Fighting the Coronavirus - Key Legal Challenges and Solutions
5th February 2020
On 30 January 2020, the World Health Organization (WHO) declared a Public Health Emergency of International Concern (PHEIC) in response to the spread of the Wuhan coronavirus, the sixth time that the WHO has made this declaration since adopting the PHEIC procedure in 2005.
The spread of the coronavirus gives rise to commercial and practical issues for businesses in China and globally. A number of countries have suspended travel and freight to and from China, while there are also similarly severe restrictions within China, and some have even evacuated their citizens from Wuhan. In addition, while the Chinese government has extended the Lunar New Year holiday until 2 February, some regions (such as Shandong, a Chinese oil refining hub) have asked businesses not to resume their operations before 10 February.
The outbreak and the measures undertaken by the Chinese Government to contain it, are already resulting in serious business disruption for a number of companies and based on our experience of previous outbreaks such as SARs, the impact only promises to worsen. Examples of businesses most affected are (i) those that rely on international trade that will be disadvantaged by trade restrictions, delays and deviations in deliveries, port closures etc; (ii) the Chinese shipbuilding and construction industry that is already affected by extensions in holidays, lack of work force, dwindling food supplies etc; (iii) transportation industry with vessels being deviated or held away from Chinese ports; and (iv) commodities and energy trading.
Companies suffering from or concerned about potential business disruption should start reviewing their existing contractual arrangements to determine what the legal implications of the outbreak and measures to contain it will be. It is common for commercial contracts to contain provisions which permit the suspension of services as a result of certain events which make the performance of a party’s contractual obligations in the time and manner specified in the contract impossible or commercially impractical. Such events are ordinarily categorised as ‘force majeure’ events, although different terminology may be used depending on the contract.
Much depends on the governing law of the contracts. Force majeure is a principle borrowed from the French civil code, whereby a party will not be liable for its failure to perform an obligation where this failure has been caused by the occurrence of exceptional events outside that party’s control. The civil code of many other civil law jurisdictions will prescribe the definition of what is meant by force majeure in that jurisdiction. For instance, Article 117 of the PRC Contract Law defines force majeure as an objective event or circumstance which is unforeseeable, unavoidable and insurmountable. If the governing law of the relevant contract is English law, the concept of force majeure is not automatically read into the contract and will need to be a contractual right agreed by the parties. If there is no force majeure provision in your contract, you will need to consider other remedies (detailed below).
The precise meaning and effect of a force majeure clause will depend on the specific wording of the clause and its interpretation under the relevant governing law of the contract. There are however a number of points that need to be taken into consideration by companies over the next few days and weeks before they invoke the force majeure provisions of a contract or when they receive a force majeure notice:
- Does the outbreak or the measures undertaken by the Chinese government or the governments of other countries affected by the coronavirus fall within the definition of force majeure in the contract? Some contracts include a defined list of such events that will constitute force majeure events. Commonly listed events of force majeure include: acts of God (including earthquakes, volcanic eruptions, landslides); natural catastrophes; plague or epidemic; wars, invasion, armed conflict; blockades, embargoes; sabotage; nationwide strikes; acts of government etc. This outbreak is quite interesting in that it involves a naturally occurring epidemic as well as a number of government actions such as the quarantines, extended holidays, transportation blockages etc. Other contracts simply define a set of criteria which must be met for the event to be considered a force majeure event (for example, the event be beyond the reasonable control of the party or cannot have reasonably been foreseen by the parties).
- Has (or will) the outbreak or the measures undertaken by the Chinese government or the governments of other countries impacted upon performance or the performance of one’s contractor or contract counterparty under the relevant contract? It will be rare for a force majeure clause not to require that the force majeure event must have an impact on the performance of the contract. The degree of impact (e.g., whether performance must be impossible or merely materially affected) will depend on how it is defined in the relevant contract and the applicable governing law.
- Does the force majeure clause include any other provisions which need to complied with? For example, a contract may provide that a party looking to serve a force majeure notice should notify the counterparty within a specified time frame or using a particular method (such as service of notice in writing by post rather than electronically by email). It is extremely important to note that such provisions may in effect be conditions precedent to the affected party’s right to rely on the force majeure clause. There may also be obligations in the force majeure clause or the applicable governing law that require the affected party to take certain steps to avoid or mitigate against the impact of a force majeure event. Therefore, if the affected party does not comply with all the requirements its non-performance may not be excused.
- Under English law the burden of proof is on the party seeking to rely on force majeure provisions to prove that an event gives rise to a permissible delay, which had the effect of preventing it from performing its obligations under the contract. Therefore, companies seeking to rely on force majeure clauses should obtain as much information as possible about the events affecting them, including the timing, the number of impacted parts/facilities, and when the force majeure event is expected to conclude. Companies who are currently in receipt of force majeure notices from their contractors or contract counterparties should respond requiring them to provide complete information in relation to the force majeure event and how it has affected the relevant party.
