The novel coronavirus COVID-19 has affected major cities and numerous towns in the PRC and around the world. On 30 January 2020, the Director General of the World Health Organization declared the coronavirus outbreak a “public health emergency of international concern”. As the situation continues to evolve rapidly, the coronavirus outbreak presents not only a public health crisis but also disruptions to businesses and their supply chains. We see clients faced with challenging questions concerning their exposure to liability under contracts of different governing laws entered with Chinese and international parties. In particular, there are concerns that contractual obligations can no longer be fulfilled as a result of the outbreak and consequential epidemic control measures implemented by governments.

This article provides practical insights on the scope and operation of (i) force majeure under PRC law, English law and Hong Kong SAR law; and (ii) frustration under English law and Hong Kong SAR law.

A. Force Majeure under PRC law

As PRC Law is codified, it is important to understand the relevant statutory provisions and the Supreme People’s Court’s Interpretations of those statutory provisions.

Under PRC law, force majeure is defined in and regulated through the following statutory provisions: Article 180 of the PRC General Provisions of Civil Law (中华人民共和国民法总则), Articles 107 and 153 of the PRC General Principles of Civil Law (中华人民共和国民法通则) and Articles 94, 96 and 117-118 of the PRC Contract Law (中华人民共和国合同法).

Force majeure is defined as any objective circumstance that is unforeseeable, unavoidable and insurmountable.[2] As a general principle of the PRC Civil Law, by the operation of statutory provisions, a party is in principle exempted from liability in whole or in part if it is unable to perform a contract due to force majeure.

Under the PRC Contract Law, in particular, the following statutory provisions regulate the operation of force majeure in the context of contracts governed by PRC law.

  • Article 94(1) provides that a party may terminate a contract if the purpose of the contract is rendered impossible to achieve due to force majeure.[3]
  • Article 96 further provides that a party who wants to terminate the contract in accordance with Article 94 shall notify the other party. The contract is terminated when the notice reaches the other party. If the other party does not agree to the termination, it may seek confirmation of the validity of the contract from the court or arbitral tribunal.[4]
  • Article 117 provides that if a party delays its performance of the contract and the force majeure event happens after the delayed performance, that party cannot be exempted from liability.[5]
  • Article 118 further provides that a party who is unable to perform a contract due to force majeure shall notify the other party promptly to reduce potential losses caused to the other party; and shall provide proof/certificate of force majeure within reasonable time.[6]

Proof/Certificate[7] of Force Majeure

On 30 January 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it will offer force majeure certificates to Chinese companies struggling to cope with the impact of the coronavirus outbreak. On 2 February 2020, CCPIT issued the first certificate to a Zhejiang-based auto parts manufacturer within one day of its application.

Although a certificate may provide evidence of the existence of a force majeure event (particularly for CIETAC arbitral tribunals, given that CCPIT is the government agency that set up CIETAC), a party will still need to show that there has been an objective circumstance that was unforeseeable, unavoidable and insurmountable such that it rendered performance impossible. The sufficiency of a certificate from CCPIT confirming force majeure has not yet been tested before the courts in China. CCPIT itself has stated that it is not taking the position that a certificate is sufficient to exempt liability.

In practice, a PRC court typically will apply relevant statutory provisions, follow relevant Supreme People’s Court’s Interpretations of those statutory provisions, and take into account all the surrounding circumstances of the case, in addition to the force majeure certificate.

To obtain a force majeure certificate, parties should make an online application to CCPIT’s certification platform[8] and submit the following supporting documents:

  • Export sales contracts, cargo booking agreements, freight forwarding agreements, customs declarations, or any other relevant contracts;
  • Certificates and/or announcements issued by municipal governments or institutions;
  • Notices and/or certificates on delay or cancellation of sea, land or air freight.

CCPIT considers the most important documents to provide are the relevant contracts. In the absence of a written contract, CCPIT may accept electronic order forms or emails that are legally enforceable and contain detailed information of the relevant orders.

