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Coronavirus Outbreak: Can PHEIC Trigger Changed Circumstances or Force Majeure Clauses?

Issue date:03 Feb 2020 Author:Lin Hanlong, Song Feifei

The outbreak of novel coronavirus (2019-nCov) has been declared a Public Health Emergency of Concern (PHEIC), the highest level in infectious disease emergency response system, by World Health Organization in the early morning on 31 January 2020 Beijing time. In the legal practice area, it is necessary to explore and discuss whether PHEIC can trigger changed circumstances or force majeure clauses, as well as their legal consequences from the perspectives of Civil Law and Contract Law.


I. Prior to 13th May 2009, PHEIC cannot be considered as changed circumstances in the Contract Law, but shall be dealt with properly as a force majeure event.


The Contract Law and General Principles of the Civil Law have no relevant provisions of changed circumstances. However, the Supreme People's Court introduced or recognized the principle of changed circumstances in the Opinions on Several Issues in the Trial of Rural Land Contract Disputes on 14th April 1986, Supreme Court’s (1992) No.29 Reply, and Summary of the Talks on National Economic Trial Work (Fafa [1993] No.8 of May 6, 1993). From this perspective, changed circumstances can apply in light of PHEIC.


However, on 11th June 2003, the Supreme Court issued the Notice on Handling the Trial and Enforcement of People's Courts during the Prevention and Control of Severe Acute Respiratory Syndromes (Fa [2003] No.72). In the Notice on Handling the Trial and Enforcement of People's Courts during the Prevention and Control of Severe Acute Respiratory Syndromes (hereinafter referred to as the Notice) “III: Properly handle the civil cases related to the prevention and control of SARS according to law” (3): if the performance of the original contract will have significant impact on the rights and interests of one of the parties to the contract due to SARS outbreak, it can be handled in accordance with the principle of fairness based on specific circumstances. Disputes, including contract non-performance directly arising from administrative measures taken by the government and relevant departments to prevent the SARS outbreak, or the non-performance of the parties to the contract due to the impact of the SARS outbreak, shall be handled properly in accordance with the provisions of Article 117 and 118 of the Contract Law of the People’s Republic of China.


The novel coronavirus outbreak closely resembles that of the SARS, and thus SARS is referenced in this article.


According to the Notice, the Supreme People's Court does not consider that SARS outbreak can be justified as changed circumstances, but it shall be dealt with the principle of fairness as stipulated in Article 5 in the Contract law and handled properly as a force majeure event pursuant to Article 117 and 118 in the Contract Law. Therefore, this article suggests that changed circumstances do not apply with respect to the new coronavirus outbreak, and the wording “handled properly” actually refers to the legal application of Article 5, 54, 77, 94, 97, 117 and 118 in the Contract Law.


It shall be pointed out that Article 6 of the Contract Law, the principle of honesty and good faith in exercising rights and performing obligations, does not apply to the Notice.


II. From 13th May 2009, PHEIC can be considered as changed circumstances in the Contract Law, as well as be dealt with properly as a force majeure event. Changed circumstances shall be considered first.


On 24th April 2009, the Supreme Court promulgated 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 (II) (hereinafter referred to as Interpretation (II)), which became effective on 13th May 2009.


Interpretation (II) Article 26: After the contract was established, where the objective circumstances have major changes that are unforeseeable and not a commercial risk caused by force majeure when entering into the contract, the continued performance of the contract is obviously unfair to one party or the purpose of the contract cannot be achieved, the party can request the people's court to modify or terminate the contract. The people's court shall determine whether to modify or terminate the contract in accordance with the principle of fairness and the actual situation of the case. Article 30: In the case of a dispute over a contract established after the implementation of the Contract Law, this Interpretation shall apply if no final decision has been made after the implementation of this interpretation; this Interpretation shall not apply in cases if the final decision has been made before the implementation of the Interpretation, and the party apply for retrial or a retrial was decided in accordance with the trial supervision procedures.


According to Article 26 of the Interpretation (II), changed circumstances in the Contract Law can apply with respect to PHEIC, and the party can request the people's court to modify or terminate the contract in accordance with Articles 5 and 94 of the Contract Law. The people's court shall determine whether to modify or terminate the contract confirming to the principle of fairness and the actual situation of the case. This is actually the legal application of Article 5, 54, 77, 94, 97, 117 and 118, as well as the laws on changing contracts.


