COVID-19 and getting paid

COVID-19 and getting paid: responding to claims of financial distress or force majeure 

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 had 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 we have been asked are:

  • How do I trust my partner when they tell me they cannot pay as COVID-19 has impacted their cash flow?
  • Our counterparty has defaulted on a contract and said they are declaring going into receivership. Due to travel restrictions we cannot visit them and have no on-the-ground information. How do we verify this is true, and how can we get paid?
  • Prior to Chinese New Year we received a court order requiring our customer to pay outstanding debts. We want to understand the long-term impact this will have on our business if we insist on them complying with that order.
  • Our counterparty sent us a force majeure certificate issued by the CCPIT, claiming that the COVID-19 epidemic prevents them from performing their obligations and hinting they want to be excused from performing their obligations   We want to understand what strategy we can use to respond and protect our interest while avoiding lengthy and costly dispute resolution processes and preserving important business relationships. 

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 analyzing 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:

Counterparty monitoring: Is the company genuinely under pressure because of their 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?

Fit to sue: 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?

Protecting your business: 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?

Building negotiation strategy: 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 our substantial experience with the local business environment and culture, Control Risks can provide insights and suggestions for next steps, and build a strategy for success.

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