Analysis of the Criteria for Decisions to Rescind Contracts Based on Force Majeure and Change in Circumstances During an Epidemic (Mainland China)

July 2022

Yanting Pei and Teresa Huang

Today, all kinds of unexpected circumstances that have arisen with varying severity of the pandemic in different parts of the world have made it difficult to normally perform contracts to a certain extent.  Under such circumstances, can a contract be rescinded due to force majeure or change in circumstances?  This article summarizes the criteria for court decisions to rescind contracts on the ground of force majeure or change in circumstances in different regions as follows as some practical references to enterprises.

I. Ways to rescind contracts

Pursuant to Article 562 of the Civil Code of Mainland China (hereinafter, the “Civil Code”), the parties may rescind the contract through negotiation or by way of agreement.  This is generally referred to as “negotiated rescission” or “rescission by agreement. If the parties have not agreed upon matters of rescission, the fulfillment of the conditions of rescission is uncertain or fail to mutually agree on the rescission, the objective of rescinding the contract can be achieved by way of Article 563 of the Civil Code, i.e. by satisfying the terms of “statutory rescission.”

Pursuant to Article 563 of the Civil Code, the conditions for statutory rescission include the following circumstances:

(1) The purpose of a contract cannot be achieved due to force majeure.

(2) Prior to the expiration of the performance period, one of the parties explicitly expresses or indicates by his/her act that he/she will not perform the principal obligation.

(3) One of the parties delays his/her performance of the principal obligation and still fails to perform it within a reasonable period after being notified to do so.

(4) One of the parties delays his performance of the obligation or has otherwise acted in breach of the contract, thus making it impossible to achieve the purposes of the contract.

(5) There is any other circumstance as provided by law.

In addition, under Article 533 of the Civil Code, if it is obviously unfair to one of the parties to continue to perform the contract after it is established in the event of any significant change to the conditions underlying the contract that is unforeseeable to the parties when the contract is executed or is not a commercial risk, the party unfavorably affected may renegotiate with the other party.  If the negotiation is unsuccessful within a reasonable period, the parties may apply to a people’s court or an arbitration institution to revise or rescind the contract.

Therefore, according to the above provisions, there are four major ways to rescind a contract pursuant to law (not the existence of agreed-upon matters of rescission under the contract).  Firstly, the parties clearly indicate that they will not perform or refuse to perform the main obligations.  Secondly, the purpose of the contract cannot be achieved due to delayed performance or non-performance by the parties.  Thirdly, the effect of force majeure makes it impossible to achieve the purpose of the contract, and fourthly, the change in circumstances makes the continued performance of the contract obviously unfair to one of the parties.  This article focuses on how to rely on force majeure and change in circumstances to rescind a contract under the influence of an epidemic.

II. Legal elements of force majeure rescission and the criteria for court decisions

Under Article 180 of the Civil Code, force majeure refers to objective circumstances that cannot be foreseen, avoided, and overcome.  At the early stage of the pandemic, judicial organs in various regions have recognized the force majeure nature of the pandemic,[1] but having the nature of force majeure does not mean that the force majeure clause can be applied in every case.  Certain legal elements still need to be met for its application.[2]  According to the judicial opinions and decisions of courts in various regions, it is generally held that the following criteria must be satisfied in the case of rescission due to force majeure: (1) the existence of force majeure; (2) the existence of the impossibility to achieve the purpose of the contract; and (3) there is a direct causal relationship between force majeure and the failure to achieve the purpose of the contract.[3] 

1.  Is there force majeure? This mainly depends on the overlap of time and the degree of unforeseeability, unavoidability, and insurmountability.

In practice, when determining the existence of force majeure, the court mainly considers whether the impact of the epidemic occurred before or after the signing of the contract, whether the parties could not foresee the epidemic and the obstruction of the contract, and, if the epidemic was indeed unforeseeable, whether the obstruction was indeed unavoidable and insurmountable.[4]

2. Is the purpose of the contract unattainable? Difficulties in performance alone do not constitute the impossibility to achieve the purpose of the contract

For the impossibility to achieve the purpose of a contract, the court will consider if it is indeed true that the contract cannot be performed or if it is only that the performance is difficult.  If the issue lies merely in performance difficulty, it will not be supported by the court.[5] 

