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Applicability of Force Majeure in Contract Disputes Concerning COVID-19 Epidemic

On April 20, 2020, the Supreme People’s Court (“SPC”) of the People’s Republic of China (“China”) published its Guiding Opinion on Several Issues Concerning Proper Trial of Civil Cases Involving COVID-19 Epidemic (in Chinese, 关于依法妥善审理涉新冠肺炎疫情民事案件若干问题的指导意见; the “Opinion”). The Opinion clarifies and details the rules of applicability of force majeure in contract disputes concerning COVID-19 epidemic in China, among other things.

According to Article 2 of the Opinion, strict care shall be taken in applying force majeure in civil cases involving COVID-19 epidemic. For civil cases meeting the elements of force majeure, Article 180 of the General Principles of the Civil Code of China and Article 117 and Article 118 of the Contract Law of China shall be applied unless other laws and regulations provide otherwise.

According to Article 3 of the Opinion, for contract disputes arising directly from the epidemic or related prevention/control measures, unless otherwise agreed by the parties, the impact of the epidemic shall be considered in combination with the regional difference, the industrial difference and the case itself in a comprehensive manner, and the causation between the pandemic or related prevention/control measures and the party’s failure to perform and the extent of such causation shall be differentiated case by case based on the following principles:

(1)Where a contract is unable to be performed for reasons directly contributed to the epidemic or related prevention/control measures, the liabilities shall be exempted in whole or in part in light of the epidemic or the extent of the epidemic prevention/control measures in accordance with the force majeure provisions. Where a contract is unable to be performed or the losses are aggravated for reasons attributable to a party, such party shall bear corresponding liabilities for its contribution. Where a party claims that it has fulfilled its obligation of timely notification stating that it is unable to perform the contract due to the epidemic or related prevention/control measures, it shall bear the corresponding burden of proof.

(2)Where the epidemic or related prevention/control measures only make performance more difficult rather than impossible, then the parties shall seek to renegotiate contract terms and the people's court shall effectively strengthen the mediation work and actively guide the parties to continue to perform. If a party requests the rescission of the contract only on the grounds of difficulty in performing the contract, the people's court shall not support it. If continued performance is unfair to a party, such party can seek judicial support for amendment to the contract term, performance method and price, etc.. After the contract terms are amended in accordance with the law, if the parties still claim exemption in whole or in part from liabilities, the people's court shall not support it. If the pandemic or related prevention/control measures frustrate the purpose of the contract, the court shall support either party’s request to rescind the contract.

(3)If a party has received any subsidy, tax relief, or other financial support associated with the pandemic or related prevention/control measures, the court may also take them into account in considering whether continued contract performance is practicable.

Reference

The Contract Law of the People’s Republic of China

Article 117: Where a contract is unable to be performed due to force majeure, then, depending on the extent of the force majeure, the performing party shall be exempted from liability in whole or in part, except where laws provide otherwise. Where force majeure occurs after a party has already been late in performing the obligation, the said party will not be exempted from liability. The force majeure herein refers to unforeseeable, unavoidable, and insurmountable objective conditions.

(In Chinese)“第一百一十七条因不可抗力不能履行合同的,根据不可抗力的影响,部分或者全部免除责任,但法律另有规定的除外。当事人迟延履行后发生不可抗力的,不能免除责任。 本法所称不可抗力,是指不能预见、不能避免并不能克服的客观情况。

Article 118: Where one of the parties is unable to perform the contract due to force majeure, the said party shall immediately notify the other party for the purpose of mitigating the potential losses suffered by the other party, and the said party shall also provide evidence of the force majeure within a reasonable time limit.

(In Chinese) “第一百一十八条当事人一方因不可抗力不能履行合同的,应当及时通知对方,以减轻可能给对方造成的损失,并应当在合理期限内提供证明。