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Wood Enterprises Adapt To Market Fluctuation

July 04, 2021

The wood industry strives to overcome difficulties, handle backlog issues, and adapt to market fluctuation due to Covid-19.

Confusion in contractual issues

“There are approximately 300,000 people working in the wood processing industry,” said Lawyer Le Thanh Kinh, Director of Le Nguyen Law Firm, VIAC Arbitrator.

The wood processing and export industry is seasonal. Exporters receive orders at the end of each year. They spend the next six months preparing raw materials and organize production. Shipments will begin in the second half of the following year. The industry employs the most labor from the time of shipment to new order placement.

Due to its seasonal nature, many wood enterprises employ workers under fixed-term or no contracts, which has become a problem for during Covid-19. Most labor contract disputes will involve (1) suspension, and (2) early termination of contracts.

In addition, taking into account the quarantine and credit sources for export enterprises narrowed by Vietnam’s major investors such as South Korea, Japan, Europe, Vietnamese enterprises are likely to encounter contract performance disputes such as (1) no payment received upon good delivery; (2) late payment and the possibility of insolvency; (3) enforceability of existing contracts (suspension, amendment or termination); (4) Contract duration, etc.

When resolving disputes, if Vietnamese exporters invoke force majure due to COVID-19 to suspend or terminate the contract,  they must be cautious of the force majure’s conditions under both Vietnamese Law and international law. Those are (1) events that occur objectively, (2) are unforeseeable, and (3) cannot be remedied by all possible necessary and admissible measures taken.

However, it should be noted that the "force majeure" rule must be considered carefully. International law does not consider Covid-19 a force majeure event that relives parties of performing their contractual obligations.

Dissolution or bankruptcy after the pandemic?

Due to the imbalance of revenues and expenditures, difficulties in resources, facilities, partners, many wood enterprises are considering bankruptcy and dissolution as the last resort.

In a survey conducted in early March with 1,200 participating enterprises, if Covid-19 lasts for 6 months, nearly 74% of enterprises said there will be a risk of bankruptcy as revenues cannot offset operating costs, salaries, interest payments from banks, rent for production and business facilities, and other costs.

Many businesses take such options to reduce burden. Bankruptcy procedures are more complicated, its legal impacts are also more severe than dissolution, therefore if businesses are given the choice, perhaps none of them are "imprudent" enough to choose bankruptcy.

Only insolvent enterprises that don’t have the right to conduct dissolution procedures will "become" bankrupt. They will be at the disposal of employees, creditors, or other subjects since the court will be requested to declare bankruptcy and proceed with bankruptcy proceedings. They must sell assets to repay debts or reinstate the business to have a basis for repayment.

If the business is not insolvent but find it difficult to continue operating and that there is a high chance of loss, it has the right (but should) choose to dissolve. When taking this option, it will be in an active position and follow simpler procedures.

Maintaining operation while awaiting recovery

Halt of large enterprises’ orders has serious impacts on Vietnamese wood enterprises, who are suppliers. Enterprises need to prepare for the post-COVID-19 period in which they continue developing commercial relations with old partners, and expanding domestic market share, for example:

- Searching for new future partners instead of depending on a few large foreign customers;

- Reviewing the legal status of their partners;

- Suspending contracts or opting for 1 to 3 months delay in payment;

- Contract suspension and extension for up to 3 months so that parties can negotiate on the basis of the partnership;

- For partners having large orders and long-term commercial relationships, turning the case into a legal dispute or terminating the contract at this stage is probably too early, except for cases where the buyer is a foreign enterprise that is insolvent and bankrupt or shows signs of serious legal violations;

- For many businesses, salaries account for the majority of operating costs, so they decide to reduce salaries. There are many methods, for example, reducing working hours while maintaining the same number of employees or shifting employees to part-time jobs; register for rotating shifts; work from home to reduce the costs of operating; hiring, transferring or lay off workers.

Laying off is an unfortunate option, however, in order to continue operating, many businesses cannot pay their employees or make a decision to lay off certain department personnel.

- Promoting online sales instead of traditional sales;

- Terminating contract and invoking force majeure.

Although enterprises cannot recover immediately, if they can maintain operation, they can certainly restructure.

According to Mr. Bui Huu Them, Vice Chairman of Ho Chi Minh City Handicraft and Wood Industry Association (HAWA), although Vietnam has made significant progress in controlling the pandemic, it is uncertain when new orders arrive. Wood enterprises should keep formulating feasible plans. Accordingly, when current customers cannot perform the contracts, they must find new customers to continue to exist in the market.

“The pandemic has a global impact, therefore, recovery is slow. Only after the pandemic subsides or ceases can the economy continue to grow.” he said.

 

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