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[Hua Li said] Zhang Shipeng: epidemic situation, force majeure and "anti epidemic measures" of enterprise contract

March 27, 2020 17:47      Think tank Business School      Reading volume:

Contract is the main means of cooperative operation between enterprises. "Contract must be strictly observed" is the purpose of contract legislation and the embodiment of the contract spirit under the market economy. Accordingly, the contract law also stipulates the liability for breach of contract as the safeguard measure of "contract must be strictly observed". However, under special circumstances, the failure to perform is really due to the exemption reasons agreed in the law or contract. At this time, the contract debtor uses the legal shield reasonably and legally to avoid further legal recourse, which is also the embodiment of the contract management level of modern enterprises. At present, COVID-19 and the government's strong measures to prevent the spread of the epidemic spread worldwide, resulting in a large number of enterprises' production being directly or indirectly affected. A large number of contracts can not be fulfilled according to the contract, and the contract management ability of enterprises is severely tested. Combined with the contract law, the author believes that the contract management of enterprises needs to focus on the following issues:

  1、 Whether the epidemic situation has an impact on the performance of the contract by the enterprise

Due to the spread of the epidemic and the government's control measures, we can clearly see that all aspects of social production have been affected, such as enterprises can't purchase production materials, workers can't go to work, enterprises can't return to work, enterprise products are expropriated for other purposes, enterprise products can't be transported, etc. in the face of the epidemic, modern enterprises in the process of socialized large-scale production, In fact, we can't be alone, and contract management problems will come one after another.

Has your business been affected? Did the epidemic directly lead to your inability to produce, or did your contract supplier fail to produce, resulting in your inability to produce? If your enterprise is directly affected by the epidemic, can you claim force majeure exemption from your contract counterpart to reduce losses? If your enterprise is indirectly affected, can you veto the other party's claim when the other party claims exemption from force majeure, so as to safeguard the legitimate rights and interests of the enterprise?

  2、 Whether the epidemic situation constitutes force majeure

The contract management of an enterprise starts from the planning of the contract to the termination of the contract, in which the management of exemption in case of breach of contract is an important part. In China's contract law, the common reasons for exemption from liability for breach of contract include "force majeure", "change of circumstances" and so on.

The second paragraph of Article 180 of the general provisions of the civil law of China stipulates that "force majeure refers to the objective situation that is unforeseeable, unavoidable and insurmountable." therefore, force majeure has four characteristics: (1) it is an objective situation, which means that it must exist independently of the behavior of the parties, neither derived from the behavior of the parties nor controlled by the will of the parties. (2) Unforeseeable means that the debtor cannot reasonably foresee the occurrence of the objective situation when signing the contract. The objective standard for judging the unforeseeable means that it is impossible to predict based on the existing technical level and the cognition of ordinary people. The scope of unforeseeable includes the occurrence and impact of the objective situation. (3) Unavoidable means that the occurrence of the objective situation is unavoidable. If the occurrence of an event can be avoided through the timely and reasonable actions of the parties, the event cannot be considered as force majeure. (4) Insurmountable means that the debtor is unable to perform its debts normally due to the emergence of the objective situation. If the damage consequences caused by an event can be overcome through the efforts of the contract subject, then the event is not an event of force majeure.

In China, the novel coronavirus pneumonia was declared as "Public Health Emergency of International Concern", "PHEIC", at 3:30 a.m. on January 31, 2020. The first 31 cities of mainland China launched a public health emergency response to the first public health incident in January 31, 2020. Shanghai, Guangdong, Zhejiang, Chongqing, Henan, Heilongjiang and other provinces and cities have successively issued notices of delayed resumption of work. On February 28, the World Health Organization raised its global risk level from "high" to "very high". From the sudden (unpredictable) and harmful (unavoidable) nature of the epidemic situation and the objective situation that is insurmountable for the performance of the contract, the current epidemic situation can constitute force majeure in the performance of the contract. Accordingly, novel coronavirus pneumonia epidemic is being reported in China in February 10, 2020, Zang Tiewei, spokesman and research director of the Standing Committee of the National People's Congress, and the government has taken corresponding measures to prevent and control the epidemic. For the party who is unable to perform the contract, it is an unforeseeable, unavoidable and insurmountable force majeure.

Of course, in many countries of the common law system, the law does not give the definition of force majeure and there are no written mandatory provisions on the legal consequences in the case of force majeure. Therefore, in international trade, the contract usually stipulates the force majeure clause to realize the exemption in case of breach of contract by the contract debtor suffering from force majeure, that is, In the Foreign-related Contracts applicable to the laws of that country, if there is no agreement on force majeure, it cannot enjoy the benefit of exemption from liability for breach of contract. This needs special attention in Foreign-related Contracts.

  3、 Are there exemptions and exceptions for breach of contract caused by the epidemic

Article 117 of China's contract law stipulates that "if the contract cannot be performed due to force majeure, the liability shall be exempted in part or in whole according to the impact of force majeure, unless otherwise provided by law". Therefore, when the epidemic situation is determined to be force majeure, the facts related to the epidemic situation can constitute an exemption.

However, if the epidemic situation leads to breach of contract, it does not necessarily lead to the contract debtor not bearing any contract liability. At least, we should pay attention to the following aspects:

1. If the epidemic situation does not constitute force majeure, the breach of contract by the contract debtor cannot be exempted. Generally, the defaulting debtor cannot claim force majeure under the following three circumstances:

(1) novel coronavirus pneumonia is not the reason for the failure of the contract, for example, employees are not able to work because of new crown pneumonia. In such a case, if the enterprises can find alternative staff, the epidemic will not constitute an irresistible force.

