In our first Legal Business Bulletin for 2011 we outline some of the emerging issues that commercial enterprises need to address as they re-establish themselves after the devastating Queensland floods. McInnes Wilson Lawyers is now operating as normal and can assist to provide support to Queensland businesses and their customers and suppliers.

Completing or ending contracts - force majeure clauses:

Force Majeure clauses provide an excuse for not performing contractual obligations due to circumstances beyond the parties’ control. These events include flood or other natural disasters. Businesses must prove that the force majeure prevented, hindered or delayed their ability to perform their contractual obligations. It is important that reasonable steps are taken to lessen the consequences of a force majeure event. This includes giving proper notice as to the occurrence of such an event and demonstrating that non-performance is due to circumstances outside the party’s control. As floodwaters subside, debate will also arise about the end of the force majeure event. If there is not a force majeure clause in a contract other means of relief may exist. These include:

  • frustration of contract: This occurs where a company is unable to fulfil its contractual obligations under the contract; not just because it is delayed, difficult or expensive;  
  • other contractual provisions: Which may allow termination or a right to delay or adjust price;  
  • insurance coverage: Whether insurance coverage can provide protection against costs and losses suffered by the company or its customers through an inability to perform contractual obligations.  

Obtaining Rent Relief from landlords:

Provisions may exist within leases for the reduction or waiving of rent (abatement) if part or whole of the leased premises are unable to be occupied. Leases may also be terminated in some cases. It is advisable that all applicable provisions within leases are checked to ascertain the position in relation to damage and repairs. Similar provisions may exist in Franchising Agreements such as express provisions allowing the franchiser a period of relief or to end the Franchise Agreement if they are not occupying the premises or cannot operate the franchised business.

Qualifying for government assistance:

State and Commonwealth governments have various types of assistance on offer for different types of affected persons and businesses. For example:

  • relief payments for families and individuals affected by floods;  
  • small business grants and loans;  
  • primary produce grants, loans, freight subsidies, and fodder;  
  • grants to local councils for rebuilding important infrastructure.  

Much of the assistance is not of any benefit for many large businesses or listed companies, or is means tested. The benefits will flow more to individuals, primary production and small to medium businesses.  

Determining extent of insurance coverage:

Businesses should review, or ask their brokers to review, their insurance policies particularly the precise wording of the document and relevant definitions to determine what is covered. Many businesses will not be insured against flood damage or may have misunderstood the contract, believing that they were insured. It may also be relevant to determine the source of the water which caused the damage and whether this corresponds to what is covered in the policy. As recommended by Brisbane Mayor, Campbell Newman, owners are advised to thoroughly document losses and provide evidence of all expenses when quantifying claims, while taking into account losses excluded by policies. McInnes Wilson Lawyers is offering a review of insurance policies at no cost to provide guidance on how businesses should approach their insurers.

Assess if tax assistance is available:

The Australian Taxation Office (ATO) is implementing a range of support strategies to help flood victims. These include the deferral of lodgement dates and the implementation of General Interest Charge (GIC) stoppers for businesses, tax payers and tax practitioners. If you are located in an affected area the ATO will automatically defer the lodgement and payment date for December monthly activity statements originally due 21 January 2011 to 21 February 2011. In addition any later deferrals which have already been granted still apply. The ATO will also make special arrangements and encourages taxpayers to contact the ATO to discuss their options.

Review obligations including ‘Material Adverse Change’ clause:

A Material Adverse Change (MAC) clause allows a purchaser the right to walk away from a deal if events occur that are detrimental to the business. It provides a level of protection against unknown or unforeseeable events and usually takes the form of either a warranty or condition within the contract. Businesses may wish to revisit the MAC clauses within their contracts in light of the recent flooding and consider whether notification or negotiation is possible.

Determine workplace health and safety and environmental risks:

The Workplace Health and Safety Act 1995 provides that employers are obliged to provide safe premises, safe systems of work, safe machinery and materials, suitable working environment and facilities. If these obligations are not complied with you can be prosecuted and fined. In light of recent flooding, employers will need to assess the relevant Occupational Health and Safety standards and ensure employees are returning to a safe working environment. Note also mismanagement of contaminated wastewater or unauthorised release of floodwaters may contravene environmental authorities such as the Department of Environment and Resource Management (DERM), leading to penalties.

Consider employees in the business:

Under section 524 of the Fair Work Act (Cth), employers retain the right to stand down an employee under an employment contract or agreement because of amongst other things, a breakdown of machinery or equipment if the employer cannot be reasonably held responsible for the breakdown, and a stoppage of work for any cause for which the employer cannot reasonably be held responsible. Therefore if an employee cannot perform their job due to the breakdown of the machinery necessary to perform that function, the employer may be able to stand them down without pay. This right to stand down without pay is subject to any express terms contained within the employment contract. Employees should not be stood down indefinitely or for long periods of time and if this occurs employers should consider their obligations in relation to redundancy and redeployment. Always seek specific advice if possible.

ASX compliance - Continuous disclosure obligations:

The Australian continuous disclosure regime requires listed companies to inform the Australian Stock Exchange Limited (ASX) of any information that a reasonable person would expect to have a material effect on the price or value of that entity’s securities. Businesses will need to continue to update the market as they assess the impact of the floods on their business in light of previous disclosures.

Other prudent disclosure/communication clauses:

Each business should also assess whether there are other key suppliers/customers/financiers or licensing bodies to whom messages should be communicated to protect goodwill, relationships and future business operation.