A large number of electronics and chemical companies, pharmaceutical firms and those from the manufacturing sector are witnessing obstacles in the supply chain due to the outbreak of coronavirus (COVID-19). The situation has pushed the Chinese companies to withdraw from their contractual responsibilities, and more than 4,800 force majeure certificates have been issued as of March 3rd, 2020.
While China has made substantial improvements in containing the novel coronavirus (COVID-19), the economic disturbances are impacting trade relationships, especially for those depending on China since it's one of the largest trading partners across the globe. Several countries, including China, have imposed lockdowns, travel bans, isolations, and quarantining the affected persons to prevent further spread. Emergency on the international trade remains as it is, and our clients have reported operational as well as business disruptions. Since it is an unforeseen pandemic event, contracts worth 373.7 billion Chinese Yuan ($53.79 billion) are put to stake after invoking force majeure (FM).
Force majeure refers to the unforeseen circumstances that prevent a party from meeting its contractual obligations. Such events usually include human-incited disruptions along with natural disasters to free a party in contract from undertaking the responsibility of non-performance. A party shall not be entitled to a force majeure in case the failure of performance is due to the general market or economic crisis.
In other words, the contract may terminate if the performance is commercially unachievable, ill-advised, unlawful or impossible. The provision clearly states that the agreement would terminate, either in part or in full, if the event causing a force majeure continues for the prescribed period.
Is the Coronavirus Outbreak a Force Majeure Event?
Force majeure is usually exercised under political and non-political circumstances. Political events state the risks associated with changes in the political scenario. However, non-political activities deal with physical risks impacting a business.
Under Articles 117 and 118 of the PRC Contract Law along with Article 180 of the General Rules on the Civil Law, force majeure exists as a doctrine covering diseases, pandemics as well as epidemics. Since these are unforeseeable, impossible to overcome and unavoidable situations, an affected party can claim force majeure.
Coronavirus (COVID-19) is a naturally occurring event (the virus) and also has governmental restrictions put into place. So, it qualifies as a force majeure event. COVID-19 itself will not count as the relevant FM event, but the consequences that lead to the inability to fulfill the contractual obligations deem it as one.
How Is Force Majeure Invoked?
The China Council for the Promotion of International Trade (CCPIT) is offering force majeure certificates enabling Chinese companies, seeking to rely on such provisions, to suspend their contractual obligations after the submission of relevant documents.
According to the Contract Law of The People's Republic of China, Article 117, and Article 118 state the situations under which a party can invoke force majeure. It is only in case of any unforeseeable, unavoidable, as well as impossible to overcome events, that a firm can do so.
But, any company invoking FM must establish a link between the non-performance of their contractual duties and the FM event. The FM event must result in non-performance directly and must be occurring during the performance period of the contract, i.e., after signing and before termination. Just because the process might have gotten a bit more time-consuming or costlier, the contractor may not be excused from their obligations. The affected party must produce sufficient evidence to prove that their working is impacted.
Under PRC General Provisions of the Civil Law, FM is an excuse for non-performance of the civil obligations. If a contract does not have the provision for FM, it is automatically implied. But, in case the clause is enlisted, the affected party can depend on it. However, any dispute that arises out of contractual non-performances, the final decision will be made by the court or an arbitrary body.
What to Do When You Receive a Force Majeure Notice?
If you receive a notice from a party claiming to non-performance of their contractual commitments, do not ignore it – immediately forward it to your management and the legal advisors. Thoroughly analyze the situation and the claim and accordingly respond to the notice.
Make sure to check:
a) Whether or not there is a force majeure clause in the contract
b) Identify the governing law of the contract
c) Analyze if the event qualifies under the force majeure clause
d) If it has an actual link between the event and non-performance
e) Evaluate if at all the performance is excusable under the frustration of contract
f) Insist on providing evidence and regular updates
g) Amend (if required) the agreement to reflect a commercially acceptable resolution
Also, within 30 days of receiving the notice, you must decide whether you want to terminate the contract or modify the same. To mitigate your damages, you must also quickly seek alternative suppliers. If at all, there is a contractual dispute, it may require litigation or arbitration.
What Impact Would the CCPIT Certificate Have Outside China?
According to the CCPIT (China Council for the Promotion of International Trade) officials, customs agencies, governments, trade agencies, and enterprises of more than 200 countries recognize the force majeure certificates. Under the English Law, it does not have any independent meaning; however, it can be invoked if there is a provision included in the contract. It is also imperative for the event in question to fall within the scope. Thus, merely having a certificate does not prove that force majeure is available under the English Law.
Most importantly, a majority of the international parties contracting with Chinese companies are governed by English law. As per these, parties can claim a force majeure only under very specific conditions. Their lengthy and elaborative outlines clearly refer to epidemics, including coronavirus, but the process to provide the inability is quite challenging.
On a Final Note
The legal opinion is divided on whether or not invoking this clause will work. Using such provisions only pass them along the supply chains worldwide, resulting in companies of other jurisdictions opting for similar relief. But, unlike during the SARS epidemic where multinationals could afford shifting their outsourcing options, this time, it is very critical. China is a valuable partner (sometimes the only source) for so many international firms. So, it is very much possible for foreign bosses to agree on renegotiating the terms than altogether getting into grievous legal battles.
Because the coronavirus outbreak is making it difficult for the Chinese firms to fulfill their obligations, they have asserted to back off and excuse their failures. The media, too, has been all over this issue. However, it hasn't yet become a massive one since foreign companies realize how valuable their Chinese counterparts are. Moreover, the non-performance is due to an unforeseen event that comes along governmental restrictions.
The exact extent of disruption in global commerce is yet to be seen. Increasingly issued force majeure certificates by the CCPIT indicate a tidal wave that is going to hit the non-Chinese parties contracting with Chinese firms. So, in response to any notice, be sure you carefully access the facts, contractual provisions along with the applicable legal principles. Get in touch with our seasoned attorneys and business consultants who can help you get through the catastrophic conditions and obtain practical solutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.