Facing the epidemic of the coronavirus, some people are thinking about how to spend the extra 10-days’ holiday, while some others are worrying about what to do with their contracts. For example, Shanghai Government requires local enterprises not to restart work before 24:00 of February 9th, as a result, it is possible that some contracts could not be performed on time or be performed at all. This may bring about a series of questions: whether the party who could not perform the contracts should undertake the liabilities for breach of contract, whether the performance of contracts could be postponed, whether the contract could be terminated, and how to bear the losses after the contract is terminated.

I.The epidemic constitutes a force majeure event

When encountering such problems, a familiar term appears to many people, namely force majeure. Does the outbreak of the coronavirus constitute a force majeure event? In precedent cases, Chinese courts normally would regard similar epidemic as force majeure event. The SARS outbreak in 2003 was very similar to the epidemic of this coronavirus. The Supreme Court of China ever issued a notice regarding the contract disputes related to SARS (“SARS cases”) in 2003. According to this notice, if the contracts cannot be performed due to the outbreak of SARS or the administrative measures adopted by government to prevent and control the SARS, the related disputes shall be handled in accordance with the relevant provisions of force majeure.  Chinese courts have handled multiple disputes related to the SARS in accordance with the relevant provisions of force majeure. 

According to the Contract Law of the People’s Republic of China, if a contract cannot be fulfilled due to force majeure event, the liabilities may be exempted in whole or in part depending on the impact of the force majeure. The “exemption of liabilities” refers to the exemption of the liabilities for damages or breach of contract, instead of the exemption of the obligations to perform contract. For example, a contract stipulates that in case of delayed performance, the defaulting party shall pay the non-defaulting party 0.5% of the contract price as penalty for each day of delay. When the performance is delayed due to force majeure, the delaying party is entitled to refuse to pay the penalty based the relevant provisions of force majeure. After the disappearance of a force majeure event, the other party is still entitled to require the delaying party to continue to perform the contract.

With above paragraph, some readers may feel relieved, at least they do not need to undertake the liabilities for breach of contract. However, it is not the case that the relevant provisions of force majeure will certainly be applied to every contract when force majeure events occur. For example, the degree of impact of the epidemic on a sales contract and a tourism contract may not be the same. When a tourism contract with Wuhan as the destination cannot be fulfilled at all, the performance of a computer sales contract signed by two Shanghai-based companies may not be affected in the least. Therefore, in each case, it is necessary to examine the impact of force majeure event on the performance of the contract according to the actual situation. In certain SARS cases, the court held the opinion that the SARS epidemic and the restrictions imposed by the government due to the SARS epidemic only affected part of the business of the defaulting party, and were not serious enough to “directly” or "fundamentally” cause the failure of the performance of the contract, therefore the force majeure cannot be regarded as the legal reason for termination of the contract. In summary, after the occurrence of force majeure events, factors such as the duration of the epidemic, the specific content of the contract, the duration of the contract, the scope of the administrative restrictions and others shall be taken into consideration to determine whether relevant provisions of force majeure can be applied.

II.What to do after force majeure event occurs

Although liabilities can be exempted under force majeure event, it does not mean that the contracting parties can rest easy and wait for the disappearance of the force majeure event. The contracting parties should take the following measures to deal with the follow-up matters of the contract:

1.After the occurrence of a force majeure event, the contracting parties shall actively take reasonable measures to reduce the extent of the damage and to reduce the adverse effects on the performance of the contract. If any contracting party fails to take measures timely and causes expansion of the losses, he shall be liable for the expanded losses.

2. Obtaining proof regarding the occurrence of the force majeure event. Some force majeure clauses in contacts may require the party affected by force majeure event to provide the other party with proof of the force majeure event within a certain period of time. Therefore, the affected party should actively obtain proof of force majeure event from government agencies or other third-party agencies. 

3. The contracting parties shall decide how to deal with subsequent issues related to the contract as soon as possible, mainly whether to change the contract or to terminate the contract. As for change of the contract, the parties will continue to perform the contract by delaying performance, reducing the price, etc. In some SARS cases, the lessees whose business has been suspended due to the SARS epidemic demanded for deduction of rent during the suspension. And the court has supported their claims in accordance with the principle of fairness in the end. As for termination of contract, in the event that the purpose of the contract is completely unrealizable due to force majeure event, any contracting party can claim termination of the contract and both parties will be relived from the contractual obligations in future.

4. If any party decides to terminate the contract, he shall collect evidence of losses arising from preparation for the performance of the contract. After the contract is terminated, the contract price corresponding to the part already been fulfilled shall be paid, and the contract price corresponding to the part not been fulfilled shall not be paid. The costs incurred during the preparation process after the contract is concluded shall be deemed as the losses of the parties. In juridical practices, the court generally will share such losses between the contracting parties in accordance with the principle of equity. In some precedent cases, each party bore 50% of the losses.

5. Giving written notice to the counter-party of the contract. There are several benefits of issuing written notices. First, to clarify that you have taken measures to mitigate losses against force majeure could reduce the risk of being held liable (for expanded losses). Second, since there are different ways of dealing with subsequent issues after the occurrence of force majeure event (change or termination), to take the initiative in giving written notice and to choose the way which is to your beneficial could help you to gain the initiative. Generally, the notice should include the following items:

(1) the specific circumstances of the force majeure event and the extent of impact;

(2) measures already taken or to be taken to mitigate losses after the occurrence of force majeure event;

(3) proposal for the subsequent issues related to the contract (change or termination);

(4) losses caused by the preparation for the performance of the contract and the proposal for sharing the losses (when the contract is terminated).

6. Actively negotiating with each other and preparing for possible litigation. The two parties must reach a mutual agreement for the change of contract. If the parties fail to reach an agreement, then litigation may be required to determine how the contract shall be changed. When force majeure event occurs, there is a higher chance that contract disputes would arise. Therefore, on one hand, the contracting parties shall maintain communication with each other and actively negotiate to resolve the problems; on the other hand, they must be prepared for possible litigation.