On 30 January 2020 a global coronavirus outbreak announced by the World Health Organisation as a public health emergency caused delays in shipments from China, as well as failures in the finance, tourism, logistics and production spheres. We offer a brief overview of the most common legal issues arising in the supply sphere.
Among the main examples of the consequences for local counterparties are delays in delivery (other failures to fulfil obligations) by Chinese suppliers and, as a result, failure by local counterparties to fulfill their obligations to end customers. For example, the consequences may affect a contracting company in Belarus that buys components from Chinese manufacturers for subsequent contract performance to a state company customer.
Can coronavirus be recognised as force majeure?
We believe this possibility does exist. In addition to the circumstances of each particular case, the following should be assessed: the terms of the contract, the applicable law, and the approach by the dispute resolution body which will decide on the issue of the legitimacy of relying on force majeure.
As a rule, the terms of the contract include a provision on force majeure with a list of events that the parties recognise as force majeure, and the legal consequences of the occurrence of force majeure.
Inclusion in the list of such events as “epidemics”, “healthcare emergencies”, “actions by the authorities”, strengthens the position of a party relying on a force majeure clause but they must still prove that the coronavirus or measures to combat it (eg, closing borders, travel bans, and other measures taken by the authorities) amount to force majeure.
If the contract does not incorporate a force majeure clause, then a violation of the contract because of coronavirus can be seen as justified under the United Nations Convention on Contracts for the International Sale of Goods of 1980 (Vienna Convention), arguing as follows:
- the coronavirus / relevant measures by the Chinese authorities are an impediment beyond the counterparty’s control;
- the parties could not reasonably be expected to have taken the coronavirus outbreak and spread into account at the time of concluding the contract (ie, for contracts concluded prior to the outbreak of the coronavirus);
- in certain cases, it was impossible to avoid or overcome the coronavirus or measures by the Chinese authorities.
However, in situations where it was essentially possible to make a delivery but this became difficult / expensive ‒ for example, due to the need to look for alternative routes to avoid closed regions ‒ then it is a matter of qualifying the circumstances as “hardship” and applying the consequences.
For example, such a situation is taking place with CNOOC, China’s largest buyer of liquefied natural gas, which stopped accepting supplies, invoking force majeure because of the coronavirus. The counterparty of CNOOC rejected the force majeure notification, stating that “if quarantine is introduced in all ports of loading and unloading in China, we will be able to accept this as a real case of force majeure. This is currently not the case”. Similarly, Chinese copper merchants announced suspension of orders and cancellation of supplies due to force majeure.
Note that the delivery time may also be affected by changes in the number of business days if the contract term is expressed in days. The PRC authorities increased the duration of national holidays during this period as one of the measures to combat the epidemic.
In addition, the fact of recognition of force majeure is not an automatic basis for delaying foreign trade operations.
How to confirm the existence of force majeure?
A party that is unable to fulfil / has not fulfilled its contractual obligations due to force majeure should contact the competent authority of the country where force majeure has emerged, to arrange issue by the authority of the corresponding certificate. For example, in China the competent authority is the China Council for the Promotion of International Trade (CCPIT). On 21 February 2020 the Council issued more than 1,600 force majeure certificates to companies in over 30 business sectors for a total of some USD 15.7 billion in contracts. In order to receive a Chinese certificate through an electronic platform, you must upload a delivery / transportation contract, a suspension / delay notice and other supporting documents to the platform.
According to unofficial information, the Belarusian Chamber of Commerce and Industry (BelCCI) is also being asked to issue a force majeure certificate.
Despite the well-known existence of the coronavirus, if you plan to refer to it, we recommend documenting force majeure in order to use the documentation as evidence.
Is there liability for non-performance?
Generally, recovering a penalty or damages from a Chinese counterparty is unlikely, since they have the right to expect exemption from liability for the entire period of force majeure.
At the same time, a party may demand compensation for damages:
- if the Chinese counterparty failed to notify (or failed to do so in good time) about force majeure circumstances and their impact on performance under the contract.
- if the Chinese counterparty has not taken all possible measures to minimize the damage to the party affected by non-performance.
Is it possible to terminate the contract?
Yes ‒ but only if the contract so provides. In the absence of such a provision, it is difficult to terminate the contract, since the fact of the occurrence of force majeure prolongs the period for contract performance but does not end the obligation to perform altogether. However, a party may try to prove that it is no longer interested in performance ‒ and on that basis demand contract termination. Please note that PRC law allows contract termination if the purpose of the contract cannot be achieved because of force majeure.
