China - A Brief Analysis On Contract Performance And Liability Allocation Due To The Novel Coronavirus Outbreak.
Legal News & Analysis - Asia Pacific - China - Dispute Resolution
18 March, 2020
Due to the outbreak of the Novel Coronavirus (hereinafter as the “Novel Coronavirus Outbreak”), the usually festive celebrations of the Chinese New Year of the Rat (2020) have become a particularly desolate time for members of the public. By midnight on January 31, 2020, the National Health Commission of the People’s Republic of China (“PRC”) had been informed of a total of 11,791 confirmed cases of the virus, and a total of 17,988 suspected cases. The World Health Organization (“WHO”) has announced that the Novel Coronavirus Outbreak is a Public Health Emergency of International Concern (“PHEIC”).
To control the spread of the Novel Coronavirus, the State Council of the PRC has announced an extension of the Spring Festival Holiday and several provincial and municipal governments have also announced a postponement of the return to work. As a result of these measures, the normal social and economic order has been seriously affected. Various legal issues have become a concern for many companies, such as whether contractual parties can modify or terminate a contract and how liability should be allocated in case of failures of performance due to the Novel Coronavirus Outbreak. We hereby provide an analysis regarding these issues for your kind reference.
From our perspective, the determination of the nature of the Novel Coronavirus Outbreak is the basis of a party’s claim. Whether the Novel Coronavirus Outbreak falls under the legal concept of Force Majeure or a Change of Circumstances should be determined on a case-by-case analysis, rather than making a uniform determination. In general, if the contract purpose of either party is unable to be achieved due to the Novel Coronavirus Outbreak, or it is unable to be achieved during the Outbreak, a claim of a reduction or an exemption of the relevant contractual obligations due to Force Majeure is likely to be supported; if the Novel Coronavirus Outbreak has had a serious impact on contractual performance, or renders the cost of performance significantly higher, the party may also assert an occurrence of Change of Circumstances, as the continuous performance could lead to unfairness between the parties in relation to their rights and obligations. In legal practice, claims do not necessarily rigidly adhere to legal theory, and a relatively flexible legal action may need to be designed for each case, in light of the commercial benefits of the parties involved and the circumstances thereof.
I. The Coronavirus Outbreak Satisfies the Characteristics of Force Majeure
Whether Force Majeure is constituted shall be, on the one hand, determined by the definition of Force Majeure in the contract (special attention shall be paid to whether the definition excludes an epidemic as Force Majeure etc.); on the other, if no such term is defined in the contract, the determination shall be made according to the laws applicable to the contract.
1. Legal Provisions Regarding Force Majeure
The definition of Force Majeure is mainly stipulated under Article 180 of the General Rules of the Civil Law of the PRC, which states “Where the non-performance of civil obligations is caused by Force Majeure, no civil liability shall arise therefrom, except as otherwise provided for by any law”; and Article 117 of the Contract Law of the PRC, which 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 any objective circumstances which are unforeseeable, unavoidable and insurmountable.”
The provisions regarding Force Majeure under the Civil Law Code of the PRC (Draft) (hereinafter as the “Civil Law Code”)1( 《中华人民共和国民法典（草案）》) are basically the same as the aforementioned provisions. If the Civil Law Code is adopted by the National People’s Congress and formally promulgated and implemented this year, the ideology for adjudication of Force Majeure cases is unlikely to change.
2. Judicial Practices regarding Force Majeure due to the SARS outbreak
The potential civil and commercial disputes caused by the Novel Coronavirus Outbreak are not yet entering into trial stage, but the opinions of the Supreme People’s Court and the judgements by the courts at all levels with regard to the 2003 SARS outbreak may shed some light on how the courts may determine the nature of the Novel Coronavirus Outbreak and allocate liabilities among the contractual parties.
