By Kiran Nasir Gore and Charles H. Camp
On January 30, 2020, the World Health Organisation declared the new coronavirus (COVID-19) outbreak a Public Health Emergency of International Concern. Alongside quarantines, travel restrictions and bans, businesses have been confronted with limited access to global human capital and unreliable supply chains. Here we examine several ways that the coronavirus epidemic has impacted global business prospects with connections to the PRC. We aim to provide businesses and their legal strategists with ideas to guide effective solutions to risks, liabilities, and disputes caused by a global public health crisis.
In December 2019, when doctors in the Wuhan province of the People’s Republic of China (PRC) first encountered the new coronavirus (COVID-19), very few of us could have imagined that the World Health Organisation (WHO) would soon declare a Public Health Emergency of International Concern (PHEIC).[i] At the time of writing (at the end of February), the impact is already devastating; global health authorities have verified more than 82,000 cases of infection and more than 2,800 deaths.[ii] Since the the writing of this article, these numbers have only continued to increase at staggering rates. In an effort to contain the outbreak and its spread, government and non-governmental organisations have swiftly imposed quarantines, travel restrictions, and bans. On the business side, these measures carry significant economic implications.
Recent travel restrictions to, from and within Chinese cities have limited access to human capital and caused global businesses to grapple with labour shortages, factory closures and supply-chain disruptions. Similar considerations also plague the future of the PRC’s ambitious Belt and Road Initiative (BRI) projects around the world.
Yet, even in volatile times, global businesses can be assertive and strategic in their approach. This article examines several ways that the coronavirus epidemic has impacted global business prospects with connections to the PRC, and provides guidance to business leaders and their legal strategists to help manage supply-chain disruptions, personnel shortages, contractual obligations, and any resulting disputes to ensure their continued success.
Supply-Chain and Distribution Disruptions
On February 17th, Apple, Inc. became one of the first global businesses to announce that, because of the coronavirus outbreak, it had lowered sales expectations for this quarter.[iii] These changed expectations are linked to slower product supply, owing to closures at its Chinese factories and decreased demand for its products among Chinese consumers.[iv] Similar effects are visible in the car, healthcare and luxury goods industries, each of which depends heavily on Chinese production streams or Chinese consumers.[v] Market watchers estimate that the true impact on global productivity and consumption will not be known for several months. These quantifiable economic losses – which by no means compare to the loss of human life – are instructive for ongoing business challenges.
In the early stages of a supply chain problem, businesses should determine which aspects of their supply chain are at greatest risk and assess whether they can absorb these challenges through alternative sourcing or inventory reserves. Indeed, longer-term solutions might involve exploring alternative sourcing and manufacturing streams, not only to address the short-term changed circumstances, but also to diversify and become more resilient in the face of future disruptions.
Risks Along the Global BRI
Just as the coronavirus epidemic has limited access to product supply and human capital within the PRC, it has a corollary impact on Chinese-led investments located outside the PRC. The BRI provides a prime-example case study.[vi] Many BRI projects rely on either Chinese-manufactured imports or Chinese personnel to advance their interests. Without access to both, in-progress BRI projects may go stagnant.
Indeed, the timing of the coronavirus could not have been worse. The WHO’s PHEIC declaration, came shortly after the Lunar New Year holiday, during which many Chinese workers located abroad had returned home for the holiday festivities. A large number of these found themselves unable to return to work, either because of travel restrictions imposed locally or their foreign employer’s unwillingness to receive them abroad for fear of further spread of the illness. According to Reuters, as of mid-February, the Chinese National Immigration Agency reported that more than 133 countries had imposed entry restrictions on Chinese citizens or people who have visited China.[vii]
Further challenges arise when considering the BRI’s globally interconnected vision. As explained in a World Bank Report published last year, full implementation of the BRI, including multilateral cooperation, is key to unlocking its full trade and economic benefit.[viii] This means that BRI projects must press on, notwithstanding setbacks. In line with this perspective, the PRC’s Ministry of Commerce swiftly announced that, in spite of the coronavirus epidemic, BRI projects remain on track, with no large-scale project delays.[ix] The veracity of this announcement – and whether full implementation remains realistic – will only be confirmed with the passage of time.
Does Force Majeure or Frustration of the Contract Excuse Performance During a Public Health Crisis?
Business leaders and legal advisers should assess the precise contractual terms and governing law of impacted supply chain contracts. Sophisticated negotiators will often include a force majeure clause in their contracts. Generally, this clause allows a party to excuse its performance in the case where an unforeseen event outside that party’s control prevents it from meeting its contractual obligations. In the context of the coronavirus epidemic, where travel bans and closures have shut down manufacturing and production lines, the utility of such a clause is self-evident.
