CMS, China | Does the Coronavirus Outbreak constitute Force Majeure?




CMS, China

Does the Coronavirus Outbreak constitute Force Majeure?

Dear Sir or Madam,

The current coronavirus situation has a considerable impact on businesses. Many companies in the PRC, but as a result of global supply chain also abroad, may not be able to duly perform their contractual obligations on time. They face the question whether such failure of duly performing contractual obligations leads to a breach of contract and respective liabilities or whether such liabilities may be exempted under the legal concept of Force Majeure. Please find below our briefing on this topic.

Kind regards,
CMS, China

The recent outbreak of the Novel Coronavirus (“2019nCoV”), which belongs to the same group of viruses which caused SARS and MERS, has considerable impact on the public life and business operations in and with the People’s Republic of China (“PRC”). As of 3 February 2020, fatalities caused by 2019nCoV within the PRC have surpassed the ones caused by SARS within the PRC in 2002 and 2003. Currently, infections and the death toll are still rising. The PRC State government decided to extend the public Chinese New Year holidays, which should have ended on 30 January 2020 after a 7-days’ holidays starting from 24 January 2020, until 2 February 2020. In addition, many local governments declared that businesses irrelevant to national economy or people’s livelihood shall remain closed until at least 9 February 2020. Many international airlines have cancelled all flights to the PRC and on 30 January 2020 the World Health Organization declared the 2019nCoV outbreak a “public health emergency of international concern”.

It is likely that a rather considerable number of companies in the PRC will not be able to duly perform their contractual obligations under the current circumstances. Many companies now face the question whether such a failure of duly performing contractual obligations under the current circumstances leads to a breach of contract and respective liabilities or whether such liabilities may be exempted under the legal concept of Force Majeure.

It is rather common that contracts governed by PRC law contain stipulations on Force Majeure. If this is the case, affected companies should carefully review such stipulations, how Force Majeure is defined (e.g. whether Force Majeure expressly covers “epidemics”, “health emergencies” or similar occurrences), the consequences of Force Majeure under the contract and whether the contractual agreement provides for special requirements (e.g. notices, certificates proving the occurrence of Force Majeure, etc.) and timelines for relying to Force Majeure. Contractual Force Majeure stipulations may vary greatly, so that it is not possible to make general statements in this regard. If affected contracts include Force Majeure stipulations, it is advised to check them in detail according to the specific case.

Below, please find a summary on what applies according to statutory PRC law:

1. Occurrence of Force Majeure

Article 180 of the General Rules of the Civil Law of the PRC, Article 153 of the General Principles of the Civil Law of the PRC and Article 117 of the PRC Contract Law, rather generally, define Force Majeure as “objective circumstances which are unforeseeable, unavoidable and insurmountable”.

Generally speaking, epidemics as well as respective governmental measures, such as instructions to extent public holidays, to close businesses, etc., can be subsumed under the above definition of Force Majeure under PRC law. In this regard, reference can also be made to the SARS outbreak in 2002 and 2003, which, in many aspects, was rather similar to the current 2019nCoV outbreak. In relation to the SARS outbreak, Article 3.3 of the Notice of the PRC Supreme People's Court on Properly Handling the Trial and Enforcement according to the Law during the Prevention and Control of SARS stated that if, due to SARS, the continued performance of the original contract may bring significant (negative) impact for one of the parties, the competent People’s Courts shall deal with related contractual disputes according to the specific situation and the principle of fairness. And further, if the contract cannot be performed due to administrative measures taken by the governments and relevant departments to prevent SARS, or due to the impact of SARS, the competent People’s Courts shall properly deal with such disputes in accordance with relevant stipulations of the PRC Contract Law on Force Majeure. Although such notice, which was promulgated on 11 June 2003, has already been abolished in 2013, due to the similarities between the SARS outbreak and the 2019nCoV outbreak, it is very likely that such notice still has reference value and that the 2019nCoV outbreak will be dealt with accordingly.

There are also court precedents affirming that SARS constituted Force Majeure. E.g. a final judgment made by the Shaanxi Tongchuan Medium People’s Court on 29 June 2015 ([2015] Tong Zhong Min Er Zhong Zi No. 00030) stated that from 28 April 2003 to 20 May 2003, SARS constituted Force Majeure and that the contractual parties shall not be liable for losses occurred during this period. Also, the PRC Supreme People’s Court ruled on 2 September 2016 ([2016] Zui Gao Fa Min Zai No. 220) that in the specific case in question SARS constituted Force Majeure.

Due to the above, in our view, the 2019nCoV outbreak and respective governmental measures, such as instructions to extent public holidays, to close businesses, etc., can indeed constitute Force Majeure. However, this does not mean that this is automatically the case for all contracts and related obligations. It must be checked in detail whether the requirements of objective circumstances which are unforeseeable, unavoidable and insurmountable are really fulfilled for the specific contract and the specific contractual obligations.
   
