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News & Knowledge

UK: Logistics and trade contracts with Chinese companies during COVID-19

6th April 2020

Chinese manufacturers, exporters and freight forwarders are slowly returning to their plants and offices after a long period of quarantine. Anybody who deals with Chinese entities will have noticed a recent increase in emails from logistics companies and manufacturers offering services and products. MSI's UK South Coast law member Lester Aldridge LLP explains more.

As many markets are still in lockdown to a greater or lesser, the ying and yang of trade means that Chinese manufacturers and shippers will be concerned by credit lines provided to businesses in those countries currently under lockdown. Demands for payment for goods which were provided late last year or earlier this year are likely to be presented and credit lines withdrawn. This issue will affect all parts of the global logistics chain as countries come out of the quarantine restrictions, as the virus dissipates.

Many companies will be facing challenges caused by not being able to move stock as a result of the current restrictions from the various governments, which have been imported on the basis of a credit line. At the same time, they will be eyeing the future where they may well need those credit lines to get business moving once again.

Agreements for the supply and importation of goods as well as the terms on which credit are provided in these situations, are often not properly documented. Credit lines can tend to evolve over a period of time, particularly when manufacturers begin to work closely with a distributor or agent in another country. That issue also affects the freight forwarding chains where business is done over a period of time. It is often a problem with shipments or a situation like the current coronavirus shutdown, which results in parties scrambling to put together the jigsaw puzzle of exchanges which evidence the contract terms and the credit line agreement. These cross border contract can raise their own particular set of issues.

A typical scenario:

A supplier in China has provided goods to us over many years on credit. The supplier is now demanding payments of all outstanding amounts and is wanting us to sell the goods in our possession but there is no market for them at the moment. What can my supplier do and what steps can they take against us if we are unable to pay?

  • The supplier will need to produce details of the underlying contract as well as the credit lines. In many cases there may be no written contract terms. If there are no written terms and conditions then legal issues like force majeure and a frustration of the contract might not apply.
  • What can the supplier do? He can threaten legal action but realistically they would need to issue legal proceedings in China or the UK ( or elsewhere). In December 2019, the Chinese press reported that a policy document had been produced by The Hangzhou Internet Court in China’s Eastern Zhenjiang province encouraging digitization, cyberspace technologies like blockchain and cloud computing in China’s Supreme Court. The Chinese Courts currently have a way to go before that happens.
  • The supplier would need to prove the law of the contract as well as the court (or arbitration system). At the moment, the ability to serve legal proceedings issued in China against a company based in the UK is complex and can take many months. Enforcing a judgement in England obtained from the Chinese Court is also not straightforward.
  • If the parties have had a discussion about the law and jurisdiction which should be used to have disputes decided and the parties have chosen English Law and the English Courts, then the English Court are still open for business. Much court work is down by using emails and c-e filing and the courts are currently preparing for trials being conducted without the need to physically attend the court. It would be possible to issue legal proceedings in England against a party owing money to a Chinese company.
  • If there is a written arbitration agreement, there is a reciprocal arrangement under the New York Convention to recognise and enforce arbitration awards but in reality it is unusual to find a Chinese Law and arbitration clause in commercial documents. If a party has agreed in writing to an English law and arbitration clause, then it is extremely easy to commence arbitration proceedings and the system is operating as normal as the vast majority of arbitration are conducted by email in any event.
  • Even when a Judgement or arbitration award might be obtained – the supplier will face additional issues. The UK Government announced this week that the insolvency rules were being changed so as to make it much more difficult for a creditor to put a company into winding up. Once that announcement is put into operation it will effectively remove that weapon temporarily from a creditors armourery.

There may be significant issues with Chinese companies trying to recover debt in the current circumstances for a number of reasons, This produces fertile ground for negotiation in order to try and reach a compromise, when a debt demand is made.

For further information and assistance please contact our member firm Lester Aldridge directly.

About Lester Aldridge LLP - Southampton

Lester Aldridge is a full service law firm, advising commercial organisations and private individuals on a regional, national and international scale, from offices in Southampton and Bournemouth.

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