The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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China

How are Force Majeure and Hardship regulated in the laws of the People’s Republic of China?

Article 180 of the PRC General Rules of Civil Law provides that no Civil Liability is borne in case of failure to perform civil duties due to Force Majeure, unless otherwise provided by law.

Force majeure means the impossibility to perform the contractual obligation due to an event which unforeseeable, unavoidable and impossible to overcome with reasonable efforts.

Article 117 of the PRC Contract Law provides that if it is not possible to fulfil a contract due to Force Majeure, then, depending on the extent of the event, the performing party shall be partially or wholly excused from liability, except where laws provide otherwise. In case an event of Force Majeure occurs when a party is already defaulting its obligations (e.g. the deadline to deliver the products e has already passed), the said party will not be excused from liability.

PRC law does not have a very clear provision defining Hardship: where the event does not cause the impossibility to fulfil the contract, but has  a major impact  on the performance of the obligation of one party, then the principle of fairness and the rule of change of circumstances, may be applied.

According to the Minutes of the National Economic Trial Work Meeting in 1993, the Supreme People’s Court held that, if due to reasons not attributable to the parties, the basis of the contract has undergone fundamental changes that could not be foreseen by the parties, with the result that performance of contract would be unfair, the contract may be modified or terminated at the request of the parties in accordance with the rule of change of circumstances.

Article 26 of the Interpretation of the Supreme People’s Court on Several Issues Concerning Application of the Contract Law of the People’s Republic of China, which came into effect as of May 13, 2009, provides that “Where any significant change in the objective environment has taken place after the formation of a contract which could not have been foreseen by the relevant parties at the time of entering into the contract, and does not belong to any commercial risk occasioned by any force majeure cause, rendering the continual performance of the contract manifestly unfair to the relevant party or rendering it impossible to realize the goal of the contract, the People’s Court shall confirm whether the contract shall be modified or terminated in accordance with the principle of fairness taking into account the actual circumstance, where the concerning party applies to the People’s Court for modifying or terminating the contract.”

When it comes to international contracts, the People’s Republic of China is a member of the 1980 Vienna Convention on the International Sale of Goods (CISG): if CISG applies to contract then Force Majeure would be disciplined by its art. 79  titled “Impediment Excusing Party from Damages” which provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

Can the Corona Virus emergency in China be considered an event of Force Majeure?

In the public Q&A session on the website of the Beijing People’s Court, the reply to the question concerning “whether the outbreak of COVID-19 constitutes a ‘Force-Majeure event’ was given as follows: both the General Rules of the Civil Law of the People’s Republic of China (“General Rules of the Civil Law”) and Contract Law of the People’s Republic of China (“Contract Law”) stipulate that a Force-Majeure event refers to a situation which, on an objective view, is unforeseeable, unavoidable and cannot be remedied. If the failure to perform civil obligations is caused by a Force-Majeure event, no civil liability shall be borne, unless otherwise provided in the law.

Since the occurrence of the outbreak of COVID-19, there has been no direct and effective treatment, nor direct and effective methods to completely prevent the spread of the epidemic, therefore, on an objective view, it is unforeseeable, unavoidable and is not able to be overcome, which meets the requirements of a force majeure event prescribed by law.

What to do in case of notice of Force Majeure in China?

In accordance with article 118 of the PRC Contract Law, where one of the parties is unable to perform the contract due to Force Majeure, the said party shall immediately notify the other party in order to reduce the potential losses suffered by the other party, and shall also provide evidence of the Force Majeure within a reasonable time.

When issuing the notice, a key point is to prove a causal connection between the Force Majeure event and the impossibility of performance of the contract. Therefore, when claiming exemption from liability for termination of a contract based on a Force Majeure event, the Party must prove: (1) whether there is a causal connection between this outbreak and the impossibility of performance of the contract, wholly or in part and  (2) whether the party affected by the outbreak has taken reasonable measures to mitigate or avoid the adverse effect of the event on the performance of the contract.

It is important to mention that the China Council for the Promotion of International TradeCCPIT  has indicated that in case a company is unable to perform an international trade contract due to the impact of Coronavirus, such company may apply to the CCPIT for issuance of a certificate of Force Majeure. However, in practice, unless it is explicitly agreed in the contract that the Force Majeure Certificate issued by the relevant organization is sufficient to prove the causal relationship, such certificate alone should not be sufficient to prove the causal relationship between the event and the impossibility of performance of the contract, nor that reasonable efforts to overcome the effects of the event have been taken by the party which is unable to perform its obligations.

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