For example, in the case involving the property rental contract between Mr. Li and Mr. Liu ((2020) Fu 0115 Min Chu No. 30624), the court held that although the plaintiff, who had leased the property in question for the operation of a restaurant, was indeed affected by the COVID-19 pandemic during its outbreak, the extent that the property becomes unusable as agreed between the parties was not reached.  The plaintiff should be liable for the corresponding breach of contract since he had unilaterally rescinded the contract simply because his restaurant business was affected by the COVID-19 pandemic.  In another case involving contract disputes between a cultural and sports development limited company and an enterprise ((2021) Fu 0115 Min Chu No. 39506), the court held that although the epidemic resulted in the plaintiff’s inability to provide the defendant with the viewing services for game performance for a period of time, still the plaintiff had provided the viewing services for one game before the defendant’s rescission request.  Therefore, this does not result in the ipso facto impossibility to achieve the purpose of the defendant’s contract, and the defendant has no right to rescind the contract in question.  Therefore, it is necessary to prove that the purpose of the contract is indeed unachievable to rescind it due to force majeure.

In addition, the court will also consider the possibility of performance extension and substitute performance unless the extension or substitute performance of the contract will still result in the failure to achieve the purpose of the contract[6] in order to satisfy the criterion that the purpose of the contract indeed cannot be achieved.  According to the guiding opinions of the Supreme Court, if the parties have received subsidies from government departments, tax relief, or other financial assistance or debt relief due to the epidemic or epidemic prevention and control measures, the people’s court may treat it as a reference factor to determine whether the contract can continue to be performed.[7] 

3. Is there a direct causal relationship? The epidemic must be the only factor causing the impossibility to achieve the purpose of the contract.

From the perspective of causation, the court mainly looks at whether the effect of the epidemic was the only factor that caused the failure to fulfill the purpose of the contract, and considers the magnitude of its impact.  As the above-mentioned opinion of the Shandong High Court, in the case of construction contract disputes, if the parties claim exemption from liability by asserting that the COVID-19 pandemic constitutes force majeure, there should be a direct causal relationship between the pandemic and the failure to perform the contractual obligations, and the impact of the pandemic is sufficient to cause the inability to perform the contract.  If a party claims exemption from liability due to its inability to fulfill the contract for its own reasons, such a claim shall not be supported.  The First Guiding Opinion on Several Issues Concerning the Proper Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic (hereinafter, the “Guiding Opinion”) also pointed out that the impact of the epidemic on different regions, different industries, and different cases should be considered, and the causal relationship between the epidemic or epidemic prevention and control measures and the inability to perform the contract as well as the size of its impact should be accurately grasped.  In the case of the lease contract disputes between Dingzhou Times Square Trading Co., Ltd.,[8] the court also specifically pointed out that although the COVID-19 pandemic was a statutory cause of force majeure, still the pandemic had been controlled and it is not true that the purpose of the contract between the plaintiff and the defendant cannot be achieved.

In addition, when determining if a contract can be rescinded, the court also generally determines if the contract should be rescinded based on a combination of factors such as the type and nature of the contract, the expected benefits, the performance status, the degree by which the epidemic and epidemic prevention and control measures impeded the contract performance, etc.[9]

III. The legal elements and the criteria of decisions for rescission based on change in circumstances  

In addition to the provisions of Article 533 of the Civil Code, there are no clearer legal requirements for applying the “change in circumstances” criterion.  This article mainly refers to the opinion of the First Civil Division of the Sichuan High Court, which held that the application of the “change in circumstances” criterion requires the fulfillment of the following requirements: (1) there is a material change that is not a commercial risk to the underlying basis of the contract; (2) the material change in the underlying conditions were not foreseeable to the parties when the contract was concluded and not attributable to the parties; (3) the material change in the underlying conditions occurs after the establishment of the contract and before the completion of its performance; and (4) the material change in the underlying conditions is obviously unfair to one of the parties if the contract is continuously maintained and performed in the judgment of an ordinary reasonable person.[10] 

The main issue encountered in the application of the “change in circumstances” criterion is the distinction between this criterion and commercial risks, which has been differentiated by the Supreme Court in its Guiding Opinions on Several Issues Concerning the Trial of Civil and Commercial Contract Disputes under the Current Situation (Fafa [2009] No. 40), and a general observation of the views of the courts in different regions shows that the principles set forth in the guiding opinion are still followed when the applicability of the “change in circumstances” criterion is determined:

1. Whether the risk is unforeseeable and not inherent in the market system

Commercial risks are inherent to business activities, such as changes in supplies and demands, price increases and decreases, etc., that have not yet reached an abnormal level of variability.  A change in circumstances is a risk that is not inherent in the market system and cannot be foreseen by the parties at the conclusion of the contract.

2. Whether the degree of risk exceeds normal and reasonable expectations

In determining whether a particular situation arising from an epidemic is a change in circumstances, courts have been asked to examine whether the degree of risk in that particular situation far exceeds what a normal person would reasonably expect.

