Force Majeure With Chinese Characteristics
Force majeure provisions are by their nature, negotiated without any knowledge of the precise circumstances in which they will apply. Such provisions will ordinarily provide relief from obligations based on events or circumstances beyond the control of the party claiming force majeure. Clearly, many companies have been reviewing such provisions in recent weeks given the very difficult circumstances encountered in the People’s Republic of China in connection with the COVID-19 virus.
Force majeure, in Article 117 of the PRC Contract Law, refers to “the objective circumstances that are unforeseeable, unavoidable and insurmountable”. Almost all force majeure contractual provisions will specifically refer to events broadly within this definition subject to an express duty to mitigate. The COVID-19 outbreak was obviously not foreseeable and in many cases parties can do little to mitigate circumstances, particularly during periods that government directives cover. However the position may not always be clear-cut and parties must be careful when considering how force majeure provisions apply.
Basis Of a Claim
There are particular features relevant in the PRC that should be noted.
- As in many jurisdictions, a party seeking force majeure relief may wish to rely on ‘epidemic’ as one of the circumstances specified in a force majeure provision or perhaps the general definition of force majeure as being an event or circumstance beyond the control of the party claiming it.
- Alternatively, a party claiming force majeure may also rely on government directives, policy statements and local regulations which have either ordered businesses to close or encouraged changes in the way business is conducted.
- Although force majeure relief is usually applied to obligations that cannot be performed, such as an obligation to deliver something or provide a service, a payment obligation usually would not fall into this category, although some government directives and policy statements provide additional scope to address the financial consequences of COVID-19.
These issues will be particularly important where one party disputes another’s rights to claim force majeure at all, the period during which force majeure relief is available and may also impact on precisely what sort of relief or variation to contractual obligations is available.
Clearly government directives issued by major cities such as Beijing and Shanghai have either required or encouraged companies to ask their employees to remain at home or in some cases have shut down business for various periods of time. Differing requirements may provide room for argument as to the way in which force majeure provisions apply, particularly where government makes a recommendation only rather than a rule that must be strictly followed. There have been differences between the various directives issued, often depending on the severity of the virus at a particular time.
The date that such directives are issued may also be a factor relevant in disputes about the validity of force majeure claims. Some periods before or immediately after a period covered by a government directive may limit the ability for a party to claim force majeure or otherwise make it more open to question.
The other variable is the nature of business being conducted. In some cases, government directives are focused on particular business areas, such as visitor attractions, cinemas and other services industries involving the gathering of members of the public in one place. For example, Shanghai has issued emergency measures to close entertainment and visitor attractions. At the same time, the environment in other sectors has evolved. For example, many restaurants closed voluntarily in the beginning, leaving a small number open. A period then followed where many restaurants started to serve takeaway food only or closed completely.
Separately, parties may find themselves in circumstances with no, or an inadequate, force majeure provision. However, there may be scope to argue for flexibility and request good faith negotiations with a view to an adjustment of payment obligations. This issue was examined during the SARS outbreak in 2003, when the Supreme People’s Court issued a notice (SARS Notice) on 11 June of that year addressing, among other things, the application of the principle of fairness in contractual disputes during the SARS outbreak. Although this Notice is no longer effective, it may be indicative of the approach that might be expected during the present COVID-19 period.
The SARS Notice said a force majeure could treated as having been established if (i) a failure to perform was directly caused by administrative measures taken by government to prevent the SARS epidemic; or (ii) it is fundamentally impossible for a party to perform its obligations due to the SARS epidemic. The general requirement was that the parties act in a fair and reasonable manner including in respect of the variation of obligations and (significantly) requests for financial adjustments – although the precise arrangements to be made were to be considered on a case-by-case basis, with no hard rules but simply an expectation that the parties adopt a fair approach. Clearly the way the SARS Notice was applied was subject to contractual arrangements and all other circumstances but with a direction to the courts to adopt the principle of fairness in deciding disputes.
New Government Directives
In 2020 parties may wish to request good faith discussion using the SARS experience as an example of how similar issues have been addressed in the past. Furthermore, it does appear that new guidance is being developed. For example, a spokesperson for the Legislative Affairs Commission of the National People’s Congress Standing Committee is reported to have stated on 10 February that if parties are unable to perform their contractual obligations due to the government measures relating to COVID-19, they should be allowed to claim force majeure relief in accordance with the PRC Contract law. The First Civil Division of Higher People’s Court of Zhejiang Province is also reported to have stated on the same day that in disputes force majeure relief and the principle of fairness should be adopted (being very similar to the SARS approach discussed above).
One should also note that the Beijing and Shanghai governments both issued notices earlier in February granting special support for small and medium size businesses for rent relief.
- In particular the Beijing notice, issued on 5 February, stated that a landlord that is a state-owned enterprise should grant a two-month rent exemption for a manufacturing premises and a 50% reduction for office leases (subject to certain criteria). It also encouraged private landlords to grant rent relief to tenants. Certain financial incentives appear to be available to landlords offering such rent relief arrangements.
- A Shanghai municipal government notice on 7 February also appeared to indicate that of February and March rent could be potentially exempted where the landlords is a state-owned enterprise and encourage private operators of large office buildings, malls and industrial parks to grant rent relief to tenants.
Some of these policy statements may be very general, though more detailed implementation measures are expected. They nevertheless collectively appear to be consistent with the approach taken in 2003 and indicate that in the event of a dispute, the courts are likely to be sympathetic to those severely impacted by the COVID-19. Perhaps more importantly, such policy statements can be used in negotiations to encourage cooperation and compromise.
The COVID-19 crisis in the PRC is ongoing and the legal issues relevant to it will no doubt continue to develop in the weeks ahead. As the financial impact of the crisis begins to bite, the issues discussed above are likely to become relevant to many business relationships.