The current outbreak of novel coronavirus (COVID 2019) was first reported from Wuhan, China on 31 December 2019, and has been declared by the World Health Organisation (WHO) as a "global health emergency".


It has been sad to read about the trauma on families and communities and hopefully we will begin to see a slowdown in reported cases. While only a small percentage of confirmed cases presently exist outside of China, the international business community will of course be taking suitable precautions to prioritise the health and wellbeing of colleagues around the world, and the World Health Organisation continues to promote best practice and guidance which is available here.

The economic impact is nevertheless slowly becoming more widespread and global businesses will be considering their options and how best to mitigate unforeseen supply chain and other issues including loss of business. Those emerging challenges and possible remedies are covered in this guidance note prepared by lawyers in our Asia business. 

How does it affect you?

China is the world's second largest economy with a gross domestic product (GDP) of £10.6 trillion. In terms of the UK's trade relationship with China, British exports to China is worth approximately £22.6 billion while imports from China is worth approximately £44.7 billion. China is among the UK's top ten trading partners for goods and services and it is the UK's second largest source of imports outside of the European Union [1]

In efforts to control the outbreak, many cities in China were forced to shut down for at least two weeks. The extended closure of factories following the Lunar New Year break and implementation of quarantine measures across China has disrupted global supply chains and logistics systems. Technology and automobile companies are especially affected, leading to the halt of production (beyond China) as well as delays in order fulfilments and product launches owing to shortage of Chinese parts. Further disruptions could potentially result in the restructuring of businesses.

Besides health concerns, the knock on effect of the coronavirus outbreak is visible across multiple sectors. Businesses with operations or interests in China ought to review and update their strategies to manage potential short-term challenges. We have identified examples of how the virus has been impacting various sectors for illustrative purposes.

Retail and Consumer

The viral outbreak has caused the demand of luxury goods to decline. One British retailer has announced the closure of 37% of its stores in mainland China and those that remain open have been operating on reduced hours as a consequence of a decline in shoppers as people observe quarantine measures. China-exposed luxury brands saw their shares drop as the outlook remains uncertain. 

Transport

The viral outbreak has also resulted in disruptions to the automotive industry. Global car makers have halted production as a result of a shortage in Chinese parts in Japan and South Korea. A global car maker headquartered in London has considered temporarily shutting down one of its European plants because of sourcing difficulties [2].

Following the Foreign Office’s advice against all but essential travel to mainland China, all British airlines have suspended direct flights between the UK and mainland China for at least two months since the end of January. Other airlines have followed suit. Due to various travel restrictions, countless flights have been cancelled or rerouted and international travel is substantially curtailed. 

Energy

Global demand of oil and gas is expected to be impacted during the current outbreak and in particular its effect on aviation and travel. Similar to the situation during the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, a multinational oil and gas company headquartered in London anticipates that the virus could remove 300,000 to 500,000 barrels a day of oil demand in the short-term (i.e. slash global demand growth by 40% in 2020) [3]. There have been reports of Chinese state backed liquefied natural gas (LNG) companies looking to invoke force majeure to cancel contracts [4].

Financial Services

British multinational banking and financial services companies are among banks operating in Hong Kong who have introduced relief measures which include waiving fees and cutting loan repayments to help ease the financial burden of small businesses and individuals amid the outbreak. Regulators in mainland China have also encouraged banks to take special measures, including extending credit and cutting interest rates, to help companies and individuals facing short-term liquidity and cash flow problems.

British financial services companies should be prepared to encounter customers in other parts of the world who default on guarantees and facilities as the financial impact of the virus spreads outside of China.    

Real Estate

Real estate agencies and associations have shut their offices in mainland China for prolonged periods and several countries have issued travel bans or quarantine measures on travellers from China. The impact on the real estate market is felt in China and beyond. The present limitations to the ability of Chinese investors to access markets in Australia, Singapore, Thailand and the United States has caused a slowdown in activity [5]. Whether the impact of the coronavirus on the property market will be as deep as the impact of SARs remains to be seen.  

