The outbreak of a new coronavirus has severely hampered business activities in mainland China and has had a ripple effect across Asia and elsewhere. As a result of the outbreak, companies in mainland China, Hong Kong, and other parts of Asia may find it difficult or impossible to fulfill commercial contracts. What legal methods can companies resort to? Will the answer under Chinese law be different from that under Hong Kong law? We discuss these issues briefly below. Whether under Chinese contract law or Hong Kong contract law, a carefully drafted force majeure clause usually provides the best support to a party seeking to avoid liability, but basic contract law principles may also provide relief. In any case, the availability of relief generally depends on the nature of the contract and the specific impact of the epidemic and the government's anti-epidemic measures on compliance.
Chinese law
According to Chinese law, considering the impact of the New Crown epidemic on the performance of commercial contracts, it should start with the wording of the contract itself. For example, if a contract has special provisions that can cover the epidemic and its effects (such as an explicit force majeure clause), the contract clauses will usually provide for any possible remedy and the procedural steps necessary to invoke that relief. If the contract does not contain provisions for the epidemic, two Chinese legal principles may still be relevant to the epidemic: force majeure and changing circumstances.
force majeure
Chinese law defines force majeure as an objective situation that is unforeseeable, unavoidable and insurmountable. If a party cannot perform the contract due to force majeure, the party will usually be partially or completely exempted from liability according to the circumstances of force majeure. China's "Contract Law" also provides that if the purpose of the contract cannot be achieved due to force majeure, the breaching party or non-defaulting party can terminate the commercial contract.
Depending on the nature of the contract and the disruption, the epidemic may constitute a force majeure event that limits the liability of the defaulting party. The party seeking to invoke force majeure on the grounds of the epidemic situation must prove that the epidemic situation is unforeseeable, unavoidable and insurmountable, and must also prove that the epidemic situation prevents the party from properly performing the contract. This will require the parties to specify the actual situation in accordance with the specific circumstances of the contract. In addition, the party seeking to invoke force majeure also needs to (a) promptly notify the other party of its inability to perform and (b) provide evidence of force majeure.
In assessing the applicability of force majeure to the new crown epidemic, the notice of the SARS epidemic issued by the Supreme People's Court in 2003 ("the Supreme Court") was a useful reference document. The notice confirms that force majeure may apply if the contract cannot be performed due to an SARS outbreak or a government response. We believe that it is not impossible for the Supreme People's Court to provide similar guidelines for the current epidemic, but even without such formal guidelines, force majeure may still be a useful principle for the breaching party under appropriate circumstances. In any case, the parties should pay attention to the notice of the Supreme Court in order to obtain important regulations and relevant guidelines related to contract performance during the new crown epidemic. Parties can also obtain proof of force majeure from channels such as the China Council for the Promotion of International Trade (CCPIT) (see here ).
Change of situation
If the new crown epidemic does not constitute a force majeure event for a particular contract, the breaching party may still consider invoking the "change of situation" principle. Chinese legal practitioners generally trace the "change of situation" principle to the Supreme Court's "Contract Law" interpretation issued in 2009. According to this interpretation, parties to a contract affected by "changes in circumstances" may request the people's court to change or terminate the contract. This explanation allows the application of this principle when objective conditions occur after the contract is established (a) unforeseen at the time the contract was concluded, (b) caused by force majeure and (c) not a significant commercial risk borne by the parties Variety. Eligible "changes in circumstances" must either make the performance of the contract significantly unfair to the party invoking the principle, or make the purpose of the contract impossible. It is worth noting that the principle of change of circumstances does not require a party to be unable to perform at all; if an event makes performance significantly "unfair" to a party, the principle may also apply. The fairness criterion is the touchstone of the "change of situation" principle. The courts need to keep the fairness criterion in mind when applying this principle and consider the actual situation of specific cases.
The process of invoking the principle of change of situation is more cumbersome than the process of invoking force majeure, because it requires the court to change or terminate the contract. The Supreme Court also instructed lower courts to use this principle with caution. In any case, it can provide a means for affected parties to limit liability arising from contracts hit by the new crown epidemic. In any case, the parties should consider notifying their counterparties of the dilemma caused by the new crown epidemic in order to give them an opportunity to reduce their losses. A company that expects the other party to perform the contract can also ask the other party to give comfort or make a commitment to show that the other party will still perform despite the new crown epidemic. If the other party has breached the contract, China's Contract Law stipulates that the non-defaulting party shall take appropriate measures to prevent its loss from expanding.
