China - Cross-border: Covid-19 And The Hospitality Sector - The Big Questions Facing UK Hoteliers And Lessons We Can Learn From China.
Legal News & Analysis - Asia Pacific - China - Regulatory & Compliance
26 May 2020
In 1976, China was hit by a devastating earthquake in the north-easterly region of Tangshan and lost its leader of thirty years, Mao Zedong. 1976 was the last time the Chinese economy recorded a contraction and, for the last 30 years, the Chinese economy has grown faster than any other on the planet. However, in Q1 2020, for the first time in almost 50 years, the Chinese economy contracted by 6.8%.
In the wake of the COVID-19 outbreak, on 23rd January 2020, China imposed a strict lockdown on Wuhan and surrounding cities in the Hubei Province. By the 12th February, 207 cities, including Beijing, were on lockdown. The level of lockdown varied by location with most implementing travel bans and restrictions on leaving the house. At the end of February, Italy followed suit, and, on 23rd March, the UK became the latest in a long line of nations to pull down the shutters.
The closing of borders, shops and public spaces across the world has taken a heavy toll on the global economy, with China a striking example of the price of lockdown. The global economy has been predicted to contract by as much as 3% in 2020; a worse contraction than during the 2008-2009 recession. The economic impact of lockdown has been felt most sharply in sectors which rely upon physical presence, including, and which will be the focus of this article, the hospitality sector.
In the UK, UKHospitality estimates that the sector has seen a 97% decline in revenue since the start of April and predicts a gruelling 18-month recovery period.
On April 8th, as the UK became accustomed to life at home, Wuhan emerged from lockdown. Now, as the UK takes its first steps towards normality, what can we learn from the Chinese experience? We review below the impact of the COVID-19 pandemic in China on the various aspects of the hospitality sector and consider the big questions facing hoteliers.
1. What hygiene measures should be followed in order to re-open?
Containing COVID-19 has necessitated step-changes in hygiene practices across the globe in the hospitality sector including everything from hand-washing to large-scale disinfecting. Marriott and IHG have now re-opened almost all hotels in mainland China through implementation of comprehensive hygiene procedures.
The travel ban in China resulted in mass cancellations and a cliff-edge drop-off in bookings. In February 2020, Marriott reported occupancy levels of just 10% in China. Whilst most hotels shut down, some remained open. Huazhu Group - who operate over 3000 hotels in China, Mongolia and Taiwan- chose to keep as many hotels open as possible. So, how did they do it? The founder, Ji Qi, reported that the group immediately developed a crisis taskforce to analyse supply chains, open up channels of communication with staff, agree massive cuts to executive salaries and develop hygiene practices that would enable some hotels to keep trading. The group reportedly focused their sales strategy on providing rooms for essential workers and those requiring quarantine.
UK hotels have been ordered to remain closed unless they are providing rooms to essential workers.
As the lockdown has eased, most hotels across China have now successfully re-opened. This has been made possible due to drastic and sweeping changes to hotel hygiene. Measures have included cutting down total guest numbers to keep common areas quiet, keeping rooms empty for 24 hours after visitors leave, avoiding unnecessary contact with guests such as baggage handling and, of course, comprehensive disinfecting and cleaning regimens. Huazhu Group, for example, have reportedly introduced a 26-step cleaning process, whilst Marriott have said they will use electrostatic sprayers with hospital-grade disinfectant, and are testing ultraviolet light technology for sanitising key cards and shared devices used by staff.
Some Chinese hotels require temperature checking and verification of one's health before entry through a smartphone application. This application – the "health code" service, enables a user to display their status (typically green for good-to-go, yellow for a seven-day or shorter quarantine, and red for a 14-day quarantine) based on his/her state-issued ID number, address, travel history and self-reported health status. This information is packaged into a QR code, which can be verified by businesses to permit entry to users deemed low-risk.
In the UK, the importance of hygiene in getting the economy restarted has been recognised. The government now advises the wearing of face masks in public places such as in shops or on public transport. Sector-bodies, such as UKHospitality, have produced comprehensive guides for the hospitality industry which offer advice for all facets of a hotel business including kitchen-staff, general handwashing, travel to work, deliveries and supply chain, reception, room service and housekeeping. The message appears to be that, when it comes to hygiene, there is no such thing as too much. In Europe, hostel provider A&O Hostels has introduced plexiglass barriers to protect reception staff from contact with guests, installed sanitation stations and contactless water taps and elected a designated hygiene officer to liaise with guests. Hoteliers are assessing risk and implementing creative solutions to guarantee safety of staff and guests.
It remains to be seen whether the UK government will claim any oversight of hygiene in the hospitality sector as we progress through the phases of de-escalation. In Singapore, for example, the Singapore Tourist Board has stated that it will run 'cleanliness audits' of hotels; permitting only those who obtain an "SG Clean" stamp to re-open. However, what is clear is that hotels are sparing no expense and leaving no stone unturned in the fight to COVID-proof their premises. Some analysts suggest that this belt and braces approach will pay dividends in the long run, as consumers will be more likely to trust and return to big hotel chains, rather than guesthouses (such as Airbnb) which are unable to emulate the industrial scale cleaning and hygiene measures of the likes of Marriott.
