The risk of your business partner failing to perform its contractual obligations is part of doing business. In normal times, this risk is more acute for foreign firms unfamiliar with local legal environment and culture. And these are not normal times. The full global impact of COVID-19 has yet to be felt, but its impact on Chinese business is already palpable. Even after several weeks, many Chinese businesses have yet to return fully to work, logistics remain problematic, people returning from locations outside their workplace are quarantined for 14 days, and companies are facing regulatory and compliance pressures – all of which have stretched company resources, disrupted capabilities and produced a spike in clear signs of financial distress on the part of counterparties.
Contract performance risks have risen sharply in this environment. A number of businesses have reported that they have received force majeure certificates from their counterparties in China, which were issued by the China Council for the Promotion of International Trade (CCPIT) in support of the counterparties’ claims for relief from breach-of-contract liability amid the COVID-19 epidemic. As of 20 April, over 7,000 force majeure certificates had been issued by the CCPIT and its local branches.
Sympathy from foreign firms for Chinese companies facing this multitude of pressures is evident. However, the natural result of these pressures is an inability to meet contractual obligations and make payments. The slowdown is having a genuine impact on Chinese business to pay debts, but also presents an ideal opportunity for less scrupulous firms to delay payments. Some of the questions that have been asked:
We are all suffering from information overload, trying to monitor for daily updates on the progress of COVID-19 in China and now globally, but obtaining actionable information about specific impacts on a local level can be frustrating. Despite these unusual times, these questions are quite typical – ultimately relating to understanding a counterparty’s current operating condition and prospects – information which is not readily available in the Chinese public record, and analysing external factors that may influence their ability to perform their obligations and remain a viable long-term business partner. However, through a combination of smart public domain research, discreet enquiries with those familiar with the company and our substantial experience with business practices and culture, we can obtain the insights you need to focus your strategy:
Is the company genuinely under pressure because of its location, industry or unique circumstances which is preventing them from performing its obligations? What local government regulations may protect the company if it refuses to perform? Are there indications, to the contrary, that the company is back to business?
What is the actual perceived status and operations of the company on the ground? Are there signs of financial distress, missed payments or contractual disputes? Are other companies in the industry and locality facing similar difficulties? Would it likely be willing to expend the time and resources necessary to arbitrate or litigate the matter? Is the company known to be aggressive and contentious when it faces difficulties with its partners?
If you take an aggressive approach in China against the company, how much do you really know about them? How significant an employer/taxpayer are they locally, and therefore how influential? How well-connected politically are they? Are you aware of their local reputation? Could aggressively pursuing the company in the short term have a long-term impact on your future success in the area or in the industry?
What is the significance of this company to your business and your reputation in China? What are your ultimate objectives? What exactly is the counterparty seeking to achieve by declaring force majeure? What grounds is the force majeure claim based on? What is the likelihood of the claim prevailing in a formal dispute resolution proceeding and what is the likely cost? What stakeholders should you proactively engage with to mitigate risks arising from the force majeure claim and from potential disruption to your operations and your supply chain? What strategies can you use to explore options with the company and reach a mutually satisfactory resolution?
Through a combination of targeted enquiries with sources familiar with the subject company, a comprehensive review of the latest available information on the company and the region, and substantial experience with the local business environment and culture, you can gain insights towards next steps, and build a strategy for success.
Rosie Hawes is a Partner at Control Risks and leads the firm’s Business Intelligence practice in Greater China and North Asia.
Jessica Pyman is a Partner at Control Risks and is responsible for all aspects of business intelligence services delivered in the Asia Pacific region.
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