Law and regulation of force majeure in China

1. Is there legislation on force majeure in your law system?

Yes.

2. If so, what is the text of the force majeure clause in your civil code?

Currently, stipulations on force majeure are mainly provided for in the PRC Civil Code, which enters into effect on 1 January 2021.

The most relevant stipulations are as follows:

  • According to Article 180 of the PRC Civil Code, if civil obligations fail to be performed due to force majeure, no civil liability shall be borne. Where the laws provide otherwise, such provisions shall prevail. Force majeure refers to unforeseeable, unavoidable and insurmountable objective events.
  • According to Article 194 of the PRC Civil Code, the limitation of action shall be suspended during the last six months of the limitation period if the right of claim cannot be exercised because of force majeure. In such a case, the limitation of action shall expire after six months from the date when the obstacles causing the suspension (i.e. the force majeure event) are eliminated.
  • According to Article 563 of the PRC Civil Code, the parties to a contract may terminate the contract if the purpose of the contract is rendered impossible to achieve due to force majeure.

Accordingly, a contract can be terminated due to force majeure only if the force majeure event still makes it impossible to reach the purpose of the contract. This threshold is rather high and, despite of the occurrence of force majeure, termination may not be possible for many contracts according to such stipulation.

  • According to Article 590 of the PRC Civil Code, where a contract cannot be performed due to force majeure, the liabilities 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 either party to a contract is not able to perform the contract due to force majeure, the 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. If the force majeure occurs after one party has already delayed its performance, the liabilities of the party shall not be exempted.

The above stipulation shows that the consequences of force majeure and the extent of an exemption of the liability depend on the specific circumstances of the case in question. Each case must be checked individually and even if force majeure generally exists, this does not necessarily lead to the exemption of liabilities in the specific case.

As set out above, a party purportedly affected by force majeure should inform the other party of the contract as soon as possible. For the purposes of evidence, this should be done in writing. Furthermore, a party purportedly affected by force majeure should take reasonable measures to mitigate the losses of the other party. Otherwise, the party purportedly affected by force majeure may still face liabilities. In addition, evidence must be provided within a reasonable time limit. For this, the relevant governmental authorities should be contacted in case they are able to issue relevant certificates.

After the outbreak of COVID-19, the PRC Supreme People's Court ("SPC") promulgated the Guiding Opinions on Several Issues Concerning the Proper Trial of Civil Cases Involving the COVID-19 (I, II, III) respectively in April, May and June 2020. The Opinions contain the views of the SPC on how to deal with certain aspects of COVID-19 related civil cases, including but not limited to dispute resolution, performance of contracts, employment relationships, judicial assistance, more flexibility in property preservation measures, civil procedure-related time limits, application of law, foreign-related commercial cases, transportation contracts-related cases, admiralty and maritime disputes, etc.

In addition, on 13 May 2020 the SPC promulgated the Guiding Opinions on Several Issues Concerning the Proper Handling of Enforcement Cases Related to the Novel Coronavirus Pneumonia (COVID-19) Epidemic According to the Law, which provide guidance to the People’s Courts on how to deal with certain aspects of COVID-19 related judicial enforcement cases, including but not limited to suspension of the enforcement application period, legal limitations for seizure measures, disposal of enforcement assets, etc.

For more details on the guiding opinions issued by the SPC, refer to our newsletters:

3. Is this mandatory or are parties free to regulate force majeure clauses?

The parties are free to regulate force majeure clauses in a contract.

4. If it is regulatory, to what extent are parties free to regulate such clauses (e.g. do parties have to take principles of reasonableness and fairness into account) and if so, in what way?

The parties are generally free to regulate and agree on force majeure clauses in a contract. Under normal circumstances, force majeure stipulations agreed by the parties in a contract will be valid and binding under PRC law. However, in accordance with the general principle of fairness and good faith, which PRC courts and arbitration tribunals may apply from time to time in the absence of detailed legal provisions, an unreasonable force majeure stipulation may be ruled invalid. In our view, unless there are exceptional circumstances, this normally should not be the case.

Furthermore, according to Article 151 of the PRC Civil Code, a party has the right to request a People's Court or an arbitration tribunal to amend or cancel a contract, which was obviously unfair at the time of conclusion.

