Chinese law on force majeure in the context of COVID-19: Information for Canadian companies

Some Chinese and foreign firms operating in China might find it difficult to meet contractual obligations due to the outbreak of COVID-19. These firms may be exploring their rights under force majeure (FM) provisions. Better inform your business decisions by understanding issues and key principles under Chinese law.

Get legal advice

Businesses should always seek professional legal advice on contractual issues in the People’s Republic of China. The Canadian Trade Commissioner Service can provide information on qualified legal experts.

What Chinese law says about force majeure

FM is a statutory basis for contractual liability relief and exemption. FM clauses are common in contracts among businesses, and specific FM events are sometimes explicitly listed, such as earthquakes, epidemics, etc. If a listed event occurs, there would be no doubt about the FM clause’s applicability. In cases where a contract only has a general FM clause, the applicable law of the contract determines whether an epidemic constitutes a FM event. China’s legislature confirmed in February 2020 that COVID-19 was unforeseeable, unavoidable and insurmountable, and therefore qualifies as FM under Chinese contract law. In other words, for contracts governed by Chinese law, FM provisions could be invoked, even if epidemic is not specifically listed.

Where business parties do not have a written contract, Chinese contract law recognizes the validity of verbal contracts and allows parties to negotiate the applicable governing law. In such a situation, a Canadian business first needs to agree on the applicable law with its Chinese partner, then refer to the FM provisions in the applicable law. If the parties cannot agree, the law of the country which is most closely associated with the contract will apply. If the contract is concluded and executed in China, a Chinese court will most likely review the case based on Chinese law.

However, the mere existence of a FM event does not automatically relieve the party invoking FM from its contractual obligations. The party invoking a FM provision in the contract must meet all the associated conditions, such as: showing causation between the FM event and the inability to perform the contract; duty to mitigate; and timely notification. It is critical to prove that the epidemic had a decisive impact on the failure of contract performance, and that the goal of the contract could not have been achieved by delaying execution or through alternative means.

Court guidance on the application of force majeure in COVID-19 cases

On 16 April 2020, the Supreme People’s Court of China (SPC) issued a “Guiding Opinions” document addressing, among other things, the application of FM in epidemic-related civil cases as well as principles to deal with contractual disputes. The SPC confirmed that FM can be applied in COVID-19 cases, but the associated conditions have to be reviewed strictly. If the goal of a contract cannot be achieved, a court may support a claim of contract cancellation, but if delayed or alternated performance could achieve the goal of the contract, the court will encourage parties to negotiate adjustments in good faith. The basic principles are fairness and balance of interests. In local guidance issued in February 2020 by Beijing and Shanghai courts, the same principles and requirements were applied.

Advice to Canadian companies

Based on the requirements of contract law and recent court guidance, the following recommendations may assist Canadian companies with questions regarding FM:

• Companies must review FM clauses and governing law in their contracts to find out whether or to what extent FM provisions apply.
• If there is no written contract, companies need to first agree with their partners on the jurisdiction and applicable law in considering the application of FM.
• Companies are recommended to thoroughly examine settlement options and alternative forms of contract performance before resorting to a legal FM claim.
• Companies should be cautious in deciding to apply FM provisions. Before invoking FM, a business should review whether notification and mitigation obligations have been fulfilled.
• With the rapid spread of COVID-19 worldwide, it is important to evaluate potential supply chain risks and develop a plan in response to possible FM claims. Companies should preserve as much evidence as possible of their business, whether as a supplier or a buyer.
• FM relief is usually applied to obligations that cannot be performed, such as an obligation to deliver something or provide a service. A payment obligation usually would not fall into this category.
• For further information, companies may wish to consult the Shanghai High Court guidance (Chinese only). While this guidance only applies to the Shanghai municipality, courts in other regions may follow a similar approach. This guidance reviews the application of FM in more detail to various types of contract, including:
  • sales
  • commercial and residential rentals
  • construction
  • tourism
  • entertainment and sports performance
  • transportation.