The consideration of PHEIC can also follow the provisions in the Notice “III Properly handle the civil cases related to the prevention and control of SARS according to the law” (3), which can apply the principle of fairness in Article 5 of the Contract Law, and be handled properly as a force majeure event pursuant to Article 117 and 118 of the Contract Law. This, actually, gets down to the legal application of Articles 5, 54, 77, 94, 97,117 and 118.


Based on the principle that “special law is prior to general law” and “new regulations are prior to former regulations’, Article 26 of the Interpretation (II) shall be applied first.


III. Changed circumstances and force majeure clauses of a contract


Changed circumstances and force majeure are firstly a legal concept. Their definitions are not completely consistent in different time, space, as well as various historical and cultural settings. However, the ideas of these two concepts are largely the same. In this article, we will not distinguish between them and will not discuss the definitions of them.


Countries and regions have adopted statutory law or prejudication or other legal sources to include changed circumstances and force majeure into law, which consist the legal clauses in contracts.


This article believes that changed circumstances clauses and the force majeure clauses of a contract are composed of "statutory clauses" and "agreed clauses." Statutory clauses are more of an exemption clause, which are stipulated much as principles. Agreed clauses are defined by the parties to the contract for changed circumstances and force majeure; it is difficult to define the scope of changed circumstances and force majeure solely based on statutory clauses. For example, if the contract does not include such agreements (i.e., without agreed clauses), the scope of changed circumstances and force majeure shall be determined by the court or the arbitral tribunal. Statutory clauses and agreed clauses apply the principle of "follow the agreement, or obey the statutory clauses if there is no agreement or the agreement is not clear". Generally, it could be understood as follows:


1. Changed circumstances and force majeure are the exemptions granted by law. When a performance dispute arises due to changed circumstances and force majeure, one or more parties to the contract have the right to invoke the changed circumstances or force majeure clauses to claim exemption;


2. If parties to the contract have defined and scoped the changed circumstances and force majeure in the contract, it should be determined by the agreement and then be exempted from liability;


3. If there is no agreement on the changed circumstances and force majeure or the agreement is not clear, the contract shall follow statutory clauses and be determined by the court or the arbitral tribunal;


4. This article believes that changed circumstances and force majeure are the exemptions conferred by law. The parties to the contract can agree on the scope of the "changed circumstances and force majeure" in the contract, but the clause stipulating that "No exemption shall be granted in case of the changed circumstances or force majeure" is invalid.


IV. Legal consequences of contracts in light of PHEIC


The first and second part of this article have discussed the legal consequences of contracts in light of PHEIC, which indeed are Article 5, 54, 77, 94, 97, 117 and 118 in the Contract Law, as well as the laws applicable on changing contracts.


Article 54 is not applicable. According to Article 54 (2), it can only apply if it is obviously unfair at the time when concluding the contract, whereas PHEIC occurs during the performance stage after the conclusion of the contract. According to Article 54 (2) and Article 151 of the General Provisions of the Civil Law of the People’s Republic of China, the time point for determining whether a contract is obviously unfair should be the conclusion of a contract. Changes leading to obvious unfairness to the interests of the party after the conclusion of the contract are not civil behaviors which are obviously unfair, (this article believes under this circumstance), and can be handled in accordance with the principle of honesty and good faith.


Article 77 is not applicable. According to Article 77, a contract may be modified if the parties reach a consensus through consultation. Article 77 shall not apply in circumstances under which one party claims to modify the contract, or both parties require modification but cannot reach an agreement.


Article 5 is a principled provision and is a God clause, so the core lies in Article 94, 97, 117 and 118 of the Contract Law as well as the laws on changing contracts. The biggest and fundamental difference between application of the Interpretation (II) Article 26 and the application of the Notice “III. Properly handle civil cases related to the prevention and control of SARS according to law" (3) is whether "the parties to the contract have the right to claim modification of the contract”. To the parties to a contract, it may be better to choose the application of Interpretation (II) Article 26.


1. Claim to modify the contract in accordance with Article 26 of the Interpretation (II)


The Contract Law, General Principles of Civil Law and General Provisions of Civil Law do not include the provision that "the parties may request to modify the contract because they are obviously unfair or cannot achieve the purpose of the contract due to changed circumstances." It is only included in the Article 26 of Interpretation (II).


Article 26 only grants the parties to the contract the right to "request for contract modifications." As for "how the contract should be modified" and "what are the criteria for modifications and approval criteria" are not specified. According to the Contract Law, General Principles of the Civil Law and the General Provisions of Civil Law, if the parties to a contract cannot reach an agreement through consultation, it shall be deemed that the contract has not been modified or cannot be modified, and it is difficult for the court to force a change through decision and embody fairness.


