Covid-19: Recent Legal Responses and the Application of Force majeure and Change of Circumstances in the PRC (Summary)

Abstract

This article provides the readers with an update on the recent legal responses in the PRC to the Covid-19 related cases as well as a general overview on the doctrines of force majeure and change of circumstances under the PRC law.

I.   Introduction

Since the outbreak of Covid-19, the PRC government has implemented a series of disease control measures and as a result of Covid-19 and the Covid-19 related response measures, there were inevitable events leading to a myriad of disputes. On 16 April 2020, 15 May 2020 and 8 June 2020, the SPC respectively issued Guiding Opinions (I), (II) and (III) on Several Issues Concerning Proper Handling of Civil Cases Involving the Novel Coronavirus Pneumonia Epidemic in Accordance with the Law (“Guiding Opinions”) to provide guidance to all levels of the People’s Courts on how to deal with the Covid-19 related civil cases.

ii.   Guiding Opinions

While the Guiding Opinions (I) and (II) are more generic and reiterate the basic principles in dealing with the Covid-19 related disputes, the Guiding Opinion (III) gives more specific context and discusses the principles that should be applied in dealing with the foreign-related commercial and maritime cases, as well as on the issues of procedural law and applicable law. The Guiding Opinion (III) stresses the importance of accurately applying the applicable international convention (eg the United Nations Convention on Contracts for the International Sale of Goods) or trade customs (eg Article 36 of UCP 600 and Article 26 of URDG 758), or in the case where a foreign law is applicable, the correct application of force majeure equivalent principles in such jurisdiction. The Guiding Opinion (III) also touches upon the issues of extending or suspending the limitation period and extending the period for submitting evidence formed outside the PRC. In summary, the Guiding Opinions serve to provide practical guidance to the courts at all levels based on the existing legal framework.

III.   Major Legal Issues of the Covid-19 Related Disputes Under the PRC Law

Broadly, Covid-19 related cases have involved the doctrines of force majeure and change of circumstances, as well as contractual force majeure clause. 

Statutory force majeure

Unlike English law, force majeure has a statutory basis for exemption of liabilities under the PRC law. According to relevant laws of the PRC, in order for there to be a force majeure event, two thresholds must be met. The first is that the circumstances shall be unforeseeable, unavoidable and insurmountable. The second is that the force majeure event must have occurred during the performance period and there is a direct causal relationship between the event and the party’s inability to perform the contact. The affected party also bears a statutory obligation to provide timely notification to its counterparty together with proof within a reasonable period.

Contractual force majeure clause

In practice, it is more often that the contracts will include a force majeure clause. However, such clause should not affect the application of statutory force majeure. If one or more events stipulated in the “force majeure clause” is not in compliance with the three abovementioned conditions, the so-called “force majeure clause” will very likely be considered an “exemption clause”, a “contractually agreed termination clause” or simply a contractual term agreed by the parties. 

Doctrine of change of circumstance 

Under the PRC law, in the case where the conditions for establishing a force majeure cannot be met, a concerned party may still consider the doctrine of change of circumstances to protect their position, which is provided in Article 26 of Interpretation II of the Supreme People's Court of Several Issues Concerning the Application of the Contract Law of the People’s Republic of China. However, in practice, the PRC courts usually hold a strict view in applying the doctrine of change of circumstances. It is also noteworthy to mention that the doctrine of change of circumstances regime will largely be codified by the new Civil Code of the PRC, which will come into force on 1 January 2021. 

IV.   Observations on English Law 

For contracts governed by English law, the doctrines of force majeure and frustration may, in certain circumstances, be invoked by a party to suspend, delay or discharge contractual obligations.

Force Majeure 

Unlike the PRC law, the term “force majeure” has no established meaning under English law and the parties have to expressly set this out in the contract. The effect of a force majeure clause depends on the specific wording of the clause. Some force majeure clauses operate to suspend or extend performance until the relevant force majeure event has come to an end, while others operate to bring the contract to a complete end. A force majeure clause will commonly include provisions regarding notices, timings and other specific requirements, which are required to be met should a force majeure event occur. 

Frustration 

Under English law, a contract may be frustrated when an event occurs that is both unexpected and beyond the control of the contracting parties, and renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. It must be noted, however, that frustration is generally difficult to establish under English law. 

V.   Conclusion

As the facts and their application to the law may be complex and arguably unique in each instance, parties at risk of performance due to Covid-19 or Covid-19 response measures are recommended to obtain prompt legal advice. 

*Disclaimer: the purpose of this article is to provide information on, and developments in, the law. It does not contain a full analysis of the law and does not constitute an opinion of Reed Smith Richards Butler on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. 

The authors would like to take this opportunity to thank their colleagues for their contribution and assistance, in particular Vassia Payiataki, Leah Lei and Arthur Lam.

– Lianjun Li, Partner, 
– Peter Glover, Partner, and 
– Cheryl Yu, Counsel (Registered Foreign Lawyer (PRC)), 
Reed Smith Richards Butler

Editorial Note: This is a summary of the article “Covid-19: Recent Legal Responses and the Application of Force Majeure and Change of Circumstances in the PRC” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in July 2020.

Jurisdictions: 

Partner, Reed Smith Richards Butler

Lianjun Li (M.Sc., LLM, FCIArb) qualified as a solicitor in Hong Kong, England and Wales in 2002 and is a partner and head of Commercial and Shipping Litigation Practice of Reed Smith Richards Butler Hong Kong. He is a fellow of the Chartered Institute of Arbitrators, a panel arbitrator of the Law Society of Hong Kong and some well-known arbitration institutions including the Hong Kong International Arbitration Centre, China International Economic Arbitration Commission and China Maritime Arbitration Commission, Singapore Chamber of Maritime Arbitration and Singapore International Arbitration Centre. He also serves as a member of the Hong Kong Maritime and Port Board, LMAA Supporting Members Liaison Committee (Asia Pacific) and the Transport and Logistics Committee of the Law Society of Hong Kong. He has extensive experience in dealing with dispute resolutions relating to international trade, shipping, documentary credits, cargo claims, insurance, investment and commerce and legal aspects of doing business, negotiation and litigation in China. He has been recognized by Chambers, Legal 500, Who’s Who Legal, Acritas Stars, China Business Law Journal and other leading legal rating firms as a leading individual for many years. He has been regularly engaged by many Chinese private or state-owned enterprises and World 500 Fortune companies in shipping/commercial disputes resolutions and advising on commercial transactions.

Partner, Reed Smith Richards Butler

Peter Glover is qualified as a solicitor in Hong Kong, England and Wales and Queensland and is a partner of Reed Smith Richards Butler. He has considerable experience in high value and complex shipping, international trade and commercial disputes involving court, arbitration and mediation proceedings. Prior to qualifying as a lawyer, he served for 11 years at sea on tanker. 

Counsel (Registered Foreign Lawyer), Reed Smith Richards Butler

Cheryl is a Counsel (registered foreign lawyer) of the Litigation team and has more than 10 years’ experience in litigations and arbitrations relating to international trade, commercial transactions, banking and letter of credit, transportation, shipping, ship finance and cross-border investments. She regularly represents clients in London, Hong Kong and Singapore arbitrations administered by ad hoc or institutional rules (such as LMAA/ HKIAC/CITEC HK/SIAC/FOSFA/ICA rules). She has vast experience in disputes with cross-border elements and parallel proceedings.