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Harrison Jia
DeHeng Law Offices, Beijing
jiahui@dehenglaw.com

           

The Covid-19 crisis has had a negative impact on international trade. This paper aims to analyse how foreign trade enterprises apply force majeure in international trade contracts during the pandemic.

Applicable laws

Circumstances where Chinese laws applies

If the contract expressly provides that the applicable law shall be Chinese law, even if the force majeure clause applicable to a pandemic has not been expressly stipulated in the contract, the pandemic shall be subject to provisions of the General Rules of the Civil Law and the Contract Law relating to force majeure.

Circumstances where United Nations rules apply

Where no governing law has been expressly agreed in the contract, the liability exemption clause set out in paragraph 1 of Article 79 of the UN Convention on Contracts for the International Sale of Goods (the ‘Convention’) may be considered where countries of the places of business of the parties are signatories to the Convention and the parties have not expressly excluded its application:

‘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.’

Circumstances where the laws of other countries are applicable

If the laws of another country can be determined in accordance with the contract, the issue of whether the pandemic constitutes force majeure shall be specifically analysed based on the specific provisions of the contract, the laws and regulations of such country regarding force majeure.

It should be noted that some national laws do not stipulate the concept of force majeure and the corresponding remedies. Therefore, international trade contracts usually contain a clear definition and scope of force majeure events and the condition for the rescission of the contract.

Circumstances where the principle of the closest connection applies

Where an applicable law has not been agreed in the international trade contract, the law of the country with the closest connection to the contract may then be determined in accordance with the conflicts of law rules of the country with the closest connection to the contract. Relevant connection points of the contract include the location of the parties, the place of conclusion and performance of the contract, and whether other provisions of the contract will express the views of the parties.

Constitutive elements of force majeure

Substantial elements constituting force majeure

Subject to the application of Chinese laws, determination of force majeure mainly depends on three factors, including ‘unforeseeable’ subjective factors, and ‘unavoidable’ and ‘insurmountable’ objective factors.

The term ‘unforeseeable’ refers to a circumstance that the parties concerned could not reasonably have foreseen before the conclusion of the contract. ‘Unavoidable’ means that the party concerned could not prevent such objective circumstances from occurring or could not avoid the occurrence of such circumstance. ‘Insurmountable’ means that the obstacles to the performance of the contract and the damage caused by the objective circumstances could not be overcome.

Procedural elements constituting force majeure

Timely notification and providing evidence

Article 118 of the Contract Law explicitly stipulates the obligation of timely notification when one party fails to perform the contract due to force majeure. In accordance with this provision, if a party to an international trade contract is unable to actually perform the contract due to the pandemic and the regulatory measures adopted by various countries to different degrees, it shall send the relevant notice to the other party in a timely manner.

Whether measures have be taken to reduce the losses

Article 119 of the Contract Law stipulates that:

‘After one party breaches the contract, the other party shall take proper measures to prevent further losses; if the other party’s failure to take proper measures results in further losses, it shall not claim any compensation for the further losses. Any reasonable expense incurred by the other party in preventing further losses shall be borne by the breaching party.’

The breaching party shall promptly take measures to prevent further losses caused by the pandemic.

Delivery of goods from the seller’s perspective

Analysis of application of force majeure

In the case of international trade contracts, such as those under cost, insurance and freight (CIF) or free on board (FOB) terms of trade, the seller is responsible for the preparation, storage and delivery of goods on board the ship. In accordance with the provision of Article 117 (1) of the Contract Law: ‘If force majeure occurs after one party has delayed its performance, the liabilities of the party shall not be exempted.’ Therefore, in cases where a delay in the performance of the contract has already occurred, as a general rule, the party causing this delay is not excused from liability under the force majeure clause during the period of delay. The parties may, however, change the implied status of law by express terms.

As the seller should fulfil its obligation of delivery of the goods, where the international trade contract fails to be fulfilled as agreed in the contract due to the impact of the pandemic, it shall notify the other party in time as agreed in the contract and actively take measures to reduce the adverse effect caused by the epidemic.

Advice to the seller

Timely notice and mitigation measures

According to Article 118 of the Contract Law, either party shall inform the other party in time if it is unable to perform the contract due to force majeure, to reduce the losses caused to the other party and shall also provide proof in reasonable time limit. Therefore, should the exporter be prevented from performing the contract in accordance with the terms of the contract owing to epidemics, it shall immediately notify the foreign buyer and shall take all possible measures to mitigate the losses; otherwise, the exporter shall be liable for the increased losses resulting from its inaction.

