove detrimental in a post COVID world, where companies will need to maintain crucial business relationships. Trends suggest that as companies resume operations, there will be an uptick in litigations arising from fall outs during the COVID period and hence risk mitigation in advance would be prudent.
The initial response was adhoc but now companies have settled in and are approaching the crisis in a structure manner. As Winston Churchill rightly said, ‘Never let a good crisis go to waste’, companies that will emerge stronger post COVID19 will command a premium value in the market.
Question 7: How can companies conserve cash?
Companies should have a strategy in place for cost optimisation, the starting point should be near term projected cash in hand and accordingly decisions can be taken on either slowing their pace of growth and/or rationalising certain costs to company. Once this strategy is agreed between stakeholders, there is a clear path to go about cash conservation. As an example - while many companies had to impose WFH, some tech and consulting companies actually realised that a lot of work could be done remotely and have extended their WFH for over 2 years to save on rentals and staff specific overheads until the market stabilises.
Companies should run detailed cost benefit analysis on all key expenditure heads weighing pros and cons of deferral depending on their business needs. We have observed companies set up task forces and war-rooms for Covid specific decisions on the overall operating costs.
Question 8: What is the impact of COVID19 on fund raises and diligences?
Trends in deal evaluation will undergo a change. The big shift likely to result from the crisis is that diligences will now be heavily focussed on processes, controls, corporate governance and business continuity policies (“BCP”) of a company in addition to the usual analysis of operating KPIs. Investors will also now evaluate companies’ basis their ability to manage business disruption and would require robust BCPs in place. Companies that are able to prove that their BCP stood the test of an actual crisis, will have an edge over those that did not take policy making as seriously. While fund raising may seem challenging and muted in the short term, companies with strong fundamentals and resilience to the crisis, will have a competitive advantage over the others.
Managing Human Capital – ‘a balancing act ’
Managing talent in times of such crisis invariably poses dichotomies between employee wellbeing on one hand and employee cost on the other. The ones ahead of the curve are likely to emerge stronger than the others.
Question 4: How should companies strike a balance between cost optimisation from a business standpoint and employee expectations in light of the guidelines issued by the Government?
While the Government may have gone back and forth on compulsory payment of wages and issued several guidelines overriding the existing labour laws in India, companies may be compelled to look at pay-cuts, retrenchment, reduction of work hours and forced unpaid leave to manage their financial position. However, while undertaking such measures, companies should be mindful of their contractual obligations with their employees as well as the provisions as per applicable central and state labour laws. The best way forward would be to have clear and transparent communication with employees, renegotiate the terms of their existing employment agreements while ensuring adherence to the internal policies of the company and avoid taking any unilateral decisions.
Question 5: How should employers look at work from home, are there any norms under Law that companies should follow?
Work from Home (“WFH”) is the new normal - the only way to ensure business continuity during a lockdown.
There is currently no legislation governing WFH, therefore companies need to formulate their own set of rules. While formulating your internal policies, some of the key aspects to be considered are: (a) manner of measuring productivity and performance of employees; (b) confidentiality and intellectual property protection to prevent data breach or compromise of sensitive information; (c) social media policy and protocols; (d) technical and administrative support; and (e) preserving employee motivation and morale. Employers should communicate the clear parameters basis which employee performance will be measured to avoid any ambiguity on either side.
Question 6: What are the best practices that companies can follow while ensuring WFH?
While companies can put in place policies for tracking employee productivity, it all boils down to ‘trust’. Employers will need to strengthen the existing relationship with employees to ensure honesty in reporting.
Communication Strategy – ‘Be transparent ’
In times of crisis, when anxiety is at an all-time high, clear and consistent communication mindful of people’s sensitivities is essential. Be it your shareholders, customers, vendors or employees, companies need to have a strategy to address concerns.
Question 10: How should companies approach communication with stakeholders, be it customers or investors?
Simple, clear and honest messaging has resonated well across segments – no sugar coating, no window dressing, say it as it is and get the bad news out.
Centralised channel of communication, internally as well as externally, will work better to ensure consistent public perception. Contradictory messages can result in loss of brand goodwill and reputation. The tone of delivery and the leadership team’s approach to communication is equally important.
Now, more than ever, customers are concerned about hygiene and safety, especially in the product delivery segment. While communicating with customers, transparency of process, quality control and safety measures adopted by companies are crucial to maintain trust.
Companies should also include the required disclaimers to encourage customers to maintain personal hygiene practices at their end as well, upon receipt of any products. Hygiene is a two way process and customers should be encouraged to adopt their own hygiene practices to fight the pandemic.
Uber, the popular Bangalore based cap operator was asked to change its payment mechanism by the Reserve Bank of India. Popular ecommerce sites like Myntra, Urban Ladder, Flipkart, and many other have been under the scanner for various regulatory matters like FDI violation, VAT related issues, Enforcement Directorate probes for maters before April 2013, Payment mechanism violations etc. With each passing day new violations or potential violations seem to be added.
The DIPP recently told the Delhi High Court that the marketplace model used by ecommerce companies is “not recognised” in the country’s foreign direct investment (FDI) policy and that the financial watchdogs are to investigate any violation.
We've summarised some important measures the regulatory authorities are taking during the Covid-19 outbreak.
"Whatever ramp time you are budgeting for in terms of demand coming back - double it. However long you think you need cash for - double it." When this is over, companies that have been household names will disappear and a new crop will emerge. How you prepare and use resources today will determine which group you are in.
Everyone has learnt something new, knowingly or unknowingly, a new skill, a new physical exercise, a new way to calm the mind or a new way to look at things. Write down the worst outcome for you and your family from this crisis”. Then, observe your actual day-to-day progress. If you’re not getting any closer to the worst outcome, you’re doing great, and you’ll come out unscathed.
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