Since the outbreak of the Novel Coronavirus Pneumonia (i.e., “COVID-2019” named by WHO), as of February 16, 2020, nearly 70,000 confirmed cases have been reported in China. Shanghai, Guangdong, Zhejiang, Chongqing, Henan, Heilongjiang and many other provinces and cities have successively issued notices of delayed resumption of work and delayed opening of schools. The outbreak has impacts on the production and operation activities of many enterprises, such as delayed resumption of work, logistics obstacles, which can cause difficulties in contract performance and lead to a series of complex performance disputes. This article mainly focuses on the sales contract with reference to the relevant legal provisions and judicial cases during SARS in 2003, aiming to study how the principle of Force Majeure can be applied to relieve or reduce breach liabilities under such circumstances, and on this basis to give enterprises suggested countermeasures.
1. Type of the performance barrier brought by the COVID-2019 - Force Majeure
本次疫情带来的履约障碍类型 – 不可抗力
We have seen precedents in our country's legal practice regarding the contract performance barrier caused by novel infectious disease and the relevant liability sharing. During the SARS outbreak in 2003, the Supreme People's Court issued the Notice on the Conduct of the Relevant Trials and Implementation of the People's Court in accordance with the Law during the Prevention and Control of Infectious Atypical Pneumonia (Law  No. 72), which provides: "Due to the the cause of SARS's outbreak, in cases of contract disputes in which the performance of the original contract has a significant impact on the rights and interests of a party, may be dealt with based upon the specific circumstances and the principle of fairness shall apply. Disputes arising from administrative measures taken by the government and its relevant departments to prevent and control the SARS epidemic directly resulting in the non-performance of a contract, or disputes arising from the total non-performance of the contracting parties due to the impact of the SARS epidemic shall be properly handled in accordance with the provisions of Articles 117 and 118 of the PRC Contract Law. "
It can be seen from above that the Supreme Court defines two types of performance barriers: one is caused by the government measures to prevent and control the epidemic, such as administrative notices on delaying resumption of work, site expropriation, and etc., and the other one is the performance barrier caused by the epidemic itself, such as large-scale infection in factory employees.
In order to control the spread of the COVID-2019, the State Council announced the extension of the Spring Festival holiday, and a number of provincial and municipal governments also issued notices for delaying the resumption of work. These notices, as abstract administrative actions taken by the competent administrative organs in response to the epidemic, shall have general binding force on unspecified targets located within the administrative area covered by such notices. In addition, due to the shortage of medical supplies, the production and sales of essential medical supplies such as masks and alcohol are to be arranged collectively by government. Some towels and underwear manufacturing factories are required by the government to manufacture medical equipment such as masks and protective clothing. These are all administrative actions (i.e., government measures) that could affect the performance of contract.
Talking about the impact of the epidemic itself, due to the wide spread of the COVID-2019, there is a chance that a large number of employees of an enterprise may get sick or isolated from work, which will lead to insufficient production capacity to such enterprise even without the impact of administrative action intervention. Due to the rise of the costs of logistics and production, some enterprises may not be able to maintain its normal production. Further, products manufactured in some specific areas with severe epidemic outbreak may even get discriminatory treatment and rejection.
2. Application of the principle of Force Majeure and legal consequences
We refer to the judicial practice during the SARS epidemic in 2003, in which some courts identified the SARS epidemic as a Force Majeure event, some courts identified it as a change of circumstances, and some other courts considered it to be a commercial risk (rather than a Force Majeure event or change of circumstances) that the parties should bear by themselves. Application of the principle of Force Majeure and change of circumstances in this epidemic will be analyzed below.
