With the outbreak of Corona Virus Disease 2019 (COVID-19), the local governments of many provinces and cities have since forced companies to delay their work resumption. Under such a circumstance, many companies, especially manufacturing companies, run the risk of failing to perform contracts and losing money for breaching. In order to reduce losses, there is a necessity for companies to claim “Force Majeure”.
According to Chinese Contract Law, force majeure is the objective circumstances that are unforeseeable, unavoidable and insurmountable, including natural acts (such as storms, earthquakes) and human acts (such as war, strikes, government orders).
Generally, if the company is not able to perform the contract due to force majeure, it can be exempted from the liabilities in part or in whole in light of how the company is affected by the force majeure. In addition, the company may terminate the contract when the purpose of the contract is rendered impossible to achieve due to force majeure.
Similar to SARS in 2003, the outbreak of COVID-19 is so abrupt that in less than two months, more than 50,000 people are infected throughout China. In addition, the World Health Organization declared COVID-19 a Public Health Emergency of International Concern on 30 January 2020. Considering the unexpected circumstances, wide-spread, large influence and difficulty in epidemic control and prevention, we believe that the outbreak of COVID-19 could be considered as force majeure under a general commercial contract.
On 30 January 2020, the China Council for the Promotion of International Trade (CCPIT) announced that CCPIT is entitled to issue relevant force majeure certificates for the COVID-19 outbreak. Just three days later, CCPIT issued the first certificate to a manufacturing company in Zhejiang, which has helped minimize the liability of breaching contract caused by COVID-19.
Based on international practice, when parties enter into an international contract, a force majeure clause will generally be inserted. How each specific contract defines force majeure and which jurisdiction the disputes will be subject to may determine whether companies can claim force majeure in such a moment.
For instance, a force majeure clause may specifically list certain events (such as earthquake, flood, war), while excluding all the other similar circumstances. Under this circumstance, the outbreak of an epidemic is also excluded. As a result, the court may not consider COVID-19 as force majeure pursuant to the contract and principle of party autonomy.
On the other hand, disputes arising from international contracts would be subject to governing laws that are agreed by both parties. Therefore, whether a force majeure clause is applicable might further depend on the consented governing rules, including international treaties such as the United Nations Convention on the International Sale of Goods (CISG).
Step I: Notification
When companies realize the anticipatory breach of contract due to COVID-19, they shall firstly notify the counterparties of such foreseeable failure of performance due to force majeure through proper means. If there is no special stipulation related to the means of notification, companies had better notify by several ways together, such as email, fax, phone and post, to ensure that counterparties receive the news as soon as possible. Companies are suggested to keep records of such delivery in case of further disputes.
Step II: Proof of Force Majeure
According to Article 118 of Chinese Contract Law, parties who invoke force majeure shall provide the evidence regarding force majeure. Although the serious circumstances of COVID-19 is well known for both parties, companies still need to prove that their failure of performance is directly caused by the epidemic. For instance, if the contract entered into is related to IT or consulting service which can be performed online, COVID-19 would probably not to be considered as an excuse for breach of contract.
For international contracts, the foreign counterparties and the foreign court may not realize the seriousness of the circumstance and the fact that the Chinese government has postponed ordinary companies’ work resumption. Under such a condition, companies need an authoritative proof. As mentioned before, CCPIT can issue force majeure certificates in English to applicable companies as long as they provide the required materials such as the local government’s notification and signed export contract. It shall be noted that the certificate is only deemed as factual proof, and whether companies will be exempt from liabilities will still depend on the court’s evaluation and final judgment.
Step III: Loss Mitigation
In practice, when claiming force majeure, the breaching party generally needs to make positive efforts in order to reduce the influence of force majeure and prevent any further losses, otherwise, the party may be found liable for the furthered losses.
(1) Force Majeure Implemented
The affected parties’ nonperformance can be divided into part nonperformance, temporary nonperformance and whole nonperformance.
When the parties are only able to part perform or must delay the performance caused by force majeure, they may request for contract modification, performance delay or part performance. In addition, the corresponding breaching liability will be exempted as well.
If all obligations under the contract cannot be performed and the purpose is rendered impossible owing to force majeure, the parties can ask for contract termination and will be free from liability.
(2) Force Majeure Not Implemented
If companies cannot implement force majeure, they may trigger Changed Circumstance for liability mitigation. Pursuant to Chinese laws regarding changed circumstance, a party may ask the court to modify or terminate the contract on the grounds that the continuous performance is obviously unfair to the party or the purpose of the contract will not be realized due to the occurrence of any material change of circumstances that is unforeseeable, not caused by force majeure, and not a commercial risk after the conclusion of the contract, the court shall decide whether the contract shall be modified or terminated according to the principle of fairness on a case-by-case basis.
(1) Companies which are affected by COVID-19 need to fully review all of the incomplete contracts and have an idea of possible losses.
(2) Affected companies shall timely notify the other parties so as to reduce the losses that may be caused to the other parties and provide relevant evidence within a reasonable time limit.
(3) If the force majeure occurs after companies have delayed their performance, the liabilities of the companies will usually not be exempted.
(4) In order to prove force majeure, besides CCPIT’s force majeure certificates, companies may also need to collect other evidence regarding how companies are severely influenced by COVID-19 and the incidental affairs, such as the local government’s notification on quarantine or postponing work resumption. Even if companies fail to claim force majeure, the evidence collected may be used when triggering changed circumstances as previously mentioned.
(5) For companies who still have the ability to perform the obligations, they are also suggested to review their incomplete contracts, evaluate whether the counterparties may fail to perform and be prepared to take measures to mitigate possible losses.
In commercial contracts, especially international contracts, based on the principle of party autonomy, improvement of force majeure clauses can clarify both parties’ rights and obligations when force majeure occurs, which may facilitate dispute resolution and avoid cost of litigation or arbitration. To improve the clause, we suggest for companies to carry out the following:
(1) Precisely define force majeure and list which circumstances can be considered as force majeure in detail; and
(2) Clearly confirm the process of how to claim force majeure, such as such as when and how the affected company is to be notified after the force majeure, and the consequences of failure to notify; and
(3) Expressly stipulate the remedies when force majeure has occurred, which may include whether or not to delay performance, alter the contract price or terminate the contract, and whether parties can be wholly exempted from liabilities.
Force Majeure, as a term not common during regular business activities, shall have more emphasis placed upon it during this unique period. As the term is complicated and does not have unified rules, if you have any doubts or questions, don’t hesitate to contact us: info@dandreapartners.com.
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