This article is republished with permission from Jackson Y. Teng, Senior Partner at Zhonglun W&D Law Firm, our Interlaw partner firm.
As the only Australian member of Interlaw, Hunt & Hunt is strategically aligned with commercial lawyers in every industrialised country in the world. Interlaw firms provide clients with access to a range of specialities, expertise in local jurisdictions and a roadmap through the legal, cultural and linguistic difficulties which cross-border commercial transactions can involve.
With the novel coronavirus sweeping through mainland China and the World Health Organization having declared a Public Health Emergency of International Concern, the PRC government has adopted a series of drastic administrative measures, such as shutting down the entire city of Wuhan.
The outbreak and the resulting measures by the central and local governments are impacting businesses and enterprises in multiple ways. In addition, many countries are also taking actions to contain the spread of the coronavirus by suspending or limiting air flights to and from mainland China. With no end in sight, these impacts are likely to last for some time and it then become paramount for businesses and enterprises to fully assess the risks that they may face as normal operations are being disrupted.
With our regular Legal Alert, we will summarize key factors and provide general legal comments for the outbreak of the coronavirus. The first issue is to review force majeure event as many contracts involving PRC contracting parties may not perform normally under the circumstance.
Ⅰ. What Constitution of a Force Majeure Event?
Section 180 of General Rules of the Civil Law of the People’s Republic of China (“Civil Law”) states, “Unless otherwise provided by law, a person who fails to perform his civil law obligations owing to force majeure assumes no civil liability. Force majeure means an objective circumstance which is unforeseeable, unavoidable, and insurmountable”.
Section 117 of Contract Law of the People’s Republic of China (“Contract Law”) states, “A party who is unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurs after the party’s delay in performance, it is not exempted from such liability. For purposes of this Law, force majeure means an objective circumstance which is unforeseeable, unavoidable and insurmountable.”
Pursuant to the above laws, “force majeure” refers to an objective circumstance, which is unforeseeable, unavoidable and insurmountable. The outbreak of the coronavirus is unforeseeable even from the perspective of medical experts. In addition, the government have adopted administrative measures in response, which include extending public holiday period, forced quarantines, and suspension of public transportation systems. We incline to think the outbreak of the coronavirus qualifies as a circumstance that is unforeseeable, unavoidable and insurmountable.
On the other hand, we shall also consider the judicial philosophy formulated during the 2003 SARS outbreak. Notice of the Supreme People’s Court on the Conduct of the Relevant Trials and Executions during the Prevention and Treatment of the SARS states, “disputes relating to non-performance of contracts directly resulted from the administrative measures taken by the government to prevent and controls the SARS epidemic shall be resolved in accordance with the Sections related to force majeure of the Contract Law”.
Ⅱ. Legal Consequences of a Force Majeure Event
The application of force majeure nevertheless shall not be abused and shall follow the principles of fairness and utmost honesty.
Pursuant to Section 117 of Contract Law, “A party who is unable to perform a contract due to force majeure is exempted from liability in part or in whole due to the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurs after the party’s delay in performance, it is not exempted from such liability”, there shall be causation between the event of force majeure and the non-performance of a contract.
Liabilities exempted under Contract Law include those for non-performance and those for damages to the contracting party that is affected by the event of force majeure. However, it may not be fair for the non-breaching party to bear all the damages. In legal practices, it is possible for PRC courts to rule that, based on the principle of fairness, the contracting party affected by the event of force majeure shall share part of the economic losses with the non-breaching contracting party.
One example is, after the 2003 SARS outbreak, some courts ruled that, the lessee of a commercial property shall still pay part of rents to the lessor even the lessee’s business operation at the premise was severely restricted.
Ⅲ. Legal Actions Can Be Taken by Exporters/vendors
As we are being frequently consulted by clients in the international trading business recently, we would take it as an example to illustrate how a business shall deal with the current circumstance cautiously.
(1) To notify the other contracting party timely and take measures to mitigate damages
Section 118 of Contract Law provides, “If a party is unable to perform a contract due to an event of force majeure, it shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period”.
If an exporter/vendor is affected by the outbreak of the coronavirus and cannot perform a business contract, it is important for it to notify the other contracting party as soon as possible through ways specified in the contract (e.g. email or written letter) and take all possible measures to mitigate economic losses. Otherwise, it would still be liable for any losses even in an event of force majeure.
On February 1, 2020, China Chamber of International Commerce (“ICC China”) announced that it would assist enterprises to acquire force majeure certificates as long as they are able to provide qualified materials and meet disclosed requirements. Enterprises are required to submit evidence(s) of delays or cancellations in sea, air or land transportation as well as export cargo sales contracts or agreements.
ICC China would process the documents in accordance with laws and regulations of PRC, as well as international trade practices. The certificate issued by ICC China is widely recognized by governments, customs, chambers of commerce and enterprises around the world.
(2) Change or terminate contracts
Section 94 of Contract Law states, “if the purpose of the contract cannot be achieved due to force majeure event, the parties are entitled to terminate the contract.”
Currently, exporters/vendors are mainly affected by the extended public holiday period and travel restrictions to their workers as well as interruption on logistic systems, while circumstances may also differ among locations due to various administrative measures undertaken by local governments. At the same time, exporters/vendors should also have foreseen and been prepared for the interruption in production during a normal Chinese New Year Holiday period. If the outbreak does not directly lead to the unattainable objective of a contract, we do not recommend the contracting parties terminate the contract. It is a complicated matter and the party that execute such a right may bear the burden of proof. Even an exporter/vendor is confronted with difficulties on duly performing a contract, it shall first actively negotiate with its business partner in goodwill.
Ⅳ. Legal Actions Can Be Taken by Importers / purchasers
(1) To notice the other contracting party timely, take measures to mitigate damages (if any), and communicate with the banks (if necessary)
As a major contractual obligation, importers/purchasers are required to make payments, which usually means issuing a letter of credit. Since the working time of banks may be affected by the outbreak, we recommend that importers/purchasers communicate and coordinate with their banks, so that late loadings, ship delays or other losses resulted from a delay in obtaining a L/C can be minimized and avoided, to the greatest extent.
(2) Coordinate Change of logistics and warehousing
Collecting goods timely is another major contractual obligation for importers/purchasers. In case ports and airports are closed due to the outbreak, importers/purchasers shall inform their exporters/vendors immediately and negotiate on alternative options. The party that does not take appropriate measures to prevent losses may be exposed to compensation claims.
In summary, despite of the existence and application of force majeure event, both importers/purchasers and the exporters/vendors shall timely and responsibly notify their counterparties, take reasonable mitigation measures and keep all relevant documents.