China’s Supreme People’s Court (SPC) recently released its Guidance on the Proper Handling of Civil Cases Involving the Novel Coronavirus Outbreak in Accordance with the Law (No.1). The Guidance aims to clarify various recurring issues that have arisen in handling civil disputes during the COVID-19 pandemic. Here are some highlights of this Guidance.
Application of Force Majeure Rules and Contract Disputes.
The Guidance recognizes that COVID-19 is a force majeure event but emphasizes that courts must accurately apply force majeure rules according to applicable laws. Under China’s Contract Law, a party that fails to perform a contract due to the impact of a force majeure event may be partially or entirely exempt from liabilities. Such party, however, has the obligation to notify the counter party of the non-performance due to force majeure and to mitigate its damages. In addition, the nonperforming party must provide proof of force majeure within a reasonable time. If a force majeure event occurs after a party’s non-performance or delayed performance, then such event cannot be a defense to breach.
According to the Guidance, unless otherwise provided in the contract, courts adjudicating contract disputes should consider different factors including the impact of the epidemic on different regions, industries and types of case, the causal relationship between the epidemic or its prevention and control measures and the nonperformance, as well as the degree of causality.
In the SPC’s answers to questions regarding the Guidance, the head of the Research Office of the SPC points out that the Guidance encourages parties to complete transactions under their contracts. If the parties will be able to perform by revising the contract, they should negotiate an amendment, rather than terminating the contract right away.
According to the Guidance, courts should not support claims for contract termination due to “difficulty” in performance and shall mediate and encourage performance. Only when the epidemic or its prevention and control measures lead to frustration of the purpose of the contract would the court uphold a termination.
On the other hand, if a contract already defines force majeure events and provides the procedures on how to handle force majeure, then courts shall honor such provisions as long as they don’t violate any mandatory law, public order or morality.
Summation: Just because a party claims force majeure to try to get out of its contract, it does not mean the Chinese court will find force majeure will allow it to do so. Most importantly, read your existing contract and beware of signing new Chinese contracts that contain force majeure provisions.
When handling labor disputes, courts must follow the Labor Law and the Labor Contract Law. The Guidance specifically provides that if an employer terminates an employee simply because the employee is a confirmed or suspected COVID-19 patient, infected but asymptomatic, under quarantine as required by law, or from an area where there is a severe outbreak, the courts will not uphold the termination.
As we wrote before, any unilateral termination in China will be viewed as problematic at this time and should be avoided.
Summation: Terminating employees in China has always been difficult and fraught with issues. That is even more true today.
Tolling of statute of limitations.
Under the General Principles of Civil Law, force majeure events can “pause” time for the purposes of statute of limitations. Within six months before an applicable statute of limitations bars a claim, a party that cannot assert its claims due to a force majeure event will be granted a six month “pause” in the statute of limitations. The Guidance confirms that parties can rely on this rule for failing to assert a claim because of COVID-19 or because of its control and prevention measures.
Summation: If you missed filing a lawsuit because of the coronavirus and it has been less than six months since any applicable statute of limitations has expired, you should at least consider trying to file that lawsuit now.