It is possible that the contract in question also provides that if the services are suspended for longer than a specified time period then one or more parties may terminate that contract. It is therefore crucial that companies make themselves aware of any deadlines set out in the contract where the force majeure provisions have been invoked. If attempts to resolve the issues giving rise to the suspension are unsuccessful (or if alternative arrangements cannot be put in place) then the party relying on the force majeure provisions may wish to discuss agreeing an extension with the counterparty closer to those deadlines. In addition to evaluating force majeure provisions in contracts, it would be advisable for companies to also consider what avenues of redress, including dispute resolution mechanisms, are provided for in such agreements in relation to any costs or losses arising out of or in connection with the non-performance of contractual obligations.
Force majeure shield
The China Council for the Promotion of International Trade (CCPIT) is offering force majeure ‘shield’ certificates to companies based in China that are seeking to rely on provisions enabling them to suspend performance of their contractual obligations. Affected companies will need to submit certain documentation to the CCPIT before obtaining the certificates (such as proof of delays or transport cancellations). What is unclear at this stage is how such certificates will fit within the contractual force majeure regime that the parties have agreed.
Frustration and hardship
If the contract does not have permissible delays or other force-majeure type events, then parties will need to consider alternative routes through which to obtain relief. Where the governing law is English law, the common law doctrine of frustration may be invoked in certain limited circumstances. If a contract has been frustrated, it will be terminated so that the parties are excused from further performance. However, in order for a contract to be frustrated, the event in question must be unforeseen, have occurred without the fault of either party to the contract and it must either make the contract’s performance impossible or it must destroy the fundamental purpose of the contract.
If the governing law is PRC law or the contract at issue contains a hardship clause, a party may argue that the coronavirus outbreak has caused hardship on such party and the contract should be either adapted or terminated. Under PRC law, if as a result of unpredictable and exceptional events that are not of a nature of commercial risk and caused by force majeure, the performance of the contractual obligation becomes unconscionable or the purpose of the contract has been frustrated, a party may resort to the courts. If the court finds hardship exists, it may either terminate the contract or adapt the contract in accordance with the fairness doctrine. However, PRC courts tend to be quite cautious in finding the existence of hardship and such finding by lower-level courts is subject to approval by higher-level courts.
Long-term LNG purchase arrangements
The above discussion in relation to force majeure and similar delayed performance provisions is based on the assumption that such provisions will provide immediate relief to parties affected by the outbreak and associated containment measures. Companies, including Chinese businesses, may however also be party to contracts where the underlying obligations will still need to be performed albeit at a later point in the contract year. For example most long-term LNG sale and purchase agreements, have annual volume commitments that can be postponed to later in the year. Therefore, the impact on the ‘take’ obligation of an LNG end-user cannot be fully assessed at this stage nor can the ability to obtain relief from performance.
There are a number of countries that have imposed temporary entry bans on Chinese citizens or recent visitors to China. However, as far as trade is concerned, we are not aware of any import or export restrictions imposed by the WHO, the PRC government, or other countries that are specific to the outbreak of coronavirus. In fact the WHO has recently reminded the global community that under Article 43 of the International Health Regulations (IHR) (2005), parties implementing additional health measures that significantly interfere with international traffic (e.g. refusal of entry or departure of international travellers, baggage, cargo, containers, conveyances, goods, and the like, or their delay, for more than 24 hours) are obliged to provide to the WHO the public health rationale and justification within 48 hours of their implementation. The WHO will review the justification and may request countries to reconsider their measures.
Depending on how the situation develops in relation to the spread of coronavirus, it remains to be seen whether governments around the world may unilaterally introduce restrictions on trade. Nevertheless, it is anticipated that the outbreak will cause practical difficulties, disruptions and delays in international trade due to the measures undertaken to contain the virus, such as additional entry-check and quarantine procedures.
The main challenge facing companies will be to judge how to adjust their strategic priorities to ensure that, as well as mitigating the financial impact of the outbreak, they do not compromise their long-term growth.
The coronavirus outbreak may give rise to a number of legal questions in relation to charter parties, including potential port closure, deviations, suspension or termination of shipments. If a port is closed or rendered unsafe due to the coronavirus outbreak then the charterers may need to nominate an alternative port. At present, however, it does not appear as though coronavirus has reached a stage where closure of Chinese ports is, or might be, contemplated due to safety reasons. A ship owner would therefore have to consider the issue very carefully before refusing an order to a port on the basis of disease risk. In case of any delays to a charter caused by deviation (e.g. landing a crew member due to illness) or quarantine, (in a time charter) the vessel might be declared off-hire as a result of a time charter’s hire/off-hire provisions or (in a voyage charter ) such deviation will usually be at the expense of the vessel owner (other than in certain circumstances provided for under the Hague or Hague-Visby Rules). In addition, vessel owners affected by coronavirus may seek to suspend (or terminate) a charter party relying on force majeure. Please see above (Force Majeure) for our discussion on the required elements of a Force Majeure claim.
