Force Majeure under Chinese law and How It May Apply to U.S. Business Interests

Tuesday, March 3, 2020

The outbreak of Covid-19 (“coronavirus”) in China has interrupted global supply chains. Factory lockdowns, labor quarantines, and transportation suspensions are impacting downstream commerce.  In many cases, force majeure provisions in supply contracts do not state whether such an epidemic is a force majeure. At present, the Chinese legislature and courts have provided no guidance on whether the coronavirus is a force majeure, but there is statutory Chinese law and precedent. Chinese statutory law provides in the Contract Law of China[1]:

Section 117: Force Majeure

A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability.

For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable.

Section 118: Duty to Notify in Case of Force Majeure

If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the other party, and shall provide proof of force majeure within a reasonable time.

In 2003, after the SARS, virus outbreak in China, the China Supreme Court issued a formal interpretation[2] that:

Contract disputes caused by the administrative measures taken by the government agencies to prevent the SARS epidemic, or directly due to the impact of the SARS epidemic, which caused the parties to fail to perform, shall be resolved in accordance with Section 117 and 118 of the “Contract Law of China.”

In addition, as to whether the 2003 SARS epidemic constitutes an objective circumstance which is “unforeseeable, unavoidable and insurmountable”, the Second Circuit Court of Beijing[3], stated that:

“SARS, as an emergency of public health, with its worldwide outbreak, is not only unforeseeable by the parties concerned, but also unforeseeable by public health experts who have extensive medical knowledge. Since its outbreak, there has been no effective method to prevent its spread, and even no definite source of infection has been determined.  Although many SARS virus infected have recovered and discharged from hospital after treatment, the medical experts have not yet developed a definite and effective treatment method. Therefore, this public health emergency, at least at present, is an objective circumstance that human beings cannot foresee, avoid and overcome. It is, by nature, a force majeure that falls into its definition by law.”

The standards of “timely notify” and efforts to “mitigate the loss” are not clear legal standards under the statute or Chinese court rulings.  The SARS epidemic broke out in 2003, and Chinese companies were not playing as active roles as today in the global supply chain, so the precedents are mostly landlord-tenant disputes and employment cases.  In those cases, Chinese courts evaluated the facts and determined if a force majeure notice was given “reasonably timely” and mitigation methods had been sought based on good faith, and were “reasonable under the circumstances."  Because of the lack of adequate Chinese legal precedent, affected companies should provide notices within the time periods, and with the substance, required by their specific contract force majeure clauses and the law CISG and U.S. law as guidelines.

As noted above, there has not been a formal interpretation or guidance as to the coronavirus.  A formal interpretation, if any is to be issued, may not be issued soon.  The SARS interpretation was not issued until after the SARS outbreak subsided.  In addition, at the current time, the judicial register or schedule has been placed on a posted delay because of the concern of the courts for the spread of the disease.  Based on these factors, it is likely that the Chinese courts will list the coronavirus epidemic to be a force majeure, but it may take time for the courts to act.  However, China Council for The Promotion of International Trade (CCPIT), officially accredited with Beijing’s Ministry of Commerce, has already granted over 1,600 certificates of force majeure to Chinese companies.  The weight of such a certification outside of China is not certain.

But, why should American companies be concerned about Chinese law? Although many American based buyers purchase under terms and conditions adopting U.S. or other non-Chinese laws, Chinese subsidiaries purchasing from Chinese subsidiaries may be operating under contracts governed by Chinese law as may be U.S. suppliers of Chinese OEMs.  The following provides some guidance in such situations.