Can I refer to force majeure from my supplier?
If you act as an intermediary and, because of force majeure with a Chinese supplier, have not fulfilled obligations to end customers, this will not release you from liability. Moreover, it is unlikely that a Chinese company will compensate your damages arising therefrom.
As a rule, this is since the Chinese supplier is not the only one and there is a real opportunity to find an alternative supplier in other regions and countries in order to minimize damages.
If there is no force majeure clause in your contract
If you intend to conclude a foreign trade contract now, you should consider incorporating a force majeure clause and when drafting it to take into account the Model clause of the International Chamber of Commerce (Publication No. 650). Moreover, “coronavirus infections” or epidemics / pandemics in general could be included.
The experience of other countries
In Lithuanian law, there is an open list of circumstances that may qualify under certain conditions as force majeure, among them, for example, “legal and unlawful actions of state institutions”. Four conditions are necessary in order to recognise a circumstance as force majeure.
The coronavirus itself may not have such an effect on performance of contracts, while decisions by the Chinese state authorities to impose restrictions including mandatory office closures, full or partial lockdown of cities, and port closures while trying to prevent the spread of the coronavirus can be recognised as force majeure.
A force majeure event applies only when a defaulting company informs its counterparty of the occurrence of force majeure and its consequences for the fulfilment of obligations under the contract.
Possible remedies are:
- termination of contract,
- suspension of performance of the contract,
- claim for payment of interest.
The Lithuanian Chambers of Commerce, Industry and Crafts issues certificates only regarding circumstances that occur in Lithuania; accordingly, in order to confirm the circumstances of the coronavirus, you need to contact the CCPIT in China.
However, the Lithuanian Supreme Court proceeds from the fact that the presence of a certificate testifying to force majeure is evidence but does not as such entail legal consequences, since the fact of force majeure in the case of a dispute must be established by the court.
Under Latvian legislation, the element of complete impossibility to fulfil obligations is of particular importance for the party invoking the coronavirus. If all the other elements are present but fulfilment of obligations is still theoretically possible – even if very cumbersome – the circumstance will not be considered by the court to constitute “force majeure”. However, if the contract incorporates “epidemics” in the “force majeure” clause, then coronavirus could be considered as “force majeure”.
A party cannot terminate the contract because of force majeure if the contract does not allow it, and damages caused by force majeure are not compensable. Also, for a fee the Latvian Chamber of Commerce may issue a certificate that “force majeure” circumstances have occurred.
In Russia, criteria similar to Belarusian law are used to qualify coronavirus as force majeure (“force majeure circumstances”). These criteria are extremeness and inevitability. In the case of force majeure, the Chinese counterparty has the right to rely on exemption from liability for failure to fulfil its obligations, which means that recovering a penalty or damages from it is unlikely.
Force majeure does not as such terminate the obligations of the debtor/obligor if performance remains possible after force majeure circumstances have disappeared. However, the creditor / obligee may terminate the contract if it is not interested in performance as a result of the delay.
In English law, a provision on force majeure is not implied, and, accordingly, will only apply in contracts where the parties have expressly stipulated it, and on the conditions specified in the force majeure clause. Thus, it all comes down to the criteria specified in the contract and their interpretation. As a rule, absence of a reasonable opportunity to foresee the circumstances at the time of concluding the contract, a causal link between the event of force majeure and inability to perform are the conditions for recognition of the fact of force majeure.
The consequences of recognition of the fact of force majeure also depend on the terms of the contract, for example, it can be either a temporary suspension of obligations by the parties, which, after a certain timeframe, allows one or both parties to terminate the contract, or the right of a party to terminate the contract right away.
If you find that coronavirus may affect contractual obligations that involve your participation, we offer the following general recommendations (to the extent applicable):
- Inform counterparties in writing that enforceable circumstances have arisen.
- Pay attention to the completion dates of foreign trade operations, and, if necessary, take steps to extend them.
- Assess and take steps for damages reduction.
- Gather evidence on the force majeure occurrence and on the above steps.
- Work out a plan for further action (to terminate the contract, negotiate amendments, not conclude new contracts and / or seek legal advice, for example, for filing a lawsuit / initiating arbitration).