With the number of globally-reported cases surpassing 80,000 across most continents, the Coronavirus outbreak has sparked major global concern for public health. However, with China’s efforts to contain the virus, the impact of this potential pandemic on the health of global businesses and supply chains is likely to be felt in the coming weeks. Indeed, the impact on stocks and shares markets in Japan, London, Wall Street and on Israeli GDP hit headlines this week.
As China struggles to recover, Israeli companies may feel the knock-on effects of its shutdown and epidemic. Since the signing of a bilateral trade agreement in 1995 and the establishment of non-profits such as IsCham, China-Israel trade has continued to burgeon. In 2018 trade reached a whopping 14 billion dollars, with imports amounting to an equally impressive 10.5 billion dollars. China is Israel’s largest trading partner in Asia and its second largest in the world. Several initiatives have helped Israeli business owners to establish a foothold in one of the world’s fastest growing economies and to benefit from the country’s leading manufacturing industry (the China-Israel Innovation Park, for example, provides manufacturing and lab facilities for Israeli start-ups, among other services).
And yet, in the wake of the recent outbreak, Israeli giants such as Castro have moved their manufacturing operations out of China. A public disruption on this scale can lead to missed contractual obligations, disruptions to services or supply chains and financial stress. We explore some contractual provisions which business owners can consider to mitigate their circumstances.
Sign your Contract under English Law
As Chinese law can be hard to enforce, the Israel Chamber of Commerce recommends signing contracts that apply in a third country, which both parties agree on, with the early involvement of an experienced lawyer. English law is a common popular choice for parties of different countries engaging in business contracts, even when they have little or no connection to England and Wales. This is for several reasons, which Tomer Treger, qualified Israeli attorney specialising in US and International Law, has explored in depth in this article:
“The commercial courts in London have gradually earned a reputation of unmatched quality and professionalism. Indeed, the Commercial Court in London is the world’s leading forum for the resolution of disputes in the fields of international trade, shipping and insurance…The numbers speak for themselves: in the year between March 2018 and March 2019 no less than 60% of the litigants in the Commercial Courts in London were non-UK nationals from 78 different countries, and this trend appears to be on the rise.”
In addition, whilst English jurisdiction draws on over 800 years of case law and precedents, China is not a case law country and handling judges may interpret commercial transactions at their discretion.
It is worth noting that Chinese parties are often reluctant to apply foreign laws to business contracts. In contrast to lengthy, highly risk-adverse Western contracts, Chinese contracts are kept relatively short and simple. There prevails a general reliance on “guangxi” (good faith) rather than precise wording, to the extent that some Chinese companies may not even review contracts before signing them.
That said, under the specific circumstances surrounding the NCV-Outbreak, foreign business owners who have indeed signed contracts that apply to foreign legal systems might find it easier and faster to resolve potential disputes with Chinese partners. Whilst in the UK the English legal system is running as per usual, the Hong Kong courts are struggling to manage the increasing backlog of cases which were adjourned as a result of the shutdown. For those who have contracts under Chinese law, note that, in addition to the adjournment of hearings and postponement of filing deadlines, the shutdown has also had a knock-on effect on the service of documents and the signing of witness statements and affidavits in China.
Consider Force Majeure
Force Majeure events are unforeseen circumstances that fall outside of the party’s control and which therefore prevent the contracting party from fulfilling its contractual obligations. Businesses operating across various industries in China have invoked Force Majeure under some of their contracts, as a result of the NCV-Outbreak, the precedent for which was set during the 2003 SARS outbreak. Notably, CNOOC (one of China’s largest oil companies) had their legal grounds for the clause rejected by Shell and Total last week.
Affected parties should refer to their contracts for Force Majeure clauses to determine whether the clause could offer their Chinese suppliers protection from the recent outbreak. The clause and the circumstances surrounding affected parties must be evaluated on a case-by-case basis – the meaning and protection offered by such a clause is highly dependent on the application of contractual interpretation on the particular wording, but also on the governing law under which the contract was signed. For example, in Israel, warfare is generally not considered a Force Majeure event, whereas, under English legislation, it could be; therefore epidemics may be treated differently in different judicial systems. In this case, the burden of proof in Force Majeure events lies with Chinese suppliers, and Israeli businesses may have scope to push back on this clause.
Attention should also be paid to whether the clause simply suspends contractual obligations until the event is finished, or whether it absolves the contracting party from its obligations altogether. Be careful not to provide assurances that could be considered as a variation of contract or a waiver of rights, especially if an anti-oral variation clause is not present.
Terminate your Contract
Rather than engaging in costly litigation proceedings, businesses might choose to terminate contracts and sign fresh agreements with different parties in order to maintain business continuity. However, this will largely depend on:
- A successful Force Majeure claim or
- A breach in contract which allows for its termination
Be aware that a Force Majeure event does not automatically allow parties to terminate their contracts – outstanding obligations and liabilities will stand to be resolved. Careful analysis of the contract’s wording will identify the scope under which the Coronavirus crisis is responsible for a party’s inability to keep to its contractual obligations and what potential actions the affected parties could take. Parties will also be expected to mitigate losses by fulfilling whatever part of the contract they still can and by resuming normal activity after the Force Majeure event subsides.
If the clause permits immediate termination of a contract, especial attention should be paid to the notice requirements. With the extension of the Lunar New Year in Mainland China, parties wishing to terminate their contract should check whether their notice period includes unexpected holidays and whether the notice requires physical, rather than electronic, delivery.
Check your Insurance
Businesses can review their business interruption insurance policies to protect themselves against income losses sustained from exposure to the NCV-Outbreak. The protection afforded to affected parties will depend on specific terms in each policy. Following the 2003 SARS outbreak, the interpretation of insurance policies sparked disputes between certain policyholders and insurance providers and similar issues may arise with the Coronavirus.
One key topic for contention involves the interpretation of the commonly inserted term, “physical loss”, with regards to the insured company. This “physical loss” is typically required in order to trigger the business interruption coverage, yet there is no universally agreed definition to determine when such a loss has occurred.
Meanwhile, some commercial property insurance may also protect policyholders when a civil authority prevents access to their premises. Other political risk policies could provide additional cover for affected businesses whose interruptions are caused by the host country’s government.
However, policy holders should check with their Israeli insurance providers for any applicable exclusions of China. Some of Israel’s largest insurance providers, such as Migdal and Menorah Mivtachim, have already made such exclusions in their travel insurance policies and will not cover travel to the Far East.
Article Written by: Syvanne Aloni