2. Can customers cancel / demand refunds on bookings?
Whether a customer is entitled to cancel a room/restaurant booking and receive a refund will depend on both the contract and the law governing the booking. Regardless of legal entitlement to refunds, many hotels have relaxed cancellation policies to offer refunds to retain consumer trust and protect their brand.
Because hospitality services contracts are high-volume business, hotels will usually contract on the basis of standard terms and conditions. In the UK, contracting on the basis of standard terms and conditions means that consumers are afforded the protection of a variety of statutes, including the Unfair Contract Terms Act 1977, the Consumer Rights Act 2015 and The Consumer Protection (Distance Selling) Regulations 2000. While in the normal course of business these general terms and conditions are seldom challenged, for those unable to obtain refunds, there may be increasing numbers of disputes which will test whether cancellation policies are above board.
Irrespective of the terms of the contract, many hospitality and travel companies, including Airbnb and Marriott, are offering full refunds to customers as a gesture of goodwill. Businesses are recognising that their actions during this pandemic can make or break their reputation. Refusing refunds, or at least credit, threatens to tarnish the brand.
In China, the Civil Aviation Administration of China ("CAAC") used its administrative powers to order airlines to offer free cancellations of flight tickets to travellers irrespective of the contract of purchase and regardless of whether or not flights were cancelled. Between January 24 and February 6, the Civil Aviation Administration of China refunded more than 13 million airline tickets. No such measures have been adopted for the hospitality industry. However, various local courts as well as the Ministry of Culture and Tourism have issued notifications on the application of force majeure principles and Article 13 of Provisions of the Supreme People's Court on Issues Concerning Law Application in Hearing Cases of Tourism-related Dispute. These provisions give consumers much greater leverage to argue for terminations. On 16 April 2020, the Supreme People's Court issued an opinion to provide guidance on the proper trial of civil cases related to the COVID-19 epidemic with a few notable directions in relation to the application of the rules for force majeure (the "Opinion"). A few notable directions in relation to the application of force majeure are: unless otherwise agreed by the parties, the people's court should take into considerations the impact of the epidemic on different regions, industries and cases, accurately grasp the causal relationship and causative potency between the epidemic or epidemic prevention and control measures and the failure to perform the contract, as per Article 3 of the Opinion. This is largely in line with the position that many local courts adopted during the outbreak of SARS in 2003.
3. Can the obligations in a Hotel Operating / Management Agreement be suspended? Can the agreement be terminated?
Many hotel agreements have run aground as contractual parties have found themselves unable to fulfil their obligations. Many hoteliers have rightly looked to the force majeure clauses in their contracts as a potential solution. Of course, only a thorough review of the contact in question can provide certainty. However, below is a general discussion of the applicability of force majeure clauses.
Force majeure will usually suspend contractual obligations in the event that a party is unable to complete them due to an act beyond its control. It often gives rise to a right of termination of the contract if the suspension continues for a certain period of time.
Chinese law, unlike many other national systems, provides for a force majeure rule which, by default, applies to all contracts. Article 180 of the General Rules of the Civil Law of the PRC, Article 153 of the General Principles of the Civil Law of the PRC and Article 117 of the PRC Contract Law, rather generally, define force majeure as “objective circumstances which are unforeseeable, unavoidable and insurmountable”. As a result, a right of termination may arise in contracts such as hotel management agreements.
In the UK, force majeure must be written into a contract. Whether it can be relied upon to suspend or terminate a contract (such as a hotel booking or hotel management agreement) in relation to the COVID-19 outbreak will depend on how the clause is triggered in the contract. Some force majeure clauses list specific events (flooding, fire, war etc.); some use broad wording such as "an event beyond the reasonable control of the parties"; and some leave force majeure as an undefined occurrence. It is vital to understand how suspension is triggered and how long the period is before termination rights apply (the application of this clause will need to be considered in detail and legal advice should be sought in this instance).
4. Do hotels need to review marketing / promotional materials?
Some hotels in China have sought to kick-start their revival with promotions and discounts. Some hotel operators have been reprimanded for these promotional activities, for practices such as inflation of “before-discount” prices, which misrepresent actual savings. This practice is a violation of Chinese advertising laws.
In the UK, as with any promotion, hoteliers must abide by consumer protection and advertising law. To this end, hoteliers may need to consider consequential amendments to marketing materials. Bookings made on the basis of availability of certain facilities (e.g. a thermal spa) may come back to bite hoteliers if they are deemed to have violated advertising law. Once facilities are closed this needs to be clearly stated on the hotel website and other marketing materials.
