Force Majeure in Contract Law as a result of COVID-9
Posted on Feb 27,2020, at 05:16 pm.
Pamela Dabdoub Legal Specialist

At 3:30 a.m. on 31st January 2020, the World Health Organization (WHO) announced the “Novel Coronavirus Pneumonia (NCP)” outbreak is listed as a Public Health Emergency (PHEIC). China has promulgated a number of rules and regulations relevant to the enforcement of contracts under the circumstances of the outbreak of novel COVID-9.

 

In light of the current epidemic in China, many businesses and parties to commercial agreements have been faced with the big question of what do if performance pursuant to the agreement is disrupted. This is a reasonable concern and parties to commercial agreements should assess what their rights and liabilities are.

 

Choice of Law

 

In assessing one's rights or liabilities, the most important question is “What law governs the agreement.”

 

Most formal agreements will have a choice of law clause which will specify which country's law will govern the contract. For the purposes of force majeure, it is important to distinguish between civil law jurisdictions vs. common law jurisdictions. In civil law jurisdictions the rights and liabilities regarding such situations are generally codified in the country's civil code. Anderson & Anderson has drafted a detailed brief regarding the relevant laws pursuant to the People’s Republic of China. Click here to read the brief.

 

In common law jurisdictions, such as Hong Kong, the United States, etc., contract common law principles will prevail.

 

China, which has a civil law system, has a civil code so that force majeure provisions are found in various provisions of the law including the General Provisions of the Civil Law, Article 180 provides: “Where the non-performance of civil obligations is caused by an act of force majeure, no civil liability shall arise therefrom, except as otherwise provided for by any law. A force majeure occurrence means any objective circumstance that is unforeseeable, inevitable, and insurmountable.”

 

The Contract Law, Article 94 provides, in part, that “the parties to a contract may terminate the contract under any of the following circumstances: (1) it is rendered impossible to fulfil the purposes of the contract due to an event of force majeure.” The Contract Law, Article 117 provides: A party who is unable to perform a contract due to force majeure is exempt from liability in part or in whole in light of the impact of the event of force majeure, except as otherwise provided in law. Where an event of force majeure occurs after the party's delay in performance, the party is not exempted from such liability.”

 

The Contract Law, Article 118 provides as follows: “If a party is unable to perform a contract due to an event of force majeure, it shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period.” There are further relevant provisions in The Company Law, Article 90; General Provisions of the Civil Law, Article 194; Law of Civil Procedure, Article 73; and Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law, Article 460.

 

Common Law- Force Majeure

 

What is force majeure?

 

Most formal contracts will include a force majeure clause, whether or not it is called “force majeure.” The definition of force majeure is an unforeseeable circumstance, at the time the contract was made, which is beyond the reasonable control of the parties obligated to perform, that prevents someone from fulfilling a contract. The effect of a force majeure clause is to limit a party's rights and liabilities when such an act occurs. A contract with a force majeure clause will ordinarily have a list of such unforeseen circumstances that are beyond the reasonable control of the party obligated to perform.

 

Pursuant to common law contract principles, parties have the freedom to contract, meaning that they can mutually agree as to what circumstances would trigger enforcement of a force majeure clause. When parties have included a force majeure clause, or the equivalent thereof, in their agreement, the words of the clause will prevail. Some common examples of force majeure provisions are acts of God, acts of the government or regulatory authorities, wars and strikes, embargos, etc. So, the big question is, is COVID-9 an act of God? Are circumstances surrounding COVID-9 considered acts of government?

 

Acts of God are often defined as events that occur due to natural causes which cannot be avoided through the use of caution and preventative measures and are thus beyond the reasonable control of the parties to the contract. Examples of acts of God include natural disasters however some contracts may even specify epidemics or pandemics as acts of God. In such a case, if the person having the responsibility to perform cannot because they have contracted the COVID-9 virus, then their nonperformance may be excused or delayed pursuant to the protection of the force majeure clause.

 

Another important fact to consider is whether the failure of performance was due to government action. We have seen a major halt in business operations due to mandatory quarantines and limitations on transportation via government instruction. In such situations, performance may be excused or delayed pursuant to the protection of the force majeure clause.

 

Even when force majeure is triggered, the persons unable to perform must still meet the notice and evidence requirements which will be expressed in most formal contracts.

 

Effect of Force Majeure Pursuant to PRC Law

 

China, which has a civil law system, has a civil code so that force majeure provisions are found in various provisions of the law including the General Provisions of the Civil Law, Article 180 provides: “Where the non-performance of civil obligations is caused by an act of force majeure, no civil liability shall arise therefrom, except as otherwise provided for by any law. A force majeure occurrence means any objective circumstance that is unforeseeable, inevitable, and insurmountable.”

 

The Contract Law, Article 94 provides, in part, that “the parties to a contract may terminate the contract under any of the following circumstances: (1) it is rendered impossible to fulfil the purposes of the contract due to an event of force majeure.” The Contract Law, Article 117 provides: A party who is unable to perform a contract due to force majeure is exempt from liability in part or in whole in light of the impact of the event of force majeure, except as otherwise provided in law. Where an event of force majeure occurs after the party's delay in performance, the party is not exempted from such liability.”

 

The Contract Law, Article 118 provides as follows: “If a party is unable to perform a contract due to an event of force majeure, it shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period.” There are further relevant provisions in The Company Law, Article 90; General Provisions of the Civil Law, Article 194; Law of Civil Procedure, Article 73; and Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law, Article 460.

 

No Force Majeure Clause

 

Another important common issue parties to commercial agreements are facing is understanding their rights and liabilities in situations where the contract does not provide any force majeure provision. In common law jurisdictions, there are traditional common law principles that can apply. These principles include frustration of purpose, and impossibility or impracticability of performance.

 

Frustration of Purpose

 

Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract and the parties were aware of that purpose. Generally, increase in expenses, loss of profits or alternative modes of performance will not be deemed a frustration of purpose. What may be considered a frustration of purpose would be destruction of the product of the contract, nonoccurrence of a contractually specified event, personal incapacity to perform a service contract, government intervention, etc.

 

Impossibility or Impracticability

 

The difference between an impossible and impractical performance is that impractical performance is still physically possible, however one, or both, of the parties would be extremely burdened by having to perform their obligations. To claim impractical performance relating to COVID-9, which would in effect excuse performance, one must prove that performance is extremely expensive or difficult.

 

Conclusion

To have a clear understanding of what your rights and liabilities are pursuant to your contract the full circumstance of your situation must be assessed. A few of those factors are addressed in this article, such as choice of law, existence of a force majeure clause, and traditional contract principles. If you would like us to assess the rights and liabilities of your personal situation, please send us an email at anderson@anallp.com to arrange a complimentary consultation with one of our experts.

 

(Photo credit: 123rf.com)

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