The Chinese authorities recognise the possibility that the coronavirus epidemic may amount to a force majeure event under certain contracts. At the end of January, the China Council for the Promotion of International Trade (CCPIT), accredited with the PRC’s Ministry of Commerce, began issuing force majeure certificates, upon request, to businesses in the PRC that claimed that their collaboration with foreign partners has been affected by the coronavirus outbreak.[x] By mid-February, the CCPIT had issued more than 1,600 such force majeure certificates.[xi]
However, obtaining such a certificate does not alone lead to an assured legal outcome. Determining whether a party may renege on a contractual promise because of a PHEIC is a nuanced inquiry that depends on careful analysis of the facts, the wording of the clause itself, and the law guiding its interpretation. An ideal contract would specifically account for a public health crisis (to avoid ambiguity, possibly one declared as a PHEIC by the WHO), alongside other enumerated force majeure events, such as a natural disaster, act of God, or other catastrophe.[xii] But even with a clear force majeure clause, it often takes protracted litigation or arbitration to determine finally whether performance is excused (without monetary consequences) or whether a breach has occurred (entitling the other side to damages).
During dispute resolution, the party that invoked the force majeure clause must prove that, under the applicable law, the clause was appropriately invoked, that the non-performing party provided appropriate notice of its failure and attempted to mitigate its effects, and that the non-performing party would have performed the contract had the force majeure event not occurred. A key element is that the non-performing party must demonstrate that the intervening event is entirely beyond the control of the parties to the contract. While the precise definition of force majeure varies under each jurisdiction’s legal system, the standard described here is generally consistent among both common law jurisdictions and PRC law.[xiii]
Regardless of contractual terms, most parties and their advisers would claim the coronavirus epidemic’s crippling impact was unforeseeable. This may seem shocking in a world with several WHO-declared PHEIC in the past decade alone (including some PHEIC alerts that remain currently active): swine flu (2009), poliovirus (2014), ebola (2014 and 2019), and zika virus (2016).[xiv]
Apart from relying on a force majeure clause, a party may possibly claim that the doctrine of frustration of purpose excuses its performance. This doctrine operates as part of the general common law of certain jurisdictions, such as New York and the United Kingdom, and is not included as an express contract clause. The law requires a supervening event that affects the very heart of the contract at issue, entirely beyond what was contemplated by the parties when the contract was formed. It only applies in exceptional circumstances to excuse non-performance. Mere hardship or inconvenience are not enough to meet this standard, and neither party can be at fault for the event. In particular, if the parties have accounted for a certain possibility in their contract (for example, if a possible public health crisis is accounted for as a force majeure event) then the event will no longer be unforeseen and the burden cannot be alleviated through the doctrine of frustration. An example of a frustrating event may be the quarantine of a local port. If goods dispatched by ship can no longer be delivered to their destination and there is no other reasonable route for performance, then this may qualify as a frustrating event under the relevant contract.
These same contractual challenges – including relevant factual and legal inquiries – apply to obligations and liabilities for BRI projects. However, among BRI projects there are additional layers of complexity. Many state-owned enterprises are involved in the BRI’s financing, design, and development.[xv] Parties with PRC government affiliation may not succeed in a force majeure or frustration claim. The PRC’s official Centre for Disease Control and Prevention investigation of the coronavirus source implicates Wuhan’s Hunan Seafood Wholesale Market.[xvi] Meanwhile, there is global speculation that the coronavirus may have leaked from a microbiology lab not far from the same market.[xvii] Regardless of which story is believed, the PRC’s failure to regulate adequately could be seen as the “cause” of the coronavirus epidemic. This undercuts the effectiveness of both force majeure and frustration claims. Under both legal claims, it is absolutely required that the intervening event be entirely outside the control of the party seeking to excuse its performance.
If a BRI project is guided by Fédération Internationale des Ingénieurs-Conseils (FIDIC) contract standards, the range of possible entitlements expand beyond merely force majeure and frustration of purpose to alleviate non-performance. For example, under FIDIC contract terms, a party claiming unforeseeable shortages in the supply of goods or labour may be able to seek an extension of time for completion.[xviii] A party may also obtain relief for delay or disruption to its productivity in cases where public authorities increase health and safety testing.[xix]
A recently published book, The Belt and Road Initiative: Legal Risks and Opportunities Facing Chinese Engineering Contractors Operating Overseas, offers Chinese-focused insights on possible challenges to execution of BRI projects.[xx] Its authors are the Permanent Forum of China Construction Law, a working group comprised of dozens of pre-eminent Chinese and international legal experts who have successfully advised Chinese contractors in international infrastructure and development projects.[xxi] The book provides nuanced and thoughtful guidance to Chinese contractors working on BRI projects around the globe, including practical solutions to the variety of setbacks they can expect: labour strikes, customs delays, and changes to local regulations and permitting requirements. Yet, nowhere does the book account for the risks associated with a possible global health crisis. Again, this suggests that the coronavirus epidemic is an exceptional global event. With impact ranging from the PRC to Italy, it can be seen as both unprecedented and unforeseeable. However, the reality is that the law is not on the side of parties who breach their obligations. In some cases, contractual terms will offer legal solutions to realistic supply-chain challenges. At all events, parties are encouraged to maintain strong communication with their business partners, as this may create opportunities to negotiate improved outcomes.