3. Whether the nature of the transaction falls within the usual scope of “high risk and high reward”

4. General consideration of the extent of the impact

The change in contractual arrangements, the underlying conditions for the contract, the impact of the change in the underlying conditions for the contract on the parties, the extent of the impact, etc., are distinguished in individual cases.

In addition, in order to prevent the “change in circumstances” criterion from being abused and affecting the normal market order, the Supreme Court pointed out in the Circular on the Correct Application of the Second Interpretation of Certain Issues Concerning the Contract Law of the People’s Republic of China to Serve the Work of the Party and the State that the “change in circumstances” criterion should be applied with caution, and the above-mentioned guiding opinion of the Supreme Court has also reiterated this point.  The opinions issued by courts at all levels during the pandemic also emphasized that such a review procedure should be followed.[11]  Therefore, two principles should also be noted in the application of the “change in circumstances” criterion:

(1) Focus on the protection of the contract abiding party

The “change in circumstances” criterion does not simply exempt the debtor’s obligations and compel the creditor to suffer adverse consequences.  Instead, it draws full attention to the balance of interests and adjusts the interests of both parties in a fair and reasonable manner.

(2) Stricter application since it is subject to the court’s internal examination procedures

If this is indeed applicable in an individual case according to the special circumstances of the case, it should be examined by the high people’s court and, if necessary, it should be reported to the Supreme People’s Court for examination

IV. More prudence required for applying the criteria of force majeure and change in circumstances in the era of normalization of the pandemic

The above analyses show that the law has a common requirement for applying the criteria of force majeure and change in circumstances, which is “unforseeability.”  The ups and downs of the pandemic have resulted in incessant unexpected situations.  Under such a business environment, enterprises are normally expected to be equipped with certain coping measures.  Therefore, more stringent requirements for applying the criteria of force majeure and change in circumstances may be proposed.

For example, the Working Guidelines of the Henan High People’s Court on the Proper Handling of Cases Involving Small, Medium, and Micro Enterprises Being Affected by the Epidemic point out that if a party to a contract concluded after the outbreak of an epidemic claims that the criterion of force majeure or change of circumstances applies since the party has been affected by the epidemic, such a claim is generally not be supported unless the contract cannot be performed because the period of the epidemic’s impact clearly exceeds the expectations of the parties.  Another example is a case involving the sales contract dispute between a pharmaceutical limited company in Guangdong and an electronic trading company in Enping City ((2020) Yue 01 Min Zhong No. 16245).  In this case, the court held that when the contract at issue was signed, the pandemic had broken out domestically and internationally.  Since this is a foreseeable commercial risk for the sale of forehead thermometers, force majeure does not apply.

In conclusion, based on the recent judicial practice, courts still hold a stricter and prudent attitude when determining whether to apply the criterion of force majeure or change in circumstances to rescind a contract.  Before making a business decision, the parties are advised to carefully examine the relevant circumstances to confirm whether the relevant legal criteria are met and whether the desired business purpose can be achieved and avoid damaging their interests by taking for granted the application of the legal provisions.  On the other hand, enterprises that have been confronted with issues are encouraged to resolve them through negotiation as much as possible.  Since all people are suffering from the pandemic, sharing part of the risk is indeed one of the viable solutions.

(The authors’ opinions do not represent the position of this law firm.)


[1] For example, the Second Q&A Series of the Shanghai High People’s Court Concerning the Application of Law in Cases Involving the COVID-19 Pandemic, the Minutes of Judges’ Meeting of the First Civil Division of the Sichuan High People’s Court about the Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic, and the Minutes of Judges’ Meeting of the First Civil Division of the Shandong High People’s Court about Cases Involving Construction Contract Disputes during the Epidemic all clearly recognized that the COVID-19 pandemic is force majeure.  

[2] Pursuant to Article 2 of the Circular of the Supreme People’s Court on the First Guiding Opinion on Several Issues Concerning the Proper Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic Pursuant to Law (Fa Fa [2020] No. 12), the people’s court shall accurately apply the specific provisions on force majeure in the trial of civil cases involving the epidemic and strictly grasp the conditions of their application.  For civil disputes arising from the direct impact of any epidemic prevention and control measures, if the statutory criteria for force majeure are met, such cases should be properly handled by applying Article 180 of the General Principles of the Civil Law of the People’s Republic of China, and Article 117 and Article 118 of the Contract Law of the People’s Republic of China.  If other laws or administrative regulations provide otherwise, such provisions shall govern. 

