The coronavirus COVID-19 has caused delays and uncertainty for corporations throughout China, and those who rely on subsidiaries and suppliers in China. Due to the China’s epidemic control measures which range from the shutdown of non-essential production to the mass quarantine of travellers, many firms are facing growing uncertainty and costs which they may seek to mitigate contractually. The first option many firms look at, is whether they’re covered by a force majeure clause, or even if their contracts contain a force majeure clause.
A force majeure clause generally allows a party relief if a force majeure event materially impacts, or renders impossible, the performance of the contract. This relief is usually the suspension of the parties' obligations under the contract during the force majeure event, and, if the event continues for a certain period of time, the right to terminate the contract.
In order to obtain this relief a party will usually need to:
prove that the event that has materially impacted, or rendered impossible, the performance of the contract, falls within the definition of force majeure; and
comply with any notice provisions, or other preconditions (e.g. taking steps to mitigate its losses), specified by the force majeure clause.
Invoking a force majeure clause is not cut and dry procedure however, there are a few questions which must be considered.
Is there a force majeure clause in the contract?
A force majeure clause can only be relied upon if one is included in the specific contract.
Is the force majeure clause applicable to COVID-19?
Even if a force majeure clause is included in the contract, it may not mean it can be invoked during COVID-19 to provide relief. Force majeure clauses typically refer to specified events. Whether the COVID-19 epidemic constitutes a force majeure event is a matter for interpretation that requires legal advice on individual contracts, rather than advice given as a whole. Naturally, it is very unlikely that the standard force majeure clause refers to COVID-19 specifically, however, it may refer to events such as pandemics or government ordered work stoppages, in which case it is possible to argue that the outbreak constitutes one or more of those specified force majeure events.
Some common force majeure events are;
Compliance with a law or governmental order, rule, regulation or direction;
any action taken by a government or public authority, including imposing embargo, export restriction or other restriction or prohibition;
delays by suppliers or materials shortages;
difficulty or increased costs in obtaining workers, goods or transport; or
other circumstances affecting the supply of goods or services.
A force majeure clause will normally specify that the party which is seeking the relief to prove that the event could not have been mitigated by preventative action. This demonstrates the point force majeure may only be invoked when the event has prevented performance of the contract, not simply that the event has caused economic hardship or that performance has become difficult or commercially undesirable.
To maximise the chance of obtaining relief under a force majeure clause, parties should consider both the direct impact the coronavirus may have had on their contract as an epidemic, as well as the effect of the numerous government actions (including travel restrictions, quarantines, and increased border checks). Parties should compile as much evidence as possible on the effects of these events, and further consider:
making reference to the declaration by the World Health Organisation on 31 January 2020 that the coronavirus constitutes a "public health emergency of international concern"; and
if the party is based in China, applying for a force majeure certificate from the China Council for the Promotion of International Trade.
How to apply for a force majeure certificate from CCPIT?
CCPIT can issue force majeure certificates to the qualified applicants who apply.
1. Register the company in the following website:
2. Complete the steps in the below link to get the force majeure certificates.
If you have any queries regarding CCPIT contact information of CCPIT branches in different cities and provinces can be found at the following address.
Invoking the force majeure clause
Force majeure clauses normally establish the method which must be followed to properly seek relief under the clause. Advice should be sought before invoking the clause to ensure proper compliance with the procedure.
It is advisable to have contracts reviewed if you are considering applying the force majeure clause, as it will undoubtedly impact several provisions such as liability and liquidated damages, delivery and termination rights.
Should a contract not contain a force majeure clause, parties may seek to rely on the doctrine of frustration. However, frustration will only be available in limited circumstances where performance of the contract has become truly impossible, or where there has been a change of circumstances so fundamental that it would be unjust to hold the parties to their original agreement. Where a contract is frustrated, the contract will terminate, and the parties will be released from all future obligations.
Force Majeure and Employment Contracts
One exception to the exception to force majeure during the COVID-19 epidemic period concerns employment contracts. The General Office of the Ministry of Human Resources and Social Security has stated that for employees who have or are suspected of having pneumonia from infection by the novel coronavirus, and those in close contact with it, during the period of isolation and treatment or medical observation, as well as those who are unable to work normally as a result of government quarantine measures or other emergency measures, the enterprises shall pay their salaries for this period and must not end their labour contracts on the basis of articles 40 and 41 of the Labour Contract Law.
If employees are prevented from returning to work due to the COVID-19 by government travel bans, they shall not be subject to termination during the epidemic period.