The outbreak is also causing significant impact to production, logistics, international services and other aspects of business and operation. Whether your businesses are based in Mainland China or rely on raw materials from there, you should consider how the very different legal and regulatory regime may impact your business operations.
How are ‘force majeure’ events regulated under People's Republic of China ("PRC") laws?
The starting point is always the relevant provisions in the contracts. Since the virus is a relatively new phenomenon, it is unlikely that any ‘force majeure’ clauses would explicitly refer to the event of a coronavirus outbreak. In order to rely on the ‘force majeure’ clause, parties will need to consider the other events included, such as pandemic diseases and plagues, actions by government and authorities, or work stoppages.
In the absence of expressed contractual provisions, whether an event can be considered to be ‘force majeure’ depends on relevant PRC laws and regulations such as the General Principles of Civil Law and the PRC Contract Law. Both of these define ‘force majeure’ as a circumstance that is "objectively unforeseeable, unavoidable, and insurmountable". A party prevented from performing a contractual obligation because of a ‘force majeure’ event can be partially or fully exempted from contractual liability in proportion to the circumstances of the ‘force majeure’. Furthermore, either the defaulting or the innocent party can rescind the commercial contract if the ‘force majeure’ event renders the purpose of the contract unachievable
Whereas the Supreme People’s Court ("SPC") has not yet issued opinions or judicial interpretation on civil and commercial trials related to the coronavirus outbreak, it confirmed in 2003 that the legal rules governing ‘force majeure’ are applicable when litigants assert that they were prevented from performing relevant contracts as a result of the SARS pandemic or measures imposed by the government. The People's High Courts in Shanghai and Zhejiang have recently confirmed that ‘force majeure’ could apply in similar terms with respect to the COVID-19 outbreak.
That said, the party invoking the defence still has to prove the actual effects of the ‘force majeure’ events. Case reports in or shortly after 2003 showed that many litigants failed to establish the defence, as the relevant government actions only partially affected their business activities and did not directly trigger the non-fulfillment. In addition, the party seeking to invoke ‘force majeure’ also needs to promptly notify the other party of its inability to perform the contract obligation and furnish evidence proving the occurrence and existence of force majeure.
The CCPIT is now offering ‘force majeure’ certificates to companies struggling to combat the impact of the COVID-19 outbreak on their business with overseas partners, and CCPIT's certificates has generally been well accepted internationally in the past.
To what extent can the principles of fairness and changed circumstances under the PRC Contract Law assist adversely-affected businesses?
Take lease contracts as an example. They are still capable of being performed during the COVID-19 outbreak as long as the premises is in a usable condition. Compared with the outstanding lease term, the period during which the normal business is affected by the COVID-19 outbreak is relatively short. Yet, judicial opinions of various local courts and case reports publicly available confirmed that, in most cases, tenants' obligations to pay rent during the period of suspension due to the pandemic have been reduced or exempted.
Similarly, businesses faced with the increased raw material prices or labour costs due to the COVID-19 outbreak may be able to seek relief based on the principle of ‘fairness’ even though these adverse changes are not insurmountable, and thus do not amount to ‘force majeure’ events.
These cases can be categorised under the ‘changed circumstances’ principle, where a party's continual performance based on the terms originally agreed becomes obviously unfair in light of materially adverse changes after the contract date. In such cases, the affected party can ask the courts to modify or rescind the contract.
The parties invoking ‘changed circumstance’ should consider notifying their contractual counterparties of difficulties arising from the outbreak so that the counterparties have a chance to mitigate their losses.
Please click here for a comprehensive guide on the Legal Implications for Businesses in Hong Kong and China from the coronavirus outbreak.