For example, paragraph 2, item 3 of Article 3 of the Circular of the Supreme People's Court on Proper Performance in Relevant Trial and Enforcement of the People's Courts According to Law during the Period of Prevention and Treatment of Infectious Severe Acute Respiratory Syndrome (FA No. 72, invalidated, hereinafter as the “Circular of SPC on Trial and Enforcement during SARS”) 2(《最高人民法院关于在防治传染性非典型肺炎期间依法做好人民法院相关审判、执行工作的通知》（法〔2003〕72号）) states that “any dispute arising out of non-performance of contract as a direct result of administrative measures taken by the government and relevant authorities to prevent and control SARS, or simply due to the impact of SARS, shall be properly settled in accordance with Article 117, 118 of the Contract Law of the People’s Republic of China.” (i.e. legal provisions of Force Majeure)
The Article titled Correctly Handling the Case Where the SARS Epidemic Constitutes Force Majeure (《正确处理“非典”疫情构成不可抗力免责事由案件》) published in theJournal of Law Application (《法律适用》) by the Beijing Second Intermediate People’s Court elaborated that “From a legal point of view, we believe that SARS, as a sudden and abnormal event and a global outbreak, was not only unforeseeable by the party concerned, but also by medical experts with extensive medical knowledge. Since the outbreak, there has been no effective way to prevent its spread, or even to determine the exact source of infection; although many SARS patients have been cured and discharged from hospital, medical professionals have not yet determined the exact and effective treatment. Therefore, this kind of abnormal event, at least at present, is an unforeseeable, unavoidable and insurmountable objective existence. Its nature belongs to Force Majeure stipulated by law, and it is a natural disaster.”
In the Cruise Leasing Contract Dispute between J.PI Travel USA, Inc. and Changjiang Overseas Cruise Travel Co., Ltd. (hereinafter as “J.PI Cruise Lease Dispute”)3, the SARS outbreak was determined as a Force Majeure event by both the first instance court (Wuhan Maritime Court) and the second instance court (the High People’s Court of Hubei Province).
However, the SARS outbreak was not determined as a Force Majeure event in some cases. For example, the Beijing High People’s Court mentioned in its request to the Supreme People’s Court, as recorded in The Official Reply of the Supreme People’s Court Regarding Instructions on the Request of Beijing Kangwei Medical Consultation Service Center Co., Ltd. Vacating an Arbitral Award of CIETAC ( Minsitazi No.57) 4(《最高人民法院关于北京康卫医药咨询服务中心有限公司申请撤销中国国际经济贸易仲裁委员会仲裁裁决案件的请示的复函》（〔2012〕民四他字第57号）), that “the tribunal ruled that SARS is not a Force Majeure event and Asia Pharmaceuticals Company should continue to pay the contracting fee, but it is not required to pay default interest without breach of contract.” Since the arbitration award of this case is not publicly available, the reasoning of the tribunal cannot be verified.
Despite the fact that contrary views existed in a few cases, and that the number of confirmed cases of illness in the Novel Coronavirus Outbreak has surpassed that of SARS, and considering that the WHO has announced the Novel Coronavirus Outbreak as a PHEIC, we are of the view that the Novel Coronavirus Outbreak satisfies the three characteristics of Force Majeure: unforeseeable, unavoidable and insurmountable.
3. Legal Consequences of Force Majeure
The legal consequences of Force Majeure against contract performance are set forth under the following two legal provisions:
(i) Article 94 of the PRC Contract Law make clear that the failure of contract purpose due to Force Majeure is a legal cause of the contract’s termination;
(ii) Article 117 of the PRC Contract Law mainly refers to, in our view, the exemption of contractual obligations during the period affected by Force Majeure, and, after the end of the Force Majeure, the parties shall continue to perform the original contract; the “liability” mentioned in Article 117 of the PRC Contract Law states that “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” may include primary obligation, liability for breach of contract and collateral obligation.
II.The Novel Coronavirus Outbreak and an Application of Change of Circumstances in the Performance of a Contract
1. Legal Provisions Regarding Change of Circumstances
Although the Novel Coronavirus Outbreak satisfies the characteristics of Force Majeure, in individual cases, the impact of the Novel Coronavirus Outbreak on contract performance varies. There are also views that the Novel Coronavirus Outbreak fulfills the legal concept of Change of Circumstances.