(1) Recognition of a Force Majeure event
Article 180 of the PRC General Principles of Civil Law and Article 117 of the PRC Contract Law both define Force Majeure as “an objective situation that is unforeseeable, unavoidable, and insurmountable”. Further, according to the Interpretation of the General Principles of the Civil Law of the People's Republic of China, “unforeseeable” shall mean that an event cannot be predicted generally based upon the current level of technology; “unavoidable” and “insurmountable” shall mean that, although the contracting party has done its best and has taken all the measures that can be taken, such party still cannot avoid the occurrence of the event and cannot overcome the consequences of the event. After the epidemic outbreak, the National Health Commission declared the COVID-2019 as a Class B infectious disease under the PRC Law of Prevention and Control of Infectious Diseases. The World Health Organization has classified the COVID-2019 as a “Public Health Emergency of International Concern”, which shows that the epidemic was unpredictable before it occurred. At the same time, its exact source of infection and treatment methods have not yet been clarified, and the epidemic is still spreading. Therefore, this epidemic could constitute a Force Majeure event. Correspondingly, the administrative actions taken by the relevant government departments in response to the epidemic are also unpredictable and mandatory, which could constitute an objective Force Majeure event.
It should be noted that the predictability, preventability and controllability of this epidemic will change with the passage of time and the development of medical technology. The knowledge level of the contracting parties may be different in certain specific cases. Additionally, the actual impact on the contract performance in different cases are also different. Under such circumstances, this epidemic should not be regarded as a Force Majeure in all time and all cases.
First, the conclusion may be different on whether this epidemic could constitute a Force Majeure event at different stages. During the outbreak of this epidemic, its development could be divided into different stages: the first case of detection, the declaration of human-to-human infection, the initiation of a major public health emergency first-level response, the extension of the Spring Festival holidays, the delay of the resumption of business work, etc. Different contracting parties may be able to foresee the impact of the epidemic outbreak on contract performance based upon different milestone events.
For example, if two parties signed a contract before the official announcement of “human-to-human transmission”, the parties should generally be considered unable to foresee the severity of the epidemic. However, after the lockdown of Wuhan and the extension of the Spring Festival holidays, the parties are supposed to have foresights for the corresponding obstacles to performances. In this case, if they still choose to enter into a contract, the epidemic can no longer be regarded as Force Majeure. In practice, Liaoning Shenyang Intermediate Court held in (2005) Shen (2) Fang Zhong Zi No. 736 that, when the contract was signed, the SARS epidemic has already broken out, real estate developers should foresee the outbreak of SARS may have an impact on its normal construction and delivery of housing, but the real estate developers still agreed in the contract to deliver the commodity houses at the end of September 2003, so the court did not support the real estate developer’s claim that SARS epidemic constituted Force Majeure.
Second, the actual obstacles to contract performance caused by the epidemic are different. It is controversy on whether the epidemic itself can constitute an obstacle to contract performance in judicial practice. After the SARS epidemic, many courts believed that the epidemic itself was not enough to constitute obstacles to contract performance, it required administrative interventions as well. For example, Shanxi High People’s Court (2017) Jin Min Zhong No. 93 held that during the SARS period, traffic was not blocked and cargo transactions were not restricted, so the SARS epidemic itself did not constitute an obstacle to fulfillment of supply obligations. If the epidemic and its prevention and control measures do not constitute a major obstacle to the performance of the contract, the parties cannot claim exemption from the breach of the contract. For example, sellers can produce and ship in different factories across the country, so they cannot argue that there are obstacles to delivery because some of their factories have lockout due to the epidemic. Due to the popularity of electronic commerce, the upgrade of automation technology and the perfection of logistics channels, there are more choices on the contract fulfillment methods. For example, online ordering and automated production can reduce the impact of the epidemic on production and operation. The performance expenses increased in the above circumstances, such as logistics costs, labor costs shall be settled in accordance with the agreement of the parties or the rules on performance costs under Articles 60, 61, and 110 of the PRC Contract Law.
Therefore, it is believed that the impact of the epidemic situation and its prevention and control measures on the performance of the contract should be evaluated when applying the Force Majeure clause. Besides, the exact situation of the epidemic and its prevention and control measures in the place of contracting party and place of performance should be examined as well.
