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Determination of COVID-19 as Force Majeure, its Application and Legal Results
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The outbreak of COVID-19 has attracted great attention from national and even international community since January 2020. With strict epidemic prevention and control measures taken by local governments (such as closing traffic, some communities and public places, postponing the dates that enterprises re-operate after spring holiday, or postponing the dates that students go back to schools, etc.), the normal social life and economic order are adversely affected. Therefore, the performance of various contracts is also definitely affected. The article tends to analyze whether COVID-19 constitutes force majeure, and its application in judicial practice of contract performance and corresponding legal results.

Determination of COVID-19 as Force Majeure, its Application and Legal Results

I. COVID-19 Constitutes Force Majeure

The article No.180 of the General Principles of Civil Law and the article No.117 of the Contract Law both provide that force majeure is “objective circumstance that is unforeseeable, unavoidable and insurmountable.' From the subjective perspective, force majeure is unforeseeable when parties enter into the contract. From the objective perspective, force majeure is unavoidable and insurmountable. Generally, force majeure includes natural disasters, government actions, wars, strikes, terrorist acts, infectious diseases and other social abnormal events.

The WHO designated COVID-19 as 'Public Health Emergency of International Concern'('PHEIC'). Pursuant to the International Health Regulations, 'PHEIC' refers to unusual events that constitute public health hazards to other countries through the international spread of diseases and may require coordinated international measures. National Health Commission of the People’s Republic of China (“NHC”) classified COVID-19 as Class B infectious diseases stipulated in the Law of the People's Republic of China on the Prevention and Treatment of Infectious Diseases. NHC decided to take preventive and control measures for infectious diseases of Class A since individual is extremely likely to be infected with COVID-19. Currently, the medical community has not been able to determine the exact source of COVID-19 since the outbreak, and no effective drug and treatment have been invented to cure the disease. Central and local governments have also taken strict control measures to prevent the further spread of COVID-19.

In conclusion, COVID-19 (including administrative prevention and control measures taken for the purpose of preventing and controlling the spread of the disease) can be determined as force majeure, which is an objective circumstance that is unforeseeable, unavoidable and insurmountable.

II. Legal Results of Constituting Force Majeure

The article No.180 of the general principles of the civil law stipulates that parties who are unable to perform their civil obligations due to force majeure shall not bear civil liabilities. Pursuant to this provisions, force majeure is a statutory exemption. The article No.117 of the contract law stipulates that if parties cannot perform obligations under contracts due to force majeure, the relevant liabilities shall be exempted in part or in whole in accordance with the influence degree of the force majeure, unless otherwise provided by law. Therefore, the Contract Law provides two ways of exemption under the concept of 'force majeure': full exemption and partial exemption. Instead of full exemption all the time once parties invoke force majeure, the liabilities resulting from the breach of the contract shall be exempted only if such part of breach is within the influence of force majeure.

The termination of contracts is determined in accordance with different types of non-performance. The non-performance of contracts caused by force majeure can be divided into three categories: complete non-performance, partial non- performance and delayed performance. The details will be described below.

III. Application and Legal Remedies of Force Majeure in Practice

In practice, in order to determine whether force majeure affects specific contractual relations and their performance, and to decide how to deal with various contractual relations, we may determine based on specific circumstances such as purposes, contents and performance of contracts as agreed by parties, when and where parties enter into contracts, etc. If COVID-19 causes complete non-performance of contracts or cause the parties fundamentally default on performing contracts, then force majeure may be applied to address disputes over performance of the contracts. Please also note that in order to invoke force majeure, the parties shall not be able to foresee the outbreak of COVID-19 when entering into contracts, or parties shall enter into contracts before the outbreak, otherwise force majeure and its relevant exemption would not be applied.

1. Legal results of application of force majeure to contracts performance

In dealing with cases involved force majeure, the court generally will not decide to terminate contracts if contracts is still able to be performed in part or performance is able to be executed but merely delayed. Instead, the court will likely force parties to perform the part of contracts that can still be performed or postpone the deadlines of performance if contracts cannot be performed on time in accordance with parties’ claims. If contracts are completely unable to be performed, or if delayed performance or partial non-performance is unable to achieve the purpose of contracts, the court may, at the request of parties, determine to terminate contracts.

Please note that, pursuant to the article No.118 of the Contract Law, when invoking 'force majeure' as a reason for liabilities exemption, the party that decides to terminate the contract shall notify the other party in time to reduce the loss that may be caused to the other party. Accordingly, the notifying party needs to prove that he/she has fulfilled the notification obligation in accordance with the law, and has provided the other party with the evidence of non-performance due to force majeure within a reasonable period of time. The notifying party shall NOT be liable for the further loss caused by the other party who fails to take measures to prevent loss after receiving the notice of termination.