The principle of Change of Circumstances was initially proposed in the Minutes of the Symposiums of the National Economic Trial Work on May 6, 1993 (Fa Fa  No. 8)5(《最高人民法院关于印发<全国经济审判工作座谈会纪要>的通知（法发〔1993〕8号）》), which is now invalid. The current effective principle of Change of Circumstances can be found in Article 26 of the Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China (Fa Shi  No. 5, hereinafter referred to as the “Judicial Interpretation II of the Contract Law”)( 《最高人民法院关于适用<中华人民共和国合同法>若干问题的解释（二）》（法释〔2009〕5号）), which stipulates that “where any major change which is unforeseeable, is not a commercial risk and is not caused by a Force Majeure event after the formation of a contract, if the continuous performance of the contract is obviously unfair to the other party or they cannot realize the purposes of the contract and a party files a request for the modification or rescission of the contract with the people's court, the people's court shall decide whether to modify or rescind the contract under the principle of fairness and in light of the circumstances of the case.” Apparently, the legal concept of Change of Circumstances is different from and exclusive to the legal concept of Force Majeure; it is unforeseeable at the time of the execution of the contract, and is neither a commercial risk nor caused by Force Majeure, and the impact of which is material.
Paragraph 1, Item 3 of Article 3 of the Circular of SPC on Trial and Enforcement during SARS provides that “Due to the SARS outbreak, the cases of contract disputes in which the performance of the original contract has a major impact on the rights and interests of one party may be handled in accordance with the specific circumstances and apply the principle of fairness.” When the Circular of SPC on Trial and Enforcement during SARS was promulgated, the Judicial Interpretation II of the Contract Law did not exist, but such provision is consistent with the conditions for an application of the principle of Change of Circumstances and the principle of fairness with regard to the allocation of liabilities as stipulated under the Judicial Interpretation II of the Contract Law.
According to the above provisions, the principle of Change of Circumstances is more flexible than Force Majeure, the application of which mainly reflects a contract alteration, including a reduction or postponement of contractual obligations during the period of the outbreak according to the influence of the outbreak.
However, shortly after the promulgation of the Judicial Interpretation II of the Contract Law, the Supreme People’s Court distributed the Guiding Opinions of the Supreme People's Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation (Fa Fa  No. 40)(《最高人民法院印发了《关于当前形势下审理民商事合同纠纷案件若干问题的指导意见》的通知（法发〔2009〕40号）》), which requires the prudent application of the principle of Change of Circumstances and the application of reporting and examination procedures when a case applied such a principle6. In practice, the people’s courts have great discretion with respect to the determination of a Change of Circumstances in individual cases, and it is difficult for parties to successfully apply the principle; therefore few assertions of Change of Circumstances are made.
2.Applying the Principle of Force Majeure or Change of Circumstances according to the degree that the performance of the contract was affected
We opine that, in practice, there is a lack in practical significance to make a theoretical distinction between Force Majeure and Change of Circumstances. In fact, Force Majeure and Change of Circumstances have several similarities: (1) both could not be foreseen at the time of the execution of the contract, and (2) both have a material impact on contract performance. However, the impact of Force Majeure on contract performance is more serious than that of Change of Circumstances, and the legal consequences of Change of Circumstances are more diverse: both the modification and termination of a contract are applicable. The key is that the claims to assert shall be based on the commercial interests of the parties and the circumstances of the case, etc. In theory, it is necessary to make a distinction between Force Majeure and Change of Circumstances. However in practice, the principle of Force Majeure and Change of Circumstances are not antagonistic to each other, and may be applied in a particular case.
Article 3 of the Circular of SPC on Trial and Enforcement during SARS also deals with the different effects of the SARS outbreak on the performance of contracts:
i. When the contract continues to be performed, the liabilities of each party shall be allocated according to the principle of fairness when Change of Circumstances occurs: due to the SARS outbreak, the cases of contract disputes in which the performance of the original contract has a major impact on the rights and interests of one party may be handled in accordance with the specific circumstances and apply the principle of fairness.
ii. When the contract cannot be performed: any dispute arising out of non-performance of contract as a direct result of administrative measures taken by the government and relevant authorities to prevent and control SARS, or simply due to the impact of SARS, shall be properly settled in accordance with Article 117, 118 of the PRC Contract Law.