  • The Agreement Adopts Chinese law         
    • If Chinese law is adopted by the agreement, the agreement is generally indisputably governed by Chinese law.  Thus, Section 117 and 118 of the “Contract Law of China” as well as any further interpretations published by Chinese courts shall apply.
  • No Adoption of any Law, but the Contract is Between Two Chinese Companies
    • If no specific law is adopted by the agreement, and the agreement is between two Chinese companies (including subsidiaries of multinational companies operating in China), Chinese courts should have both personal jurisdiction and subject matter jurisdiction over the parties. Therefore, the agreement is governed by Chinese law, and Section 117 and 118 of the “Contract Law of China” as well as any further interpretations published by Chinese courts shall apply.
  • No Adoption of any Law, between a Chinese company and a non-Chinese Company
    • China is a signatory of United Nations Convention on Contracts for the International Sale of Goods (“CISG”). If the non-Chinese party of a supply agreement is also from a signatory country, the CISG will be the governing law.  Article 79 of CISG[4] states:
    • (1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
    • (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.
  • Non-Chinese law is adopted in an agreement with or without a force majeure clause, that may conflict with Chinese Law
    • If the choice of law clause in a supply contract stipulates that non-Chinese law (such as U.S. or European law) governs the contract, and the coronavirus epidemic is not listed as a force majeure event in the contract or recognized under the foreign law.  A Chinese court may not enforce a foreign judgment or arbitration awards in China. In the Chinese supplier may petition the Chinese court for non-enforcement of a foreign arbitration award or a ruling of a foreign court, based on Sections 4 and 5 of “Act of Foreign Laws Application in Civil Disputes in China”[5] (“AFA”)

Sections 4 of AFA states that "if the laws of the People's Republic of China have mandatory provisions on applying certain Chinese laws on such civil disputes, Chinese laws shall apply." Section 5 provides that Chinese law shall be applied to protect certain interests, and the non-Chinese law shall not apply in such a scenario.

China Supreme Court has clarified that in what scenarios the AFA shall apply[6]. "In one of the following scenarios, which involves the public and public interests of the People's Republic of China, the parties cannot stipulate the governing law by agreement, and a tribunal can apply, regardless of rules of conflict of laws, laws of China according to the mandatory provisions in Section 4: (1) those involving the protection of workers' rights and interests; (2) those involving food safety or public health; (3) those involving environmental safety; (4) those involving financial security such as foreign exchange control (5) involving antitrust and anti-dumping; (6) situations that the court finds appropriate. "

Presumably, for interruptions caused by the coronavirus outbreak, Chinese suppliers would claim that because they were forced to delay delivery to protect workers' rights, food or public health safety, or environmental safety, their failure to perform is excused without liability.  Thus Chinese suppliers may be able to move to avoid enforcement of a judgment or award based on the application of non-Chinese laws.

In addition, Sections 5 of AFA states that "if the application of foreign laws would harm the social and public interests of the People's Republic of China, the laws of the People's Republic of China shall apply." The concept of "social public interest" is found in decisions on the non-recognition and non-enforcement of foreign arbitration awards, or foreign court decisions.  However, recognition and enforcement of foreign arbitration awards is an obligation required by international treaties that China is a signatory. Therefore, the Supreme People's Court and local courts have been reluctant to use "social and public interests" to invalidate foreign arbitral awards in commercial cases.  This is not to say that recognition of foreign court judgments is easy in China.

For further information, please contact the authors of this Alert.  Please also see a Chinese language version of this Alert below.

Also, please join us for a complimentary webinar on Wednesday, March 4 at 12:00 pm EST covering the Coronavirus and Force Majeure correlation.  Register here.

James Bruno
313.225.7024
bruno@butzel.com

Bill Yang  杨全
313.225.7094
yang@butzel.com

(Translation in Chinese Language)

中国法律规定的不可抗力及其对美国商业利益的适用

          中国爆发Covid-9(“冠状病毒”)造成了全球供应链大面积中断。 工厂关停,劳工隔离和运输暂停影响了下游的生产经营。 在许多情况下,供应合同中的不可抗力条款并未明确流行病是否属于不可抗力。目前,中国的立法机关和法院尚未就冠状病毒是否属于不可抗力提出任何解释,但中国的成文法律和判例可供参考。 在《中国合同法》中规定:

第一百一十七条 因不可抗力不能履行合同的,根据不可抗力的影响,部分或者全部免除责任,但法律另有规定的除外。当事人迟延履行后发生不可抗力的,不能免除责任。

本法所称不可抗力,是指不能预见、不能避免并不能克服的客观情况。

第一百一十八条 当事人一方因不可抗力不能履行合同的,应当及时通知对方,以减轻可能给对方造成的损失,并应当在合理期限内提供证明。

          2003年在中国爆发了“严重急性呼吸综合症”(以下使用英文缩写“SARS”),中国最高法院的官方解释(该解释虽然已经失效,但仍值得做比较分析使用)是:

