COVID-19 vs. Force Majeure, Let’s Make it Simple
After the outbreak of COVID-19, there are many articles concerning whether COVID-19 shall be deemed as a force majeure circumstance, how to defend the claim of the liability for breach of contract and so on. These articles have analyzed from the laws to the judicial decisions. However, for the majority enterprises, you may only want to know whether you can take advantage of force majeure; if yes, then how to use the relevant provisions and what are the results?
Let’s make it simple, we will use the “Q & A & Example” method to explain this topic within 3 minutes.
Q1: Can I defend with force majeure?
A: After reviewed the relevant contract, please answer 3 questions. Do you know COVID-19 will happen when you sign the contract? Can you avoid the impact of COVID-19 on the implementation of the contract? Is there any action to overcome the impact of COVID-19 objectively?
If the answers are negative, then normally, you can defend with force majeure.
For example,
On Jan. 1, 2020, Wuhan Company A and Shanghai Company B agreed that A would assign an engineer to repair the equipment in Shanghai on Feb. 6. Since the lockdown of Wuhan on Jan. 24, the engineer could not make it. Whether A could defend with force majeure? The answer is positive.
Let’s change some details. On Jan. 10, 2020, A and B agreed that A would pay RMB100, 000 to B on Feb. 6, however, A failed to arrange the payment on time. Whether A could defend with force majeure? It seems that the answer might be positive for the second and third question. In fact, normally, the court would not support a defendant to defend with force majeure on the failure of payment.
Let’s add one more fact. The financial staff and boss of A were diagnosed with COVID-19, and sent to the hospital. Then the answer shall be negative for the second and third question, and A could defend with force majeure.
Q2: How to declare force majeure?
A: There are 3 steps:
(1) To notify the counterparty. The basic requirements are, notify the counterparty in accordance with the relevant contract articles concerning the notification methods and due time, with the introduction of the circumstance, the impact on the implementation of the contract, and the measures to prevent any increase in the losses sustained.
(2) To take measures to prevent any increase in the losses sustained. For example, in the previous case, if A has a branch in Suzhou, then A shall assign the engineer in Suzhou to repair equipment for B in Shanghai as soon as possible.
(3) To provide the evidence of the force majeure. The evidence are various and optional. The evidence could be the documents or screenshot of the relevant government policies, for example, in the first case, A could provide the documents of the government decisions on the lockdown of Wuhan and resumption of work. The evidence could be a certificate issued by the notarization office. If it is an international trade issue, recently many enterprises have applied for the certificate issued by the local branches of CCPIT, and CCPIT provides such certificate for free.
Q3. What will happen after I have declared the force majeure successfully?
A: You can dissolve the contract, or you could be partially or wholly exempted from liability.
(1) If the objectives of the contract cannot be realized due to COVID-19, the contract could be dissolved. For example, the contracts concerning a scheduled birthday party, or a tour to Japan to admire the oriental cherry and etc., normally, such contracts have a tight timeliness requirement.
(2) For the majority contracts, normally, you shall defend with partially or wholly exempted from liability. How to determine whether you could be partially or wholly exempted from liability? You have to review the following 3 questions.
First, whether you have notified the counterparty in a timely manner, for example, due to the lockdown of Wuhan, A failed to assign an engineer to repair equipment for B, however, B failed to notify its client Company C in accordance with the contract signed with C, and the consequence is that C had to suspend the manufacture due to the failure on the supply of components. Then B shall undertake the loss for the period of the delayed notification.
Second, whether you have taken measures to prevent any increase in the losses sustained, for example, if A assigned an engineer of its Suzhou branch to provide repair service to B, then this is an appropriate measure.
Third, whether COVID-19 has the impact on partial or wholly performance of the contract? For example, although B’s warehouse in Wuhan could not deliver goods, but the warehouse in Suzhou could deliver partial of the goods, and B failed to deliver any goods, then B could not be wholly exempted from liability.
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Annex: Laws, regulations, judicial interpretation, and judicial opinions