What if your Chinese supplier doesn't supply?

Chinese workers in protective clothing / Photo: Reuters

Israeli firms doing business with China need to examine their legal remedies for costly disruptions.

With the number of globally-reported cases surpassing 80,000, the coronavirus outbreak has sparked major global concern for public health. Despite China’s efforts to contain the virus, the impact of this potential pandemic on the health of global businesses is likely to be felt in the coming weeks. Plunging financial markets indicate the depth of concern.

As China struggles to recover, Israeli companies may feel the knock-on effects of its shutdown and the epidemic. Since the signing of a bilateral trade agreement in 1995 and the establishment of non-profits such as IsCham, China-Israel trade has burgeoned. In 2018, trade reached a whopping $14 billion, with imports amounting to $10.5 billion. China is Israel’s largest trading partner in Asia, and its second largest worldwide. 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.

In the wake of the recent outbreak, Israeli giants such as fashion company Castro have moved their manufacturing operations out of China. Disasters on this scale can lead to missed contractual obligations, disruptions to supply chains, and financial stress. We explore some contractual provisions which business owners can consider to mitigate their losses.

Sign your contract under English Law

As Chinese law can be hard to enforce, the Israel Chamber of Commerce recommends signing contracts under the law of a third country, agreed on by the parties. English law is a highly popular choice for parties of different countries engaging in business contracts, even when they have little or no connection to England and Wales. In relation to China, an advantage of English jurisdiction is that it draws on over 800 years of case law and precedent, whereas the Chinese legal system relies on the judges’ discretion in deciding commercial disputes.

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 fairly short and simple. There prevails a general reliance on "guangxi" (good faith) rather than on precise wording, to the extent that some Chinese companies may not even review contracts before signing them.

Nevertheless, in the specific circumstances of the coronavirus, foreign business owners who have signed contracts governed by the English legal system might find disputes with Chinese partners resolved in a more timely manner. Whilst in the UK the English legal system is running as usual, the Hong Kong courts are struggling to manage the growing backlog of cases that were adjourned as a result of the shutdown.

Examine force majeure clauses

Force majeure events are unforeseen circumstances that fall outside of a party’s control and that prevent that party from fulfilling its contractual obligations. Businesses in various industries in China affected by the coronavirus outbreak have invoked force majeure clauses as a defense against claims against them for breach of contract. The precedent for this was set during the 2003 SARS outbreak. The defense is not necessarily successful. Notably, CNOOC (one of China’s largest oil companies) recently had their legal arguments for invoking such a clause rejected by Shell and Total.

Affected parties should examine their contracts to determine whether a force majeure clause could offer their Chinese suppliers protection from the consequences of the coronavirus outbreak. Such clauses must be evaluated case-by-case, and on the basis of the precise wording of the contract. The burden of proof in force majeure claims arising from the coronavirus outbreak lies with the Chinese suppliers, and Israeli businesses may have scope to reject such claims.

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.

A force majeure event does not automatically allow parties to terminate their contracts - it may simply suspend contractual obligations until the event is over. Careful analysis of the contract’s wording will identify the actions that the affected parties can take. It is possible that parties will be expected to mitigate losses by fulfilling whatever part of the contract they still can, rather than terminate it completely.

If the clause permits immediate termination of a contract, particular attention should be paid to the notice requirements. With the extension of the Lunar New Year in mainland China, parties wishing to terminate their contracts should check whether their notice period includes unexpected holidays.

Check your insurance

Businesses should review their business interruption, commercial property, and political risk insurance policies to determine what protection they offer against income losses sustained from exposure to the outbreak. The protection afforded to affected parties will depend on specific terms in each policy and, crucially, their interpretation. Following the 2003 SARS outbreak, the interpretation of insurance policies sparked disputes between certain policyholders and insurance providers.

One key contentious topic is 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.

Importantly, 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.

Syvanne Aloni is a paralegal at Asserson law offices, an English law firm based in Tel Aviv.

Published by Globes, Israel business news - en.globes.co.il - on March 8, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Chinese workers in protective clothing / Photo: Reuters
Chinese workers in protective clothing / Photo: Reuters
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