因政府及有关部门为预防'非典'疫情而采取行政措施直接导致合同不能继续,或者由于'非典'疫情的影响致使合同根本不能合并而引起的纠纷,按照《中华人民共和国合同法》第一百一十七条和第一百一十八条的规定妥善处理。

          此外,至于2003年SARS疫情是否构成“不能预见、不能避免并不能克服的客观情况”,北京市第二中级人民法院课题组在《法律适用》2003年第6期《正确处理“非典”疫情构成不可抗力免责事由案件》中指出:

……非典型肺炎作为一种突发性的异常事件、一种世界范围内爆发的疫情,不仅当事人不能预见,而且具有广博医学知识的医学专家也无法预见;从其爆发至今,还没有有效的方法阻止其传播,甚至还没有确定确切的传染源;尽管有许多非典型肺炎病人经过治疗病愈出院,但到目前医学界还没有确定确切有效的治疗方法,因此,这种异常的事件,至少在目前,是人类无法预见、不可避免、不能克服的客观存在,其性质属于法律上规定的不可抗力事件,是一种自然灾害。

          中国的法条或中国法院的判决并没有给“及时通知对方”和“减轻可能给对方造成的损失”设定明确法律标准。SARS于2003年爆发,那时中国公司在全球供应链中的角色不像今天如此活跃,因此我们检索到的当年的案例主要集中在房屋租赁纠纷和劳动关系纠纷案件。 在这些案件中,中国的法院通过审视事实,确定是否“合理及时”地发出了不可抗力通知,以及是否基于诚信原则在当时的情形下想方设法减轻可能给对方造成的损失。 

          如上所述,现在(2020年2月)关于冠状病毒的司法解释仍未出台。官方即使发布新的司法解释,可能短期内也无法出台。当年对SARS适用不可抗力的解释也是在SARS平息之后才发布的。此外,由于法院担心疾病继续扩散,目前,很多法院的案件受理或排期也被推迟。 基于以上因素考量,中国法院很可能会将冠状病毒的流行列为不可抗力,但法院的行动需要一些时间。然而中国商务部领导的中国国际贸易促进委员会(CCPIT)已向中国的公司颁发了1600多份不可抗力证书。这种证书在中国以外所起的作用仍不甚确定。

          但美国公司为什么要关注中国法律呢?因为尽管许多地处美国的买家采用了美国或其他非中国的法律作为条款和条件的依据进行采购,但即使是从中国子公司采购,其中国子公司也要按照中国法律管辖的合同进行经营,例如向中国主机厂供货的美国供应商们。以下提供了对这类情形的适用准则。

  1. 合同约定适用中国法律

      如果合同约定适用中国法律,则该协议一般无可争议地受中国法律管辖。因此,应适用《中国合同法》第117条和第118条以及中国法院发布的任何进一步的解释。

  1. 两家中国公司之间的合同未约定适用法律

          如果协议未明确适用哪国法律,并且协议双方均为中国公司(包括在中国运营的跨国公司的子公司)之间达成的协议,则中国法院对双方应具有个人管辖权和标的管辖权。因此,该协议受中国法律管辖,《中国合同法》第117条和第118条以及中国法院发布的任何进一步解释均适用。

  1. 中国公司与非中国公司之间的合同未约定适用法律

          中国是《联合国国际货物销售公约》(简称“CISG”)的签署国。 如果合同的非中方也来自签署国,则以CISG为准。 CISG第79条规定:

(1) 如果一方证明自己无法履约是由于无法控制的障碍所致,并且无法合理地期望双方在缔结合同时可以考虑到避免或克服该障碍,则无法履约的一方不承担任何责任。 

……

(4) 无法履约的一方必须将障碍的事实及对该方履行能力的影响通知另一方。 如果在无法履约的一方知悉或应该知道该障碍之后的合理时间内,另一方未收到通知,则无法履约的一方应对由此造成的损失承担赔偿责任。

