Crisis Management under Coronavirus Outbreak - Invoking Force Majeure

Since the outbreak of the new coronavirus, COVID-19, we have witnessed the continuous ripple effects of the spread of the outbreak on people's daily lives and business operations, especially businesses operating in China and the Greater China region. We understand the difficulties our clients are currently facing, not only with respect to the safety of their families and employees, but also the significant impact the outbreak has caused, and continues to cause to their business.

The unfortunate disruptions to our clients' business operations will unavoidably impact their ability to comply with their contractual obligations to their business partners, be it in the region or around the world. If your business and ability to perform your obligations have been or will be affected, it is therefore critical to understand your rights and obligations under ongoing contracts or negotiations as well as the options available to effectively address and cope with the current difficulties and minimize any negative impact of the crisis on your business.

In difficult and challenging times like these, businesses should be aware of the possibility to invoke the doctrine of force majeure.

Force Majeure under Different Governing Laws

Under Chinese law, force majeure (不可抗力) is a legal doctrine that is codified by legislation. Article 117 of PRC Contract Law and Article 180 of PRC General Rules of Civil Law define force majeure as any objective circumstances which are unforeseeable, unavoidable and insurmountable (不能预见、不能避免并不能克服的客观情况). It is worth nothing that the spokesperson of the Legislative Affairs Commission of the National People's Congress Standing Committee (全国人大常委会法工委) has clarified on 10 February 2020 that the government's preventative measures in containment of the new coronavirus can constitute an unforeseeable, unavoidable and insurmountable force majeure event, if performance of a contract is prevented as a result of these measures.

The consequence of successful invocation of force majeure is that the invoking party will be exempted from liability in part or in whole depending on the impact of force majeure. The parties affected by force majeure may also terminate the contract in question if the force majeure relied upon frustrates the purpose of the contract.

If contracts do not contain a force majeure clause, the codified provisions will apply. For contracts with a force majeure clause, the contractual clause will apply to the extent that it is not inconsistent with the general principles under PRC Contract Law, including the principles mentioned above.

To invoke force majeure under Chinese law, the following factors should be fulfilled.

1. The invoking party must notify the other party in a timely manner to reduce possible losses caused to the other party.
2. The relevant contract must have been concluded before the force majeure event.
3. A causal link must be established between the invoking party's inability to perform the contract and the event of force majeure. In this regard, the invoking party bears the burden to prove the existence of force majeure and the impact on its performance of the contract. It is worth noting that companies can apply to the China Council for Promotion of International Trade (中国国际贸易促进委员会) for certificates of force majeure in relation to international trade contracts.

Under Hong Kong law, there is no doctrine of force majeure under the respective local legislation. A party's right to invoke force majeure would depend on the construction and interpretation of the force majeure clause in the relevant contract.

It is therefore key to review your force majeure clause to understand (i) the definition and scope of force majeure, i.e., what events does the force majeure clause cover; (ii) the effect of the force majeure clause, i.e., does the force majeure clause exempt a party's obligation to perform the contract in full or in part, or does it only delay the performance; and (iii) the steps required to invoke the force majeure clause, e.g. is written notice required, or are there any mitigation measures to take.

Under the United Nation’s Convention on Contracts for the International Sale of Goods ("CISG"), which is the governing law often used for international sale of goods contracts, force majeure is specifically codified under Article 79 as an impediment beyond a party's control. Based on this provision, a party's liability for a failure to perform any of its obligations can be exempted if the failure was due to an impediment beyond the party's control and that the party could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences. To invoke the force majeure doctrine under Article 79 of the CISG, a notice of the impediment and its effect on the party's ability to perform must be given to the other party.

Steps You Should Take Now

We recommend that our clients take the following steps if they are encountering difficulty in performing their contracts due to the coronavirus outbreak:

1. Review your contracts, in particular the governing law clause, dispute resolution clause, and the force majeure clause (if any).
2. Analyze the likelihood of success of invoking force majeure based on the applicable governing law and the force majeure clause in the contract (if any). If the contract contains a force majeure clause, check the relevant scope of the force majeure clause and the effect of the force majeure clause, as well as the prescribed steps to invoke the force majeure clause.
3. Keep detailed documentation when any failure to perform occurs, such as the time of occurrence of the force majeure event, and the impact you have suffered due to the force majeure event.
4. Notify your overseas business partners in a timely manner of any situations that cause your non-performance and consider negotiating with your business partners for possible modifications or cancelation of the existing contracts on a without-prejudice basis.
5. When entering into new contracts, ensure that relevant provisions cover situations like the current coronavirus outbreak.

How CMS Can Help

CMS has a great depth of experience in helping clients in managing crisis situations and negotiating solutions to save the business and minimize financial loss and the impact of the crisis. Should negotiations with your business partners fail, we have a market-leading team specialized in cross-border disputes, in particular those relating to disputes between Chinese and European, U.S. or Asian parties. CMS has lawyers qualified in various jurisdictions, including, among others, Hong Kong, China, Singapore, Australia, the U.S., Germany, the U.K., as well as a number of renowned CISG experts who are highly experienced in dealing with CISG disputes and have published extensively in this area. 

We can therefore best assist our clients to navigate this crisis by reviewing the relevant contracts and formulating strategies to safely and effectively address the difficulties our clients are facing.

If you have encountered any problem in performing your contracts due to the current coronavirus outbreak or any other related issues, or simply have questions about the legal situation you are facing in these challenging times, please do not hesitate to reach out to us. 

For the latest information about COVID-19, please visit our Corona Center. If you have any questions about dealing with the current situation and its impact on your company, our CMS Response Team will be happy to help.