[3]For example, the Minutes of the Judges’ Meeting of the First Civil Division of the Shandong High People’s Court about Cases Involving Construction Contract Disputes during the Epidemic pointed out that in construction contract dispute cases, if a party asserts that the COVID-19 pandemic constitutes force majeure and claims exemption from liability, basically the following four criteria should be met: (1) the epidemic has a direct causal relationship with the failure to perform the contractual obligations; (2) the impact of the epidemic is sufficient to make the contract performance impossible; (3) the binding covenants between the parties in the construction contract are not breached; and (d) the other circumstances of force majeure exemption are met.  The Minutes of Judges’ Meeting of the First Civil Division of the Sichuan High People’s Court about the Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic also pointed out that (1) if a party claims exemption from liability due to force majeure and the following conditions are met, the claim can be deemed established: (a) the parties did not and could not foresee the occurrence of the epidemic and the implementation of epidemic prevention and control measures when concluding the contract, and did not make prior arrangements in the contract; (b) the government in the place where the parties are located or where the contract is to be performed has taken measures to prevent and control the epidemic, and the parties and their performance are involved in and affected by the epidemic prevention and control measures; (c) the epidemic prevention and control measures occurred after the conclusion of the contract and before the completion of the contract performance; (d) the improper performance of the contract by the parties has a causal relationship with the occurrence of the epidemic and the implementation of epidemic prevention and control measures; and (e) the circumstances leading to the improper performance of the contract by the parties cannot be avoided or prevented; (2) the party claiming exemption from liability on the ground of force majeure shall not be supported in the following circumstances: (a) the party was aware or should have been aware of the occurrence of the epidemic or the implementation of epidemic prevention and control measures when the contract was concluded; (b) there is no causal relationship between the party’s improper performance of the contract and the occurrence of the epidemic and epidemic prevention and control measures; or (c) the improper performance of the contract by the parties is related to the occurrence of the epidemic and the implementation of epidemic prevention and control measures, which are not unavoidable or insurmountable. 

[4] For example, in the case involving a specific property rental contract between Mr. Li and Mr. Liu ((2020) Fu 0115 Min Chu No. 30624), the court first confirmed the time factor between the outbreak of the pandemic and the performance of the contract.

[5] Pursuant to Paragraph 3(2) of the First Guiding Opinion of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic, in case of difficulties in contract performance due to an epidemic or epidemic prevention and control measures, the parties may renegotiate.  If the performance can continue, the people’s court should use its best effort to enhance the mediation and actively guide the parties to continue the performance.  If a party requests to rescind the contract due to difficulties in performance, the people’s court will not support the request.  The Second Guiding Opinion of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic also points out that the request to rescind a contract merely due to the increase of performance cost will not be supported.

[6] See the answer to Question 1 in the Second Q&A Series of the Shanghai High People’s Court Concerning the Application of Law in Cases Involving the COVID-19 Pandemic.

[7] See Paragraph 3(3) of the First Guiding Opinion of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic

[8] See the (2021) Ji 0682 Min Chu No. 181 decisions and other decisions.

[9] See the provisions of the Working Guidelines of the Jilin High People’s Court on the Proper Trial of Civil and Commercial Cases Involving the Novel Coronavirus Pneumonia Epidemic, the Second Q&A Series of the Shanghai High People’s Court Concerning the Application of Law in Cases Involving the COVID-19 Pandemic, and the Specific Opinions of the Nanjing Intermediate People’s Court on the Proper Trial of Real Estate Cases Involving the Novel Coronavirus Pneumonia Epidemic.

[10] See the Minutes of Judges’ Meeting of the First Civil Division of the Sichuan High People’s Court about the Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic.

[11] For example, the Minutes of Judges’ Meeting of the First Civil Division of the Sichuan High People’s Court about the Trial of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic, the Second Q&A Series of the Shanghai High People’s Court Concerning the Application of Law in Cases Involving the COVID-19 Pandemic, the Working Guidelines of the Jilin High People’s Court on the Trial of Civil and Commercial Cases Involving the Novel Coronavirus Pneumonia Epidemic, and the Specific Opinions of the Nanjing Intermediate People’s Court on the Proper Trial of Real Estate Cases Involving the Novel Coronavirus Pneumonia Epidemic all directly stress the need to strictly follow the examination procedure.  Some other local courts such as the Henan High Court, the Jiangsu High Court, and the Shandong High Court also emphasize that relevant applications should be governed by the provisions on change in circumstances in Article 26 of the Second Interpretation of the Supreme People’s Court on Specific Issues Relating to the Correct Application of the Contract Law of the People’s Republic of China.