5. If a contract just says you can terminate for “force majeure” is there any guidance/case law as to what this means (in the absence of it being defined in the relevant contract)?

In any case, we suggest defining force majeure in a contract. In regard to COVID-19, it would be advantageous if this definition expressly covers occurrences such as “epidemics”, “health emergencies” or “governmental actions”, etc. If force majeure is not defined in a contract governed by PRC law, the above-mentioned statutory definition of “objective circumstances which are unforeseeable, unavoidable and insurmountable” applies. In this case, it must be determined in the individual case whether the purported force majeure event can be covered by such a general definition.          

For contracts concluded after the COVID -19 epidemic began, COVID-19 is foreseeable and it is thus doubtful whether COVID-19 can still be regarded as a force majeure event. However, in such cases, Article 533 of the PRC Civil Code may apply and provide solutions. For details, see the item “Are there any alternative remedies that a party could consider based on being unable to perform a contract due to the corona virus?” below.

6. Is there a difference in all of this in B2B transactions versus B2C transactions?

No.

7. Is there a difference in judgement when the force majeure clause is laid down in a contract or in T&C’s?

Only to a limited extent, provided that the T&C’s have been validly included into the contract.

PRC law generally requires that where a contract is concluded by use of T&C’s, the party providing the T&C’s shall abide by the principle of fairness when determining the rights and obligations of the parties, and shall, in a reasonable manner, draw the attention of the other party to clauses, which restrict its liability and, if so requested by the other party explain such clauses. Generally, this also applies if there is a restriction of liability in case of force majeure. “Reasonably drawing the other party’s attention” requires that the party providing the T&C’s shall use, at the time of conclusion of the contract, a special indication, such as words, symbols or a font sufficient to draw the attention of the other party to provisions of those T&C’s restricting that party’s liability.

Other than the above, PRC law does not provide specific guidance on the requirements regarding the inclusion of T&C’s into a contract. 

In legal practice, the party providing the T&C’s usually bears the burden of proof that the T&C’s have been included effectively. Therefore, we generally advise making an explicit reference to the application of T&C’s in the respective contract or purchase order or acceptance, and to deliver any new version of the T&C’s to the contracting party. For reasons of proof, it is further recommended that the contracting party agree with the T&C’s in writing or at least confirm their receipt in writing. 

Under PRC law, in case a battle of forms occurs, the outcome is not entirely clear. Two main theories exist: (1) Last-Shot Rule and (2) Knock-Out Rule. Some legal commentators are of the opinion that the Last-Shot Rule applies. However, most legal commentators favour the Knock-Out Rule and, as far as we can see, this also constitutes the practice of most PRC courts. Note that in the case of conflicting T&C’s, only those provisions that do not contradict each other will be considered valid. Contradicting provisions will be considered invalid and in this case, the provisions of statutory law will apply.

8. Do you have examples of force majeure clauses which you think (would) work well in practice?

A general example clause on force majeure according to PRC law could be as follows:

“If a Party cannot perform its obligations stipulated in this Agreement due to reasons which are directly and exclusively attributable to Force Majeure, it shall notify the other Party in writing without undue delay of the occurrence of such an event and, within 30 (thirty) days of the occurrence, provide to the other Party a statement or certificate of the existence of the circumstances constituting Force Majeure.

Force Majeure shall mean any of the following objective circumstances to the extent they are unforeseeable, unavoidable and insurmountable: earth quake, storm, flood, fire or other acts of nature, epidemics, such as but not limited to SARS and COVID-19, war, acts of terrorism, riot, public disturbance, government actions or other events beyond the control of the Parties. For the avoidance of doubt, a Party’s economic loss or downturn shall not be considered Force Majeure.

If an event of Force Majeure occurs, no Party shall be responsible for any damage, increased costs or losses which the other Party may sustain by reason of such failure or delay of performance. The Party claiming Force Majeure shall adopt measures to minimise or remove the effects of Force Majeure and within the shortest possible time attempt to resume the performance of obligations affected by the event of Force Majeure. If the consequences of such an event cannot be remedied within 6 (six) months from the occurrence, the Parties shall through consultations decide whether to modify or terminate this Agreement according to the effects of the event of Force Majeure on the performance of this Agreement.”

9. Do you (already) have an example of a force majeure clause which is “corona future proof” or “virus proof” and you willing to share that with us?