The contract shall not be terminated without careful consideration

According to Article 94 of the Contract Law, if the purpose of a contract cannot be achieved due to force majeure, the parties may terminate the contract. Hence, the parties are not entitled to terminate the contract if the pandemic does not directly lead to the failure of the purpose of the contract. Where there is genuine difficulty in performing a contract, the foreign trade enterprise shall actively negotiate with the upstream and downstream enterprises on rescission or modification of contracts.

Urging the buyer to perform the contract

At present, many domestic foreign trade enterprises have suffered great losses due to the cancellation of foreign orders. If the foreign buyer is not affected by force majeure, it shall not be entitled to request the direct rescission of the trade contract on the grounds of the pandemic, unless the foreign buyer provides evidence to prove that the pandemic has led to prohibitive provisions in its home country or a decrease in the quality of the goods so that the purpose of the contract cannot be achieved, or other agreements or legal causes that may justify the rescission of the contract have appeared due to the pandemic.

Receiving goods from the buyer’s perspective

Analysis of receiving goods

For the buyer to claim force majeure and refuse to perform the contract, it must pay attention to the following points. The first to be noted is whether the trade term stipulates the transfer of risks after the buyer receives the goods. After the risks of goods has been transferred to the buyer together with the goods shipped on board under FOB, CIF or other trade terms, if the buyer is located in the country where control measures have been taken to prevent epidemic, the seller shall not be required to bear the risks caused by force majeure.

Second, if the buyer claims to reject the goods due to the government injunction, it shall be decided whether such injunction has been issued or implemented at the time of conclusion of the contract. Governmental prohibition must be exercised after the agreement is signed and before its termination, otherwise it shall not constitute an event of force majeure.

Third, the buyer’s refusal to perform the contract by claiming force majeure shall also satisfy that at the time of the conclusion of the contract, it could not reasonably be foreseen that the government might take control measures.

Finally, it is necessary to determine whether the buyer itself is at fault for the performance of the contract. After issuance of the government injunction orders, the buyer shall take reasonable measures to prevent the risk of failure of receiving the goods. The force majeure exemption shall not be claimed in respect of any increased losses caused to the seller by the fault of the buyer.

Analysis on payment issue

In terms of payment, the obligation to pay the price of the goods is a monetary obligation, which may be fulfilled by means including fund transfer, remittance, cheque and bill of exchange, which is mainly satisfied through the bank settlement system. If the pandemic does not cause international business to collapse in the country of payment, the buyer’s grounds for withholding the payment will be difficult to establish. Therefore, the obligation to pay the price generally does not apply to the exemption of force majeure.

Advices to the buyer

Inform the seller and communicate with the bank

One of the main obligations of the importer in international trade contracts is to make payment and the prior obligation involved in contracts is usually the issuance of a letter of credit within a certain period. During the pandemic, the working hours of the bank may be affected, so if the letter of credit obligation of the importer happens to be within the scope of the pandemic, the importer shall notify the foreign seller as soon as possible and coordinate the working hours of the bank so as to reduce losses such as late shipment and vessel demurrage charges.

Coordination of change of logistics and warehousing

Another major obligation of the buyer is to accept the delivery of the goods. If the delivery place is closed due to the pandemic, the buyer shall inform the foreign seller and the carrier as soon as possible and negotiate with the buyer to change the time or place for taking delivery of the goods, so as to minimise the losses that may be caused to the parties.

Conclusions

To sum up, where force majeure clauses are applied to an enterprise engaging in international trade during the epidemic, the following matters shall be noted:

• first, the parties shall prudently and carefully determine whether the situation meets the constitutive elements of the force majeure. If in fact the contract can still be performed, both parties should endeavour to perform the contract;
• second, in the case of an event of force majeure, the party claiming force majeure shall notify the other party in a timely manner and shall pay attention to keeping proper evidences;
• third, the official force majeure certificates are very crucial. However, the enterprise must not regard it simply as a ‘golden medal’ for exemption of its liabilities;
• fourth, even if the claims on the ground of force majeure are accepted by the counterparty, the party claiming force majeure shall still pay close attention to the latest development; and
• last, based on the confidentiality or efficiency of cooperation between the two sides, the parties should attach importance to mediation and other non-confrontational ways of dispute settlement.