Multinationals add China-Taiwan risk clauses to contracts as tensions rise

Multinational corporations are inserting clauses related to China-Taiwan tensions into commercial contracts as fears rise of possible Chinese action around the democratically ruled island.

Specific provisions covering a possible conflict in the Taiwan Strait — as well as business disruptions caused by tensions over Taiwan more broadly — have been included in agreements in recent months, lawyers have told Nikkei Asia.

Companies were increasingly concerned that in the event of a takeover of the island by force, the US government could impose sanctions on assets in Taiwan if it deems them to be under China’s control, legal experts said. They were also worried about China blockading the island or otherwise disrupting logistics around the strait, a vital shipping route for global trade.

“I think in this world, irrespective of where you are from, and irrespective of how heightened you think the risk is, that [this] is an issue that you would probably want to have addressed or at least think about addressing in your longer-term arrangements,” said Joshua Cole, a partner at Ashurst who heads Asia corporate transactions.

Cole, who works on projects related to technology and telecommunications, pointed to joint ventures in Taiwan as carrying possible sanctions risks. If the US blocked transactions involving assets in Taiwan, foreign companies could find themselves unable to exit JVs and in a worst-case scenario could be forced to forfeit their stakes.

Other commercial lawyers said the war in Ukraine had prompted companies to pay closer attention to sanctions regimes and blockades and their possible implications for Taiwan.

In a clause of one contract seen by Nikkei Asia, neither party would be liable for failure to perform the terms of a supply agreement in the event of a “national or regional emergency or other geopolitical event(s) over the Taiwan Strait and/or the South China Sea which restricts freedom of navigation through these waters under customary international laws”.

Not everyone who is worried about the situation is putting their concerns into contracts, however. “Given Taiwan is a politically sensitive issue for Chinese companies, it could be a risk putting it into writing,” said one lawyer, who spoke on condition of anonymity.

Commercial contracts generally include force majeure clauses that free both parties from their obligations if a catastrophic event prevents either of them from delivering on the terms of the contract.

“People are paying a lot more attention to [force majeure] and testing it in that particular context and potentially amending it to make sure that it deals with that situation,” Cole said of a potential Taiwan conflict.

While some legal experts argued that a force majeure provision could be enough to cover an event related to a war over Taiwan, others said these clauses could be interpreted differently by different courts.

One lawyer raised the issue of Beijing’s One China policy, which regards Taiwan as a renegade province, and noted that existing clauses might not be enough to cover military escalations or geopolitical developments involving the island.

Former US House Speaker Nancy Pelosi’s visit to Taiwan last August triggered Chinese missile launches into the coastal waters of the self-ruled island. China also launched a military exercise rehearsing a blockade.

Dennis Kwok, a lawyer specialising in commercial disputes, said companies last year began asking him to include provisions dealing with a possible Taiwan conflict scenario or regional escalations that could have an impact on business, such as a severing of supply chains.

“How would your contracts deal with these scenarios? These are not acts of war, but are legal risks businesses need to consider,” Kwok said.

In the US, discussions about a Chinese invasion of Taiwan have become more urgent in recent months. Since 1949, the Chinese Communist party has never renounced the use of force to take control of Taiwan, which it has never ruled.

A US congressional war game simulating a Chinese invasion of Taiwan took place last month following remarks by the CIA that Chinese president Xi Jinping had ordered his military to be ready to invade by 2027. The comments did not mean that China had decided to do so, US officials added.

Taiwan is the world’s 16th-largest trading economy and has global trade relations that could result in huge economic consequences in the event of a conflict, experts and western officials have warned. The Rhodium Group estimated in December that trillions of dollars worth of trade would be affected and that global supply chains, particularly those for semiconductors, would suffer huge disruptions.

Taiwan’s defence ministry said last week that its annual military drills — the first phase of which is set to take place this month — would focus on combating a potential blockade and maintaining its combat capabilities.

A version of this article was first published by Nikkei Asia on April 27 2023. ©2023 Nikkei Inc. All rights reserved.

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