By Wenhao Han, Partner at Zhong Lun Law Firm
As COVID-19 spreads, businesses are feeling its impact on their operations, even if they aren’t based in China. For businesses with supply chains dependent on China, this is especially the case. It’s therefore important to know where your company stands legally.
In mid-February, for example, Jaguar Land Rover stated in a Financial Times article that it had to fly components out of China in suitcases, in a race to prevent its UK plants from closing by the end of the month. With more stringent requirements on quarantines likely to be imposed, the situation may stay with businesses for longer than expected. During such an unprecedented event, goodwill and commercial cooperation are essential for businesses trading with China to overcome such temporary difficulties. On the other hand, there will inevitably be situations where companies need to review their contracts with commercial partners.
Understanding where you are from a legal perspective is key to making sound commercial decisions, and dealing with coronavirus-related events.
Which law governs your contract?
When disputes arise, the first thing to do is find out which law governs the contract. It is fundamental to verify if the contract was signed under UK law or China law. You can find this information in the governing law clause of the contract.
The governing law may vary for different types of contracts. For example, most shipping and commodities trading contracts are usually governed by English law, whereas other commercial contracts may be subject to Chinese law.
Does the current coronavirus situation constitute a force majeure event?
There are currently a lot of discussions about whether the COVID-19 outbreak should be regarded as a force majeure event. If so, suppliers who are no longer carrying out their jobs could be relieved of or suspended from their obligations. The answer to this question is somewhat complicated, and the approaches to a force majeure event are different under English and Chinese law.
According to English law, force majeure is a term that needs to be explicitly set out in the contract. It is not a rule of law or a term that can be implied in the contract. If your contract contains the words “Acts of God”, “disease”, or “epidemic”, then COVID-19 would fall within the force majeure clause. As the situation develops, the more the measures to contain the virus prove to be unsuccessful, the stronger the case is to argue that it constitutes a force majeure event.
By contrast, under Chinese contract law, force majeure can be applied even if the contract does not mention it. Chinese authorities have already issued force majeure certificates to assist Chinese companies in proving they are undergoing a force majeure event.
By contrast, under Chinese contract law, force majeure can be applied even if the contract does not mention it.
Under both English law and Chinese law, companies relying on a force majeure event must give notice to their counterparts, and need to show that it has used its reasonable endeavours to mitigate losses. Once a valid force majeure event is identified, parties have three resolutions: They may suspend their obligations temporarily, terminate the contract, or relieve the non-performing party of its liability.
What other contractual terms are in your contract?
Shortage of supply may not be the fault of your primary partner. Delays in the supply chain may be due to a knock-on effect produced by other businesses that sit lower in the supply chain. Many businesses will find themselves in a suite of intertwining contracts, under which their roles and positions are dependent, but different.
In such situations, it is useful to take a holistic view. You should check the clauses in your contract, which specify the allocation of risks in the event of delay or non-performance by an innocent party. A well-drafted contract will usually have these terms in it. Moreover, if the loss you suffered is not solely caused by events related to the coronavirus, you may refer to other clauses in the contract to determine the bearer of the loss and whether risk and loss can be passed on down the contract chain.
Seek legal advice
You may be the party wishing to rely upon the break-out of coronavirus as a force majeure event, or the one receiving such notice from your business counterpart. No matter on which side you stand, it is advisable that you take proper legal advice to assess your rights and remedies under each of the intertwining contracts you are involved in.