For some special contracts, such as the lease contract of a shop or office, the renter’s claim for rent reduction or exemption may be supported by the court's decision (If the court supports the claim of rent reduction or exemption, then to whom the owner can claim their loss?). These special contracts should be specifically analyzed based on the characteristics of the contracts. Then, if the court does not support rent reduction or exemption, can the renter use this as a reason to claim "terminate the contract and exempt from the liability for breach of contract"? According to Article 26, when the condition of "continuing to perform the contract is obviously unfair to one party or unable to achieve the purpose of the contract" is formed, the contract shall either be modified or terminated. Objection to modifying or terminating the contract is against Article 26 (not necessarily disagreeing with Article 117). However, the termination of the contract at this time may be more unfair to the owner. This article believes that for such special contracts, Article 26 should not be applied at this time, but the Notice “III. Properly handle the civil cases related to the prevention of SARS according to the law” (3) and the Article 117 of the Contract Law should apply. The party can delay the performance of obligations and can be exempted from liability. As to when to perform the obligations, if the two parties to the contract cannot reach an agreement, it can be determined by the court. The claim to delay the performance of the contract can be understood as a claim to modify the contract.


2. Claim to delay the performance of the contract in accordance with Article 117 of the Contract Law


According to Article 117 of the Contract Law, a delay in performing the contract and exemption of liability can be claimed. If the delay in performing the contract is understood as a change of the contract, Article 26 of the Interpretation (II) can also be applied at the same time.


3. Claim to terminate the contract and exempt from liability according to Article 26 of Interpretation (II), Notice “III. Properly handle the civil cases related to the prevention and control of SARS in accordance with law” (3), and Article 94 and 117 of the Contract Law


When exercising the right to terminate the contract and be exempted from liability in accordance with Article 118 of the Contract Law, the party shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period. Increased loss due to untimely notice to the other party shall be undertaken by the party who claims to cancel the contract. Here, it is necessary to clarify the legal consequences of "not providing evidence within a reasonable period" and "providing evidence." According to the Contract Law and the rules of evidence in civil procedure, as long as "providing evidence" proves to constitute "force majeure", it can be exempted from liability. However, no clear provisions on "consequences within a reasonable period" are included. According to Article 118 of the Contract Law, as long as "the party shall timely notify the other party so as to mitigate the losses that may be caused to the other party”, it can be exempted from liability. As there is no stipulation on what legal consequences should be borne by "not providing evidence within a reasonable period", it causes the fact that "not providing evidence within a reasonable period" may not be required to bear legal consequences.


According to Article 97 of the Contract Law, after the termination of a contract, performance shall cease if the contract has not been performed; if the contract has been performed, a party may, in accordance with the circumstances of performance and the nature of the contract, demand the other party to “restore such party to its original state or adopt other remedial measures”, but such party does not have the right to demand compensation for damages; while the party "exercises the right to terminate the contract and be exempt from liability", it also enjoys the right to require the other party to "restore to the original state and adopt remedial measures according to the performance and the nature of the contract". Meanwhile, the other party also enjoys the right to "require the party to restore to the original state and adopt remedial measures according to the performance and the nature of the contract."


4. Exception to the application of force majeure in light of PHEIC


According to the provisions of Article 117 of the Contract Law, where an event of force majeure occurs after the party’s delay in performance, the party is not exempted from such liability. Therefore, the prerequisites and foundations for PHEIC as a force majeure event for exemption is that the party has not breached the contract prior to the event (this article considers "delayed performance" as a breach). If the party has breached the contract prior to the force majeure event, it shall not be exempted from liability.


This article further argues that if the party has previously breached the contract, but it enjoys the defense right of simultaneous performance or defense right of first-performance, such "breach" does not apply to "force majeure occurs after the party delays performance", and the party may be exempted from liability.


5. The statute of limitations is suspended due to force majeure but is not suspended due to changed circumstances


According to the provisions of Article 194 of the General Provisions of the Civil Law, during the last six months of a limitation, if the claim cannot be exercised due to force majeure, the limitation shall be suspended. If the party considers the event as a force majeure, the risk of "whether the event is justified as force majeure" should be borne by the party before the determination of the court, so caution is recommended.


