From March 2022, several cities in China have established citywide or block lockdown to contain the new variant of COVID-19 virus – Omicron. Namely in Shanghai, the citywide lockdown from 1 April has continued into May and more cities are experiencing ad-hoc lockdown or epidemic control and prevention measures. As a result, companies may face difficulties rendering contractual obligations, for example inability to continue manufacturing goods or performing services under terms agreed in commercial contracts signed before the lockdown. Under such cases, the circumstances in which the contracts were originally signed under have significantly changed and companies may invoke force majeure.

What is force majeure?

A force majeure clause exempts one or both parties from liability or obligation since an extraordinary event, such as war, strike, crime, or "Act of God" prevents one or more parties from fulfilling their obligations under the signed contract. Epidemic measures enacted to contain COVID-19 (such as lockdown) which directly restricts companies from performing contractual obligations may constitute as a force majeure, since the original terms can no-longer be performed. For instance, as the citywide lockdown in Shanghai continues, manufacturers unable to resume work cannot fulfil their contractual obligations, and such manufacturers may invoke the force majeure clause.

Invoking force majeure during or after lockdown

The legal basis for force majeure is provisioned under The Civil Code of the People's Republic of China

Articles 180, 563 and 590.

Article 180

A person who is unable to perform his civil-law obligations due to force majeurebears no civil liability, unless otherwise provided by law. "Force majeure" means objective conditions which are unforeseeable,unavoidable, and insurmountable

Article 563

The parties may rescind the contract under any of the following circumstances:
(1) the purpose of a contract is not able to be achieved due to force majeure;

Article 590

Where a party is unable to perform the contract due to force majeure, he shall beexempted from liability in whole or in part according to the impact of the forcemajeure, unless otherwise provided by law. The party unable to perform the contractdue to force majeure shall promptly notify the other party to mitigate the losses thatmay be caused to the other party, and shall provide proof of the force majeure within areasonable period of time.Where the force majeure occurs after a party's delay in performance, such party'sdefault liability shall not be exempted

Under such provisions, companies invoking force majeure are not wholly exempted from contractual obligations. Rather companies are required to prove that the lockdown measures directly impacted their contractual terms. For example, a manufacturer could not deliver the goods as agreed within the contract since the factory was lockdown and manufacturing could not continue, therefore, the manufacturer could be exempted from such obligation and breach of contractual term.

In conclusion, affected companies can be exempted from for the breach of contract in part or in whole according to the influence of the force majeure – such as an epidemic measure.

Terminating contracts under force majeure

Contracts can only be terminated if the fundamental purpose of the contract cannot be achieved due to force majeure. Namely, where the contract cannot be performed or cannot be performed in accordance with the agreed terms defined in the contract.

The Circular of the Supreme People's Court on Issuing the Guiding Opinions (II) on Several Issues concerning the Proper Trial of Civil Cases Related to the COVID-19 Epidemic According to the Law ("the guiding opinions of the Supreme Court (II)) provides further guidance on contract termination.

If the epidemic situation or epidemic prevention and control measures cause the parties to fail to perform the sales contract within the agreed time limit or the performance cost will be increased, and the continued performance does not affect the realization of the purpose of the contract, if either party request to terminate the contract, the people's court will not support.

Under such example, though the continued performance of the contract has been adversely affected by the epidemic measures, the force majeure does affect the purpose of the contract. Hence, the contract cannot be terminated. Instead, both parties to the contract shall still perform their contractual obligations in accordance with the agreement in accordance with the principle of good faith.

The affected party in such instance may apply the change of circumstance to renegotiate the contractual terms, if the epidemic situation or epidemic prevention and control measures significantly increased the performance costs of labor, raw materials and logistics, or significantly reduced the price of products.

Change of circumstances

The Civil Code of the People's Republic of China revised in 2020 includes epidemic within the provisions in change of circumstances. Specifically, parties to a contract adversely affected by the epidemic may renegotiate the conditions for the performance of the contract. If the negotiation fails within a reasonable period of time, each party may request the people's court or arbitration institution to change or terminate the contract.

The Civil Code stipulates parties to renegotiate new terms in the first instance and continue to perform according to the negotiated terms. However, if the negotiation fails each party may request the people's court or arbitration institution to change or terminate the contract by applying to the principle of fairness.