……

  1. 合同约定适用非中国法律,无论有无不可抗力条款,有可能与中国法律存在冲突

          如果供应合同中的适用法律条款规定由非中国法律(例如美国或欧洲法律)管辖该合同,并且在合同中未将流行病列为不可抗力事件,或该非中国法不承认流行病属于不可抗力。中国法院可能会不予执行外国仲裁裁决或外国法院的裁定。中国的供应商可能依据是中国的《涉外民事关系法律适用法》(以下简称“AFA”)第四条和第五条向法院申请不予执行外国仲裁裁决或外国法院的裁定。

          第四条规定,中华人民共和国法律对涉外民事关系有强制性规定的,直接适用该强制性规定。 而第五条则规定,外国法律的适用若会损害中华人民共和国社会公共利益,则应适用中华人民共和国法律。

          中国最高人民法院《关于适用〈中华人民共和国涉外民事关系法律适用法〉若干问题的司法解释(一)》(法释〔2012〕24号)第十条明确了在何种情况下AFA第四条适用。 “有下列情形之一,涉及中华人民共和国社会公共利益、当事人不能通过约定排除适用、无需通过冲突规范指引而直接适用于涉外民事关系的法律、行政法规的规定,人民法院应当认定为涉外民事关系法律适用法第四条规定的强制性规定:(一)涉及劳动者权益保护的;(二)涉及食品或公共卫生安全的;(三)涉及环境安全的;(四)涉及外汇管制等金融安全的;(五)涉及反垄断、反倾销的;(六)应当认定为强制性规定的其他情形。”

          可以预测的是,对于由于冠状病毒爆发而造成的供应中断,中国供应商会主张供应商被迫延迟交付是为维护工人的权利、保护食品或公共卫生安全、或保护环境安全,所造成无法履约是应该免责的。 因此,中国供应商可以向中国法院主张基于中国法律而免予执行执行按照非中国法律而形成的外国仲裁裁决或外国法院的裁定。

          此外,AFA第五条规定:“外国法律的适用将损害中华人民共和国社会公共利益的,适用中华人民共和国法律。” “社会公共利益”的概念曾出现在不予承认和不予执行外国仲裁裁决或外国法院判决的情况下。但是,承认和执行外国仲裁裁决是中国作为国际条约的签署国所应该履行的义务。 因此,最高人民法院和地方法院一直很谨慎的使用“社会和公共利益”作为理由拒绝承认和拒绝执行商业案件中的外国仲裁裁决。这并不代表外国法院的裁决可以轻易地获得中国的承认。

          获取更多信息,请您联系:

James Bruno
+1.313.225.7024
bruno@butzel.com

Bill Yang 杨全
+1.313.225.7094
yang@butzel.com

[1] Contract Law of China, March 15, 1999 (https://www.wipo.int/edocs/lexdocs/laws/en/cn/cn137en.pdf)

[2] Notice on Related Trial and Enforcement during the Prevention and Treatment of SARS Epidemic (CLI.3.49481, June 11, 2003, expired, for comparative analysis only) (http://pkulaw.cn/%28S%28pvgj1x45wuwnwm5555df4e55%29%29/fulltext_form.aspx?Gid=49481&Db=chl&EncodingName=big5)

[3] Correctly Apply Laws to Cases Where the SARS Epidemic Constitutes an Excusable Force Majeure (CLI.A.1112295, Application of Laws, Issue 6, 2003)  (https://www.pkulaw.com/qikan/fab69afe39235f5f62555561d299c0f6bdfb.html)

[4] ANNOTATED TEXT OF CISG Article 79 (http://www.cisg.law.pace.edu/cisg/text/e-text-79.html)

[5] Act of Foreign Laws Application in Civil Disputes in China (Issued on Oct. 28, 2010 by President Hu, effected on April. 1, 2011) (http://www.gov.cn/flfg/2010-10/28/content_1732970.htm)

[6] Interpretation (1) of the Supreme Court on Several Issues Concerning the Application of the Law of China in Civil Relations, released on Dec. 28, 2012, in effect on Jan. 7, 2013, China Supreme Court (https://www.chinacourt.org/law/detail/2012/12/id/146055.shtml)

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