In the J.PI Cruise Lease Dispute, the first instance court and second instance court both recognized the SARS outbreak as a Force Majeure event; however, the second instance court held, in combination with the duration of the epidemic and the ratio of the lease term, that “the impact of SARS on the disputed contract has not reached the extent that the purpose of the contract cannot be realized. Therefore, J.PI Travel USA, Inc. has no right to unilaterally rescind the disputed contract in accordance with the contract or the law”; however, the court considered that “such a Force Majeure event has affected the performance of the disputed charter contract, and J.PI Travel USA, Inc. does not have to pay rent for the period of the performance of the contract affected by the SARS outbreak.”
The second instance court actually applied the principle of fairness when Change of Circumstances occurred to allocate the rights and obligations of the parties after determining the SARS outbreak as a Force Majeure event.
III. The claims or defenses a party may assert when it fails to perform due to the Novel Coronavirus Outbreak
In light of the provisions regarding Force Majeure and the rules on Changing of Circumstances, the parties may make relevant assertions according to the extent of the impact of the Novel Coronavirus Outbreak on contract performance, which includes:
(1) termination of contract;
(2) reduction of obligation for continued payment during the Novel Coronavirus Outbreak;
(3) delay of delivery and release of liability for delayed performance;
(4) refusal of goods, or strengthened quality inspection of goods from the infected areas;
(5) increase of price. The detailed analysis is as follows.
1. Could the claim regarding a termination of the contract be supported: depending on the extent of the impact of the Novel Coronavirus Outbreak on the contract performance and whether the purpose of the contract is fundamentally affected
Under Paragraph 1 of Article 94 of the PRC Contract Law, the element that “the contract purpose cannot be achieved due to Force Majeure” is one of the legal causes for contract termination, and a party to the contract may refer to this clause to terminate the contract.
Judicial practices are cautious on a party’s assertion to terminate a contract based on a Force Majeure event, and a case-by-case analysis is usually required based on the nature and purpose of the contract, as well as the impact of a Force Majeure event.
In the Realty Lease Contract Dispute between Dalian Pengcheng Holiday Damu Co., Ltd. and Dalian Zhengdian Watch Industry Co., Ltd.7, the Procuratorate of the Liaoning Province protested that the SARS outbreak constituted a Force Majeure event, while the High People’s Court of the Liaoning Province did not deny that the SARS outbreak was a Force Majeure event in the retrial, it did not support the lessee’s claim regarding the termination of the contract as “the business scope of Holiday Hotel includes catering and guest rooms; after the hotel being leased to Zhengdian Company, the actual operating business scope also included the abovementioned two categories. The Emergency Notice issued by the Dalian Forestry Bureau and the Administration Bureau for Industry and Commerce only forbade the operation related to wild animals, and thus only the catering service of the Zhengdian Company was affected, and the guest room service was still in normal operation. The suspension of wildlife operations affected the operation of the catering service, partially rather than wholly…Due to the SARS outbreak and the relevant government departments' notices to suspend the operation of wildlife, it only affected some of the business activities of Zhengdian Company, which did not ‘directly’ or ‘fundamentally’ lead to Zhengdian Company’s failure to perform its leasing contract with Pengcheng Company”.
In this case, the court’s main concerns were whether the order issued by the government forbade relevant business activities, and the relationship between the prohibited business activities and the business activities of the lessee. This case also applied the Force Majeure provisions in the Circular of SPC on Trial and Enforcement during SARS in a cautious way when deciding on the termination of contract due to the SARS outbreak.
Another example is the J.PI Cruise Lease Dispute mentioned above. The first instance court (Wuhan Maritime Court), did not support the claim of contract termination on the ground that “the purpose of the cruise lease contract that Changjiang Oversea Cruise Travel Co., Ltd. entered into is to provide shipping services, and the Chinese government did not issue any shipping ban due to the SARS outbreak, and the cruise is seaworthy...”
