S1E5 Force Majeure and Contract Non-performance During the Coronavirus Crisis - Transcript and Highlights

We have released the full transcript of our recent discussion with Jason Chang here:

https://china-business-law-podcast.simplecast.com/episodes/force-majeure-and-contract-non-performance-during-the-coronavirus-crisis/transcript

Below are some of the best highlights from the episode:

1. On meeting a high standard for proving force majeure:

Art:

"So let's take maybe a step back and for the benefit of our audience explain what a force majeure clause is, what it actually allows someone to do. These clauses are seldomly invoked and there's not necessarily a lot of case law surrounding them. But first as I understand you must have a force majeure clause in the contract as a starting point and like we said for most sophisticated contracts, there should be something in there, but to the extent there is no force majeure clause or Act of God or unavoidable unforeseeable event then you're kind of out of luck, right?

Jason:

"Perhaps. One threshold question that we always want to look at before telling the client they're out of luck is actually the governing law and you mentioned a good one case law. So for common law jurisdictions such as the United States and also in Hong Kong, if you're going to be looking at the research, you're going to look at the case law and I would say on the whole in terms of specific cases that we've looked at, the threshold for a force majeure triggering event is quite high. You're going to have to show a lot of evidence. You're going to have to show a lot of documentation and prove that this circumstance has made it impossible for you to perform on the contract. 

Now on the other hand in the PRC and under PRC law because it's not a case law jurisdiction and you don't have to rely on that. But I do know that in the PRC this coronavirus event is widely been seen as something within the PRC as an unavoidable unforeseeable event that could very likely trigger the equivalent of a force majeure event in China. So I would say in addition to obviously meeting that threshold with facts and clear documentation, what governing law is the contract under I do think that's going to be a very strong factor in the analysis."

2. Force majeure usually only suspends/delays a party's obligation not terminate it

Art:

"Governing laws is key as you said. But one thing I think is apparent across the different governing laws out there is that force measure as I understand has to be the sole cause of the party not being able to perform. There can't be other kinds of factors out there. And so as you said it need it's a very high threshold to meet. One thing though that I think is confusing to people is just because a party invokes a force majeure clause to say look, I can't send you the goods that I promised to send you by, you know, the end of February, it doesn't necessarily excuse performance. It just may be temporarily suspend performance, delay it. I think there's still an obligation of the party to use sort of their best efforts to perform the contract."

Jason:

"Absolutely. So putting the governing law differences aside. I would agree you do have to make your best efforts and if it's not considered sort of impossible or impractical to perform on the contract you are still expected to perform on the contract. So you can't use force majeure as an excuse to exit out of the contract completely or fundamentally change the terms of the agreement. But if say the coronavirus instead of you know driving your truck through Wuhan which is the direct straight shot to Southern China, you're going to have to drive around and as a result incur more fuel charges, a delay in the delivery and potentially lose your profit or maybe even operate at a loss. Those are then business decisions for the performance of your contract. And if you got to take a detour or your truck driver had to be quarantined for 14 days and you can only move the product after 14 days, then that's where the cards fall and it's a difficult business decision to make." 

3. Contingency planning and insurance

Jason:

"I've seen a lot of companies look at this from a risk mitigation perspective and at the same time as you know, working with and collaborating with their counterpart in China having a sort of a worst-case scenario / most likely scenario / best case scenario kind of mapped out already in terms of what steps we would take if it was the worst case scenario. Say the worst case scenario is that my supplier can't perform within six months. That would be my worst case scenario then what is my plan of action if that is the situation that I find myself?

And so doing some of that, you know, thinking ahead thinking strategically thinking about the agreement not just you know, one contract at a time, but the totality of the relationship and the business relationship. Oh another interesting point that that we've seen is also the insurance aspect of it whether there's insurance coverage sometimes maybe it's the last but you know what you don't have to cover it and then your insurance can cover."

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