As business is progressively re-emerging questions are rising with regard to who will have to bear the consequences of the COVID-19 shut-down. This will give rise to complex discussions where multiple parties are involved in a same project or when sophisticated supply chains are involved. If you are hoping that the magic formula called “Force Majeure” will certainly save you, you may want to read this!
What is Force Majeure?
Both the General Principles of Civil Law and the Contract Law define force majeure as being unforeseeable, unavoidable, and insurmountable objective conditions. The General Principles of Civil Law further provide that where force majeure is found, parties may terminate a contract or may be partially or wholly released from civil liability if they fail to perform a contract or damage a third party.
Obviously the COVID-19 outbreak in China and the subsequent government containment actions are uniquely likely to be considered a force majeure event under the most common force majeure clauses but, still, there may be exceptions or nuances and there are definitely limitations and conditions.
Great, an easy way out of my contract, right?
Not really! It’s crucial to understand that force majeure does not automatically exempt parties from liability. It is a contractual issue, not as statutory one. Hence one should not simply anticipate that the current circumstances will necessarily fall under the scope of the applicable force majeure rules.
If you believe force majeure may apply to your situation we suggest you would first ask yourself three simple questions：
- How is Force Majeure defined under your specific contractual relation? Force majeure clauses will vary widely from one jurisdiction to another and from one contract to another. Review the force majeure or equivalent clauses in your contract or if there is no contract or if it does not provide for any specific clause dealing with unforeseeable situations, you should consider the provisions of the applicable contract law. In case of transnational contracts, the applicable law shall be determined according to the international private law rules of your jurisdiction.
- Is it effectively impossible for me to perform my contractual obligations and to which extend? It is important to understand that, as such, inconvenience is not enough, cost increases (even substantial) are not enough, reasonable delay on your supplier-side is not enough. Performance must be impossible in part or in full.
- Can I undertake reasonable measures to mitigate the losses incurred by my contractual partner? Keep in mind that the duty of care and the duty of loyalty apply to all contracts and impose that parties would do everything (reasonably) possible to try and limit the damaging consequences of the force majeure situation on the contractual relationship.
So, what to do if you believe force majeure applies to your situation?
If it appears that you will (or may) fail to meet your contractual obligations due to the restrictive measures imposed as a consequence of the COVID-19 outbreak, we recommend you apply the following urgent measures:
1/ inform your client or contractual partner about the situation, and explain in detail how the restrictive measures affect your capacity to deliver, as well as why you intend to rely on the applicable force majeure provisions;
2/ put in place measures which will allow you to mitigate your risk (if your problem is that your supplier is defaulting) or the risk of your client (where you are defaulting), perhaps also conducting a search for alternative solutions in close collaboration with your client;
3/ make all relevant correspondence official i.e. in China, send out original copies duly chopped to the official correspondence address by courier (preferably EMS)
4/ collect and keep valid evidence of the force majeure situation, as well as of all measures you have put in place to mitigate the risk; in this respect it is important to note that obtaining the certificate of force majeure from the China Council for the Promotion of International Trade (CCPIT) will most often NOT suffice to prove that you are undergoing a force majeure situation; you should keep an official copy of all restrictive measures applicable to you which are preventing you from operating under normal conditions; when there is any doubt about whether or not a specific restrictive measure applied to you is indeed a formal government sanctioned measure, you should ask the local authority imposing the measure to officially confirm the fact that this measure is in force in your area and imposed on you;
5/ be proactive about engaging and negotiating in good faith with your contractual partners; keep in mind that under such situation everyone is under duress and that loyal contractual partners shall always seek solutions in good faith; during a crisis it is always a good idea to keep your long term priorities in mind rather than acting out of panic.
6/ When the emergency situation ends, immediately inform your contractual partner and advise them of the schedule you expect to be able to meet to deliver on your obligations. All arrangements or agreements made with your contractual partner should be confirmed in writing and formally documented (original copies, duly chopped).
Still have doubts or questions?
This article aims to provide you with some helpful guidance to assess your situation. However, as stated, every contract is different and situations vary. Our lawyers are of course available to help you further. In fact, for a flat fee of 1000 RMB, we will conduct a high-level review of your contract (on the subject of force majeure specifically), based on your specific circumstances we will discuss with you if and under which circumstances force majeure could be invoked, and provide you with a short memo summarizing our assessment and eventually briefly formulating our suggestions.
Please do not hesitate to reach out and ask us about the further details and conditions about this offer by sending an email to nathaniel.rushforth@dawo-lf.com.