(2) The epidemic situation shall not constitute force majeure under the foreseeable circumstances of the contracting party. For example, in the current epidemic environment, after the enterprise has concluded the contract, it claims that it will not perform the contract with the epidemic situation as force majeure.

(3) Before the outbreak of the epidemic, the contract debtor delayed the performance of the contract, and then the epidemic caused the contract to be unable to be performed. At this time, the contract debtor cannot take the epidemic as a force majeure exemption.

2. The liability exempted from force majeure is limited to the liability for breach of contract. As the legal exemption condition of liability for breach of contract, force majeure is the main practice of the laws of various countries of modern civil law system, but the scope of exemption from liability for force majeure should be limited to liability for breach of contract and can not be arbitrarily extended to no liability. For example, in the contract of work, the Contractor receives the materials from the ordering party for processing. Due to the impact of the epidemic situation, the processing work cannot be completed, resulting in the failure to perform the contract. The contractor may not pay liquidated damages, but must return the materials delivered by the ordering party.

3. Force majeure shall not of course exempt the contract debtor from all liabilities for breach of contract. In case of force majeure breach of contract, the liability for breach of contract shall be solved according to the impact of force majeure. If force majeure has made it impossible for the debtor to perform the contract, the contract between both parties shall be terminated and the debtor's liability for breach of contract shall be exempted; For the opposite party of the contract, if the interests of maintaining the contract are greater than those of terminating the contract, the opposite party of the contract has the right to require partial performance or continuous performance. In other words, if force majeure only causes partial failure of the debtor to perform the contract, the content of the contract shall be changed to exempt the defaulting party from partial liability for breach of contract; If force majeure only causes the debtor's delay in performance, the debtor may be required to continue to perform, but the liability for breach of contract for delayed performance shall be exempted.

4. If the contract debtor suffering from force majeure delays in performing the notification obligation and causes losses to the other party, it shall still be liable for breach of contract. China's contract law stipulates that the contract debtor suffering from force majeure shall timely notify the other party of the facts of force majeure and provide the certificate of force majeure issued by relevant authorities.

  4、 Has the enterprise taken "anti epidemic measures" in contract management

The epidemic has had an in-depth and extensive impact on enterprise contracts. Facing the current epidemic, the contract management department of the enterprise should have its own "anti epidemic measures" to prevent the expansion of damage.

1. Diagnose the contract. Sort out the outstanding contracts of the enterprise as soon as possible to judge whether the performance of the contract will be affected by the epidemic. Similar to natural infection novel coronavirus pneumonia, the contract of an enterprise may also be infected by the epidemic. The contract that can be affected can be regarded as a "confirmed" contract. It can be regarded as a "suspected" contract for performing the contract that may be affected. For these two types of contracts, the contract managers should further comb the "illness" and see if there is "force majeure". Room for application, whether continuous "observation" is required.

In Foreign-related Contracts, it is also necessary to review whether the contract contains the agreement of "force majeure" (when the applicable law of the contract is Anglo-American law, the contract agreement is the main basis for claiming exemption, which is different from the legal principle of force majeure exemption in China) or whether there is an exclusion clause of "force majeure" (if the applicable law of the contract is French law, the exemption of force majeure can be excluded by agreement, which is different from the mandatory application of the exemption principle of force majeure in Chinese law).

2. If the contract is "confirmed" to be affected by the epidemic and the enterprise is unable to perform its obligations in time in accordance with the contract, the enterprise shall arrange to send a notice to the other party as soon as possible. If the contract stipulates the method of notice, it shall be in accordance with the contract. The notice will constitute the epidemic as "force majeure" Events and the situation that the enterprise is unable to perform the contract as agreed due to the epidemic situation, and propose to change the contract (such as delayed performance or partial performance of obligations) or terminate the contract according to the situation of "force majeure" (when the purpose of the contract cannot be achieved due to the epidemic situation) And attach relevant epidemic certificates or relevant decisions taken by government departments to prevent the operation of enterprises as supporting documents.

A novel coronavirus pneumonia certificate can be issued by the third party organizations such as the Trade Promotion Council, various trade associations, etc., or by administrative measures or administrative orders issued by relevant government departments for controlling the epidemic situation, involving the contract debtor as "new crown pneumonia". If the patient or suspected case is isolated for observation, the medical certificate and relevant certificates of isolated observation shall be provided.

3. After sending the notice to the other party's enterprise, the contract debtor suffering from force majeure shall also pay attention to receiving the feedback of the other party's enterprise. If the other party raises an objection to the content of the notice, it is necessary to communicate with the other party in time or seek legal support.

4. In the process of sorting out the contract, it is also necessary to consider whether the opposite party of the contract has the possibility of claiming "force majeure" to itself, so as to prepare for a rainy day; after the opposite party of the contract sends the notice of "force majeure" to itself, on the one hand, we need to actively take measures to prevent the expansion of losses, on the other hand, we also need to consider the "force majeure" proposed by the other party Whether it belongs to the situation of no exemption or the scope of no full exemption, so as to take further measures to protect the interests of the enterprise.

Of course, the current epidemic is a disaster for the whole society. As a member of the social community, individual enterprises communicate and cooperate with each other and help each other to overcome difficulties. Therefore, if there is a dispute, we advocate to solve it through friendly negotiation and strengthening communication on the premise of clarifying the contractual status of the enterprise.

  Dr. Zhang Shipeng, lecturer, School of business, East China University of Technology

  Source: Business School of East China University of Technology

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Business School of East China University of Technology
Business School of East China University of Technology
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