2. Consequences of Force Majeure

PRC law provides for the following consequences in case of Force Majeure:
   
  According to Article 117 of the PRC Contract Law, where a contract is not able to be performed due to Force Majeure, the liabilities shall be exempted in part or in whole in light of the effects of the Force Majeure event, except as otherwise provided by law. If the Force Majeure occurs after one party has already delayed its performance, the liabilities of the party shall not be exempted.

The above stipulation shows that the consequences of Force Majeure and the extent of an exemption of the liability really depend on the specific circumstances of the case in question. Each case must be asserted individually and even if Force Majeure generally exists, this does not necessarily lead to the exemption of liabilities in the specific case.
     
  According to Article 94 PRC Contract Law, the parties to a contract may terminate the contract if the purpose of the contract is rendered impossible to achieve due to Force Majeure.

Accordingly, a contract can be terminated due to Force Majeure only, if the Force Majeure event makes it impossible to still reach the purpose of the contract. Such threshold is rather high and, despite of the occurrence of Force Majeure, many contracts will not be able to be terminated according to such stipulation.
     
  Article 118 of the PRC Contract Law stipulates that if either party to a contract is not able to perform the contract due to Force Majeure, such party shall give notice to the other party in due time so as to reduce the losses that may be caused to the other party and provide evidence within a reasonable time limit.

Accordingly, a party purportedly affected by Force Majeure, should, as soon as possible, inform the other party of the contract. For evidence purposes, this should be done in writing. Further, a party purportedly affected by Force Majeure should take reasonable measures to mitigate the losses of the other party. Otherwise, the party purportedly affected by Force Majeure may still face liabilities. In addition, it is required to provide evidence within a reasonable time limit. For this, it is suggested to contact relevant governmental authorities on the possibility that they issue relevant certificates. In our view, the official announcements of the PRC State government on the extension of the public Chinese New Year holidays and the official announcements of local governments that businesses shall remain closed, likely are sufficient in this regard for the respective time periods, i.e. until 2 and 9 February 2020, respectively. With regard to international contracts between PRC entities and foreigners, the China Council for the Promotion of International Trade (CCPIT) Commercial Certification Center issued a notice on 30 January 2020 that the CCPIT is entitled to issue relevant Force Majeure certificates for the 2019nCoV outbreak. Affected companies can apply for Force Majeure certificates under http://www.rzccpit.com/ by uploading relevant purchase agreements, freight agreements, notices/certificates on cancelations/delays, certificates/announcements issued by relevant governmental authorities or institutes and/or other supporting documents.
   
3. Conclusion

In conclusion, in our view, the 2019nCoV outbreak and respective governmental measures, such as instructions to extent public holidays, to close businesses, etc., can indeed constitute Force Majeure. However, each case must be checked individually and if affected contracts include relevant stipulations on Force Majeure, these stipulations must be checked carefully and in detail.

Generally speaking, we advise the following:
   
  To evaluate the impact of the 2019nCoV outbreak on your business and contractual obligations;
     
  If applicable, to inform your contract partners as soon as possible and in writing;
     
  If applicable, to adopt reasonable measures to mitigate losses;
     
  If applicable, to collect evidence on the occurrence of the Force Majeure event, adopted mitigation measures, incurred own losses, etc.;
     
  If applicable, to evaluate the possible consequences of the Force Majeure event and what consequences are intended, e.g. termination of the contract, change of the contract with regard to deadlines and delivery dates, etc.;
     
  If applicable, to discuss and negotiate with your contract partner on how to proceed.
   

In case you have questions or for further information, please contact the authors of this newsletter:

Ulrike Glueck Dr Ulrike Glueck
Managing Partner
Head of Corporate Practice Area Group

CMS, China
T +86 21 6289 6363
E Ulrike.Glueck@cmslegal.cn
CMS

Michael Munzinger
Counsel
CMS, China


T +86 21 6289 6363
E Michael.Munzinger@cmslegal.cn


CMS Angela Chen
Junior Associate
CMS, China


T +86 21 6289 6363
E Angela.Chen@cmslegal.cn
 


 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

CMS, China
“CMS, China” should be understood to mean the representative offices in Mainland China of CMS Cameron McKenna Nabarro Olswang LLP, CMS Francis Lefebvre Avocats and CMS Hasche Sigle, working together. CMS, China is a member of CMS Legal Services EEIG, a European Economic Interest Grouping that coordinates an organisation of independent member firms. CMS Legal Services EEIG provides no client services. Such services are solely provided by the member firms in their respective jurisdictions.

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