The coronavirus (Covid-19) outbreak first started in Wuhan (central China) around the middle of December 2019 did not take too long to have its national-wide percussion. On Jan. 24^th, 2020, the Wuhan government announced the lockdown of the whole city (with around 11 million people), which soon extended to the whole Hubei Province (with a population of around 58.5 million) and lead to a no exit or entry of any people, vehicles except for the transportation of epidemic control material or daily necessity supply into this central province of China. On Jan. 26^th,2020 the State Council of the People’s Republic of China gave public notice[1] to have a three-day extension of Chinese New Year holidays, followed by official notices of many provinces to prohibit the resume of business or school before Feb. 9^th, 2020, except for sectors crucial for epidemic control, provision of daily necessities and basic city maintenance[2].  As the outbreak progressed, some regions (such as Guangdong in the south of China) that suffered relatively less impact of the coronavirus gave green light to a complete resume of work since Feb. 10^th, 2020, however, some regions closer to the epicenter, such as Zhengzhou city (around 500km north to Wuhan) prohibits the resume of work in construction sector (except for projects important to civil life such as public transportation construction, preferential policy housing for people with low income) before March 16^th, 2020.

 

Logically, epidemic control measures are not only taken within China: some foreign countries imposed travel ban to Chinese citizens; certain international airline companies announced the temporary cancellation of flights from and to China; international organizations such as GSAM and IPBA have decided to cancel or postponed their annual conventions (Mobile World Congress 2020 in Barcelona and IPBA 2020 Shanghai).

 

Needless to say, the cease of production within China, lockdown of Chinese provinces with heavy presence of industrial manufacture, cancellation of international transportation, etc. directly and indirectly caused the delay or failure of contract performance. The China Council for the Promotion of International Trade (CCPIT) issued the first “Force Majeure Certificate” on Feb. 2^nd, 2020 for a manufacture company in Zhejiang Province, in support of declaring the force majeure impact on the Chinese company’s ability to deliver the goods to an African factory. However, it did not take long before Royal Dutch Shell Plc and Total SA to publicly reject the Force Majeure notice issued by a Chinese LNP buyer. Parties affected are anxiously seeking legal advice and wondering if force majeure can be the solution for the contract performance impediment caused by Covid-19.

 

It is out of this actual and prominent legal need that the author hereby intends to shed some light on the definition, application of force majeure from Chinese legal system perspective, and furthermore, give some suggestions to parties affected by Covid-19 in order to be better shielded under Force Majeure.

 

1. Definition of Force Majeure and its legal consequences in Chinese law   

 

Article 180 of PRC General Provisions of the Civil Law (GPCL) defines force majeure as “any objective circumstance that is unforeseeable, inevitable, and insurmountable.”

The same article further stipulates that “Where the non-performance of civil obligations is caused by a force majeure, no civil liability shall arise therefrom, except as otherwise provided for by any law.”

 

In the provisions of PRC Contract Law, following the same idea provided in the GPCL, art. 117 stipulates that Force Majeure is the objective circumstance that is “unforeseeable, inevitable, and insurmountable”. In case of failure of contract performance due to force majeure, depending on the impact of it, parties will be partially or completely exempted from the liability, except otherwise provided by the law. If force majeure happens after the parties delay the contract performance, they cannot be exempt from liability of failure of contract performance. Art. 94.1 also provides that parties can terminate the contract when force majeure causes the contract purpose impossible to be achieved. In addition to the above “general” terms, the Contract Law provides also specific provision depending on the kind of contract parties stipulated. For example, in this regard, for cargo carriage, it’s stipulated that carrier is free from compensation liability if cargo is damaged, destroyed due to force majeure and cargo owner is free from payment liability if cargo is destroyed during transportation due to force majeure. Other Chinese laws, such as PRC Travel Law, PRC Maritime Law, etc. all follow similar idea and provide exemption of liability from parties affected by force majeure event.

