On 16 April 2020, the Supreme People's Court ("SPC") of the People’s Republic of China (“PRC”) has promulgated the Guiding Opinions (I) on Several Issues concerning the Proper Trial of Civil Cases Related to the Novel Coronavirus Pneumonia (COVID-19) Epidemic According to the Law (the "Opinions").
The Opinions contain 10 items directed to the People’s Courts in the PRC on how to deal with certain aspects of COVID-19 related civil cases, including but not limited to dispute resolution, Force Majeure, performance of contracts, employment relationships, judicial assistance and more flexibility in property protection measures.
1. Promotion of alternative dispute resolution
With regard to the handling of COVID-19 related civil cases, the Opinions expressly promote the use of alternative dispute resolution (“ADR”) by stating that People’s Courts at all levels shall put ADR mechanisms “at the forefront” and prioritize mediation. People’s Courts are requested to guide the parties involved in disputes to negotiate settlements, share risks and amicably overcome difficulties.
This is, to some extent, in line with the already existing Articles 9 and 122 of the PRC Civil Procedure Law which also state that People's Courts shall encourage dispute resolution by mediation where appropriate in order to try to reach an amicable solution before rendering a judgement.
However, the Opinions go beyond the above stipulations of the PRC Civil Procedure Law. We expect that People’s Courts are likely requested to render actual judgments only where absolutely necessary and where ADR is not at all possible.
2. COVID-19, Force Majeure and handling of contractual disputes
Already on 10 February 2020, the Legal Working Committee of the Standing Committee of the People’s Congress had declared that, generally, “COVID-19 can constitute Force Majeure under the PRC Contract Law”.
The Opinions basically confirm the above and state that, in general, both the COVID-19 epidemic and respective prevention and control measures may constitute Force Majeure. The Opinions provide further guidance as follows:
a) Accurately apply statutory Force Majeure provisions
First, the Opinions emphasize that People’s Courts, when hearing civil cases related to the epidemic, shall accurately apply the specific provisions of Force Majeure and strictly evaluate the conditions of the individual case in question.
Provided that the epidemic situation or the epidemic prevention and control measures directly lead to a situation that meets the statutory requirements of Force Majeure (i.e. “objective circumstances which are unforeseeable, unavoidable and insurmountable”), relevant statutory provisions, such as Article 180 of the General Rules of the Civil Law of the PRC and Articles 117 and 118 of the PRC Contract Law shall apply. It is further stated in the Opinions that, in line with general legal principles, the party seeking a partial or total exemption of its liabilities due to Force Majeure bears the burden of proof that a Force Majeure event directly resulted in the partial or total non-performance of its contractual obligations.
According to the above-mentioned statutory Force Majeure provisions, where a contract is not able to be performed due to Force Majeure, liabilities for breach of contract shall be exempted in part or in whole in light of the effects of the Force Majeure event, except as otherwise provided by law. If the Force Majeure occurs after one party has already delayed its performance, the liabilities of the party shall not be exempted. Further, if either party to a contract is not able to perform the contract due to Force Majeure, such party shall give notice to the other party in due time so as to reduce the losses that may be caused to the other party and provide evidence within a reasonable time limit.
The above is in line with and clarifies existing statutory stipulations on Force Majeure and corresponds to our related analyses, e.g. in our previous newsletter “Does the Coronavirus Outbreak constitute Force Majeure?” dated 3 February 2020.
b) Handling of related contract disputes
As already set out in our previous newsletters and comments, also the Opinions emphasize that each case must be evaluated individually and even if Force Majeure generally exists, this does not necessarily lead to the exemption of liabilities in the specific case. In this regard, the Opinions state that, for contractual disputes directly affected by the epidemic situation or epidemic prevention and control measures, the People’s Courts shall comprehensively evaluate and consider the impact of the epidemic situation on different regions, different industries and different cases to accurately evaluate the causal relationship and the degree of causality between the epidemic situation or epidemic prevention and control measures and a contract party’s failure to perform the contract.
The Opinions provide the following further details:
(1) If the epidemic situation or the epidemic prevention and control measures directly result in a party’s failure to perform the contract, Force Majeure provisions shall be applied in accordance with the law. The liability of the non-performing party shall be partially or completely exempted according to the degree of the impact of the epidemic situation or epidemic prevention and control measures.
If the failure to perform the contract or the increase of losses was attributable to one of the parties, such party shall bear corresponding liabilities in accordance with the law. Further, the party relying on Force Majeure bears the burden of proof that it had timely notified the other party of this (as required by Article 118 of the PRC Contract Law).
