China: Back To Business Guide – Commercial Contracts/Disputes

Back to business FAQs

1. Vendors are chasing debts aggressively, can I rely upon economic hardship as a basis for delay or terminating commercial contracts?

"Economic hardship" is not a basis for termination of contracts under the PRC law. That said, there is a doctrine called "change of circumstances" under the PRC law. A party invoking this doctrine needs to prove that:-

• a material change in circumstances has occurred after the formation of the contract;
• such material change was unforeseeable when concluding the contract and out of the usual scope of commercial risks; and
• the party's obligation to perform would be dramatically unfair or the purpose of the contract has been frustrated due to such material change.

If a "change of circumstances" can be established, the affected party can request the competent court to either vary or terminate the contract at the court's discretion based on the principle of fairness. In the absence of any contractual or statutory right of termination, the affected party is not entitled to unilaterally terminate the contract based on "change of circumstances".

2. Our customer wants to terminate our contract due to force majeure. What are some of the relevant considerations?

Parties affected by the outbreak should first check the contractual force majeure clause, if any, to confirm if there is a contractual right to terminate in a force majeure event. If so, the contractual requirements as agreed between the parties and any other statutory requirements under the governing law of the relevant contract shall be followed.

Alternatively, Article 180 of the PRC General Provisions of the Civil Law and Articles 117 and 118 of the PRC Contract Law set out statutory provisions relating to force majeure, which is defined as any objective circumstances that are unforeseeable, unavoidable and insurmountable.

If the purpose of the contract cannot be realized because of the force majeure event, the affected party is entitled to terminate the contract pursuant to Article 94(1) of the PRC Contract Law.

Therefore, the affected party seeking to be exempted from its contractual liabilities needs to prove that: (i) the outbreak of COVID-19/the relevant government measure was unforeseeable, unavoidable and insurmountable and thus constitutes a force majeure event; and (ii) such force majeure event prevents the performance of the particular obligation.

Further, the affected party also has an obligation to give a timely notice of the force majeure event and provide evidence within a reasonable time limit. It is suggested that such notice and evidence shall be provided as soon as practicably possible.

3. We were preparing to initiate a lawsuit but this was delayed by COVID-19. Can we still sue? What is the impact of COVID-19 on the statute of limitations?

If the statute of limitations does not expire, you can still sue. The general statute of limitations under the PRC law is three years from the date on which a party knows or should have known of the facts giving rise to its claim. During the last 6 months of the limitation period, the statute of limitations can be suspended if there is a force majeure event which prevents the party from commencing a claim. The limitation period resumes after the causes of the suspension no longer exists, and the limitation of action shall expire after six months from the date when the obstacles causing the suspension are eliminated.

Whether COVID-19 and/or the relevant government measures can be viewed as a force majeure event will need to be examined on a case-by-case basis. Therefore, the parties shall either commence a legal proceeding before the expiry of the statute of limitations or make a written demand/request to the counterparty so that the limitation period will be interrupted and a new limitation period starts running from the date of the demand/request.

4. Courts and major arbitral institutions have resumed operating, but are they operating as usual, and if not what alternative procedures are in place? Courts

Courts at different levels in different provinces in China have adopted different measures to cope with COVID-19.

In February, the Supreme People's Court of China (the "SPC") issued a notice which required that "courts at all levels to guide litigants to file cases or mediate disputes online, encouraging judges to make full use of online systems for litigation, including those for case filing and ruling delivery, to ensure litigants and their lawyers get better legal services and protection". The SPC has also promoted the use of a 'mobile micro court' ("移动微法院") on the social media platform, WeChat, in 12 provinces and cities to conduct trials on the Internet.

Arbitral institutions

China International Economic and Trade Arbitration Commission ("CIETAC"), one of the leading arbitral institution in China, issued a notice on 28 January 2020, encouraging parties to submit the fillings through the online system (http://online.cietac.org/) and by courier. The hearings scheduled to take place prior to 15 February 2020 were postponed until further notice from the tribunals.

Shanghai International Arbitration Centre ("SHIAC") has also adopted similar measures with the hearings scheduled to take place between 31 January and 9 February being postponed. SHIAC encourages parties to submit the fillings through courier.

Appointments must be made before visiting CIETAC and SHIAC.

5. Am I required to attend a hearing in person at this time in China?

Courts in different places may have different practices/rules. As stated above, courts in China have taken the initiative to conduct hearings on the Internet.

Further, parties can try to reach an agreement to conduct the hearing through video-link, failing which, an application to conduct the hearing on the Internet or postpone the hearing can be made by each party to the relevant court.

6. Amid the outbreak of COVID-19, how are decision-makers (e.g. courts, arbitral institutions etc.) approaching requests for extensions of time and hearings?

Based on our experience and understanding, courts/tribunals in China are generally sympathetic and agreeable to a time extension for submission of documents and hearings in these extraordinary times, but the length of such extensions will be decided on a case-by-case basis.

7. Given there are still significant local movement restrictions, are there any new or alternate procedures in place for the purpose of serving documents on the other party?

Service of documents in China is made through the competent court. Under the PRC Civil Procedural Law, service by leaving documents at a premises can only be made if the recipient refuses to accept the service and certain additional steps must be followed.

To minimize the risk of being served by public announcement by the competent court, if possible, a notice with the mobile number (or telephone number) of the person in charge can be posted on the front door of the office, so that if service is made when the office is closed, the person in charge can be reached by telephone call or SMS.

New legislation

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.