（2）Legal consequences brought by Force Majeure
Based on the principle of party autonomy, the parties’ agreement on contract performance and the relevant liabilities should be complied with first on deciding the legal consequences brought by the epidemic. If the parties have no agreement on this issue or the agreement is unclear, the epidemic may lead to the following legal consequences in the event of Force Majeure which creates obstacles to the actual performance of the contract:
Firstly, according to Article 117 of the PRC Contract Law, the Force Majeure may partially or completely exempt the liability for breach of contract. The scope and extent of the exemption shall be corresponding to the influences of Force Majeure. First of all, if the Force Majeure only affects the performance of part of contractual obligations, the scope of exemption should be limited to the liability for non-performance of such part of the contractual obligations instead of the entire contract liability. Secondly, if the Force Majeure only causes the contract performance delayed temporarily, the scope of exemption should be limited to the liability for breach of contract caused by such delayed performance, and the parties cannot be considered to be unable to perform the contract. For example, Shanghai High Court held in (2005) Hu Gao Min Er (Shang) Zhong Zi No 159 that: “During the SARS period, the respondent received many orders from many government departments in in March, April, and May in 2003, resulting in its failure to meet the demand of many customers including the appellant. However, the appellee recovered its ability to supply since June 2003. Therefore, the respondent should be liable for breach of contract for its failure to supply the appellant’s requested quantity of goods in June 2003.” Last but not least, if the Force Majeure and the debtor’s behavior jointly lead to the failure of the contract performance, the extent of exemption should be determined accordingly.
Secondly, when it becomes impossible to achieve the purpose of the contract due to Force Majeure event, the contract can be terminated. According to Article 94 of the PRC Contract Law, the contract can be terminated when the Force Majeure has reached the extent that the purpose of the contract cannot be achieved. For example, Fujian Putian Intermediate Court once ruled in (2019) Min 03 Min Zhong No. 2606 that after the “African Swine Fever” epidemic, all pigs were subject to harmless treatment, and the government also quarantined the epidemic area, and the tenant confirmed that it could not continue the pig business. Therefore, the purpose of the lease contract could not be achieved, so the court supported the lessee’s request to terminate the contract. It should be noted that the standards for triggerring Force Majeure clause to terminate a contract are generally strict in judicial practice. If the Force Majeure event does not render the purpose of the contract impossible, the parties are not entitled to terminate the contract. For example, the Liaoning Provincial High Court ruled in (2013) Liao Shen Er Min Kang Zi No. 14 that the SARS epidemic and the relevant government’s notices to suspend wildlife trading business only affected some of the business activities of Zhengdian Company, and it was not enough to cause the lease contract with Pengcheng Company to be impossible to perform, so the Force Majeure clause should not be applied.
3. Suggested countermeasures and advices
(1) Review and assess risks for contracts being performed and to be performed
As the COVID-2019 is still developing, it is advisable that companies should ask their legal departments to review the contracts that are being performed and to be performed to determine whether the performance of such contracts is being or will be affected by the epidemic, i.e., whether the company can deliver the commodities on time, whether the company’s production capacity can meet the demand of the contract, whether the physical distribution channels are blocked, and etc. For the contracts that may be affected, the “Force Majeure” clauses in the contract should be reviewed to see whether the contract includes “Force Majeure” clauses, whether the “infectious diseases” or “plagues” are clearly stated as cases of Force Majeure, whether the relevant clauses explicitly exclude the application of Force Majeure clause, and etc. For contracts that may be at risk, the company should explain the situation to counterparties in a timely manner and try to negotiate how to resolve the problems together.
