As the new coronavirus (Covid-19) spreads, businesses around the world are feeling its impact on their operations even if they are not based in China. It is particularly so for businesses with supply chains dependent on China. With more stringent requirements on quarantines likely to be imposed, the situation may stay with businesses for longer than expected.

At the time of such an unprecedented event, goodwill and commercial cooperation are essential for businesses trading with China to overcome the temporary difficulties. There will, however, inevitably be situations where parties need to review their contracts and understand where they are from a legal perspective before making sound commercial decisions to deal with the coronavirus related events and seek remedies in contract or at law.

Which law governs your contract?

When such differences arise, the first thing to do is find out which law governs the contract. Such information is usually contained in the governing law clause of the contract agreed by parties when making the contract. The governing law may vary for different types of contracts. For example, most shipping and commodities trading contracts are usually governed by English law, whereas other commercial contracts may be subject to Chinese law.

Does the current Coronavirus situation constitute a force majeure event?

There are currently a lot of discussions about whether the Covid-19 should be regarded as a force majeure event and one which could enable the party who is no longer performing the contract to be relieved or to be suspended from performing its obligations. The answer to this question is somewhat complicated and the approaches to the force majeure event are different under English law and Chinese law respectively.

In English law, force majeure is a contractual term that needs to be expressly set out in the contract. It is not a rule of law or a term that can be implied into the contract. There is also no standard clause for force majeure. The provisions of such clauses may vary from contract to contract. Arguably, the Covid-19 would fall within the force majeure clause if the clause contains words such as Acts of God, decease, or epidemic. As the situation develops, the more the measures to contain the virus prove to be unsuccessful, the stronger the case to argue that it constitutes a force majeure event.

By contrast, Chinese contract law recognises force majeure operating as a rule of law, which can be applied even if the contract does not contain such express terms. Under Chinese law, an event that is “unforeseeable and unavoidable, and not the result of the defendant’s actions,” can be regarded as a force majeure event. Chinese authorities have already issued force majeure certificates to assist Chinese companies in proving a force majeure event, which gives authenticity to a declaration of force majeure under their contracts.

Under both English law and Chinese law, the party relying on a force majeure event must give notice to their counterparts and need to show that it has used its reasonable endeavours to mitigate their loss. Once a valid force majeure event is identified, parties may suspend their obligations during the period of the applicable event, terminate the contract, or relieve the non-performing party of its liability. 

Any other contractual terms in your contract?

Many businesses will find themselves in a suite of intertwining contracts under which their roles and positions are dependent but different in each contract. In such situations, it is useful to take a holistic view to consider the allocation of risks and the knock-on effect respectively and collectively under the intertwining contracts insofar as the delay and non-performance caused by the coronavirus-related events are concerned.

A well-drafted contract will usually have terms specifying the allocation of risks in the event of delay or non-performance by an innocent party. It is, therefore, worthwhile to check these terms in detail as well. Moreover, if the loss you suffered is not solely caused by events related to the coronavirus, you may need to refer to other clauses in the contract to determine the bearer of the loss and whether risk and loss can be passed on down the contract chain.

Seek legal advice 

No matter whether you are the party wishing to rely upon the break-out of coronavirus as a force majeure event or you are the party receiving such notice from your business counterpart, it is advisable that you take legal advice and assess your rights and remedies under each of the intertwining contracts you are involved in to make informed decisions.