It is also important to remember that Article 26 of the Supreme People’s Court’s Interpretation No.(II) of the PRC Contract Law provides that where a relevant party petitions the People’s Court, the People’s Court shall decide whether to modify or terminate a contract under the principle of fairness and in light of all the circumstances of the case where (a) there is an unforeseeable major change of circumstance after the formation of the contract that is not a business risk and is not caused by a force majeure event and (b) if the continued performance of the contract is obviously unfair to the other party or cannot realise the purpose of the contract.[9]

B. Force Majeure Clauses under English law and Hong Kong SAR law

Under both English law and Hong Kong SAR law, force majeure is regarded as a contractual creation and has no agreed definition. This is contrasted with PRC law where force majeure is a defined concept codified in statute. In the absence of a force majeure clause, parties to English and Hong Kong SAR law contracts cannot avail themselves of the force majeure doctrine (though the narrower doctrine of frustration, discussed below, may still apply).

Whether a party can rely on a force majeure clause in light of the coronavirus outbreak will depend on the specific wording of the relevant force majeure clause. The drafting of force majeure clauses varies significantly from contract to contract.

Typically, force majeure clauses:

  • provide for a party to be excused from performance of its contractual obligations where there are circumstances beyond the reasonable control of a party;
  • specify a non-exhaustive list of force majeure events. The coronavirus outbreak and any related epidemic control measures may be captured by wording such as ‘disease’, ‘epidemics’, ‘Acts of God’, ‘Acts of Government’ or a general catch-all like ‘other circumstances beyond the parties’ control’;
  • may exclude events that could have been reasonably foreseen or avoided at the time of entering into the contract;
  • may require a defaulting party to show it has used all reasonable efforts to mitigate the effects of the force majeure;
  • may require a party to give notice to the other party in a prescribed form and within a particular time limit when a force majeure event has occurred;
  • usually provide for when a party is released from their contractual obligations as a result of the force majeure event and whether a non-defaulting party has any termination rights.

A party must show that the coronavirus outbreak or any related epidemic control measures fall within the scope of the relevant force majeure clause. Generally, a party must also show:[10]

  • causation – the party was prevented, hindered or delayed from performing the contract due to the force majeure event;
  • its inability to perform the contract was beyond their control;
  • there were no reasonable steps the party could have taken to avoid the effects of the force majeure event; and
  • the party complied with any notice or other requirements imposed by the clause.

The courts typically interpret force majeure clauses strictly with the result that it can be difficult to claim their benefit. For example, where a party’s inability to perform is caused by multiple factors, only some of which are force majeure events, the party may not be able to rely on force majeure to excuse non-performance.[11] Further, where a force majeure event makes performance by a party more difficult or expensive, but does not prevent performance, this may not be enough to allow the party to rely on force majeure.[12] In contrast, if the force majeure clause requires the event to merely “hinder” (as opposed to “prevent”) performance, a party may be able to claim relief in circumstances where it is unable to perform without either dislocating its business or breaking other contracts in order to fulfil one.[13]

C. Frustration under English law and Hong Kong SAR law

Under both English law and Hong Kong SAR law, frustration is a principle of common law and rights arising out of frustration do not need to be provided for in contract. Frustration arises where an event occurs, after contract formation, which is beyond the parties’ control rendering it impossible to perform the contract or where the relevant obligation is transformed into a radically different obligation from what was contemplated at the time the contract was entered.[14]

A frustrating event generally must be unforeseen, unexpected or uncontemplated at the time the parties entered the contract. A two-stage test would be applied to assess whether the coronavirus outbreak constitutes a frustrating event:

  • Stage 1 – Was the particular event/situation provided for in the contract? If yes, frustration is not possible. If not, proceed to the next stage.
  • Stage 2 – Was it an event of such nature that continued performance of the contract was rendered impossible or such that performance was rendered so radically different from what was originally contemplated that it would be unjust to hold that the parties remain bound by the contract? If yes, the contract may be frustrated.