(2) The parties who have been already affected by Force Majeure shall notify the other party and provide proof promptly
Article 118 of the PRC Contract Law stipulates that “[I]f a party is unable to perform a contract due to an event of Force Majeure, it shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of Force Majeure within a reasonable period.” Therefore, after being affected by the outbreak of COVID-2019, providing the timely notification and adequate evidence is the key for the parties to reduce liability and losses, which should be noted as follows:
Firstly, the notification should be timely. In principle, the parties should issue the notification within a reasonable period after the outbreak of the COVID-2019 and related administrative actions that have affected their performance of the contract. Considering that courier services may be suspended or delayed during the Spring Festival and epidemic period, the E-mail and other electronic ways should be taken into consideration.
Secondly, the content of the notice should at least include the occurrence of Force Majeure and its causation to the inability of performance. In addition, it can also include the future expectations of contract performance, and the willingness to negotiate with the other party to resolve obstacles to contract performance.
Thirdly, the evidence of Force Majeure shall be provided upon notice to the other party or within a reasonable period thereafter. The contents of the evidence shall generally include government notices, announcements and provisions to prove that the contract cannot be performed due to the prevention and control measures. If the party is a natural person and cannot perform the contract due to his suffering from the disease, the relevant diagnosis and treatment documents should be provided to the other party in a timely manner after his healing.
It is noticeable that for international trade contracts that cannot be performed due to the COVID-2019, the parties can apply to the China Council for the Promotion of International Trade (“CCPIT”) or the council in their province or city for the certificate (website: http://www.rzccpit.com) to provide evidence to foreign counterparties or prepare for potential disputes. According to the requirements of the CCPIT, companies applying for Force Majeure-related certificates must submit an announcement or notices issued by the government department at the city level or above; notifications and certifications of delays or cancellations of relevant shipments or flights; relevant information such as export sales contracts, booking agreements, freight agency agreements, customs declarations, etc. If the debtor or its employee is suffering from the COVID-2019 or a suspected case which is observed in isolation, then the hospitalization certificate, diagnosis certificate and relevant evidence of isolation should be provided.
Regarding domestic commercial activities, we have not noticed that any organization can issue documents similar to the aforementioned CCPIT Force Majeure Certificate. It is believed that the reason why CCPIT issues certificates of Force Majeure is mainly because foreign governments, customs, chambers of commerce, courts or arbitration institutions may not understand or fully believe in the Force Majeure event claimed by Chinese companies. So, it needs to be supported by credible certifications. It is believed that it is not necessary to obtain similar certification for domestic commercial activities, because the notices issued by local governments of provinces and municipalities are accessible to the public. According to Article 10 of the Several Provisions of the Supreme People's Court on Evidence in Civil Proceedings, it is a fact that does not require proof. Therefore, domestic courts or arbitration agencies should not require the company to provide additional certificate in order to prove the Force Majeure event.
(3) Appropriate measures should be taken to prevent the loss from widening.
According to the relevant law, no matter whether the party is affected by epidemic or not, it should take appropriate derogation measures after the occurrence of the epidemic or its actual knowledge of the difficulty of performing the contract, so as to prevent the loss from widening and avoid aggravating its own responsibility. The derogation measures can be changing the delivery method, extending the delivery period or timely disposing consumables goods. At the same time, after the impact of the epidemic has been eliminated, performance of the contract should be resumed as soon as possible. It is recommended that enterprises pay close attention to the relevant policies and make use of it to deal with the potential legal risks. Currently, the People’s Bank of China, the China Banking Regulatory Commission and other financial regulatory departments have issued a number of policies to provide support to parties affected by the COVID-2019.
(4) Take full account of the impact of the epidemic when signing new contracts
Referring to the above-mentioned Liaoning Shenyang Intermediary Court’s ruling, if a new contract is signed after the outbreak of epidemic, the impact of the epidemic on the performance of the contract should be fully considered. Because when the new contract is concluded, the epidemic and the corresponding government measures could be foreseeable. So, it may be difficult to be recognized as Force Majeure at that moment. Therefore, the impact of the COVID-2019 on performance should be fully taken into consideration when signing new contracts. If there is concern about subsequent performance, the relevant party should make performance clause more flexible, or add a consultative mechanism or even a unilateral termination right in the contract.