For contracts concluded after the COVID-19 epidemic began, COVID-19 is foreseeable and it is, thus, doubtful whether COVID-19 can still be regarded as a force majeure event. A clause covering both force majeure as well as COVID-19 after the start of the epidemic could potentially read as follows: 

“If a Party cannot perform its obligations stipulated in this Agreement due to reasons which are directly and exclusively attributable to force majeure or which are directly and exclusively attributable to the effects of COVID-19, it shall notify the other Party in writing without undue delay of the occurrence of such an event and, within 30 (thirty) days, provide to the other Party a statement or certificate on the existence of the circumstances constituting force majeure or the effects of COVID-19.

Force majeure shall mean any of the following events: earth quake, storm, flood, fire or other acts of nature, epidemics and pandemics, war, riot, acts of terrorism, public disturbance, strike or lock outs, government actions or other events beyond the control of the Parties where their occurrence is reasonably unpreventable and unavoidable.

If a Party cannot perform its obligations stipulated in this Agreement due to reasons which are directly and exclusively attributable to force majeure or which are directly and exclusively attributable to the effects of COVID-19, such Party shall not be responsible for any damage, increased costs or losses which the other Party may sustain by reason of such failure or delay of performance. The Party claiming that it cannot perform its obligations stipulated in this Agreement due to reasons which are directly and exclusively attributable to force majeure or which are directly and exclusively attributable to the effects of COVID-19 shall adopt measures to minimise or remove the effects of force majeure or COVID-19 and within the shortest possible time attempt to resume the performance of obligations affected by the event of force majeure or COVID-19. If the consequences of such an event cannot be remedied within 6 (six) months from the occurrence, the Parties shall through consultations decide whether to modify or terminate this Agreement according to the effects of the event of force majeure or COVID-19 on the performance of this Agreement.”

In addition, for contracts concluded after the COVID-19 epidemic started, with the effect that COVID-19 is not regarded as force majeure anymore, Article 533 of the PRC Civil Code may apply and provide solutions. For details on this, see the item “Are there any alternative remedies that a party could consider based on being unable to perform a contract due to the corona virus?” below. 

10. Are there any alternative remedies that a party could consider based on being unable to perform a contract due to the corona virus?

An alternative remedy may be the legal concept of an unpredictable change of circumstances under PRC law. According to Article 533 of the PRC Civil Code, 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 does not constitute commercial risks; and (4) if the continuous performance would be obviously unfair to the concerned party, the concerned party may negotiate with the other party. If the negotiation fails within a reasonable period of time, the parties may request the competent court or arbitration institution to modify or terminate the contract.

The PRC Civil Code, which is China's first combined codification of civil law, will enter into effect on 1 January 2021. Concurrently with the entry into effect of the Civil Code, various essential pieces of legislation, including the PRC Contract Law and the General Rules of the Civil Law, etc., will be abolished. The legal concept of an unforeseeable change of circumstances was already provided for 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) (“SPC Interpretation on PRC Contract Law (II)”), which will cease to be effective as of 1 January 2021. Compared to Article 26 of the SPC Interpretation on PRC Contract Law (II), Article 533 of the PRC Civil Code no longer requires that the change of circumstances is not caused by force majeure. Thus, it is expected that if a party is subject to force majeure, it may still assert Article 533 of the PRC Civil Code and apply for an amendment or termination of the contract. This change appears to be a consequence of the COVID-19 epidemic, where it was broadly discussed in relation to PRC law whether Article 26 of the SPC Interpretation on PRC Contract Law (II) is applicable, in addition or alternatively to stipulations on force majeure, or not.

Furthermore, compared to Article 26 of the SPC Interpretation on PRC Contract Law (II), Article 533 of the PRC Civil Code emphasises that the parties shall first negotiate and try to find an amicable solution. Only if negotiations fail shall they forward the matter to the competent institutions. In regard to the latter, Article 533 of the PRC Civil Code now clarifies that such competent institutions are not only People's Courts, but also arbitration institutions.

11. Is there anything else we should know or you would like to share on this topic?

No.

Portrait ofUlrike Glueck
Dr. Ulrike Glueck
Managing Partner
Shanghai
Portrait ofMichael Munzinger
Michael Munzinger, LL.M.
Counsel
Shanghai