Where the people's court or arbitration institution decides to change the contract, the party shall continue to perform the contract according to the changed conditions based on the agreement of the parties or the effective judgment document.

Case Study

Epidemic prevention and control measures directly restricted the delivery of goods within the agreed time limit defined in the contract. Parties failed to negotiate new terms and the seller requested the people's court to change the conditions of performance time limit. The people's court changed the performance time limit according to the principle of fairness in combination with the actual situation of the case.

Consequently, companies should note that invoking force majeure clause for lockdown measures can be complex, which requires proof of the force majeure directly impacting the contractual obligation. Under certain circumstances, the party is exempted from the breach of contract, but the performance of the contract shall continue. Terminating contracts under force majeure should demonstrate the purpose of the contract is affected by the force majeure, otherwise the people's court may not support such case. Alternatively, companies may utilise the change of circumstances provisions to renegotiate more suitable terms or apply to the people's court to change or terminate the contract.

疫情下商事合同履行问题

自2022年三月以来,新冠肺炎病毒的新型变种奥密克戎再次席卷,为了应对疫情,各地均采取了不同程度的疫情管控措施,尤其在上海,截止到目前在一整个月的时间里采取全域静态管理,大部分企业处于停工停产状态,该管控措施对在疫情前已经订立且在履行中的商事合同均造成不同程度的影响和障碍,导致合同无法继续履行,或待复工复产合同恢复履行后,均将面临一系列问题。

疫情对商事合同履行的不利影响,主要是指因疫情及各级政府因为疫情而采取的管控措施,导致商事合同无法履行或者不能按约履行,或者合同虽然能够继续履行,但是因为疫情导致合同的基础条件发生了重大变化,继续履行合同将对一方明显不公平。对于前述不利影响,可能构成不可抗力和情势变更。

根据《民法典》关于情势变更规则的规定,因疫情受到不利影响的一方合同当事人可以与对方重新协商合同履行条件,在合理期限内协商不成的,当事人可以请求人民法院或者仲裁机构变更或者解除合同。在此情况下,对于合同如何继续履行,主要由合同当事方进行协商,并按照协商的结果继续履行。如果协商不成的,由人民法院或仲裁机构根据公平原则变更或者解除合同,如人民法院或仲裁机构决定变更合同的,则按照变更后的合同继续履行。在该等情况下,商事合同无论是继续履行还是解除,都是基于合同各方的合意或者生效裁判文书。

如果疫情的不利影响对商事合同的履行构成了不可抗力,根据《民法典》180条、563条和590条规定,如果不可抗力导致合同根本目的无法实现,则可以解除合同。如合同不能履行,或者不能按照合同约定履行,则受到不利影响的一方根据不可抗力的影响,部分或者全部免除责任。此处免除的责任,是指未能按约履行而导致的违约责任。在合同解除的情形下,若合同尚未履行的,终止履行,合同未解除的,在不可抗力的情形消失后,合同均应当继续履行。

需要说明的是,根据《最高人民法院关于依法妥善审理涉新冠肺炎疫情民事案件若干问题的指导意见(二)》(以下简称"《最高院指导意见(二)》,疫情或者疫情防控措施导致当事人不能按照约定的期限履行买卖合同或者履行成本增加,继续履行不影响合同目的实现,当事人请求解除合同的,人民法院不予支持。该种情形下的合同继续履行虽然受到了疫情的不利影响,但是不属于需要适用不可抗力规则的情形,合同双方仍应按照诚信原则,依照约定履行合同义务,该情形与正常情况下的合同履行并无差异。

当然,如果前述情形下,继续履行合同对一方当事人明显不公平,构成情势变更的,则如前所述适用情势变更规则。如疫情或者疫情防控措施导致人工、原材料、物流等履约成本显著增加,或者导致产品大幅降价,继续履行合同对一方当事人明显不公平,受不利影响的当事人请求调整价款的,人民法院应当结合案件的实际情况,根据公平原则调整价款。疫情或者疫情防控措施导致出卖人不能按照约定的期限交货,或者导致买受人不能按照约定的期限付款,当事人请求变更履行期限的,人民法院应当结合案件的实际情况,根据公平原则变更履行期限。

这里需要注意的是已经通过调整价款、变更履行期限等方式变更合同,当事人请求对方承担违约责任的,人民法院不予支持。

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.