- Before the promulgation of the new Civil Code, there was no explicit provision for change of circumstances in mainland China. The concepts of change of circumstances and force majeure were perceived to be mutually exclusive. Following the promulgation of the new Civil Code, contractual parties that are affected by the pandemic may now consider the applicability of the various reliefs under the force majeure or change of circumstances regimes, depending on the extent of the contract performance being affected by pandemic-induced events.
- Aside from the new Civil Code, parties to a contract should also pay attention to the Guiding Opinions, which established a basic judicial attitude of "terminating contracts with caution and encouraging transactions," and provided further detailed guidance for handling COVID-19-related disputes.
In more detail
1. The force majeure regime
Under PRC law, force majeure is a statutory doctrine. In the absence of any force majeure clause in a contract, the doctrine applies to the contract automatically. Where there is an expressed contractual force majeure clause, such contractual provision applies provided that it does not conflict with or derogate from the general principles as set out under PRC law.
The new Civil Code fully incorporated the relevant statutory provisions about force majeure under the PRC General Rules of the Civil Law and the PRC Contract Law. The force majeure regime remained more or less unchanged after the Civil Code came into effect.
The key principles of force majeure in PRC contracts can be found here.
2. The change of circumstances regime
The new Civil Code expressly established the change of circumstances regime at the statutory level, and specified that reliefs of force majeure events are available under either the force majeure regime or change of circumstances regime, as the case may be.
Change of circumstances can be invoked when the following conditions are met:
- Occurrence of change of circumstances: The basic conditions of the contract have undergone a significant change, which was unforeseeable by the parties at the time the contract was concluded and was not part of the commercial risks. Force majeure is also an event of a change of circumstances.
- The event occurred after the conclusion of the contract and prior to the completion of the performance of the contractual obligations.
- The occurrence of the event is not imputable to either party.
- To continue to perform the contract would clearly be unfair to the party concerned.
If a change of circumstances is established, the legal consequences include the following:
- Obligation of renegotiation: Parties are obliged to conduct a negotiation to modify or terminate the contract. A party that fails to discharge this obligation will be held liable for compensation.
- Modification or termination of the contract: In the absence of any agreement after the renegotiation, the parties may request the court or an arbitration institution to modify or terminate the contract.
- Priority of modification and termination: For the purpose of encouraging transactions, the adjudicators must give priority to maintaining the contractual relationship by modifying the contract. However, if it is not possible to eliminate the unfairness by modification, the contract will be terminated.
3. The differences between the two regimes
The differences between force majeure and change of circumstances are as follows:
- Different events: Force majeure requires three elements, i.e., being unforeseeable, unavoidable and insurmountable. Change of circumstances requires two elements, i.e., being unforeseeable and unbearable (i.e., it will be obviously unfair for one party to continue to perform its obligations).
- Different applicable conditions: If the contract cannot be performed due to the occurrence of an objective situation, e.g., the force of nature and the force of society, force majeure will apply. If the performance of the contract is still possible but continuous performance thereof would be obviously unfair to a party, e.g., due to the legal order, economic order or the specific purchasing power of the currency, then change of circumstances will apply.
- Different procedures: Under the doctrine of change of circumstances, parties are required to conduct renegotiation as mentioned above. In the case of force majeure, there is no requirement for renegotiation, but the party is required to give notice of and prove the force majeure.
- Different consequences: Force majeure is a statutory ground of exemption, where the party may be exempted from its contractual obligation in whole or in part pursuant to the force majeure clause. While the change of circumstances is not a statutory ground of exemption, the party's application for modification or termination of the contract would be subject to the court's discretion.
4. The applicability of the two regimes
In practice, the Guiding Opinions and some of the latest judicial decisions do provide insights on how civil cases involving the COVID-19 pandemic may be handled:
- If the pandemic or its prevention and control measures directly render the performance of the contract impossible, force majeure should apply.
- If the pandemic or its prevention and control measures only make the performance of the contract difficult, a change of circumstances should apply.
- The court should adopt a basic judicial attitude of "terminating contracts with caution and encouraging transactions." For contracts that can continue to be performed, the court will make efforts to facilitate mediation and encourage the parties to continue to perform the contract, and the contract will not be terminated. The court will decide to terminate the contract only when the purpose of the contract can no longer be achieved.
- If a force majeure event in the upstream contract makes the performance of the downstream contract impossible, the court will consider whether there is a causal relationship between the force majeure event in the upstream contract and the failure to perform the downstream contract. If so, the force majeure exemption may equally be invoked by the defaulting party of the downstream contract.
1. Guiding Opinions on several issues concerning the proper trial of civil cases involving COVID-19 (I), (II) and (III)
2. Please refer to Coronavirus outbreak: Force majeure from a PRC law perspective published on 18 February 2020 for more details about the general position of the doctrine of force majeure in mainland China.
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