The High People's Court of Hubei Province adopted a quantifiable method which divided the number of shipping days affected by the SARS outbreak by the duration of the ship lease in the second instance and stated that “the average duration of each cruise affected by the SARS outbreak was 109 days, compared with an average charter period of no less than 240 days for each cruise ship involved in this case, and thus the affected duration accounted for at most 45% of the charter period; compared with the remaining 1078 operating days of the five cruises whose service was suspended on April 13, 2003, therefore the affected duration accounted for at most 50% of the charter period. Therefore, the court finds that although the SARS outbreak has greatly affected the performance of the party, this impact has not yet lead to the failure of contract purpose.”
The second instance court in this case determined on the failure of contract purpose due to the SARS outbreak by means of data quantification, which provided a good reference for a party with a short performance period intending to terminate the contract because of the Novel Coronavirus Outbreak.
2. In the event that the parties continue to perform the contract, whether the rent can be reduced or exempted during the period that the operating income is affected by the Novel Coronavirus Outbreak
Due to the Novel Coronavirus Outbreak, most commercial lessees have suspended their operations in response to the government’s prohibition and control requirements, and concerns as to whether lessees can claim the exemption of rents during the suspension period has attracted broad attention. From a corporate social responsibility perspective, many commercial real estate groups such as Wanda Group, Longhu Commercial, China Resources Land, and Xincheng Holdings, have reduced or exempted rents proactively, in order to alleviate economic losses and related pressure on commercial tenants because of the suspension.
With regard to the rights and obligations of the parties under a leasing contract, the lessor of a commercial property has an obligation to ensure that the commercial property is in good operation. Some local governments have issued documents forbidding commercial operations. If the building where the leased property is located is closed and the lessor does not provide property services, the lessee may assert a defense regarding the right of performance if the lessor continues to claim rent based on the contract. The lessors’ initiative to reduce or exempt rents during the suspension of business is an act of honesty that deserves commercial praise.
According to our research on relevant cases, most courts consider that rent during the period of suspension due to the epidemic could be reduced or exempted. For example, in the Lease Contract Dispute among Xiangyuan County Wuyang New Century Co., Ltd., Wang Shuwen and Guo Hongwei8, the Intermediate People's Court of Changzhi City of Shanxi Province held that “the tenant in this case has run the hotel for only a short time. In April 2018, the hotel suspended the business due to the SARS outbreak for five months. In May 2014, the government widened and renovated Yuhuang Road in front of the hotel. The SARS outbreak and the widening of Yuhuang Road were objective circumstances, which were unforeseen, inevitable, and insurmountable when the contract was concluded, and thus constituted a Force Majeure event. The lessee has no operating income during the period of Force Majeure. The lessee shall be exempted from paying rent for 10 months.”
A few judgements considered that the suspension of operations is a normal commercial risk, and did not support the lessee’s claim for rent reduction. For example, in the Lease Contract dispute between Liaoyuan Juyuan Industry and Trade Group Co., Ltd. and Jiang Yuge and Liaoyuan Shenghua Hotel9, the Liaoyuan Intermediate People’s Court of Jilin Province (the second instance court) held that “the economic loss of the Shenghua Hotel for the four-month suspension of business due to the 2003 SARS outbreak, a Force Majeure event encountered by Jiang Yuge during the operation of the Shenghua Hotel, is a normal operating risk. This operating risk should not be borne by Juyuan Company.
Therefore, the judgment in the first instance which supports Jiang Yuge's claim to reduce or exempt the contracting fees during the SARS outbreak was wrong and should be corrected.” The judge acknowledged that SARS was a Force Majeure event in the second instance, but considered that the loss by operational suspension due to Force Majeure was a foreseeable normal commercial risk. The logic of the second instance judgment, which corrects the first instance judgement, is questionable.
There may be some potential controversies in practice under different situations. For example, if there are no explicit injunctions in certain places, and the leased properties are eligible to continue operation, while in fact the lessees’ business purpose is hard to achieve, can the lessee’s claim for rent reduction be supported during the epidemic period? Or, if the government bans expire, but due to the effect of the epidemic, people are still reluctant to go out can the lessee’s claim for rent reduction from February 10 to the end of February, or to the end of March be supported? (Some local governments have instructed a majority of industries to resume work after February 10, and it is reasonable to expect that at least until February or even March, the operating income of the lessee will still be significantly affected).