The above, basically also only summarizes existing statutory stipulations and corresponds with what we explained in our previous newsletters and comments. It needs to be noted, however, that the Opinions in basically all Force Majeure related clauses state that only if the epidemic situation or the epidemic prevention and control measures directly lead to a situation that meets the statutory requirements of Force Majeure, relevant statutory provisions shall apply. The meaning and possible consequences of this appears not entirely clear and it should be awaited whether and, if so, which impact this will have in practice.
(2) According to the Opinions, mere difficulties to perform a contract due to COVID-19, does not constitute Force Majeure. In detail, the following is set out:
i）If the epidemic situation or epidemic prevention and control measures only cause difficulties in performing a contract, the parties are encouraged to (re-) negotiate. If it is possible for the parties to continue to perform the contract, the People's Court shall effectively encourage and apply mediation and actively guide the parties to continue to perform the contract.
If a party requests the termination of the contract based on the difficulty of performance, the People’s Court shall not support such request.
Where continued performance of the contract is evidently unfair to one party, and if that party requests a change to the contract performance period, method of performance, price amount, etc., the People's Court shall decide whether to support the request in light of the actual circumstances of the case. If, after the contract has been modified, a party still claims partial or full exemption from liability for non-performance, the People's Court shall not support such claim. Only if the purpose of the contract cannot be realized anymore due to the epidemic situation or epidemic prevention and control measures and a party requests the termination of the contract, the People’s Court shall support such request.
ii) Again, the above basically is a summary of existing legal stipulations. According to Article 117 of the PRC Contract Law, only where a contract is not able to be performed due to Force Majeure, the liabilities shall be exempted in part or in whole. Thus, mere difficulties are not sufficient.
The above-mentioned possibility to request a modification of the contract has its legal basis, in our view, in Article 26 of the Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of the Contract Law of the People's Republic of China (II) (the “Interpretation”). According to such stipulation, if (1) the concerned party suffers from an unpredictable change of circumstances; (2) which could not have been foreseen by the parties at the time of the conclusion of the contract; (3) which is not caused by Force Majeure; (4) which does not constitute commercial risks and (5) if the continuous performance would be obviously unfair to the concerned party, the concerned party may request the competent court or arbitration institution to modify or terminate the contract. Interestingly, in the Opinions the SPC does not state the possibility to request termination of the contract in such case.
With regard to a termination of the contract, the SPC appears to only refer to Article 94 of the PRC Contract Law according to which the parties to a contract may (at their own option) terminate the contract, if the purpose of the contract is rendered impossible to achieve due to Force Majeure. In our view, the Opinions indicate that People’s Courts shall, generally, strictly promote and try to achieve amicable dispute resolution and that contracts shall be continued to be performed and only be terminated in exceptional cases, i.e. specifically only, if the purpose of the contract cannot be achieved anymore. Mere difficulties in performing a contract shall not be sufficient to justify a termination of the contract. Due to the Opinions, we expect that People’s Courts will at least be very reluctant or more likely not at all willing to grant a termination of a contract according to Article 26 of the Interpretation (while a modification of the contract remains possible, if the respective prerequisites are fulfilled).
iii）Lastly, with regard to contractual disputes, the Opinions state that if a party has received governmental subsidies, tax relief or other types of funding and debt relief due to the epidemic or epidemic prevention and control measures, the People’s Courts may take this factor into account for determining whether a contract can continue to be performed.
3. Properly Handling Employment Disputes
The Opinions promote the coordination with the government and relevant departments and to support employers to adopt flexible work methods in accordance with laws and regulations during the period of epidemic prevention and control.
With regard to employment dispute cases, the Opinions emphasize that the relevant stipulations, such as Article 26 of the PRC Labour Law and Article 40 of the PRC Labour Contract Law, shall be applied accurately. According to 26 of the PRC Labour Law and Article 40 of the PRC Labour Contract Law, the employer may terminate an employment agreement with the employee by a 30 days' prior written notice or one month's wages in lieu of notice only, if (1) the employee is unable to take up his/her original work or any work specially arranged by the employer after completion of the period of his/her medical treatment for illness or not work-related injury, or (2) the employee is unqualified for his/her work and remains unqualified even after receiving a training or after readjusting the work post, or (3) the objective conditions taken as the basis for the conclusion of the contract have changed so greatly that the original labour contract cannot be carried out, and no agreement on modification of the labour contract can be reached through consultation by the parties. The Opinions now further state that no labour relationship can be dissolved purely because the concerned employees are confirmed patients, suspected patients, asymptomatic infected persons of COVID-19 or because the concerned employees are under required quarantine or from a region where the epidemic is relatively severe.