2. Special remedy for contracts not applying force majeure

As described above, if COVID-19 causes material breach of contracts, the parties may invoke force majeure to exempt corresponding liabilities. Therefore, if contracts are still be able to be performed under the influence of COVID-19, force majeure may not be applied. However, under certain circumstances, the performance of contracts will have a significant impact on the rights and interests of one party or is obviously unfair to one party, the outbreak of COVID-19 may be invoked as 'Change of Circumstances' and thus the principle of fairness can be applied by courts. This application is consistent with the opinions of the Supreme People's court during SARS in 2003. The Supreme People's court issued an official notice, in order to resolve disputes during the period of SARS, that clearly stipulates that, on one hand, if SARS caused complete non-performance of contracts or parties could not fundamentally perform contracts at all, SARS may be determined as 'force majeure'. On the other hand, if performance of contracts would have significant impacts on the rights and interests of one party, the principle of fairness may be applied by courts in accordance with the specific circumstances.

Pursuant to the article No.26 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Contract Law of the People's Republic of China (2), the 'Change of Circumstances' refers to a principle that after entering into contracts, certain objective circumstances have significantly changed which is unforeseeable by parties while entering into contracts. Such change is also not generated by commercial risks or force majeure. Due to such change of circumstances, the continuous performance of contracts is obviously unfair for one party or is unable to achieve the purpose of contracts. Under such circumstances, if parties request courts to modify or terminate the contracts at issue, the courts shall, based on the principle of fairness and specific circumstance of each case, determine whether to modify or terminate the contracts. 

In conclusion, the application of force majeure is relatively strict because it requires us to determine whether the obligations under contracts can be completely performed. The application of Change of Circumstances requires courts to determine whether such changes would cause extreme difficulties or obvious unfairness during the course of performance, that is, whether one party would be obliged to pay a huge price in order to perform the contracts.

Force majeure is one of statutory exemptions and reasons for contract termination. Thus, courts need not to be involved when one party invokes force majeure unless the other party denies the application of force majeure to exempt contractual liabilities. While the application of Change of Circumstances requires relevant parties to file with courts, and judges would determine whether to modify or terminate contracts based on the specific circumstance of each case.

Ⅳ. Legal Impacts of COVID-19 on the Performance of Certain Common Kinds of Contracts 

Shanghai COVID-19 prevention and control conference was held in February 16, 2020. The vice president of Shanghai High People's court announced that if contracts could not be performed because of COVID-19 prevention and control measures, the measures may be considered as force majeure that is unforeseeable, unavoidable and insurmountable. If force majeure would be applied to exempt certain non-monetary liabilities under contracts, unless otherwise provided by law, the liabilities may be exempted partially or completely in accordance with the influence degree of force majeure. If force majeure would not be applied but the performance of contracts is obviously unfair to one party because of the outbreak of COVID-19, the principle of Change of Circumstances may be applied to resolve disputes. The above instructions further clarified the application of relevant laws in Shanghai, which also provided guidance for dealing with the performance of contracts affected by COVID-19. Based on the above-mentioned instructions, the article tends to share some experience below in dealing with contractual disputes during COVID-19 period arising from the performance of certain common kinds of contract: 

1. Lease contracts

In leasing relationship, the mainly contractual obligation of a lessor is to provide a lessee with leased property, and the mainly contractual obligation of a lessee is to pay the rent in time. To determine whether the lessee is able to invoke 'force majeure' and request the lessor to reduce the rent or even terminate the contract due to COVID-19, we are required to consider relevant factors such as contract term, the content of performance, the influence degree of COVID-19 and causal relationship, etc.

During the outbreak of SARS, in deciding one specific case involved the lease contract, the intermediate People's Court of Changzhi city, Shanxi province held that SARS was force majeure. In the case, a hotel had been closed for 5 months because of SARS, the court decided that the lessee shall be exempted from the rent during this period. 