 

Despite that the legal consequence of force majeure is more or less clear, the definition of the same is never really clarified by the law. Neither the GPCL nor the Contract law provide further definition of “unforeseeable”, “inevitable” and “insurmountable”, therefore, the determination of Force Majeure in Chinese legal practice relies mainly on the judge’s discretion on case by case, although in general, this term usually includes natural disasters (such as typhoon, earthquake, floods, etc.), social incidents (such as change of government, war, social unrest, etc.), government action (such as confiscation)^[3].

 

Regarding whether epidemic can be defined as Force Majeure, discussion has been going on since the outbreak of SARS back in 2003. Most of the Chinese courts took the ground that SARS is a natural disaster belonging to Force Majeure.^[4]

 

Today, 17 years later, we are facing the same legal issue. On Feb. 10^th, 2020, the Legislation Commission of the Standing Committee of People’s Congress[5], during a press conference, pointed out that the Covid-19 as public hygiene emergency has led to corresponding government epidemic controlling measures and therefore, for parties who cannot perform the contract thereof, [the Covid-19 situation] represent Force Majeure event that’s unforeseeable, inevitable, and insurmountable.

 

Based on this interpretation issued by the corresponding commission of the Standing Committee of the Chinese national legislative organ, the outbreak of Covid-19 is considered to be Force Majeure, therefore, the relevant provisions of the same in the Chinese laws may be applied in cases where Covid-19 becomes the impediment of the contract performance, if all the key elements mentioned in the following part 2 are met.

 

2. Key elements to enact Force Majeure shield under Chinese law in judicial practice

 

If defining Covid-19 as Force Majeure event is the first step, then knowing the key elements in order to apply related protections is the second. Art. 118 of PRC Contract Law requires that the party who cannot perform the contract due to Force Majeure shall notify the counterpart in time in order to mitigate the loss caused on the other party. However, more elements are gauged in actual judicial practice, based on the rulings published on China Judgement Online. Here below some elements extracted from precedent rulings through a not exhaustive research of cases where parties used Force Majeure as argument to defend themselves. Despite that China is a Civil law system and the precedent cases are not stare decisis, it still shreds some light about how the laws are actually being interpreted and enforced in real practice, and therefore, has certain significance for the people applying it.

   

1. It’s not fundamental to have Force Majeure clause in the contract to enact this resort.

 

Since both the GPCL and the PRC Contract Law provide Force Majeure as the default exemption of liability, it’s not fundamental to have Force Majeure clause in the contract to enact this resort. In ruling (2019) Su 06 Civil Final No. 32[6] issued by the Intermediate Court of Nantong City, Jiangsu Province, judge expressed that “whether there is Force Majeure clause in the contract does not affect the direct application of the provisions of law”.  Despite the above, it’s still suggested to have a Force Majeure clause in the contract, and a good one, since within this clause, the parties can make better and clearer instructions about how the party affected by Force Majeure should act, such as the time limit to send the notification, the detailed measures they should take to mitigate the loss, etc. In the same ruling, the judge also expressed that “if the Force Majeure clause has smaller scope than the default scope, the parties can still use the default Force Majeure scope as argument for exempt of duty; if it has bigger scope than the default one, the exceeding part shall be deemed as additional exempt of duty clause agreed by the parties”.

 

1. The impairment of the ability to perform the contract caused by the Force Majeure event will be carefully gauged.

 

In order to apply this default liability exemption, one thing is to have the objective Force Majeure event to happen and another is to have the same event to actually impeding the contract performance. Since the Force Majeure can affect parties in different ways, whether and how the failure of performance is due to the impairment of the ability caused by the Force majeure is for sure one of the key elements that the court should gauge. In the Guideline Regarding Several Issues of Judicial Trial of Commercial Cases Related to the Outbreak of Covid-19 issued by the 2^nd Civil court of the High Court of Zhejiang Province[7], it’s stated that “even though Covid-19 is Force Majeure, it does not impede all the contract performance”, and that “it’s necessary to combine all the elements such as the contract signing time, performance time frame, viability of alternative and performance cost to gauge the impact of Covid-19 on the contract performance”.