Conclusion
It may be true that the coronavirus epidemic has surprised even the best-prepared and most sophisticated governments, international organisations, and businesses alike. But today, as the aftermath and true impact continue to reveal themselves, we are better informed and, therefore, better equipped to respond to a global health crisis of this magnitude. Proactive business leaders and legal strategists can implement international best practices for contracts, construction timelines, and personnel needs by drawing on the lessons now learned, and manage expectations and obligations accordingly.
About the Authors
Charles H. Camp is an international lawyer with over thirty years of experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in Washington, D.C. to focus on effective, personalised representation in complex, international matters. Mr. Camp teaches international negotiations at the George Washington University Law School.
Kiran Nasir Gore is Counsel at the Law Offices of Charles H. Camp, P.C. Her expertise is in international dispute resolution, including advocacy before US courts, commercial and investment arbitration tribunals, and investigative authorities. She also draws on her professional experiences as an educator at the George Washington University Law School and New York University’s Global Study Center in Washington, D.C.
References:
[i] Statement on the second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV), World Health Organisation (Jan. 30, 2020), https://www.who.int/news-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-outbreak-of-novel-coronavirus-(2019-ncov)
[ii] Globally aggregated coronavirus outbreak statistics are available at https://www.worldometers.info/coronavirus/
[iii] Daisuke Wakabayashi, “Apple Signals Coronavirus’s Threat to Global Businesses,” N.Y. Times (Feb. 17, 2020), https://www.nytimes.com/2020/02/17/technology/apple-coronavirus-economy.html
[iv] Id.
[v] Megan Cerullo, “Coronavirus chills luxury brands in — and outside — China” (news broadcast), CBS News (Feb. 13, 2020), https://www.cbsnews.com/news/coronavirus-chinese-tourism-luxury-brands-us-europe/
[vi] Keith Zhai and Matthew Tostevin, “Coronavirus slows China’s Belt and Road push,” Reuters (Feb. 18, 2020), https://www.reuters.com/article/us-china-health-silkroad/coronavirus-slows-chinas-belt-and-road-push-idUSKBN20C0RF
[vii] Id.
[viii] Belt and Road Economics: Opportunities and Risks of Transport Corridors (The World Bank Group, 2019), pp. 3-9, https://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative
[ix] Zhong Nan, “BRI projects not affected by coronavirus, official says,” China Daily (Feb 21, 2020), http://global.chinadaily.com.cn/a/202002/21/WS5e4f7970a31012821727952f.html
[x] “China trade agency to offer firms force majeure certificates amid coronavirus outbreak,” Reuters (Jan. 30, 2020), https://www.reuters.com/article/us-china-health-trade/china-trade-agency-to-offer-firms-force-majeure-certificates-amid-coronavirus-outbreak-idUSKBN1ZU075
[xi] “China issues over 1,600 force majeure slips to coronavirus-hit companies,” China Daily (Feb. 17, 2020), https://www.chinadaily.com.cn/a/202002/17/WS5e4a38eaa31012821727818d.html
[xii] Many contracts will account for a “pandemic” in their force majeure clauses to ensure that performance is excused should the contract no longer be feasible. See e.g., Akorn, Inc. v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325, 117 (Del. 2018).
[xiii] See e.g., Permanent Forum of China Construction Law, The Belt and Road Initiative: Legal Risks and Opportunities Facing Chinese Engineering Contractors Operating Overseas (Kluwer Law International, 2019), pp. 188-189.
[xiv] Nicola Davis, “Coronavirus: what other public health emergencies has the WHO declared?,” The Guardian (Jan. 30, 2010), https://www.theguardian.com/global/2020/jan/30/coronavirus-what-other-public-health-emergencies-has-the-who-declared
[xv] “Embracing the BRI ecosystem in 2018: Navigating pitfalls and seizing opportunities,” Deloitte Insights (Feb. 18, 2018), https://www2.deloitte.com/us/en/insights/economy/asia-pacific/china-belt-and-road-initiative.html
[xvi] “The Epidemiological Characteristics of an Outbreak of 2019 Novel Coronavirus Diseases (COVID-19) – China, 2020,” China CDC Weekly. 2: 1–10 (published by the Chinese Centre for Disease Control and Prevention (Feb. 20 2020), http://www.ne.jp/asahi/kishimoto/clinic/cash/COVID-19.pdf
[xvii] Steven W. Mosher, “Don’t buy China’s story: The coronavirus may have leaked from a lab,” N.Y. Post (Feb. 22, 2020), https://nypost.com/2020/02/22/dont-buy-chinas-story-the-coronavirus-may-have-leaked-from-a-lab/
[xviii] See e.g., FIDIC Silver Book 2017, Clause 8.5(c); FIDIC Red Book 1999, Clause 8.4(d).
[xix] FIDIC Red Book 1999, Clause 8.5.
[xx] Permanent Forum of China Construction Law, The Belt and Road Initiative: Legal Risks and Opportunities Facing Chinese Engineering Contractors Operating Overseas (Kluwer Law International, 2019).
[xxi] Id., p. xxiii.