5. Could new technology help hotels get back up and running?
Many hotels have been undertaking steps to innovate and evolve their business models with the aid of new technologies. As hotels look to re-open, tech may offer innovative ways of ensuring we keep our distance.
Technology may offer a lifeline to businesses unable to operate in compliance with social distancing rules. Contactless check-in and check-out procedures offer a way for hotels to bring in customers with minimal (or no) contact with staff. Pre-pandemic, hotels in China were at the forefront of innovation in hotel systems. Smart LYZ Hotel in Shenzhen offered a fully contactless experience as early as 2018: a mobile verification code permits access at the front door, and a smart-robot guides visitors to their rooms and provides room-service. In China, consumers have very much welcomed and adopted these new forms of interaction with hotels and restaurants. They may now prove to be helpful in getting hotels back to business.
Some hotel providers such as Marriott already offer contactless check-in to loyalty members as a fast-tracking perk. Systems such as this may be rolled out across the board. The problem is that new systems involve financial outlay, training and inevitable growing pains. Hotels will need to consider whether these systems offer a service which is reliable enough and cost-effective to be prudent in a time of great uncertainty and risk.
As with any digital system, data collection and processing can raise red flags. In China, data has been a hot topic since a suite of cyber-security regulations came into effect in the last two years. While hotels are usually aware of data protection requirements in relation to their customer data, the applicable processes and policies should be reviewed to be suitable for newly adopted digital services.
6. Will business interruption insurance pay out?
Business interruption insurance protects businesses from loss of revenue as a result of, usually, physical damage. Insurance companies in China have begun to seize the opportunity to sell policies offering protection to businesses looking to re-open, whilst in the UK insurance companies appear to be minimising their risk by attempting to narrow their coverage.
After previous virus outbreaks such as SARS and Ebola, insurance companies have created exclusions to their policies for viruses or bacteria- related losses to commercial property. In China, many insurance companies such as Tianan Property Insurance and China Life have recently expanded their coverage of COVID-19-related business interruption in order to promote the resumption of business and production. These products aim to cover the risks of a company for having to pay compensation to its employees who contract COVID-19 when returning to the workplace; for employees being required to observe quarantine measures; and for workplaces being required to close when there is a source of infection at the workplace. At this time, it appears that most insurance policies are providing for a fixed allowance rather than compensation for all actual business losses.
In the UK, risk management firm Willis Towers Watson estimates UK insured losses for business interruption could total up to $14 billion as a result of COVID-19 and Lloyds of London have stated that it expects COVID-19 related insurance claims to cost it between £2.5bn and £3.5bn; equal to the combined impact of hurricanes Harvey, Irma and Maria in 2017. Unsurprisingly, many insurance companies in the UK, such as AXA, have been quick to make clear that their standard policies do not offer coverage for interruption due to coronavirus. The Financial Conduct Authority (FCA) has also weighed in, stating that most business interruption policies will not provide coverage. Many claims have been denied, spurring litigation. For example The Guardian reports that a number of small firms are taking insurers (including Hiscox) to court for failing to pay out under a policy which included "notifiable diseases". In light of this, on 1 May, the FCA announced it was commencing a test case on behalf of SMEs who have been denied an insurance pay out on over 150 different policies. The result will bind those insurers that are parties to the case and create persuasive guidance for other, similarly worded policies.
7. What government subsidies are available?
Hotels should take advantage of all government offerings to assist them in staying afloat.
Local authorities in China have issued various incentive policies to help companies through the COVID-19 pandemic, for instance, extending the payment period of social insurance and tax, reducing interest of company loans and exempting or reducing rental costs for small to medium-sized companies which lease commercial space at commercial properties owned by state-owned enterprises. Recently, the Shanghai Municipal Government issued policies aiming to provide credit support to companies which suffered most during COVID-19 such as hotels. Specific measures include changing repayment arrangements, extending repayment periods and granting loans continuously without the borrower having to pay off the principal first. In Beijing, the Municipal Government issued policies to allow companies in the hospitality sector to delay social insurance payments until July (subject to the confirmation by relevant industry authorities) and to waive late payment fees. Meanwhile, employees of those companies can still enjoy various social insurance benefits during the late payment period.
The UK Government has set out a number of initiatives to help businesses. This includes:
Business Interruption Loan Scheme
Business Rates Holiday (only for Retail, Hospitality, Leisure)
Cash Grant (only for Retail, Hospitality, Leisure)
Job Retention Scheme
Statutory Sick Pay Rebate
Increased Time to Pay Tax
Coronavirus Corporate Financing Facility (CCFF)
For most hotels in China, despite the tentative re-openings, the lack of incoming tourists means they are still nowhere near back to full health. Most important to the process of re-opening is a comprehensive review of hygiene to protect staff and give confidence to consumers. UK hotels are likely weeks, if not months, behind those in China. No doubt hoteliers are observing the developments in China closely to enable them to prepare to emerge from the pandemic.
For further information, please contact:
Sven-Michael Werner, Partner, Bird & Bird