14 May 2020
Introduction
On 16 April 2020, the Chinese Supreme People's Court (SPC) issued Guidance on the Proper Handling of Civil Cases Involving the Novel Coronavirus Outbreak in Accordance with the Law (I) (the Guidance), which came into force on the same day.
The Guidance, which aims to clarify various procedural and substantive issues within the framework of existing laws, will be of significant importance for Chinese Courts when handling civil disputes in relation to COVID-19. Here are some highlights.
1. Causation
Both Articles 2 and 3 of the Guidance emphasize that, as a condition for the application of the force majeure rules, there should be a "direct impact" from COVID-19 or from the prevention and control measures in relation to COVID-19. The SPC requires that the direct causation between COVID-19, or the related prevention and control measures, and the failure to perform the contract, should be accurately ascertained. The direct causation means that the failure of performance of the contract is directly caused by force majeure events. There should be no other intervening factors between "one cause" and "one consequence". These two Articles also indicate that the SPC has formed a cautious judicial attitude through the rigorous Guidance to prevent the abuse of force majeure defense.
2. Self-induced inability to perform a contract
The Guidance further provides that, if the failure to perform the contract, or the increase in the losses, is attributable to one party, that party shall bear the corresponding liability in accordance with the law. It is in line with the spirit of Articles 119 and 120 of Contract Law of the People's Republic of China, that is, the requirement of mitigation for innocent parties, and each party bearing responsibility for the degree of fault. The innocent party should be reminded that appropriate measures should be taken to prevent the loss from expanding after receiving the force majeure notice during such special period of time; otherwise no compensation can be claimed for the extended loss.
3. Onus of proof
It is expected that the proof of direct causation will be the key issues in claims where a party relies on COVID-19 as a force majeure event. Adducing sufficient evidence to prove there is a "direct impact" will be crucial if a party wishes to rely on force majeure in order to be partially or completely exonerated from liability. In this regard, the Guidance also stipulates that if contractual obligations cannot be fulfilled due to COVID-19, or the related prevention and control measures, that party shall bear the burden of proving that they have fulfilled their obligation of timely notification of the other party.
4. A distinction between "difficulty" in performance and frustration of performance of the contract
In Article 3 of the Guidance, a distinction is drawn between the difficulty in performing the contract and frustration of performance of the contract.
Courts should not support claims for termination of contract based on the "difficulty" in performing that contract. If performing the contract turns out to be obviously disadvantageous for one party, and that party applies to amend the contract, for instance requesting a revision of the period of time for performance, or the methods of performance, or the contract price or quantity, etc., the Courts should decide whether or not to grant such request on the basis of the factual matrix. Only when the pandemic, or the related prevention and control measures, result in frustration of performance of the contract, would the Courts decide to terminate the contract.
5. Guidance on handling labour disputes
Article 5 of the Guidance clearly states that employers shall not terminate employment contracts on the grounds that an employee is a diagnosed or suspected COVID-19 patient, has COVID-19 but is asymptomatic, is under quarantine in accordance with the law or originates from an area with a severe outbreak. The Guidance also provides that when handling labour disputes, reference should be made to the policies/measures issued amid the pandemic, by the relevant administrative departments of the State Council and the provincial governments. It is, therefore, recommended to pay attention to the policies on employment issued by the State Council and the provincial governments.
6. Suspension of the time limit and extension of Court deadlines
Articles 6 and 7 of the Guidance aim to smooth litigation proceeding in such unique times and provide practical rules for the suspension of the time limit stipulated under the Chinese General Provisions of Civil Law. If the right to claim cannot be exercised due to the COVID-19, or the related prevention and control measures, within the six months preceding the time bar, a party may claim a suspension of the time bar on the grounds of force majeure. It should be noted that the suspension of the time bar can only "pause" time and is different from an interruption/discontinuance of the time limit. After the force majeure event disappears, the provisions of the statute of limitations will resume.
If the Court deadlines (such as the deadline for filing a defence, presenting evidence, etc.) as specified by the law or required by the Court, is delayed due to COVID-19, or the related prevention and control measures, the parties can apply for a time extension within ten days after the impediment disappears. . In this regard, the applicant must provide evidence proving the existence of such impediment. The Court has the discretion to decide whether or not to permit an application for the extension of the Court deadline.
7. Flexibility in Court fees and property preservation and related measures
The Guidance points out that for the party who faces financial difficulties due to the pandemic, the Court could be flexible with regards to the payment of court fees. The Guidance also recommends that the Courts be flexible in carrying out property preservation orders and related measures, with the aim of reducing the burden on the parties that have been adversely affected by the pandemic.
Finally, it is advisable that the parties pay close attention to preserving evidence, especially in relation to the causal relationship and to notices to their counter party regarding force majeure. In addition, parties should actively explore dispute resolution solutions and strive to reach agreement by changing the contract performance period, the performance method, the contractual price/amount, and other related matters.
For further information, please contact:
Canming Wang, Local Partner, Clyde & Co Westlink JLV.
canming.wang@clydecowestlink.com
