Business and Law Amid the Coronavirus Crisis
The COVID-19 pandemic has turned out to be a daunting challenge for the global economy. Throughout the struggle, many governments have enacted a variety of measures, such us orders to refrain from certain types of business operations, mobility restrictions and social distancing. Though certainly medically reasonable, they have spawned a number of adverse economic ramifications.
Demand for goods and services has been largely quashed, shipping controls have rendered supply of goods difficult if not impossible, while many factories have shut, breaking supply chains. The Coronavirus pandemic will, in all likelihood, have relented in several months. While the related restrictions were harsh, getting the economy back on track and up to speed is not, and reversing the negative economic consequences may take years.
Coronavirus crisis
The extent of the crisis caused by the pandemic is unprecedented, with many economists comparing it to the Great Depression of 1929. The GDP forecasts are less than optimistic, for the Euro Zone a drop of approx. 5 to 9%, for Poland a plunge of up to 4.5-5% is anticipated. However, any diagnosis in this regard can be hardly accurate, as we already know that industrial production in Europe plummeted by as much as 11.8% in March 2020 alone (compared to March 2019). According to many experts, weathering the storm may last between 1 to 2 years, that is assuming that we will not be seeing the second wave of the pandemic necessitating further or deeper restrictions.
In the wake of the crisis, it has dawned on business how susceptible modern economy and world trade are to worldwide goods exchange disruptions. Until recently, very few had suspected that supplies of all sorts of goods from China and other countries being the world’s factories, may be suspended. The apparent situation ought to force entrepreneurs to diversify their supply chains, so as not to rely solely on one region, and to move procurement sources, at least partially, back home. As far as legal issues are concerned, it is advisable to include contractual clauses allowing non-performance due to force majeure. De facto freezing Polish courts may, in turn, make alternative dispute resolution techiques, such as arbitration or mediation, grow on entrepreneurs.
Tighter Protection of Domestic Markets
Judging by the measures taken so far, governments may be reasonably be expected to lean toward protecting their own markets against import and to boost export in an effort to help their countries’ economies bounce back. A Polish example of that might be the most recent amendment to the Act of July 7, 1994 on State Treasury Guaranteed Export Loan Insurance, extending support for Polish exporters.
Even before the pandemic, the budding trade dispute between the US and China, as well as increasing US-EU friction on international trade, had been evident. Now such conflicts can only gain momentum as each country or supranational organization will seek to protect its own market. This will pose a challenge for Polish entrepreneurs in that they will have to continuously monitor the situation, be more active within industry associations and engage more in public advocacy, both in Poland and Brussels.
Closed operations have also adversely affected capitalization and valuation of many firms, exposing them to the risk of being taken over by foreign rivals, especially if the potential buyer is acting with government aid. The European Commission has spotted that risk, calling upon member states to enact regulations preventing selling valuable European assets. Many EU member states have already passed, or are in the process of passing, such regulations, and the Polish government is also currently working on them. Their objective is to safeguard the domestic market, but on the other hand, they may render it difficult to find foreign partners or attract foreign investment in Poland, which may – paradoxically – hinder rebuilding the economy.
Employment Structure v. State Aid
When deciding whether or not to invest in Poland, entrepreneurs ought to consider the structure of such investment – existing or future – in terms of labour relations. Some hitherto popular employment structures, for instance branch offices of foreign entrepreneurs or branch offices of Polish companies in Poland, which were separate from the parent company, have found themselves in dire straits due to COVID-19 and the way in which state aid has been envisaged. It turned out that Polish branch offices of foreign entrepreneurs (treated as foreign entrepreneurs) could not seek assistance in saving jobs, even though they had been employing sizeable numbers of Polish staff. Interestingly, Polish branch offices of domestic companies, deemed ineligible for government help, have also found themselves in a similar position, because they are multi-establishment enterprises with particular branch offices acting as employers. From the entrepreneurs’ point of view, such structures were often reasonable due to the variety between given locations, as well as management issues and operational history. It is advisable to look closer at such operating models as entailing more risk – evidenced by the legal pandemic containment measures – which may prove to be a factor when planning company operations.
FX Risk
Foreign currency exchange matters may come across as immensely important for entrepreneurs operating in Poland. Between March 1 and May 15, 2020, the PLN lost nearly 6% against the Euro, and as much as 8% against the Dollar. Though it may be a welcome change for exporters, in the long shot, this trend may mean more expensive imports, including investment import. Currency fluctuations also hinder planning and profitability studies. In an effort to safely navigate such drastic FX changes, entrepreneurs may want to consider securing their incomes and expenditures by entering into currency option agreements with banks or availing themselves of different kinds of protection against currency-related risks.
Tooth-and-Nail Competition
The unheardof roadblocks for businesses may spur some to fight dirty against their rivals by breaching anti-monopoly laws or using unfair competition practices. On April 15, 2020, the President of the Office of Competition and Consumer Protection (UOKiK) announced that his office would be closely monitoring the market and counteracting any unlawful practices. This may mean greater than before activity of the UOKiK.
New Legislation
The pandemic has shown us that the law, which many times falls behind technological progress or current socio-economic phenomena, has undergone innumerable emergency changes. Some of them are temporary, while some other have been enacted as final regulations in connection with, or on the back of, COVID-19.
Entrepreneurs might find them interesting and they may have a positive impact on their future operations, for example broadening the extent of remote work, or increasing the flexibility of corporate electronic decision making. In some cases, the provisions have remained the same, but due to the pandemic experience, their application will change. Analyzing the newly exposed risks for business operations and taking pre-emptive measures to counter them in the future is advisable.
Author:
Małgorzata Grzelak
Partner at Squire Patton Boggs, Warsaw
Marcin Wnukowski
Partner at Squire Patton Boggs, Warsaw
Last Updated on February 12, 2021 by Łukasz