COVID-19 and the Small Print

The COVID-19 pandemic, together with the international governmental response to contain it, has had an immediate and damaging impact on a wide range of businesses internationally across all sectors, including the satellite and space sector. The numbers of employees affected by the virus directly, in combination with restrictions on people’s movements internationally and locally, has in many industries severely and suddenly impacted companies’ operational performance, customer markets, supply chains, access to finance and, in many cases, their viability.

Businesses of all sizes and stages of maturity in the satellite and space sector are facing a wide range of issues, and management teams will be faced with unexpected and important decisions in the face of the crisis. In addition to using government support programs, companies can mitigate as many risks as possible by relying on contractual rights and protections.

Changing work practices for the large number of employees now required to work remotely further magnifies business risk. Some work at home setups were hastily arranged and employees may even be using personal IT equipment. Redundancies and temporary staff furloughs may put increased pressure on those remaining in post. The data security challenges this presents in the face of increased potential for malign cyber activity and the responsibility for continued data protection obligations must also be considered to avoid further harm to businesses and their reputations.

When to Terminate Commercial Contracts

Many companies in, or supplying the airline and leisure travel industry, including cruise, are facing unforecasted challenges and decisions as to whether to terminate contracts.

Managements may be familiar with the commercial and financial terms of their key contracts but now must understand their legal rights if current circumstances it may be better to limit obligations or terminate them. Businesses should also consider whether key business partners in supply chains may look to terminate their contracts with you, so preparations can be made for such eventualities.

Force majeure clauses are a starting point for enquiries about finding a way to exit a contract that has suddenly become unattractive or impossible to perform due to COVID-19. In common law countries, like the United Kingdom and United States, such force majeure is conferred through contractual rights and will depend entirely on the contract provisions such as the definition, details of termination, and notice rights and whether circumstances arising from COVID-19 apply. Contracts subject to civil codes, like in France and Spain, may have deemed force majeure rights outside contractual terms that should be considered.

Force majeure is generally available as a way to avoid performing obligations which the relevant event or circumstance has made impossible or has substantially hindered. It is not there to allow parties to walk away from receipt of benefits that they do not now need. In addition, carefully drafted contracts will often exclude force majeure from applying to payment obligations.

Compliance with notice periods to trigger termination rights is important, as well as ensuring that the notice provider has proper grounds to terminate in order to avoid risking repudiatory breach themselves which may allow the counterpart to terminate. In common law jurisdictions, if there is no applicable force majeure or other termination right, it may be possible to claim frustration of contract due to unforeseeable changes in circumstances making the contract impossible to perform such as illegality of performance.

Continued Access to Finance

Continued availability of funding from banks and other lenders is also a key area of concern for many businesses during the COVID crisis. Major banks have publicly aligned themselves with central government policies to support businesses through the crisis and have a range of potential concessions and products available that can assist affected firms. Banks are sensitive to negative publicity at the best of times and this is especially the case now, meaning that otherwise sound businesses are likely to have open dialogue about the sudden business challenges brought on by COVID. Banks are more likely to cooperate and even assist if they are aware of decisions or issues beforehand rather than after the event. This is particularly the case for small and medium-sized enterprises, but also applies to larger companies and those with more sophisticated credit facilities.

Not missing renewal notice or expiration dates, together with familiarization with the details of the loan documentation (including any supporting guarantees, security, or other related documents), will be important in avoiding inadvertently giving the bank options to decline further advances, accelerate loans, cancel availability, or take enforcement action that could lead to the insolvency or liquidation of a business.

Although loan agreements will differ from case to case and country to country, there are a number of core terms relevant to most loans that banks are particularly sensitive to. Meeting scheduled repayments, compliance with financial tests and other terms and undertakings are naturally top of the list. Failure to comply (or perceived reluctance to comply) with requirements to provide information to lenders or delays in providing it, in circumstances where the bank is already on high alert for defaulting clients, will be of concern to banks and may lead to more extensive scrutiny.

Requirements for the bank’s prior consent or notification of business decisions should be taken seriously especially when decisions are driven by the crisis and are therefore more likely to be out of the ordinary for the business. Activities such as raising further finance from third parties, granting security, making disposals or acquisitions of assets will often require prior bank consent. Termination of key customer or supplier contracts, litigation or closure of business activities are examples where notification if not consent could be required by loan documentation.

Companies may also be concerned with so-called Material Adverse Effect (MAE) and cross default clauses which are common in banking documentation but may be less so in other commercial contracts. Though not generally relied upon by banks other than as a last resort, Material Adverse Effect clauses, which give a bank the right to call a default if conditions facing the business deteriorate significantly, tend to come into focus in times of major crisis and uncertainty. Cross-default clauses in loan agreements can be triggered if you default under a separate finance agreement unrelated to your main bank loan, e.g. a rent deposit bond, a performance guarantee related to a customer contract, or the purchase of manufacturing or office equipment.

Similarly, defaults may occur if satellite operating or spectrum licences are terminated or partner funding through grants or other incentive arrangements from public authorities are discontinued.

Employees and Data Protection and Security

As well as the commercial and finance pressures highlighted above, COOs, compliance, and HR personnel are faced with new challenges and questions related to data security with staff working remotely.

Regulatory compliance regarding personal data of staff and third parties held by companies has become increasingly important as a feature of risk management policies in recent years. Government agencies charged with regulating data management will continue to oversee compliance under national laws despite the new level of challenges due to the shift to widespread work from home. There is likely to be recognition that resources may be diverted away from usual information governance work during the crisis and as long as data controllers are seen to be attempting to comply and not abusing the situation as an excuse not to comply, regulators may show leniency towards unintentional technical or minor breaches.

Companies may also need to consider making sensitive enquiries into the health of their staff, and the degree to which this information can be shared. In many cases, it may be good practice to keep staff generally informed of levels of known COVID cases in an organization, but this should not go as far as naming individuals or revealing details that would identify affected individuals.

Scams and fraudulent activity has unfortunately spiked with the onset of the crisis, as cyber criminals and fraudsters seek to take advantage of the perception that people who are not used to working from home may not have sophisticated cyber security applications. Management teams will want to reiterate to their staff the basic messages to be alert to scams such as considering email legitimacy before opening links and attachments, familiarity with email senders, and the way emails are addressed. Immediate red flags would include any requests for sensitive bank information like passwords, account details and or unverified payment instructions to different bank accounts.

Reinvigorating internal risk and IT policies and emphasizing the importance of compliance while working from unfamiliar working environments like a home study or kitchen table are sensible and manageable steps. For those with cyber risk insurance, compliance with policy terms will support any claims that need to be made and for those looking to take out such insurance cover, having an up to date and robust policy will assist in achieving competitive pricing.

There are undoubtedly many unexpected challenges presented by the COVID-19 outbreak. The above are just some of the legal-related challenges which many businesses are facing. With attention to the relevant details and seeking appropriate and timely advice, the legal and regulatory aspects can play an important part in any company’s risk mitigation. VS