From an employer’s perspective, companies operating in China should comply with and take guidance from the Chinese government’s notices and regulatory documents amid the coronavirus outbreak. As mentioned above, the PRC central government has issued a notice extending the Lunar New Year holiday. Additionally, many provincial or municipal governments have issued notices on the postponement of work that are effective locally. For example, the governments of Shandong, Shanghai, Guangdong, Fujian required enterprises (other than the enterprises whose operation is required to ensure public utilities, epidemic control or people’s daily needs) not to resume work before 10 February 2020. The notice issued by Fujian province even specifically sets out prevention measures to be adopted in workplaces, such as daily recording of employee’s health condition and report of coronavirus infection to local epidemic control authority.
The government’s authority to issue these notices to extend holidays or postpone work is based on the Emergency Response Law of the People’s Republic of China and the Law of the People’s Republic of China on the Prevention and Treatment of Infectious Diseases, which empowers the government to take measures to prevent virus transmission. Non-compliance with these regulatory documents could result in administrative or criminal penalties.
In addition, the Ministry of Human Resources and Social Security of the People's Republic of China (MOHRSS) has issued several notices amid the outbreak, including the notice on 24 January 2020 clarifying on salaries, leaves and other labor relation issues that may arise due to virus control and prevention measures or disease treatment. Similarly, many local MOHRSS authorities have respectively issued their versions. Employers should keep abreast of and ensure compliance with such notices.
Beyond compliance with local laws, Chinese companies should ensure measures are taken to properly assess the risks to employees and the impact on business continuity and adapt their plans accordingly. These measures include assessing the risks faced by their staff whilst at work and developing measures to control those risks, identifying how much flexibility they have to adapt their working arrangements to ensure business continuity and special measures to protect vulnerable employees. The key is to plan ahead and to show leadership, thereby enabling employers to be well prepared to support their staff and to maximize the resilience of their business.
Banking and financing considerations
During periods of acute operational and business disruption (such as that being triggered by the coronavirus), short-term liquidity and cash-flow is inevitably impacted. Companies should be actively managing, modelling and monitoring their liquidity and projecting their likely working capital needs. Based on information already available, companies should be re-assessing and modelling the likely impact on their respective liquidity and working capital requirements, with a number of potential downside scenarios, including a worst case.
Companies should review all of their debt funding agreements to ensure that they do not contain triggers that could possibly result in credit lines being curtailed or terminated. Whilst we do not consider that the current circumstances regarding coronavirus in themselves would constitute a “material adverse change” under most debt funding agreements, those types of provisions are invariably fact-specific and so they should be considered carefully. Any financing modelling exercise should also include an analysis of compliance with financial covenants and the like in the various downside scenarios (including worst case).
As part of their ongoing dialogue with funders, companies should ensure that communications are consistent, with clear messages from companies that they are implementing plans to actively manage and mitigate the impact of the coronavirus on their business and cash-flows. Pro-active engagement with the relationship principals is recommended, i.e. companies should be calling their funders, rather than waiting for such calls.
As well as looking inward, companies need to look outward and review and analyse the position of their key counterparties, particularly those where an insolvency or similar event affecting such counterparty could have a material adverse impact on their position. Early engagement with such key counterparties is essential to ensure that there are “no surprises”. Typical issues include: accounts receivable (i.e. ensuring that there is no unplanned material loosening of credit controls); supplier stock control management; credit rating downgrades and the like.
An analysis of planned capex and a separation of “essential” vs “non-essential” capex is an important exercise in order to allow companies to be ready to defer non-essential capex if circumstances require this to be done. In our experience, such an exercise can take a long-time and so it is better commenced earlier rather than later.
If the initial review suggests that there may be liquidity and working capital management issues, companies should consider engaging with their financial advisor(s) to provide insights and support as the company reacts to such problems. Funders will typically be more supportive if they see their borrower pro-actively managing such issues with appropriate external support.
Businesses, including Chinese companies, should ensure that the relevant contractual and legal requirements are followed where they (or a counterparty) are seeking to rely on force majeure provisions in relation to the non-performance of contractual obligations, whether as a result of the coronavirus outbreak or the measures undertaken by the Chinese government or other governments which have undertaken measures to contain the coronavirus. At the same time, companies should assess the costs and losses of non-performance of contractual obligations and seek to control the losses and put alternative arrangements in place where feasible. Businesses also need to closely monitor the current situation and be decisive at this early stage in order to adapt their strategy and mitigate the financial impact. Further, from an employer’s perspective, companies should similarly monitor the situation on a regular basis, taking guidance from authorities in China and from international bodies such as the WHO.
It is important to not lose sight of the fact that the impact is likely to be short-term in nature - months rather than years. The Chinese government’s announcement of a US$174 billion injection into their markets for 3 February 2020 is intended to mitigate a potential contraction in liquidity and any related increase in funding costs. In addition, the government has a