Health and Life Sciences

China manufactures key ingredients in the global supply chain for antibiotics and other drugs. Many pharmaceutical companies rely on China to source active ingredients. One Indian pharmaceutical is concerned that unless China resumes production soon, many drug companies will run out of inventory [6].  The shortage in supply may persist even after Chinese factories resume production if logistical problems arise. Pharmaceutical companies typically stock around three to six months of inventory, which is not enough lead time to get regulatory approvals for another plant. 

What to do to mitigate risks?

Here are some practical steps that companies can take to mitigate risks:

  • Identify contracts relating to transactions that are likely to be affected by the current outbreak to understand your rights and obligations as well as the applicable laws and dispute resolution mechanisms. 
  • As soon as a default occurs, consider acting promptly including providing relevant notices of a dispute and commencing enforcement action where appropriate.  
  • Review insurance policies to understand the scope of coverage and relevant notification periods.
  • Review employment terms (including work from home policies) of employees in affected countries and consider revisions to employment policies where applicable.
  • Review information security policies and systems to ensure they are suitable for work from home arrangements.
  • Monitor directives and guidelines issued by governments and regulatory bodies on how to respond to the outbreak.
  • Monitor special arrangements of governments, regulatory bodies and the courts as limited service hours may impact the ability to meet deadlines, obtain regulatory consents and approvals and to satisfy milestone dates.
  • Monitor travel advisory alerts and quarantine rules which may impact business travel. 

*Seefootnotes here

If you would like to speak to one of our team, either in Asia or in the UK, Germany or the GCC, about any of the issues raised in this briefing, please, in the first instance, contact one of the following:

Key Contacts

Michael Barnett

Michael Barnett

Divisional Managing Partner, Dispute Resolution
London, United Kingdom

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Simon Catto

Simon Catto

Head of Dispute Resolution - Scotland
Edinburgh

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Simon Kamstra

Simon Kamstra

Partner, Head of Leeds Office and Co-Head of International Arbitration
United Kingdom

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Mark Molyneux

Mark Molyneux

Partner, Dispute Resolution
United Kingdom

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Ronald Sum

Ronald Sum

Partner, Commercial Litigation
Hong Kong

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Janie Wong

Janie Wong

Partner, Commercial Litigation
Hong Kong

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Footnotes

[1]  M. Ward. Briefing Paper: Statistics on UK Trade with China. House of Commons Library (5 November 2019), https://researchbriefings.files.parliament.uk/documents/CBP-7379/CBP-7379.pdf (last accessed on 11 February 2020).

[2]  Nissan to shut Japan factory due to shortage of Chinese parts (11 February 2020), https://www.bbc.co.uk/news/business-51441344 (last accessed on 12 February 2020).

[3]  J. Blas and A. Edwards. BP Sees Virus Wiping Out One-Third of Oil Demand Growth in 2020. Bloomberg (4 February 2020), https://www.bloomberg.com/news/articles/2020-02-04/bp-sees-virus-wiping-out-one-third-of-oil-demand-growth-in-2020 (last accessed on 11 February 2020).

[4]  S. Yu, D. Sheppard and H. Dempsey. Chinese LNG Importers Consider Invoking Force Majeure. The Financial Times (4 February 2020), https://www.ft.com/content/5ad82068-4757-11ea-aeb3-955839e06441 (last accessed on 11 February 2020).

[5]  C. Archibal and L. Moon. Property markets reel from coronavirus outbreak as Chinese investors pause transactions. SCMP (11 February 2020), https://www.scmp.com/business/article/3049825/international-property-markets-reel-coronavirus-outbreak-chinese-investors (last accessed on 11 February 2020).

[6]  S. Findlay, H. Kuchler and S. Neville. Drugmakers braced for coronavirus disruption to China supplies.  The Financial Times (12 February 2020) https://www.ft.com/content/8630c51c-4cc0-11ea-95a0-43d18ec715f5 (last accessed on 12 February 2020).