SUPPLY-CHAIN disruptions during the Covid-19-induced worldwide lockdowns have led to a number of Malaysian and Chinese companies seeking legal help over breaches of contract.

Malaysia-China Legal Cooperation Society president CW Loh said the lockdowns caused disruptions to travel, manufacturing and supply chains.

There are now double the number of Malaysia-China businesses that seeking the association’s legal advice.

“One third of those want mediation, another one third want  legal action, while the remaining want to wait and see,” Loh told The Malaysian Insight.

The issue is compounded by the differences in law between both countries.

Since Malaysia and China do not recognise each other’s legal and court systems, arbitration has emerged as an important means to resolving disputes, Loh said.

Chinese companies are generally willing to negotiate as they understand that the delays are unintended, he said, but warned that legal fees would be higher than usual as the cases deal with cross-border legalities.

“We do not yet know how much money can be claimed in cases but if both sides are willing to arbitrate then a final number can be arrived at.

“But due to the cross-border nature of these cases, we need to prepare documents for both sides in their respective languages, Chinese and English, and this will naturally cost more. There is also staff costs, travel and accommodation expenses to take into account.”

As long as the sum involved is not too high, lawyers will typically recommend arbitration.

Loh said the most common types of advice sought involve e-commerce, disruptions to the solar energy supply chain, price hikes for raw materials to make masks and gloves, as well as palm oil.

“If say companies have agreed on a price but due to the pandemic face price hikes or supply shortages, that can be considered as a breach of contract. 

“The supply side usually will not be willing to hike expenses to fulfil the contract as it can be cheaper to break the contract and pay compensation.”

Addy Heng of Wong & Partners, a member firm of Baker & McKenzie International, said some contracts also become “impossible to fulfil” due to uncontrollable costs and other issues arising from restrictions to curb the spread of Covid-19.

Heng said with the pandemic impeding the production of raw materials and disrupting supply chains, skyrocketing costs are forcing suppliers to break contracts and purchasers have no choice but to take legal action to recover their losses.

As the pandemic is something not anticipated by parties to contracts, Heng said the “force majure” clause in contracts could be used to seek claims and mediation.

Due to the differences in law in China and Malaysia, he said, the only legally binding framework companies have is the contract.

If the contracts don’t have the force majure clause, he said, it will be difficult to claim for losses.

Not all parties may agree with the clause either, as it is meant for natural disasters, such as floods, and is unlikely to cover a pandemic of Covid-19’s scale.

Heng also warned of the time-consuming nature of cross-border legal work due to the differences in law in both countries, which can take up to six months to a year to complete, or more, in addition to the extra expenses.

As such, he said, lawyers will typically review the terms of contract and recommend mediation.

“This is why negotiations are better done face-to-face. But with borders locked down, this is impossible, so lawyers can only judge based on what they see on their screens during tele-conferences, which can be difficult,” Heng said. – July 13, 2020.