Coronavirus (COVID-19) Advice for businesses
Paul Hardman, director and head of corporate and commercial at Gregg Latchams which is a member of China Britain Business Council, examines the impact and legal implications of the Covid-19 outbreak on UK businesses.
Businesses are well versed in the ups and downs of the economy, responding to market changes, competition and conditions outside of their control.
However, every so often an unforeseen set of circumstances can result in a crisis for which there can be unanticipated and wide-reaching implications. This is the case with Coronavirus, or Covid-19.
At the time of writing this, every continent has recorded cases, over 118,000 people have been infected with the death toll exceeding 4,200. The US Federal Reserve cut interest rates by half a percentage point on 3 March – the only emergency rate cut since the last financial crisis. This has led many economic commentators to draw parallels to the effect of the 2008 global recession.
This ‘viral slowdown’ which started in China’s Hubei province in January has resulted in restrictions on the movement of people and closure of businesses.
Impact on the Chinese economy
China’s position on the global economy is now significant, while markets have looked back to the SARS outbreak to predict the possible impact of Covid-19, the world is now a very different place. China now accounts for 16% of global GDP (at the time of SARS it was 4%).
Links between British and Chinese companies are now closer than they have ever been, and this is where the challenge lies. Deeply complex supply chains involving a myriad of companies means the potential commercial impact of this virus is far-reaching and as yet, unquantifiable.
So many businesses have links either directly or indirectly with Chinese markets – China produces one-third of the world’s chemicals, half of all LCD screens and two-thirds of polyester.
For companies with established trading links, import arrangements or manufacturing contracts Covid-19 represents a major threat to their future success.
Legal implications for companies
Inevitably, businesses with links to China need to review their contracts while also ensuring they mitigate as far as possible to prevent further spread of the outbreak at home.
In navigating their way through this unchartered territory firms need to understand the legal landscape in order to make informed commercial decisions which deal with coronavirus related events and seek remedies in contract or at law.
Companies must first consider which rule of law governs any contracts they have in place. The governing law may vary for different types of contracts. For example, most shipping and commodities trading contracts are usually governed by English law, whereas other commercial contracts may be subject to Chinese law.
Is Covid-19 a force majeure?
A force majeure would mean firms unable to perform or deliver to their contractual terms can be relieved or suspended from performing their obligations.
However, force majeure is not a consistent term and is treated differently in Chinese and UK law.
In English law, force majeure is a contractual term that needs to be expressly set out in the contract. It is not a rule of law or a term that can be implied into the contract and there is no standard clause. The provisions of such clauses may vary from contract to contract. Arguably, the Covid-19 would fall within the force majeure clause if the clause contains words such as “epidemic” and “disease” and if there is a catch-all type of wording for matters outside a party’s reasonable control. As the situation develops, the more the measures to contain the virus prove to be unsuccessful, the more likely that it will fit within one or more of the described circumstances constituting a force majeure event.
By contrast, Chinese contract law recognises force majeure operating as a rule of law, which can be applied even if the contract does not contain such express terms. Under Chinese law, an event that is “unforeseeable and unavoidable, and not the result of the defendant’s actions,” can be regarded as a force majeure event. Chinese authorities have already issued force majeure certificates to assist Chinese companies in proving a force majeure event, which gives authenticity to a declaration of force majeure under their contracts.
Under both English law and Chinese law, the party relying on a force majeure event must give notice to their counterparts and need to show that it has used its reasonable endeavours to mitigate their loss. Once a valid force majeure event is identified, parties may suspend their obligations during the period of the applicable event, and if allowed by the contract once the prescribed period has passed give the notice to terminate the contract.
As with any unforeseen issue – professional legal advice is the first action, knowing the facts and implications of any decisions given the current set of circumstances is the only way to get through these next few months until the situation returns to normality.