Generally speaking, the success of a claim for rent reduction is related to whether the leased property is affected and the degree of the impact of the Novel Coronavirus Outbreak on it (for example, the extent of the impact of the Novel Coronavirus Outbreak on supermarkets and pharmacies would be significantly different from those on other entertainment industries such as cinemas and KTV, and some are even positively affected). For the service industry in general, there is a basis for the lessee to claim rent reduction during the suspension period due to the Novel Coronavirus Outbreak. The claim of business losses beyond the Novel Coronavirus Outbreak period is difficult to support, but the judges may still exercise discretion to support this claim based on the business scope and the business purposes of the parties and in combination with the evidence submitted. The above issues require a case-by-case analysis according to the specific circumstances of the case. The lessee has the burden to prove that the leased property has not satisfied the purpose of normal operation and usage; if it fails, the losses may be considered a “normal commercial risk” and the claim for rent reduction or exemption is not likely to be supported.
3. Liability for delayed performance caused by the Novel Coronavirus Outbreak: judicial practices generally exempt liability for delayed performance caused by Force Majeure
As for the contractual obligations that cannot be fulfilled due to the Novel Coronavirus Outbreak, it is generally recognized in judicial practices that liability for delayed performance can be exempted by the corresponding number of days due to the Force Majeure event.
For example, in the Commodity House Pre-sale Contract dispute between Yin Wenmin and Sanya Changyuan Property Development Co., Ltd10, the Sanya Intermediate People’s Court held that SARS was a Force Majeure event and found that “the house delivery period extended by the SARS outbreak was from May 8 to September 9, 2003, and the house delivery period extended by the construction of civil defense works was from March 1, 2003 to November 16, 2003. The overlapping periods from May 8 to September 9, 2003 shall not be counted twice. Therefore, the delivery date due to the combination of the abovementioned two reasons should be November 16, 2003. Due to the impact of the typhoon which caused delays in various projects, the delivery deadline should be postponed again. That is, after November 16, 2003, it was postponed for another 22 days to December 8, 2003, as the deadline for the final delivery of the house due to delivery delays for various reasons.”
4. Whether to reject goods from the infected area
The Novel Coronavirus Outbreak has been listed by the WHO as a PHEIC. Airlines from the United States, the United Kingdom, France and other countries have suspended civil aviation flights to and from China, and there is a possibility that consignees in other provinces or other countries may refuse to accept goods.
As to whether a consignee may reject goods from the infected area based on Force Majeure, we are of the view that it shall be determined based on the quality standards according to the contract and whether the consignee can prove the impact of the epidemic on the quality of the goods. The rejection of goods may be deemed an improper exercise of contractual defense and the rejecting party may incur liabilities for breach of contract with respect to its rejection. If the goods are less likely to be contaminated by a virus and vaccination measures have been taken against them properly, there would be a limited effect on the contract performance. However, the consignee may, based on the characteristics of the goods, add a novel coronavirus examination as an acceptance prerequisite, and such a requirement is commercially reasonable. The consignor shall attach importance to the potential rejection and prepare in advance.
5. Whether a party can claim to allocate among parties the increase on the cost of performance due to the Novel Coronavirus Outbreak
After the Novel Coronavirus Outbreak, if a contract is eligible for continued performance, but the cost of performance increases significantly, we refer to Item 1 of Paragraph 3 of Article 3 of the Circular of SPC on Trial and Enforcement during SARS which states that “Due to the SARS outbreak, the cases of contract disputes in which the performance of the original contract has a major impact on the rights and interests of one party may be handled in accordance with the specific circumstances and apply the principle of fairness”.
We believe that the parties to the contract may claim an application of the principle of fairness to allocate losses incurred by the outbreak of the epidemic.
The claiming party needs to prove that: (1) the performance costs are significantly higher than those costs before the outbreak of the epidemic; (2) the increase in performance costs is connected to the epidemic outbreak; and (3) the party will suffer significant damage by continued performance under the original contract. Thus, the burden of proof for the claiming party is relatively high.
