Whether the Novel Coronavirus Outbreaks Can Serve as the Defense for Nonperformance of Contract (Taiwan)

Teresa Huang and Tiffany Hsiao[1]

The novel coronavirus (“COVID-19”) outbreaks in Wuhan of China in December 2019 with ever increasing confirmed infection cases have created fears and anxieties among people all over the world.  Governments of various countries have successively taken corresponding epidemic control measures.

In view of the uncertainties triggered by the COVID-19 to the world economy, all sectors facing the onslaught of the epidemic will surely face a certain degree of inconvenience in terms of business operation.  This article seeks to discuss issues concerning the room and legal basis for adjusting a contract which was executed before the epidemic outbreaks, i.e., whether the epidemic outbreaks constitute force majeure and change of circumstances under the Civil Code, which cannot be attributed to any party, and whether it is possible to further claim the exemption of performance or to request adjustments to the contract.

Although there has been no corresponding practical case since the COVID-19 outbreaks, still competent authorities have gradually promulgated corresponding measures.  For example, the Financial Supervisory Commission (hereinafter, the “FSC”) has indicated that if a listed or OTC-traded company whose 2019 financial reports cannot be submitted during the required period due to the delay of their certified public accountants in conducting audits in mainland China as a result of the epidemic outbreaks, such company may apply to the FSC for approval by attaching the reasons for the failure to publicly announce and file their financial reports on time, the supporting materials and the intended extension in accordance with Article 4, Paragraph 1, Subparagraph 1 (which stipulates earthquakes, floods or other  force majeure factors) and Paragraph 2 of the Regulations Governing the Applicable Scope of Special Circumstances for the Public Announcement and Filing of Financial Reports and Operational Status Report of the Public Company.  However, competent authorities or courts have not yet issued specific opinions on issues such as whether the epidemic outbreaks can constitute force majeure, reasons not attributable to any party, and change of circumstances under the Civil Code.  This article seeks to analyze the following legal basis which may be potentially applicable to the epidemic outbreaks based on relevant practical cases during the previous SARS outbreaks.

I. Change of circumstances, force majeure and reasons not attributable to any party relied on as the legal basis for amending a contract

(1) Change of circumstances:

Under Article 227-2, Paragraph 1 of the Civil Code, “if there is change of circumstances which is not predictable then after the establishment of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation.”  This is the so-called “principle of change of circumstances.”  This principle applies under the following three criteria according to current legal practice (the 94-Chong-Shang-348 Decision rendered by the Taiwan High Court):

1. The circumstances have changed after the legal relationship is established;

2. The occurrence of such circumstances is not foreseeable by the parties;

3. Performance or implementation to fulfill the previously determined legal effect would be obviously unfair. In addition, regardless of whether the circumstances have changed, this can be determined based on objective external facts and has no bearing on whether the reasons are attributable to any party.

(2) Force majeure/reasons not attributable to any party

In addition, the Civil Code of Taiwan also contains exceptional provisions on contract performance upon occurrence of force majeure or reasons not attributable to any party after a contract is established.  For example, Article 225 of the Civil Code provides that “if performance is not possible for reasons not attributable to the debtor, the debtor may be released from the obligation to perform,” and Article 230 of the same law provides that “the debtor shall not be liable for delay in case of failure to perform for reasons not attributable to the debtor.”

The so-called “force majeure,” according to practical judicial views, refers to reasons which cannot be overcome by human efforts.  To wit, they are not avoidable even with anyone’s highest level of caution.  This means that such extreme events which have occurred due to external forces including natural disasters like thunders, floods and typhoons or wars cannot be resisted by human efforts (the 96-Tai-Shang-2763 Decision of the Supreme Court and the 94-Shang-129 Decision of the Taiwan High Court).  The practices reflected in court decisions mostly affirm that force majeure should constitute circumstances where the parties to a contract should not be held accountable.  In practice, a contract often includes such two reasons in its disclaimer provisions.

II. Analysis of whether the current COVID-19 epidemic can be relied on to assert change of circumstances, force majeure or reasons not attributable to any party in order to request an exemption of performance or adjustment to the provisions of the contract based on the current laws and the practical inclinations reflected in court decisions during the SARS outbreaks in 2003:

(1) Change of circumstances:

According to the above determination criteria for change of circumstances, since the COVID-19  broke out and spread last December, change of circumstances should apply after the establishment of a legal relationship if the contract was executed before that.  In addition, the outbreaks should be deemed hardly foreseeable by the public.  Finally, the provisions of the contract have to be reviewed to determine if it would be obviously unfair to request the performance or implementation of the contract.  For example, surgical facial masks have been subject to government control and expropriation by the government in Taiwan after the epidemic outbreaks.  If a surgical mask provider who executed any sales contract before that cannot ship the products, it should be able to claim change of circumstances.

