Teresa Huang and Jolene Chen
Facing the current grave challenges for controlling the novel coronavirus (“COVID-19”) outbreaks, different parties are in dire straits and the disputes so triggered are no longer avoidable. Particularly for contracts which had been signed before the COVID-19 pandemic escalated, in case of delay or failure to perform due to protracted outbreaks, whether it is possible to suspend the performance or adjust the contractual obligations on the ground of the pandemic outbreaks has attracted a lot of attention. Therefore, this article seeks to leverage the trial practices during the outbreaks of the severe acute respiratory syndrome (SARS) and briefly analyzes and discusses the trial opinions of courts on the civil disputes triggered during the pandemic outbreaks for your reference.
I. Legal basis for adjusting contractual obligations on the ground of force majeure and change of circumstances
Under the Contract Law, if a contract cannot be performed due to force majeure, the liability shall be exempt in whole or in part according to the impact of the force majeure unless otherwise stipulated under the law. A party who had delayed the performance before the force majeure occurred cannot be released from the liability. The so-called “force majeure” refers to an objective circumstance which cannot be foreseen, avoided and overcome. A party who cannot perform the contract due to force majeure should timely notify the other party to reduce potential losses to the party and should provide proof within a reasonable period. In addition, if the purposes of a contract cannot be fulfilled due to force majeure after it is executed, the parties may rescind the contract.
Pursuant to Article 26 of Interpretation II of the Supreme People’s Court on Several Issues Concerning the Application of the Contract Law of the People’s Republic of China and relevant circulars from the Supreme People’s Court, in case the objective circumstance after the contract is established is subject to any material change which is not a commercial risk and which is unforeseeable when the contract is executed and is not caused by force majeure, if continued performance of the contract would be obviously unfair to either party or if the purposes of the contract cannot be realized, the parties may request a people’s court to change or rescind the contract. The people’s court shall determine if the contract should be changed or rescinded according to the principle of fairness and in consideration of the actual circumstances of this case. This is the basis for asserting that the provisions of a contract should be adjusted on the ground of change of circumstances. However, to also balance the protection of the non-breaching party of a contract, a people’s court should be prudent in applying the principle of change of circumstances rather than simply exempt a debtor’s obligation and cause the creditor to assume negative consequences. On the contrary, sufficient attention should be paid to the balance of interest and the fair and reasonable adjustment of the benefit relationship between the parties. Applicable individual cases should be heard by a high people’s court. If necessary, a case shall be referred to the Supreme People’s Court for review.
In addition, the following circular which was issued during the SARS outbreaks but has been abolished can be referenced since it is of great referential value: the Circular of the Supreme People’s Court on Proper Performance in Relevant Trial and Enforcement by the People’s Courts Pursuant to Law during the Period of Prevention and Treatment of Infectious Severe Acute Respiratory Syndrome. This circular specifically pointed out that cases involving contract disputes where the performance of the original contract would have a great impact on the rights and interests of one of the parties due to the SARS outbreaks could be handled under the principle of fairness according to the specific circumstances. If a contract could not be performed directly as a result of any administrative measure taken by the government and relevant authorities in order to prevent and address the SARS outbreaks or if any party to a contract could not perform the contract at all as a result of the SARS outbreaks, the resultant disputes should be properly handled pursuant to the provisions on force majeure under the Contract Law.
II. Analysis of whether the COVID-19 outbreaks constitute force majeure or change of circumstances, which will further justify the request not to perform or to adjust the obligations under a contract, according to the opinions reflected in the laws and regulations which have been currently promulgated and to the trial inclinations of civil courts during the SARS outbreaks:
According to relevant news reports, a spokesman for the Legal Working Committee of the Standing Committee of the National People’s Congress stated in an authoritative answer to legal questions related to the prevention and control of the pandemic that the current sudden public health incident of the COVID-19 pandemic in China is force majeure, which is unforeseeable, unavoidable and insurmountable for parties who cannot perform a contract. Under the relevant provisions of the Contract Law, if a contract cannot be performed due to force majeure, the liability shall be exempt in whole or in part according to the impact of the force majeure unless otherwise stipulated under the law.
Courts in other provinces and cities have also released similar circulars or normative documents to provide guidance for contract disputes triggered by the pandemic. For example, Civil Division No. 1 of the Zhejiang High Court released the Circular on the Implementation Opinions (for Trial Implementation) on Regulating Civil Legal Disputes Concerning the Novel Coronavirus Pneumonia Pandemic on February 10, 2020. Pursuant to the circular, if administrative measures taken by the government and relevant authorities to control the outbreaks result in the inability to perform a contract or if the outbreaks of an epidemic make it impossible for the parties to a contract to perform, and the parties in the resultant disputes assert that their legal liabilities should be reduced or exempt, a people’s court shall properly deal with the issues in accordance with Articles 117 and 118 of the Contract Law of the People’s Republic of China (i.e. provisions of force majeure). If a party to a contract requests a people’ court to amend or rescind the contract since continued performance of a contract is obviously unfair or cannot fulfill the purposes of the contract due to the outbreaks of a pandemic, the people’s court shall determine relevant circumstances under the principle of fairness and pursuant to Interpretation II of the Supreme People’s Court on Several Issues Concerning the Application of the Contract Law of the People’s Republic of China (i.e., the principle of change of circumstance). In addition, according to news report, the Shanghai High People’s Court released on February 16 an explanation about the requirement that “the inability to perform a contract due to the prevention and control of an epidemic can be regarded as force majeure,” holding that if a contract cannot be performed due to any measure to prevent and control the COVID-19 pandemic pursuant to law, this should be deemed force majeure for the failure to perform a contract. If a situation which does not constitute force majeure is obviously unfair to a party to a contract in the performance of the contract, this matter may be handled in reference to the principle of change of circumstances. The Shanghai Municipal Commission of Housing and Urban-Rural Development released the Circular on Further Enhancing Epidemic Control Measures for Construction Sites to specifically include construction delays as a result of an epidemic as the force majeure stipulated under the contract, and the construction entity should extend the construction period stipulated in the contract. In addition, the China Council for the Promotion of International Trade issued a circular on January 30 to specifically indicate that if a contract on international trade cannot be performed on time or cannot be performed due to the impact from the COVID-19 outbreaks, the enterprise may apply to the council for factual proof concerning force majeure.