6. In the event of overdue due to force majeure or changed circumstances, parties can apply an extension to the court within ten days after the obstacle is removed


According to Article 83 of the Civil Procedure Law of the People's Republic of China, if the party delays the deadline due to force majeure or other legitimate reasons, extension can be applied, that is within ten days after the obstacle is removed, an application may be made; however, whether to allow it or not is at the discretion of people's court, so the risk of "extending the time limit" should be borne by the party. It is therefore also recommended that the rights conferred by Article 83 be treated with caution.


V. PHEIC causes breach of contract by a party to a third party other than a party to the contract


Article 121 of the Contract Law stipulates that where a party’s breach is attributable to a third party, it shall nevertheless be liable to the other party for breach. Any dispute between the party and such third party shall be resolved in accordance with the law or the agreement between the parties.


"Dispute between the party and such third party" referred to in Article 121 of the Contract Law can be understood as a dispute between the parties to a contract, and "resolved in accordance with the law or the agreement between the parties " can be understood as Interpretation (II) Article 26, Notice “III. Properly handle the civil cases related to the prevention and control of SARS according to law” (3), as well as Article 94 and 117 of the Contract Law, which can resolve contract disputes directly caused by PHEIC.


However, if one of the parties default on a third party other than the party to the contract, could the party to the contract be exempted from liability? This article argues that:


1. According to Article 121 of the Contract Law which stipulates that " where a party’s breach is attributable to a third party, it shall nevertheless be liable to the other party for breach”, the defaulting party cannot be exempted. Indirect or transitive reasons cannot be exempted.


2. However, if the party can prove that the breach is not caused by a third party, but caused by PHEIC, it has the right to exercise the rights conferred by Article 26 of the Interpretation (II), Notice “III. Properly handle the civil cases related to the prevention and control of SARS according to law”, as well as Article 94 and Article 117 of the Contract Law. It can be exempt from liability for direct reasons.


VI. Foreign-related jurisdiction and enforcement


If a foreign-related contract causes a dispute due to PHEIC and be handed to a Chinese court, the court shall apply Article 26 of the Interpretation (II), the Notice “ III. Properly handle the civil cases related to the prevention and control of SARS according to law” (3), as well as Articles 5, 54, 77, 94, 97, 117, 118, and 121 of the Contract Law. At this time, any agreement excluding the application of these legal provisions shall be invalid.


If a foreign-related contract causes a dispute due to PHEIC and is delivered to a foreign court or an overseas arbitration agency for a decision or ruling, and then request a Chinese court’s recognition and enforcement based on their decision or ruling, the person subject to enforcement has the right to request the people’s court to review the decision or ruling based on the public order principle, and Article 26 of the Interpretation (II), the Notice “ III. Properly handle civil cases related to the prevention and control of SARS according to law” (3), as well as Articles 5, 54, 77, 94, 97, 117, 118, and 121 of the Contract Law. If the decision or ruling violates these provisions, the people's court may make a ruling that it will not recognize and enforce it.


VII. A look at PHEIC from the perspective of the General Provisions of Civil Law & the Tort Law of the People's Republic of China
This article has discussed whether PHEIC can trigger changed circumstances or force majeure clauses and the legal consequences from the perspective of the Contract Law. However, the disputes caused by PHEIC may be civil disputes other than contract disputes.  No clear judicial interpretation has been provided by the Supreme Court.


This article considers that in accordance with the provisions of Article 180 of the General Provisions of the Civil Law, and referring to the Notice “III. Properly handle the civil cases related to the prevention and control of SARS according to law” (3), PHEIC is a "force majeure" event referred to in Article 180. In accordance with the provisions of Article 180, those who are unable to perform civil obligations due to force majeure shall not bear civil liability, and may resort to Articles 6, 7, and 151 of the General Provisions of the Civil Law, requesting the people's court to reasonably determine the rights and obligations of all parties in accordance with the principles of fairness and good faith. As for how to "reasonably determine the rights and obligations of all parties", it is suggested to refer to the discussion earlier in this article.
According to the provisions of Article 29 of the Tort Law of the People's Republic of China, where any harm to another person is caused by a force majeure, the tortfeasor shall not be liable. In a tort liability relationship, force majeure can be used as an exemption for no-fault tort by terminating the causality between the tortfeasor’s behavior and the result of the harm. To prove the party does not need to bear the liability, it must prove that the harm was caused by force majeure, that is, between force majeure and the result of the tort there exists a legal cause and effect relationship. If the tortfeasor cannot prove this, it shall bear the corresponding tort liability. The stipulation that "where any harm to another person is caused by a force majeure, the tortfeasor shall not be liable" does not relieve the tortfeasor of the burden of proof on causality.

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