(2) Force majeure/reasons not attributable to any party

The outbreak of an epidemic disease should be deemed insurmountable to people.  Even though the Taiwan government has rapidly taken strict measures to control the epidemic, still its actual transmission and spreading are actually unavoidable due to frequent cross-strait exchanges.  This should be sufficient to prove that epidemic outbreaks are indeed force majeure.  If a contract cannot be performed as previously agreed due to the impact of the epidemic outbreaks after it was executed, any party to the contract should be allowed to claim reasons not attributable to such party.

(3) The following actual cases during the SARS outbreaks are provided for reference:

1. After the parties entered into a contract, the ear thermometer market was in a chaos due to the spreading of the SARS epidemic in Taiwan, not to mention that the Ministry of Economic Affairs also announced the suspension of ear thermometer export, and that the Department of Health expropriated ear thermometers from manufacturers. As a result, the Appellant failed to deliver the goods on time.  It was not expected after the contract was established that Taiwan would be included as the SARS infected areas on May 21.  In addition, ear thermometers had been in short supply in the market and been difficult to come by.  Therefore, it would certainly be unfair to request that the Appellant should deliver ear thermometers to fulfill the original purpose of the sales contract at issue.  Therefore, the principle of change of circumstances should apply to this sales contract (93-Guo-Mao-Shang-6 Decision of the Taiwan High Court).

2. The parties entered into a group tour contract with a check delivered to the Plaintiff as a deposit for the group members by the Defendant. However, the check was rejected because the Defendant had refused to pay the deposit check due to his failure to perform the contract as a result of the SARS outbreaks which affected the original itinerary.  The Court held that since the travel at issue had been prevented by the SARS outbreaks, it should be deemed a force majeure event, and that the contract could not be performed for reasons not attributable to any party to the contract.  Therefore, the Defendant’s failure to pay the deposit was not erroneous (the 92-Bei-Jian-16486 Decision of the Taipei Summary Court of the Taipei District Court of Taiwan).

3. Another example relates to the delay of the 2003 National Intercollegiate Athletic Games as notified by the Ministry of Education due to the SARS outbreak in Taiwan. The 2003 athletic games were not conducted as scheduled due to the order of the competent authority to prevent the escalation of the SARS epidemic.  It is difficult to conclude that there is any reason attributable to the parties to the contract (the 96-Chong-Shang-37 Decision of the Taichung Branch of the Taiwan High Court).

4. However, if the epidemic does not shake the foundation of a contract, this cannot constitute change of circumstances. For example, although the SARS epidemic was spreading, still the area in which the contract was to be performed was not an infected area, while the duration of the epidemic was also short and the long-term business income had not been ideal.  This shows that the income factor was not only contributed by the SARS epidemic  In view of objective facts in society and the stability of law and order, the impact of the SARS outbreaks did not shake the foundation of the contract.  If the contract is requested to be terminated on such basis, the principle of fairness would be violated.  In addition, the request to terminate the contract on the ground of change of circumstances is also groundless (the 94-Shang-86 Decision of the Taiwan High Court).

III. Conclusions and suggestions

According to the above cases, although corresponding jurisprudence basis is available for a claim as such to adjust the performance of a contract during an epidemic outbreak, still relevant evidence should be produced to meet legal requirements.

Impact of such epidemic outbreaks on industries is somewhat unavoidable.  Therefore, it is recommended that the provisions of a contract should be reconfirmed as soon as possible to determine if special corresponding provisions are available and if such provisions are reasonable and fair under the current circumstances.  If it is determined that contract performance is indeed impacted, it is recommended to try to negotiate with the other party to modify the contract first and to weather the hardship with the other party.  If it is necessary to adjust or rescind the contract pursuant to law, it is recommended that legal professionals should be consulted to analyze the extent of satisfaction with the above corresponding criteria as soon as possible and to prepare comprehensive relevant information and fulfill the burden of proof as much as possible.  In addition, under the special circumstance where Taiwan faced the SARS epidemic before, there have been precedents in practice for recognizing that an epidemic outbreak can constitute change of circumstances, force majeure and reasons not attributable to any party.  Therefore, as long as the satisfaction with corresponding criteria can be sufficiently explained, it is possible that corresponding claims under such epidemic outbreaks are more acceptable in practice.

Finally, it is hoped that with global efforts, the epidemic outbreaks can blow over quickly, and health and economics in the world can be restored as soon as possible.

[1] The authors are lawyers at Lee, Tsai & Partners.  However, the contents of this article merely reflect personal opinions and does not represent the position of this law firm.