However, that whether specific circumstances constitute force majeure depends on different situations. In February 15, 2020, the People's Court of Haishu District of Ningbo city in Zhejiang Province resolved two lease contractual disputes arising from the outbreak of COVID-19. The court agreed that COVID-19 prevention and control measures had certain impacts on the performance of two lease contracts, but the purposes of two contracts could still be achieved regardless of the impacts. After the outbreak of COVID-19, the two lease contracts could continue to be performed and the purposes of them could still be achieved. Therefore, the lessees were NOT entitled to request to terminate the contracts by invoking force majeure. In the first case involved vehicle leasing, the plaintiff as driver claimed that due to the spread of COVID-19, the local government adopted the measures to close the communities, which constituted force majeure. The plaintiff requested the court to terminate the contract and the defendant to return the deposit. After negotiation, the plaintiff finally agreed to continue to perform the contract and was willing to share with the defendant the loss due to the impact of COVID-19. The second case involved the dispute over house leasing. The plaintiff leased the house to the defendant for use as an online booking house. Both parties agreed that the lease term was 5 years. Subsequently, the buildings where the house located were closed and no entry was allowed to prevent the further spread of COVID-19. The defendant considered that the house at issue could not be used anymore and such specific circumstance constituted force majeure. Accordingly, the defendant notified the plaintiff to terminate the contract. The plaintiff filed with the court and alleged that the lease term was for 5 years and thus COVID-19 could not affect the performance of the contract in the long run. The plaintiff requested defendant to pay monetary damages because the termination of the contract by defendant was the breach of contract. Finally, both parties reached a settlement. The defendant agreed to pay the damages, and did not ask the plaintiff to return the rent that was not due.

Although COVID-19 constitutes force majeure, the determination of force majeure in each specific contractual dispute requires a comprehensive analysis combined with all relevant factors mentioned above.

2.Service contracts

Service contracts mainly include tourism contracts, transportation contracts, intermediary contracts, consulting contracts, accounting and legal service contracts, etc. Taking tourism contracts as an instance, on January 27, 2020, the general office of the Ministry of Culture and Tourism of the People’s Republic of China issued an urgent notice that requires tourism enterprises to suspend the business activities, and requires national travel agencies and online tourism enterprises to suspend operating team tourism business and stop selling the tourism products of 'air tickets + hotels'. The urgent notice obviously has a significant impact on the performance of tourism contracts. The author believes that both parties to the tourism contracts may claim that COVID-19 has constituted force majeure.

If COVID-19 and the relevant prevention and control measures exert little impact on the performance of tourism contracts, then defaulting parties cannot invoke force majeure. The holding of the case regarding tourism contractual dispute (Meng Yuan v. Zhong Jia travel agency) published in the Supreme People's court Bulletin (second issue of year 2005) also confirms the above-mentioned principle. In the case, the court held that although SARS occurred during the performance of the tourism contract at issue, the scope of SARS was very small which did not exert an adverse impact on the daily life of the general public. Therefore, SARS in the case did not constitute force majeure.

For intermediary contracts, consulting contracts and accounting and legal services contracts, if COVID-19 has little impacts on the performance of the above contracts, the court will not generally support the allegations of breaching parties who invoke force majeure to exempt liabilities. Even though local governments have required enterprises to postpone the dates of resuming work, service providers can perform the relevant service contracts through working at home, therefore, force majeure cannot be applied in this circumstances. However, if the performance of service contracts requires field visit, on-site research and other activities as agreed by parties, and such activities are prohibited due to control measures taken by governments, then the performance of such service contracts can apply the relevant provisions of force majeure. Accordingly, the service contracts would be modified or terminated.

3.Construction Contracts

The governmental order that requires construction enterprises to suspend working or postpone the resumption of work may delay the performance of construction contracts or even cause the contracts not to be performed completely. Therefore, force majeure may be applied in resolving construction contractual disputes. The construction enterprises may exempt the other party from the liability arising from the breach of contracts in accordance with the specific circumstances, such as postponing the acceptance dates of construction projects, exempting the other party from the liabilities arising from delayed performance, etc. In order to maintain the performance of contracts, the construction enterprises may not necessarily terminate the construction contracts.

In conclusion, if enterprises cannot perform their obligations under contracts in time as agreed because of COVID-19, enterprises should notify the other parties as soon as possible (if contracts provide the requirements on when and how to notify, the notifications should be carried in consistent with the requirements). The notifications should clearly stipulate that enterprises could not perform contracts as agreed because of COVID-19, and request other party to agree to modify or even terminate contracts by invoking the principle of force majeure. The notification should also attach the evidence of prevention and control measures taken by relevant governments as supporting documents.

The relevant enterprises may also require the China Council for the Promotion of International Trade (“CCPIT”) to issue certificates as factual evidence of force majeure. The certificate issued by CCPIT has been recognized by more than 200 countries and regions and their relevant governments, customs, chambers of commerce and enterprises, and has strong authority and credibility in the world.

Finally, please note that the Supreme People's court has not issued any judicial interpretation on how to address the disputes over the performance of contracts affected by COVID-19. That whether force majeure can be applied in a specific contractual dispute arising from performance affected by COVID-19 requires us to determine based on specific performance circumstances.

Shanghai Veritas Law Corporation desires to provide clients with legal services regarding addressing various contractual disputes over performance affected by COVID-19.