2 tips for businesses managing COVID-19 legal risks

By Li Weiming, Tiantai Law Firm

The novel coronavirus (COVID-19) pandemic has dealt a heavy blow to businesses, bringing a majority of enterprises to a standstill. In the author’s opinion, apart from keeping aligned with the overall corporate strategy, and assisting in handling individual cases related to COVID-19, an enterprise should take into account two points that deserve particular attention during its legal risk management.

(1) Repairing and improving internal control system

In the course of an enterprise’s development and operation, maintaining a sound internal control system is always the best defence against unpredictable risks facing an enterprise. The pandemic outbreak may disrupt the ongoing performance of all contracts of a company.

Li Weiming
Tiantai Law Firm

The necessity of pandemic containment may put factory orders at the risk of delayed delivery. Similarly, the procurement, logistics, research and development, human resources, administration and other functions are likely to suffer from problems such as suspended production or supply, expropriation or confiscation due to the pandemic containment measures imposed by the government.

There is no doubt that ongoing government-imposed COVID-19 containment measures constitute a force majeure event that is unforeseeable, unavoidable and insurmountable, as is defined by law. However, will it necessarily lead to an exemption from the liability for termination of contract? In the interests of the company, for contracts that are still in performance, how can they be handled, by categories, in a systematic fashion?

It depends. At present, it is generally believed that, although the government-imposed containment measures constitute force majeure, whether it justifies the exemption from termination of contract, and how to plan and design a systematic handling by categories on various issues arising from contracts, might depend on such factors as the contract term, contract provisions, the severity of COVID-19 impact, and the causal relationship based on categories during internal contract management. The conclusion should be studied and made case-by-case pursuant to legal requirements on force majeure, or situation changes.

Similarly, for some small and medium-sized enterprises (SMEs), the ongoing pandemic will inevitably bring about labour disputes, which particularly requires predictive and supportive policies to be in place. After the COVID-19 outbreak, the General Office of the State Council decided to extend the 2020 Spring Festival holiday. Some local governments also ordered business entities to postpone their resumption of production or work for pandemic containment purposes.

Some employees were even unable to report to work due to local travel bans, giving rise to problems about salary payment and leave, and compensatory working days off. All of the above will undermine the stability of existing employment contracts between enterprises and their employees at various levels. On the one hand, enterprises need to follow government-imposed rules, while on the other hand, they have to address the conflicts between their production costs and compliance.

In this context, can the remuneration system and employee benefit arrangements be adjusted promptly in line with costs and job changes? For all of this, a well-established internal employment system and a balanced and flexible employee handbook are particularly important.

If a sound internal control system is in place, the effective and sound business operation of an enterprise is no longer a problem. In this special pandemic situation, a sound internal control system also helps get rid of the management style that bases decisions on experience and personal judgment alone, and further boosts the efficiency of operation.

At present, the government is launching pro-business policies to ease the COVID-19 impact, especially in terms of credit, financing, taxation and investment facilitation. Against this backdrop, an enterprise with a sound internal control system will win trust from capital markets and investors, and have access to lower financing costs, finding itself in a better vantage point to develop a sharp competitive edge at this particular stage.

(2) Paying extra attention to weak areas of legal risk management

The challenge posed by the COVID-19 pandemic goes beyond the risks already in sight. It is more about the risks that remain unknown amid the pandemic. Compared with the legal risk management of businesses, extra attention and stronger effort might be required for anti-fraud, charitable donations, personal information protection, and intellectual property innovation and protection, under the new business model.

Specifically, when it comes to compliance, well-known multinational corporations have reportedly been involved in major compliance scandals in succession, such as Wells Fargo opening fake accounts to cook its books, and Brazilian oil giant Petrobras’ massive corruption.

In recent years, even personal fraud is deserving of greater attention. According to one survey, as many as 95% of SMEs show failures in their internal controls and compliance management, and employee frauds are frequently seen at SMEs.

A survey of 500 auto dealerships found that the fraud-related losses per store exceeded RMB200,000 (US$28,500) a year, and the per-store loss caused by irregular business exceeded RMB500,000 a year. Fraud is most likely to occur when employees lack confidence in their job stability, which deserves precautions from SMEs amid the COVID-19 pandemic.

The ongoing pandemic will drive more enterprises to innovate their business models, such as improving their production processes and actively pursuing digital or intelligent transformation. From the perspective of legal planning, therefore, an enterprise should make early plans for their IPR issues, and even for IPR protection. In particular, the legal work of businesses will be greatly driven by searches, applications, licensing of invention, patent of internet, intelligence-related production processes, and relevant IPR disputes, amid this pandemic.

An enterprise should draw upon sound peer practices regarding its weak areas of legal risk management. It should actively draw upon sound legal frameworks or legal warning mechanisms adopted by large enterprises or listed companies demonstrating sound management.

For the majority of companies, the COVID-19 pandemic has come as both a challenge and an opportunity. The legal work of an enterprise will be a driver of its healthy and orderly development only when good peer practices are extensively absorbed to continuously improve its related systems.

Li Weiming is a partner at Tiantai Law Firm.

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