 

Same idea was already implemented in the ruling (2017)Yue0307Civil First No.399[8] issued by Longgang District Court of Shenzhen city, where the plaintiff alleged that the newly issued government policy about the 20% increase of mandatory down payment for the second real estate purchase of Shenzhen citizen after his signature of the real estate purchase contract impeded his ability to perform, judge determined that this government act did not actually impede the plaintiff’s ability to perform, since the Supplementary Notice of this policy also provided that if buyer had paid deposit before the issuance of the policy, the old policy (lower down payment amount) shall apply. Therefore, even though government policy can be deemed as Force Majeure, in this case it did not actually affect the plaintiff’s ability to perform, hence he cannot use this as a cause to terminate the contract.

 

1. Immediate notification and all possible measures to the party’s capacity taken to mitigate loss are essential to be shield under Force Majeure events.

 

This is clearly stipulated in the PRC Contract Law and therefore the most frequently gauged element in relevant precedent cases. In the ruling issued by Tianjin High Court in 2002 for the case Zhongji General Import and Export Company vs. Tianjin Harbor Second Pier Co. Ltd[9]., the judge determined that, even though the defendant (Tianjin Harbor) was not able to save all the goods of the plaintiff deposited in the harbor from the sea tide caused by the typhoon after Tianjin Harbor received the weather forecast from the National Sea Forecast Center, the Tianjin Harbor did fulfill the due diligent as harbor operator and organize a lot of man power and equipment to accelerate the loading and moving of the goods. Considering the weather condition and the time, equipment, nature of the goods, the fact that Tianjin Harbor did not move the goods storage on higher places including the plaintiff’s goods was reasonable non-performance and therefore the Tianjin Harbor was protected under Force Majeure. In another case (2006)Hu First Intermediate Civil Final No.609[10], the judge determined that the China Eastern Airline did not adopt all necessary measures and remedies to mitigate the passenger’s (plaintiff) loss by not telling him he would need to wait for another three days for the second scale if he boarded on the first flight and not suggesting him to take the flight from Shanghai another day when his flight from Shanghai to Hongkong was delayed by the snow. Instead, the airline company assured him that they would help him to solve the issue but in reality, the airline company did not help him to change the flight ticket or compensate his costs in Hongkong airport during the waiting. Therefore, the court denied that Force Majeure could be a ground for exempt of liability for the airline company.

 

3. Practical suggestions to enterprises affected by the coronavirus to be protected under Force Majeure shield in Chinese legal system

 

Based on the key elements gauged in the judicial practice where Force Majeure is used as argument for exempt of duty, the author hereby gives the following suggestions to entities affected by Covid-19 who intend to apply the Force Majeure shield:

 

1. Seek for professional legal advice. Nothing in this document constitute or may constitute legal opinion. Therefore it’s suggested to read the present document together with legal support from a Chinese lawyer.
2. Check the contract signature date. If it’s after the outbreak of the Covid-19, then it’s very unlikely that Force Majeure can be applied.
3. Check the Force Majeure clause in your contract. If there is such clause, need to comply with the terms, such as the time frame of notification, the measures that should be taken, etc.
4. Send notification to the counterpart immediately after finding oneself affected by the Covid-19 and keep track of the evidence, such as the sending notice, official notice, document, policy issued by the government. Even though the outbreak first started in the middle of December 2019 in Wuhan, different government actions from various level within China or globally were taken in different time. It’s important to give immediate notice to the counterpart when the party’s ability to perform is affected by the objective situation. Keeping track of all the evidence is also important, not only as proof to the counterpart during communication, but also as proof in case of a lawsuit. The Guideline Regarding Several Issues of Judicial Trial of Commercial Cases Related to the Outbreak of Covid-19 issued by the 2^nd Civil court of the High Court of Zhejiang Province[11] states that, due to the cease of operation of currier during epidemic control, notice sent through SMS messages, wechat[12] messages, email can be admitted as proof.
5. Start negotiation with counterpart to find measures that both parties agree to mitigate the loss. Exempt of liability only applies to the part of loss where the party has taken all necessary measures to mitigate, therefore, it’s essential to take the reasonable measure to the party’s ability, and it will be better if the measures are negotiated and agreed by both parties so it will be easier to prove in the lawsuit.