The outbreak of coronavirus (also known as COVID-19) is viciously impacting the whole world, in a way forcing companies, banks, financial corporations and factories to act accordingly, and be prepared for the anticipated financial and legal implications. Losses are certainly not limited to lives but will extend to have serious impacts on global economy. The urgent question is how the world will fulfill the future needs of global markets, being heavily dependent on Chinese industry, while Chinese factories are shut down to control the spread of the virus?  

Though the current situation is evolving rapidly, yet business owners can take proactive steps to mitigate the impact of coronavirus on their employees and their investments as well. They should take preventive and remedial measures to reduce legal risks. Such legal risks, affecting the world of finance and business, must be first identified. In my opinion, they can be stated as follows:

1. Force majeure and its implications for contractual obligations.
2. Legal and financial impact on capital structures.
3. Legal and financial impact on loans and credit.
4. Legal impact on staff rights and health safety.
5. Coverage of insurance companies in case coronavirus risks.
6. Ability of marketing for new deals.
7. Staff suspension from work due to quarantine or travel restrictions imposed by   governments.

Economic Atmosphere Change:

The outbreak of coronavirus forced many companies worldwide to adopt fresh action strategies. Obviously, the world of finance is currently in a dire need to get ready for any potential consequences of the virus outbreak and provide as many details of its impact on the global economy and the legal consequences resulting from contractual obligations on the companies. Therefore, governments took precautionary measures to protect their citizens whether inside or outside. Such measures, including quarantine, home isolation, travel restrictions and border closure, led to suspension of employees and, consequently, to business interruption.

On the 30th of January, coronavirus was declared a global health emergency by WHO. This led to the cancellation of major events in many countries and also contributed to the reduction of trade deals of many global companies. For instance, Toyota announced suspension of production, consequently, hundreds of factories in China stopped their wheels, causing production of spare parts to malfunction. Moreover, suspension of motion and labor led to a marked decline in consumption, and numerous global companies were deadlocked in many sectors including education, aviation, tourism, commerce, hospitality, investment, shipping and others. Therefore, potential legal and financial consequences are likely to occur, as companies may confront risks of political, economic and legal insecurity. The spread of the epidemic for a long time may also result in economic turmoil, public discontent in many countries, stifling of creativity and growth failure.

Furthermore, the suspension of Chinese manufacture will have a negative impact on global supply chain as well as projects of construction, processing industry and infrastructure. It will also cause business interruption, whether directly or indirectly, to other markets including commodity markets (iron, copper ... etc.), retail trade, transportation, industry and others. Moreover, there will be a significant impact on shipping sector, whether in terms of flight disruption or delay due to health and technical checks carried out in ports, or because of border closure, travel bans or quarantine of suspected cases including the crew or the passengers. Consequently, delays in delivery of goods are inevitable, resulting in costly logistic and insurance implications. Hence, a number of strategic plans must be developed to ensure the continuity of work.

Force Majeure: Impact on Contractual Obligations

Affected parties should review their contracts as whether they provide a force majeure clause, and whether or not the relevant epidemiological clause provides legal protection against coronavirus.

Force majeure is defined as unexpected and unavoidable circumstances beyond the control of the contracting parties, under which they cannot fulfill their contractual obligations. Some provisions of force majeure describe certain events beyond control and reason, others are narrow describing only certain events.

Furthermore, some force majeure requirements exempt from the performance of contractual obligations in case that it is impossible. On the other hand, some other force majeure requirements do not exempt a party from his obligations if performance remains possible though difficult in terms of finance, which requires that one party should take more risks.

We recommend that companies should assess their future legal and financial risks, and develop plans addressing these risks. As for companies facing potential non-performance under existing contracts, they should take a range of proactive steps including legal review of relevant contracts and, most importantly, early communication with the other party. Contract implementation is a very important step towards fulfillment of obligations by virtue of the contract terms, and a significant evidence of goodwill. However, certain unexpected incidents may obstacle such implementation or make it difficult for some party.    

 

Impact of Exceptional Circumstances and Force Majeure on International Contract Implementation

Contracts are the most widely used legal tool in commercial activities. If the contract is held correctly, the parties are required to perform the contract by virtue of its provisions; this is expressed as the binding force of the contract. Sometimes, the contract implementation is either difficult or impossible for one of the contracting parties due to exceptional circumstances such as emergency or force majeure.

 

Business Interruption and Insurance Coverage

Does insurance cover the bad impact of coronavirus on the affected business? 

Locally, only big brands are interested in contracting with insurance companies. However, most of the other companies with limited business do not show much care for insurance because they generally rely on government support both in times of prosperity and crisis.

Actually, insurance is an essential issue for international companies. Many companies are likely to have insurance coverage in case of business interruption. Unfortunately, this insurance often covers losses and damage resulting from natural catastrophes only, such as hurricanes, earthquakes or fires, but it does not cover epidemics.

Usually, insurance companies are keen to exclude infectious diseases resulting in business interruption from their contracts. Yet, in certain exceptional cases, where this a clear and explicit provision stating that epidemics should be included in the insurance contract, there is scope for negotiations on whether coronavirus is among insured epidemics or not.

A number of insurance companies in China received limited demands concerning coronavirus. However, the insurance policy of business sector frequently requires direct material loss to properties. Consequently, there will be no coverage for the damage caused by closure of factories and suspension of work due to the outbreak of coronavirus, because the insurance policy does not cover losses of business interruption.

Hence, accurate contract formulation is the prerequisite to ensuring adequate protection for business contracts whether related to insurance or force majeure.