Hong Kong law
Some contracts and principled protections provided by Hong Kong law can also be used to help limit legal liability related to commercial contracts that have been hit by the new crown epidemic. Under Hong Kong law, force majeure applies only when the parties include a force majeure clause in their contract, but even if there is no special contract provision, the common law contract frustration principle can provide some kind of relief.
force majeure
The parties usually include force majeure clauses in their commercial contracts governed by Hong Kong law to specify the consequences in the event of an accident. Such clauses can help allocate risk when an accident adversely affects one or both parties' ability to perform contractual obligations on time or simply.
In practice, force majeure clauses vary greatly depending on how they are drafted. Although the term "force majeure" is not always used, the relevant clauses usually contain three main features:
1. Certain events are defined as "force majeure events" or "events beyond the reasonable control of a party", and there is usually a non-exhaustive list of examples of events covered by the clause;
2. reporting obligations or formalities that the party invoking the clause must comply with; and
3. Consequences of a force majeure event, such as an extension of the time to perform the obligation, or the parties no longer need to perform the obligation.
Some force majeure clauses may even stipulate which party retains the benefits of payments or work performed under the contract in the event of a force majeure event.
Whether the situation caused by the outbreak of the New Crown epidemic constitutes a force majeure event related to any particular contract will largely depend on how its force majeure clause was drafted. A party wishing to rely on a force majeure clause must generally prove that: (a) the event falls within the scope of the force majeure clause as drafted; (b) as a result of the event, its performance was obstructed, impeded or delayed (the increase in costs or expenses is generally insufficient To constitute force majeure); (c) its non-performance was caused by circumstances beyond its control; and (d) there were no reasonable measures that it could take to avoid or mitigate the event or its consequences.
Whether the new crown epidemic constitutes a force majeure event will ultimately depend on the interpretation of the relevant contract terms. If the clauses clearly indicate that "illness," "epidemic," or "quarantine" is a force majeure event, these clauses will make the answer reasonably clear. Other provisions may include more general events such as “natural disasters”, “government actions”, “strikes” or “conditions beyond the control of both parties”. The current outbreak may be a combination of more than one factor: the disease / epidemic itself and subsequent government / public behavior. The affected parties should carefully review the force majeure clauses in their contracts to determine whether they are applicable.
Frustrated contract
If the contract does not contain a force majeure clause, the common law contract frustration principle may still be significant. This principle can be used to terminate a contract if an event that makes it impossible to perform the contract objectively or commercially is impossible after the conclusion of the contract, or if it differs from the contract's assumptions.
According to the criteria for determining the frustration of a contract, if an event makes the outstanding contract rights / obligations significantly different from the reasonable expectations of the two parties at the time of contracting, so that it is unfair for the two parties to adhere to the original agreement under new circumstances. The principle of contract frustration and invalidation can be applied. However, the scope of the principle is very narrow: if the contract has force majeure clauses, or if performance is only made more onerous or more expensive, or if the failure to perform is due to the fault of either party, these conditions will not constitute a contract failure. Hong Kong law clearly states that you must not invoke a frustrated contract just to get rid of bad business agreements, or if the two parties had anticipated related events. The party invoking this principle bears the obligation to prove the contract's frustration and invalidity according to the strict standards mentioned above. Typical examples of contract failures include the destruction of the subject matter of the contract, the incapacity of an individual, the performance of the contract is no longer legal, or the contract loses its business purpose.
Unfortunately, both in Hong Kong and the United Kingdom, there is very limited case law that specifically addresses whether and how an epidemic can defeat the purpose of a commercial contract. But a case during the SARS epidemic shows how narrow the principle is. In Li Ching Wing v. Xuan Yi Xiong [2004] 1 HKLRD 754, during the SARS epidemic, the tenant had to abide by a 10-day quarantine order when the 24-month lease went to the 13th month, and the tenant sought The contract was frustrated and the lease was terminated. The court rejected the tenant's efforts to rely on the principle of frustration and invalidation of the contract, mainly because the isolation order lasted only a short period of time with respect to the lease. The ruling proves the difficulties that a party may face by successfully invoking the principle of frustration and invalidation of the contract.
The parties affected by the new crown epidemic must carefully consider the general guidelines on which the contract frustration and invalidation principle is based to see if this principle is helpful to the specific circumstances of their commercial agreement. The application of this principle ultimately depends on the obligations caused by the contract and its subject matter, and how the new crown epidemic affects the obligations and subject matter.
The information provided in this article does not constitute legal advice, as further explained in the terms / statements linked below. Any information concerning the People's Republic of China (hereinafter referred to as "China") is not intended and should not be construed as forming an opinion, determination, or certification regarding the application of Chinese law. We are not permitted to engage in Chinese legal affairs.
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