The COVID-19, which was unforeseeable before December 2019, has been spread nationwide and unavoidable, is currently a pandemic that cannot be overcome by the current level of medicine, and is even likely to be regarded as a force majeure event. In practice, however, whether the pandemic can constitute force majeure or change of circumstances for the performance of a contract and further result in the right to rescind the contract or to claim an exemption of the default liability still has to be generally determined based on the actual circumstances, the purposes of the specific contract, status of performance and causal relationship. Please see below for your reference a summary of the opinions reflected in civil court judgments rendered during the SARS outbreaks:
1. If the scope of a pandemic is very small and does not constitute a threat to the daily lives of the general public and does not result in any inability to perform a contract or the failure to realize the purposes of the contract, then the right to rescind or to exempt default liabilities cannot be claimed on the ground of force majeure (reference case: second-instance case involving the lawsuit brought by Yuan Meng against Zhong Jia Travel Agency concerning the disputes about their travel contract, Supreme People’s Court Gazette, Second Issue, 2005).
2. As a result of the pandemic outbreaks and strict measures taken by local governments to control the free movements of a large population, construction workers cannot go to work and engage in construction. The court may extend the original performance period to include the period of pandemic control and exempt the default liability for construction delays (reference case: appeal of Wenmin Yin vs. Sanya Changyuan Property Development Co, Ltd. concerning presale contract disputes over commercial houses; (2005)-San-Ya-Min-One-Zhong-79).
3. Since the SARS pandemic was well-known to the public, if the purposes of a contract cannot be realized due to the business suspension of a specific industry as requested by the government, the court may support the exemption of the rents charged during the pandemic outbreaks under the principle of fairness (reference case: the second-instance civil decision, (2004) Hu-Two-Zhong-Min-Two-(Min)-Zhong-354, on the matter involving the disputes over the property rental contract between Shanghai Paipu Entertainment Co., and Shanghai New Huang Pu Real Estate Co. ,Ltd.
4. If the government does not compel the across-the-board business suspension, but business operation is severely impacted by pandemic outbreaks (including only partial business suspension), since this may not necessarily result in the inability to fulfill the purposes of a leasing contract, force majeure or change of circumstances may not directly apply. In addition, if the parties have reasonably shared the negative impact of the pandemic outbreaks through negotiation, the court may believe that since the principle of fairness has been met, the claim that the rents should be additionally reduced or exempt will not be supported (reference case: appeal of a case involving leasing contract disputes between Huizhou Guohang Auto-trading Ltd. et. al. and Guangxi Airline Ltd. ((2007) Guei-Min-Four-Zhong-1); and the retrial civil decision ((2013)-Liao-Shen-Two-Min-Kang-14) involving property leasing disputes between Dalian Pengcheng Holiday Damu Ltd. and Dalian Zhengdian Biaoye Ltd.).
III. Conclusions and advice:
The current difficulties with the pandemic control have resulted in different degrees of challenges for the performance of contracts previously executed by many enterprises. Enterprises and individuals responsible for relevant contracts are advised to first comprehensively sort out and review relevant circumstances based on the duration and extent of the impact on their own contracts, the potential impact on the fulfillment of a contract’s purposes or the inability to perform the contracts in order to negotiate a solution with the other party with respect to relevant performance issues or to take necessary legal measures as soon as possible.
If it is found as a result of the review that the purposes of the contract cannot be achieved or the contract cannot be performed at all, a written notice may be delivered to the other party to the contract to request an exemption of the liabilities or to rescind the contract, along with written proofs issued by government authorities or relevant institutions concerning prevention and control measures or force majeure. In case of a material change which has not yet reached the extent of force majeure but is still unforeseeable when the contract is executed, and which is not a commercial risk, if continued contract performance will be obviously unfair to one party or cannot achieve the purposes of the contract, it is recommended that negotiation with the other party to the contract should be actively conducted to modify unfair clauses to reasonably distribute the losses from the negative impact by the pandemic outbreaks.
If an international trade agreement cannot be performed due to this pandemic, application may be filed with the China Council for the Promotion of International Trade by submitting relevant materials to obtain a factual proof concerning force majeure to serve as an important supporting document for exempting the default liabilities of enterprises pursuant to law.
The sudden outbreaks of the COVID-19 pandemic and the subsequent control measures have not only derailed the daily lives of all people but also posed grave challenges to contracts which have been executed but not yet fully performed. However, the pandemic is temporary. It is believed that if all contractual parties can properly resolve potential legal disputes pursuant to law and based on practical judicial experience, the difficulties will be resolved with past prosperity restored.
 The authors are lawyers at Shanghai Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and does not represent the position of this law firm.