In addition, if the claiming party proves the aforesaid issues, but the other party refuses an increase on consideration, the issue of whether the contract can be terminated without liability and how to return the benefits generated by performance by both parties may further arise.
IV. Suggestions on contract performance during the Novel Coronavirus Outbreak
Based on the above, we advise following the below suggestions in the performance of the contract during the Novel Coronavirus Outbreak.
1. Evaluate the impact of the Novel Coronavirus Outbreak on contract performance
Enterprises should plan in advance and evaluate the actual and potential impact of the Novel Coronavirus Outbreak on the performance of contracts. If the Novel Coronavirus Outbreak causes difficulties in contract performance, measures should be taken as soon as possible. The comprehensive consideration of commercial interests is usually the basis and purpose of subsequent legal action.
2. Timely notify counterparties and keep all written evidence such as notices
Article 118 of the PRC Contract Law provides that “if a party is unable to perform a contract due to force majeure, it shall promptly notify the other party to reduce possible losses to the other party and shall provide evidence within a reasonable period.” Therefore, even if the Novel Coronavirus Outbreak is deemed as a force majeure event in a particular case, the performing party shall have the legal obligation to notify the other party with respect to its inability to perform the obligations, regardless of whether there are contractual provisions.
We advise that, with respect to the difficulty in contract performance due to the Novel Coronavirus Outbreak, the performing party may communicate with the counterparty on matters such as subsequent performance and try to form supplementary agreements and other written documents so as to avoid subsequent disputes. The issues for attention include, but are not limited to:
i. Sending written documents in accordance with the notice period, notice procedures and notice methods stipulated in the contract;
ii. Ensuring that the notification documents are effectively received and keeping the receipt vouchers; and
iii. In a case whereby the contract is not governed by PRC laws, the party may seek legal advice from local lawyers as early as possible and negotiate with the counterparty on performance arrangement and assumption of responsibilities.
3. Prompt application for the issuance of a certificate of Force Majeure
According to Article 118 of the PRC Contract Law, the party claiming Force Majeure shall be responsible to prove the constitution of Force Majeure, and shall make endeavors to obtain an explanation from the government or other departments on the Force Majeure event and the impact on the performance of the contract.
In accordance with Item 6 of Article 8 of the Articles of Association of the Constitution of the China Council for the Promotion of International Trade, issuing a Force Majeure Certificate is one of the duties of the China Council for the Promotion of International Trade (hereinafter as the “CCPIT”). The CCPIT recently issued an official notice11 on providing a force majeure certificate for the Novel Coronavirus Outbreak. Some notary offices may also handle notarizations for Force Majeure events in respect of the Novel Coronavirus Outbreak and publish notices on the acceptance of notarization (such as the Chang’an notary office in Beijing). Regarding the specific procedures and document requirements for the CCPIT certification and notarization, the party concerned may consult with personnel from the relevant departments.
4. Keep all market information, data and other supporting documents to prove that the Novel Coronavirus Outbreak affects the operation of enterprises
The party that claims the modification or termination of the contract shall bear the burden of proof under the evidence rule of “who claims, who provides evidence” in civil proceedings. Therefore, before making a commercial decision, an enterprise shall prudently consider whether to terminate the contract or negotiate a modification of the contract; if a contract is to be terminated due to the Novel Coronavirus Outbreak, the enterprise shall prudently consider whether the impact of the epidemic on the performance of the contract has reached a level whereby the contract purpose cannot be achieved.
Where the contracting parties fail to reach a consensus through consultation within a short period of time, the parties proposing to modify or terminate the contract shall pay attention to the information on the development of the Novel Coronavirus Outbreak, and preserve materials which reflect that the market quotations and data affect the operation of enterprises, and make good preparations in response to the negotiation and litigation.
The beginning of 2020 has been very difficult, but we believe that our unified strength will overcome all obstacles. We hereby thank the staff who are on the front line of fighting this virus, and wish everyone good health and continued prosperity.
