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The legal impacts of the coronavirus on RMG contracts
Novel Corona-virus was first identified in Wuhan, the capital of China’s Hubei province, in early December 2019. The World Health Organisation (WHO) declared the virus a Public Health Emergency of International Concern (PHEIC) on January 30. However, the virus has not yet been declared a “pandemic”—a term used to describe an infectious disease which has spread globally—and the WHO has not recommended any trade or travel restrictions.
However, a number of countries have issued warnings against travelling to Hubei and elsewhere in China, as well as restrictions on entry of travellers from China. Some international commercial airlines have suspended flights to and from China and some vessels are also not calling at Chinese ports.
The Chinese government has imposed restrictions on movement within China in response to the outbreak. Manufacturing industries are on an extended holiday that began during Chinese New Year. The shutdown of Chinese manufacturing is likely to have an impact on the global supply chain, along with a consequential impact on construction projects and other downstream industries.
The final consequence of this is a slowdown of the “global factory” due to the coronavirus outbreak, through both the domestic markets of China and their involvement in the global supply chain. Chinese goods make up more than 26 percent of Bangladesh’s total imports, which includes raw materials, finished products, machinery and consumer products worth around USD14 billion per annum. The consumer market in Bangladesh is also dependent on Chinese supply.
Though there have been no coronavirus cases detected in Bangladesh so far, the country’s economy is now likely to face an adverse impact because it maintains close trade relations with China. Readymade garments (RMG) is a major sector of manufacturing and export for Bangladesh, and more than 50 percent of the raw materials used for this industry are brought from China. Due to the virus outbreak in China, disruptions in the supply chain could continue for several more months, leading to a financial loss worth BDT 14-15 billion for the garments accessories sector alone. The failure of delivery from Chinese exporters may compel buyers in other countries to claim compensations for a breach of contract with regard to timely delivery, and on the other hand, the overseas buyers of RMG from Bangladesh may also claim compensation from exporters in Bangladesh.
However, the contracting parties may be excused from this breach of contract by using the “force majeure” (FM) clause. Force majeure events are unexpected circumstances outside of a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations. Usually, international sales contracts do not explicitly mention this clause. Affected parties should consider whether their contracts make provisions for force majeure clauses and whether the outbreak falls within the protection offered by the relevant clause.
Force majeure clauses can be relied upon only if all reasonable steps have been taken by a party to mitigate the effect of the event, so it is unclear whether Bangladesh can be excused by invoking this clause. The shortage of component materials may have an impact on pricing now and in future months, the scarcity of such parts may well drive prices upwards if demand remains stable. As a result, contracts should be reviewed to ensure that protection against price rises is also included, or whether they need to agree to new terms or “flex” other parts of their supply chains to ensure adequate provision of stocks at a commercially sensible price.
On the basis of the emergency declared by the WHO, force majeure provisions are likely to be increasingly relied upon and invoked by an affected party. The China Council for the Promotion of International Trade (CCPIT) announced that it would be offering “force majeure certificates” to businesses in China affected by the outbreak of the coronavirus in Wuhan.
Whether a Chinese exporter can successfully invoke FM, and/or rely on the CCPIT certificates to do so, will depend on the governing law of the contract and the terms of the relevant clause. The CCPIT has already issued its first force majeure certificate to a manufacturing company in Zhejiang province to help stem the firm’s losses, arising from its inability to meet its contractual obligations with Peugeot’s African plant, which potentially exposed it to a damages claim.
Release from performance as a result of force majeure is not recognised as a standalone principle in some countries, such as the UK. It is therefore a matter for parties to deal with expressly in their contracts and the protection afforded by the clause will depend on the precise drafting. In the event of a dispute as to the scope of the clause, the English courts will apply the usual principles of contractual interpretation.
According to global law firm Gibson, Dunn and Crutcher, “The usual rules of contractual interpretation under English law apply to the interpretation of force majeure clauses. The court must ascertain the objective meaning of the language which the parties have chosen to express their agreement, and consider not only the wording of the particular force majeure clause but must also consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. Market practice may also be relevant to the exercise of interpretation, provided that it is clearly evidenced. In practice, however, market practice may be difficult to prove and a recent English case has confirmed that evidence of market practice after a contract is concluded will not result in terms being implied into a contract.”
The crisis along shipping lines are likely to be more acute, since the business is highly regulated by laws and protocols. The shipping industry is likely to be impacted in a number of ways—they are facing disruptions in voyages to and from China, but also from delays in other countries as a result of quarantine and port checks due to cases, or suspected cases, of the coronavirus amongst crew and passengers on board vessels. Delivery of cargo may be delayed, or cargo may need to be discharged at alternative or interim ports, with expensive consequences and significant logistical and insurance implications.
International law firm Morrison and Foerster LLP recently provided an overview of force majeure clauses under Chinese law and English law, noting that in relation to Chinese law, “Useful guidance in evaluating the applicability of force majeure to the coronavirus outbreak is a notice of the Supreme People’s Court (SPC) issued in 2003 in relation to the SARS epidemic, which confirmed that force majeure would apply where the SARS epidemic or government measures adopted to combat it rendered a contract unable to be performed. It is not unreasonable to expect similar SPC guidance in response to the current outbreak, but even without that formal guidance, force majeure may be a useful doctrine for defaulting parties in appropriate circumstances.”
As for the Hong Kong law, the authors examined the importance of the doctrine of frustration in circumstances where a contract does not contain a force majeure clause and, in relation to force majeure itself—“Whether the coronavirus outbreak qualifies as a force majeure event ultimately will depend on the construction of the contractual clause at issue. Some clauses may make it reasonably clear if they specifically identify “disease”, “epidemic”, or “quarantine” as force majeure events. Other clauses may include more general events such as “acts of God”, “acts of government”, “strikes”, or “circumstances beyond the parties’ control”. The current outbreak could be a combination of more than one factor, the disease/epidemic itself and the government/public actions that ensue. Affected parties should carefully review the force majeure clauses in their contracts to determine whether they may apply.”
Consequently, Bangladeshi exporters may evaluate their sales contracts and also the possible impacts of failure to export RMG on time, and figure out whether they can claim compensation from Chinese sources of raw materials. The Export Promotion Bureau and BGMEA should study the issue, evaluating the laws and practices related to force majeure of buyers’ countries. This will be a new experience for buyers and sellers of Bangladesh and act as a good reference for trade law practitioners.
MS Siddiqui is a legal economist. He can be reached at mssiddiqui2035@gmail.com
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