2022 witnessed another COVID-19 outbreak. To bring it under control, different epidemic prevention and control measures have been adopted in different places in China, especially the lockdown in Shanghai, causing disruptions to the normal production and international trade of enterprises. International trade has always been our strong suit. Here we have sorted out the legal issues commonly consulted, hoping to help foreign companies to promptly respond to and avoid legal risks in their business activities in China.
1. Does the foreign buyer have the right to terminate the contract between the foreign buyer and the Chinese supplier, if such contract cannot be performed due to the severe pandemic and such severe pandemic is a force majeure event specified in such contract?
The party autonomy is highly respected in the international trade. Therefore, the focus should be on the text of the contract, and the stipulations in the contract should be applied first. If the severe pandemic has been included in the contract as a force majeure event, both parties may suspend performance within the scope of the force majeure event and its duration. At the same time, it should be determined whether the purpose of the contract cannot be achieved due to force majeure, depending on the nature of the contract. If the purpose of the contract cannot be achieved, the contract may be terminated on the grounds of force majeure.
However, if the pandemic has not affected the realization of the purpose of the contract, the conditions for applying force majeure have not been met. We do not recommend foreign clients to terminate the contract on the grounds of force majeure. However, foreign clients can claim that they shall continue to perform their contractual obligations after the force majeure situation is eliminated, or perform the contract according to the plan otherwise negotiated by both parties.
According to our experience as Chinese lawyers engaged in international trade for a long time, when the pandemic situation hinders the performance of the contract, our suggestions are as follows: firstly, notify the other party to the contract in writing in a timely manner; secondly, take active measures to avoid further losses; and thirdly, retain relevant evidence and materials related to the negotiation between the two parties, and try to communicate in writing if possible (such as communications via company emails).
2. Does force majeure apply in this circumstance where the Chinese supplier fails to deliver goods on time because most of the staff and workers are quarantined at home due to the pandemic? What can be done to reduce the losses?
First, if the pandemic is defined as a force majeure event in the contract, force majeure shall apply. Second, in case that no clear stipulation is given in the contract, please refer to the applicable laws specified in the contract. If such applicable laws stipulate that the pandemic belongs to force majeure, force majeure shall apply. If still no conclusion can be drawn based on the contract or the applicable laws and both parties are from a state party to the United Nations Convention on Contracts for the International Sale of Goods (hereinafter as “CISG”), Article 79 Paragraph 1 of the CISG shall apply, which stipulates that a party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.
Compared with the pandemic situation in 2020, the impact of the pandemic this year is relatively smaller. Yet there is no official unified opinion on whether the pneumonia pandemic in 2020 is a force majeure generally recognized in international trade. Therefore, the three criteria shall be followed in determining a force majeure event: namely, unforeseeable, unavoidable and uncontrollable.
With most staff quarantined at home due to the epidemic prevention and control measures, the factories have to suspend its operation and the customs export procedures are slowing down, causing the delay of the performance of the contract. Whether such delay will affect the realization of the purpose of the contract should be determined on a case-by-case basis. However, if the Chinese supplier can overcome the difficulties because it is not impacted by the compulsory measures imposed by the government and because its employees can still go to work, force majeure shall not apply. If that is the case, it is recommended that both parties negotiate a solution based on the rules of hardship stipulated in the Principles of International Commercial Contracts. The rules of hardship are derived from the principle of fairness. Hardship refers to the situation where the occurrence of events that cannot be foreseen or controlled by the parties fundamentally alters the equilibrium of the parties because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished. The rules of hardship can apply regardless of whether such hardship can be overcome or not. Therefore, in light of the rules of hardship, the seller can explain the situation to the buyer and renegotiate the contract, such as amending the contract by reducing the quantity of the subject matter of the contract or changing the term of performance; the buyer can request the seller to provide a solution (such as refunding) within a time limit and look for other suppliers at the same time to avoid default in the following transactions.
3. Who shall bear the additional costs if due to the epidemic control measures, the goods are stranded in the ship or at the port or airport and cannot be transferred, causing unavoidable additional costs?
Who shall bear the additional costs for warehousing and demurrage shall be subject to the contract of carriage. If no contract of carriage is signed or no relevant stipulation is given in the contract, the bearing of the additional costs shall be subject to the “International Commercial Terms” (hereinafter as “Incoterms”). According to the Incoterms, with delivery as the boundary, the seller shall bear all the costs before delivery, and the buyer shall bear all the costs after delivery (except for the agreed freight). Thus, the bearing of the additional costs depends on whether the additional costs occur before or after delivery.
Above is our general analysis about the bearing of the additional costs. Since such additional costs are not attributable to either party, the parties may negotiate a plan of sharing or sparing such additional costs to overcome the difficulties together, considering the relief policy issued by the government, in the spirit of fairness and for the sake of subsequent and long-term cooperation.
If you have any potential or existing disputes concerning international trade and need assistance from Chinese lawyers, please contact us via email@example.com.