17 February 2020
China | Coronarivus
The ongoing outbreak of the Covid-19 and the measures implemented to control the spread of the outbreak over the past three weeks have already prevented many enterprises and individuals from performing their contractual obligations. Suppliers have been prevented from delivering the promised goods. Clients have been prevented from taking the delivered goods. Contractors have been prevented from accessing construction sites. Retailers have seen their stores closed.
In the absence of agreed contractual provisions dealing with that particular situation, how to handle contracts affected by the current Covid-19 outbreak pursuant to the relevant PRC laws and regulations? Should the affected party claim the existence of a force majeure event as an excuse for the non-performance of its obligation or, instead, claim for a revision of the contract on the ground of unforeseen hardship?
Like in most of the civil, common and international legal systems, under PRC laws, pacta sunt servanda-agreements must be kept. The traditional excuse to the performance by a party to a contract of its contractual obligations without being deemed in breach of the contract is when such performance is impossible for an event of force majeure. Article 117 of the PRC Contract Law provides indeed that: "if the contract cannot be performed due to an event of force majeure, liability is partially or wholly exempted depending on the effect of the event of force majeure, unless the law provides otherwise".
However under PRC laws, it is admitted that hardship provides, under certain circumstances, an additional ground for the discharge of the contract or for its adaptation to the changed circumstances.
This has been legally recognized under the Interpretation of the Supreme Court on Certain Issues Concerning the Application of the PRC Contract Law (II), issued by the Supreme People's Court in 2009, which provides the following: "Where a party to a contract petitions the court to modify or terminate the contract on the grounds that the continuous performance of the same is obviously unfair to the party or the purpose of the contract will not be realized due to occurrence of any material change of circumstances that is unforeseeable, not caused by force majeure, and not a commercial risk after the conclusion of the contract, the court shall decide whether the contract shall be modified or terminated according to the principle of fairness on a case-by-case basis."
An illustration of the above principles can be found in the judicial practice that followed the SARS outbreak in 2003, which is of the same nature as the Covid-19 and had similar adverse effects on business activities in China. In that respect, the Supreme People's Court issued a notice (Fa  No. 72) specifying that contracts affected by the SARS outbreak shall be dealt with either (i) on the ground of force majeure, or (ii) or the ground of hardship. Accordingly, in judicial cases relating to contracts affected by the SARS outbreak, some courts defined SARS as force majeure event while some others as hardship (change of circumstances) depending on the circumstances of the cases. The judicial practice in relation to contracts affected by the Covid-19 is likely to follow the same path.
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