Apart from the human tragedy, the Coronavirus will also have negative economic consequences. Among which, it is estimated that lots of contracts can not be performed as expected. So, whether Corona can be deemed as Force Majeure to get an exemption of liabilities for breach of contract, is a question that we would like to figure out. Another question is whether delayed performance or termination of contract is allowed.
An example: an auto parts manufacturing company in China cannot deliver a steering gear unit to an African factory of a car manufacturer as stated in the contract. Is this Force Majeure? Of course this depends on the law applicable to the contract.
In case Chinese law is applicable, article 117 of the Contract Law of the PRC, and Article 180 of General Rules of the Civil Law of the PRC stipulates 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, 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. Article 94 of the Contract Law stipulates the parties may terminate the contract under the circumstance of force majeure.
For purposes of this Law, force majeure means any objective circumstances which are unforeseeable, unavoidable and insurmountable.
Obviously, the Covid-19 (Corona) outbreak is an unforeseeable incident, neither experts could have predicted it, let alone the ordinary public. As of now, there are no curable vaccines or effective medicines available. So, it is non-disputable that the Coronavirus is unforeseeable and unavoidable. The only doubt goes to whether it is insurmountable.
From a legal perspective, the Coronavirus shares many similarities with SARs. Let's refer to the cases that happened during the SARs period, to see how force majeure cases were dealt with by the multiple layers of courts of the PRC.
On June 11, 2003, the Supreme People's Court issued a guideline to its subordinate courts, stating how to handle trial and enforcement properly according to the Law with respect to SARS. The Supreme court stated the following: "Cases in which parties of the contract can not perform because of SARS can be dealt with according to Article 117 and Article 118 of the Contract Law of the PRC, which is force majeure. In short, the non-performance of contract due to SARS can be recognized as force majeure.
However, also in some “SARS” cases, some courts did not support the application of force majeure, because the government’s acts were deemed to have only partially affected the business activities of the breaching parties and did not directly or radically trigger the non-fulfillment.
So, whether force majeure can be a reason for the exemption of contractual liability should be judged case by case. General judgment rules are: whether the force majeure is the direct cause that one party cannot perform the contract.
On 30 January 2020 the China Council for the Promotion of International Trade stepped in to help companies announcing to offer force majeure certificates to help companies deal with disputes with foreign trading partners. While applying companies must provide legitimate documents such as proof of delays or cancellation of transportation to the council. If contracts state that to rely on force majeure one needs such a certificate by a relevant authority, these certificates may help. Even if the contract does not require such a certificate and these certificates are not necessarily binding on the courts, these are a major help in proving force majeure.
If you need further information please do not hesitate to contact our Asia team Joost Vrancken Peeters at +31620210657 or [email protected] or Ye Yu at +31639267995 or [email protected].
Director Asia Desk