Business laws — steering clear in a pandemic

The coronavirus pandemic has given rise to legal complications for enterprises, especially those with business contracts. Law experts say firms should adopt a proactive approach in dealing with the ramifications. Oswald Chan reports from Hong Kong.

Businesses with substantial but inflexible operating costs, such as those covering rents and staff, are among the first to feel the pain of the economic fallout from the novel coronavirus pandemic.

Topping the list are hotels, retailers, restaurants, bars, fitness service or training providers and beauty parlors, some of which have lost the vast majority of their patrons due to the worldwide travel curbs or social distancing measures that still remain in force in most countries. Dwindling revenues, coupled with steady costs, are creating cash flow problems.

As enterprises falter in meeting their expenditures amid crumbling revenues, they face an array of possible legal action from creditors, such as their own employees, landlords, customers and other associated parties. Lawsuits, including bankruptcy and insolvency proceedings, would ensue if the legal challenges are not handled properly.

Legal challenges

There are also companies with business plans fixed for the duration of the last financial year and are committed to the procurement of goods and services prior to the outbreak. Unless the relevant contracts have a force majeure clause that covers the pandemic, it is difficult for businesses to back out from their commitments.

In Hong Kong, business contracts sometimes include a force majeure clause that allows a party to be excused from its contractual obligations in the event of a force majeure event. These refer to exceptional or unexpected circumstances that are beyond a contracting party's reasonable control and prevent them from honoring its obligations.

But, other factors, such as increased expenses or changes in economic or market conditions that affect the profitability of an enterprise, or the ease with which the parties' obligations can be honored, are generally not regarded as a force majeure event.

"Unlike civil law jurisdictions on the Chinese mainland where contract laws provide for statutory force majeure rules, and offer considerable discretion to the courts to re-open terms when there're major changes to circumstances after the contract date, the legal rules in Hong Kong provide very limited redress for clients whose contractual obligations are made materially more onerous by the pandemic," global international law firm Withers Partner Daniel Tang told China Daily.

"The major challenge is the limited legal remedies available to deal with economic hardships resulting from the outbreak," he said.

Moreover, clients with genuine needs for court assistance were also adversely affected, as the closure of courts in Hong Kong denied them opportunities to file bankruptcy applications or initiate legal proceedings. Even previously scheduled court hearings had to be postponed and faced substantial delays down the road because of the backlog created.

The pandemic has also brought long-term changes to the business environment for Hong Kong companies.

"Finally, clients trying to make a deal often have their hands tied, as the drastic changes in the economic outlook force them to adjust on a commercial basis and assumptions, as well as projected earnings in the short-to-medium term future. Needless to say, international travel restrictions and social distancing rules also hamper efforts to meet in person where interpersonal interactions are key to the deal making process," said Tang.