Further, national and provincial policies in relation to labour relationships during the COVID-19 epidemic period shall be properly considered and referenced when handling employment dispute cases. For more details on the relevant national and provincial policies, please refer to our previous newsletters “Coronavirus Outbreak: What should companies do when employees are back to work?” dated 31 January 2020, “Coronavirus Outbreak: Follow-up updated policies on the treatment of employees” dated 5 February 2020 and “Coronavirus Outbreak: What can companies do in HR management during the epidemic period?” dated 7 February 2020.
4. Protecting Consumers’ Rights by Punitive Damages
The Opinions stipulate that where masks, goggles, protective clothing, disinfectants and other anti-epidemic items as well as food and medicine are sold under circumstances as set out Article 55 of the PRC Consumer Protection Law, Article 148 (2) of the PRC Food Safety Law, Article 144 (3) of the PRC Drug Administration Law and Article 15 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Adjudication of Food and Drug Disputes, and the consumer claims for punitive damages in accordance with the law, the People’s Court shall support such a claim.
The above mentioned circumstances refer to, inter alia, situations where (1) business operators are engaged in fraudulent conduct when providing goods, or (2) business operators know clearly that goods have defects and still provide them to consumers and the goods cause death or serious damage to health, or (3) food manufacturers produce, or food traders knowingly trade food not meeting food safety standards, or (4) anyone produces counterfeit or inferior drugs or, knowingly, sells or uses counterfeit or inferior drugs.
5. Suspension and Extension of Time Limits
The Opinions stipulate that if, within the last 6 months of a limitation of action period, a right holder requests the suspension of the limitation period in accordance with Article 194 (1) of the General Rules of Civil Law of the PRC due to the epidemic situation or epidemic prevention and control measures, the People's Court shall support such request. Due to the reference to Article 194 (1) of the General Rules of Civil Law of the PRC, this only applies, if the epidemic situation or epidemic prevention and control measures actually constitute Force Majeure and if the right of claim was not able to be exercised due to such Force Majeure event.
In accordance with Article 83 of the PRC Civil Procedure Law, if a party exceeds a time limit due to an event of force majeure or for other legitimate reasons, the party may apply for an extension of the time period within 10 days after the removal of the obstacles. The application for extension of time shall be subject to the approval by the People's Court.
The Opinions set out that the epidemic situation or epidemic prevention and control measures due to COVID-19 can constitute Force Majeure in the above sense. However, the People's Courts shall comprehensively evaluate and consider whether or not to grant the application in light of the epidemic situation and the evidence provided in order to protect the procedural rights of the party concerned in accordance with the law. Thus, it will, in practice, likely to a large extent depend on the competent People’s Court’s discretion whether to grant such extension or not.
If the concerned party is a confirmed patient, a suspected patient, an asymptomatic infected person of COVID-19 or someone who is in close contact with the aforementioned persons and the respective time limit expired during required quarantine of the concerned party, the court shall grant the application for extension of the litigation period.
6. Providing Judicial Assistance and Adopting Flexible Protective Measures
Following the Notice by the Enforcement Bureau of the Supreme People's Court of Matters concerning Effectively Conducting the Enforcement Work during the Period of Prevention and Control of the Outbreak of Novel Coronavirus Pneumonia, the Opinions provide that, the People’s Courts at all levels shall strengthen judicial assistance and be flexible in adopting protective measures in litigation.
The Opinions clarify that if a party is in financial difficulties due to the impact of the epidemic and applies for the exemption, reduction or suspension of litigation costs, the People's Court shall promptly examine such application and make a corresponding decision in accordance with the law. Litigating parties who require judicial assistance shall be provided with relief measures based on their applications in a timely manner.
The Opinions also provide for flexible measures of property preservation or property value preservation. Accordingly, with regard to enterprises affected by COVID-19, especially micro, small and medium sized enterprises (“MSMEs”) and individual businesses, the competent People’s Courts can adopt flexible measures of property preservation or property value preservation in order to reduce the burden on enterprises and help enterprises resume work and production. Also, an enterprise applicant (MSMEs and individual businesses) of property preservation or property value preservation is now exceptionally allowed to provide alternative securities such as a third-party guarantee and liability insurance of property preservation.
In essence the Opinions do not bring much new concepts. They are, basically, a summary and an explanation of relevant existing statutory stipulations dealing with situations such as the current COVID-19 epidemic, i.e. especially Force Majeure related stipulations. However, they provide a useful overview in this regard and in certain aspects they bring further guidance to People’s Courts on how to handle relevant cases, and, thus, contribute to legal certainty. Examples are that contracts shall, in general, not be terminated, if performance is only more difficult or burdensome due to the current COVID-19 situation. Since the current Opinions are named “Guiding Opinions (I)”, additional opinions of the SPC concerning the COVID-19 epidemic are expected to be issued in due course. They may provide for more specific guidance or on new aspects which have not been covered by existing statutory law.