ZHENG, Yanli (Leanne) , Partner, Jun He
1. Article 180 of the PRC Civil Law Code (Draft) states, “a party who is unable to perform a contract due to Force Majeure is exempted from civil liability. Where the laws provide otherwise, such provisions shall prevail. Force Majeure means any objective circumstances which are unforeseeable, unavoidable and insurmountable.”
Article 563 of the PRC Civil Law Code (Draft) states, “the parties to a contract may terminate the contract under any of the following circumstances: (1) it is rendered impossible to achieve the purpose of contract due to an event of Force Majeure; (2) prior to the expiration of the period of performance, the other party expressly states, or indicates through its conduct, that it will not perform its main obligation; (3) the other party delayed performance of its main obligation after such performance has been demanded, and fails to perform within a reasonable period; (4) the other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract; (5) other circumstance as provided by law. ”
Article 590 of the PRC Civil Law Code (Draft) 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. 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 an event of Force Majeure within a reasonable period. Where an event of Force Majeure occurs after the party's delay in performance, it is not exempted from such liability.”
2. This Circular has been invalidated by the Decision of the Supreme People's Court on Abolishing Some Judicial Interpretations and Documents of a Judicial Interpretation Nature which were issued between July 1, 1997 and December 31, 2011 (Tenth Group) (《最高人民法院关于废止1997年7月1日至2011年12月31日期间发布的部分司法解释和司法解释性质文件（第十批）的决定》)due to change of situation.
3. See (2007)E’minsizhongzi No.27 Judgement (《（2007）鄂民四终字第47号民事判决书》).
4. In the Official Reply of the Supreme People's Court Regarding Instructions on the Request of Beijing Kangwei Medical Consultation Service Center Co., Ltd. Vacating an Arbitral Award of CIETAC( Minsitazi No.57), the Supreme People’s court denied the request of vacating the arbitration award by Beijing High People’s Court.
5. The Minutes of the Symposiums of National Economic Trial Work provides that “6. to establish the awareness of commercial risks, and fairly handle the bearing of losses. There are both opportunities and risks for the parties involved in the market to engage in business activities. The people's courts, as the final judgment on disputes over commodity trading, shall pay attention to correctly determining the assumption of risks in accordance with legal provisions and business habits. Any risk of loss that is to be borne by one party is not transferable to any other party. If one party takes reasonable self-protection measures when the other party seriously breaches the contract, it shall be supported. If, for reasons not attributable to either party, a fundamental change in the objective circumstances forming the basis of the contract which could not have been foreseen by the parties has taken place, so that performance under the original contract was manifestly unfair, the contract may be modified or rescinded at the request of the parties on the basis of the principle of change of circumstances..”
6. The Guiding Opinions of the Supreme People's Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation provides that “In apprehending the value of adjustment, the people's courts shall follow the principle of giving weight to the protection of non-defaulting party. The principle of a “change of situation” shall not be applied simply to relieve debtors from obligations and let creditors bear adverse consequences, but to fairly and reasonably adjust the interest relations between both sides with a full consideration of the balance of interests. In litigation, the people's court shall actively direct the parties concerned to renegotiate and revise contracts; if renegotiation fails, the court shall try to solve disputes through mediation. In order to prevent the normal order of market transactions from being affected by the abuse of the principle of ‘change of situation’, if the people's court decides to make a ruling under the principle of ‘change of situation’, it shall strictly implement the relevant procedures for examination and approval of the application of the principle of “change of situation” in accordance with the requirements of the Notice of the Supreme People's Court on the Correct Application of the Interpretation II of Several Issues concerning the Contract Law of the People's Republic of China to Serve the Overall Work Objectives of the Party and the State (No. 165  of the Supreme People's Court).”
7.See (2013) Liao Shen Er Min Kang Zi No. 14 Civil Judgement (《（2013）辽审二民抗字第14号民事判决书》).
8.See (2017) Jin 04 Min Zhong No.2272 Civil Judgement (参见《（2018）晋04民终2272号民事判决书》).
9.See (2017) Ji 04 Min Zhong No.441 Civil Judgement (参见《（2017）吉04民终441号民事判决书》).
10. See (2005) Sanya Min Yi Zhong Zi No. 79 Civil Judgement (《（2005）三亚民一终字第79号民事判决书》).