While the coronavirus outbreak and related epidemic control measures may be unforeseen at the time of entering into the contract, the key obstacle will be showing that there is ‘radical difference’ in the parties’ obligations. Bearing in mind that English and Hong Kong SAR courts apply the principle of frustration within very narrow limits, it is not sufficient that a contract becomes unexpectedly difficult or more expensive to perform on one or both sides. The courts will not relieve a party from a turn of events that makes performance more onerous, or leads to a delay that is merely transient.

However, the courts may take into account the likely period of interruption (e.g. extension of holidays, delays in resumption of work, quarantine periods, isolation orders) as benchmarked against the outstanding period for performance under the contract with a view to determining whether such delay causes a radical change in the nature of the contract. In this regard, the courts will consider delay from a commercial perspective, appreciating that businesses should “be free from commitments which are struck with sterility for an uncertain future period”, and will offer relief where there is “a reasonable probability from the nature of the interruption that it will be of indefinite duration”.[15]

Under both English law and Hong Kong SAR law, frustration will cause a contract to be brought to an end automatically, without either party’s act or election. Parties are released from their unperformed future obligations.[16] This may not be desirable for parties who want to maintain their commercial relationships. In such a situation, parties can consider whether or not they can avail themselves of the doctrine of temporary impossibility – a concept similar to frustration and also narrowly applied – which affords parties the right to suspend performance for the period during which it is impossible to perform a contract.

Compulsory Quarantine

The Hong Kong SAR government has announced a 14-day mandatory quarantine period for all persons entering Hong Kong SAR from the China Mainland starting from 8 February 2020.[17] Persons under quarantine are directed to stay at home, hotels, other dwelling places or temporary accommodation provided by the government. Any person concerned who leaves such places without permission may commit a criminal offence.

Whether this measure constitutes force majeure or frustration depends on the wording of the force majeure clause and the specific contractual obligations it affects. If there is no force majeure clause, then one would also have to consider whether the measure makes it impossible to perform the contractual obligation or transforms the contractual obligation into a radically different one. Naturally, in situations where (i) physical presence of that particular person is required to carry out the obligations and (ii) the obligations require performance within a very short timeline, the 14-day quarantine may directly affect their ability to perform the contract. This requires careful factual analysis and the impact of the quarantine will vary from case to case.

D. Practical Tips

As the coronavirus outbreak continues to create ongoing uncertainty, we suggest the below practical steps for parties to be prepared for different eventualities:

  • Check the governing law of your contract. If your contract is governed by PRC law, take advice on whether a force majeure certificate should be sought and whether you can rely on the statutory regime of force majeure under PRC law in addition to or as an alternative to any contractual terms on force majeure;
  • If your contract is governed by either English or Hong Kong SAR law, review any force majeure clause contained in the contract and take advice on their scope and effect. Take advice on whether you can rely on frustration as a matter of the operation of English/Hong Kong SAR law;
  • Review your contract as a whole and evaluate how force majeure clauses, if any, affect the overall fabric of the contract. Consider in particular whether there are provisions on suspension of performance and whether any termination rights or obligations to renegotiate are triggered as a result of force majeure or hardship;
  • Monitor and keep copies of relevant government and regulatory announcements, notices and policies;
  • Notify other parties promptly in the manner and form prescribed by the contract;
  • Keep detailed records where there is non-performance of a contract, including the timing of non-performance, the parties involved, the contractual obligations affected, proof of the force majeure or frustrating event, mitigation efforts and quantifiable losses;
  • Mitigate the effects of the force majeure or frustrating event and potential losses sustained by the other party;
  • Actively negotiate with the other party for possible waivers, time extensions and mutually beneficial alternatives to fulfil contractual obligations;
  • If possible, amend your existing contracts and when entering into new contracts, ensure force majeure clauses are drafted with sufficient certainty and clarity; consider inserting ‘epidemics’ and/or ‘government action’ equivalent wording; and
  • Last but not least, always take careful advice on choosing the most suitable governing law and dispute resolution clauses for your contract at an early stage when you are negotiating or drafting the contract.