China Business Law Podcast

Force Majeure and Contract Non-performance During the Coronavirus Crisis

Episode Summary

We talk with Jason Chang, Of Counsel at DLA Piper, on what international companies should know about force majeure and the current coronavirus situation.

Episode Notes

3:00 - What is force majeure?

5:28 - Are force majeure clauses always in contracts and what’s standard?

8:48 - What if the contract is silent on this issue and how does governing law matter?

11:26 - Force majeure often doesn’t totally excuse the party to perform the contract

14.16 - Chinese trade association issuing force majeure certificates now, what value do these have?

17:50 - How should foreign companies be preparing now for Chinese companies potentially using a force majeure clause in their contracts?

Bonus questions:

23:55 - A lot of parents in China, expats, etc., sending their kids to private schools in China which can’t open.  What can they do?

31:18 - What kind of personality do you need to have to handle sticky issues like force majeure cases and compliance issues generally as a lawyer?


Episode Transcription

China Business Law Podcast

S1E5 Force Majeure with Jason Chang


Welcome everybody to another episode of the China Business Law Podcast. I'm your host Art Dicker and today we have the pleasure of being joined by Jason Chang. He is of counsel at DLA Piper. He was at DLA Piper in China for many years and now he's back in California, welcome Jason.



Hey Art.   Glad to be here. 



Yes, it's a privilege to have you on.  You co-authored an article about coronavirus and the issue of force majeure. I think it would really help our audience if you gave a bit about your background and what kind of a practice areas you focus on.



Great, so I'm an international attorney focusing specifically on US China compliance investigations and litigation issues. So a lot of my clients come from both sides of the table both from the US side in representing US multinational companies who are looking to do business in China and kind of look at some of the operational risks, business risk.

In running a cross-border multinational business on the China side. I also have several clients that are multinational Chinese companies who are expanding abroad expanding internationally and getting their feet wet really with a lot of the US legal and regulatory issues. And so that's kind of what I do. It's a kind of an emerging space.



Yeah, and you've got experience now on both sides of both sides of the ocean and you're right. These issues are not going away as more and more Chinese companies go out and US companies encounter more and more regulations in China.

Well today though, we're going to focus on the coronavirus issue and it's obviously on everyone's minds these days both from a personal health and situation and also for many people on the business side and how it impacts the economy and any particular business contracts they may have with Chinese companies. So let’s get into it.

The specific issue of force majeure, you know, obviously the situation that we've seen, you know parts of China on lockdown we've seen workers having difficulties potentially not even being allowed to go back to work whether its manufacturing or other industries, clearly leading to some delays probably from Chinese companies on shipments and just general performance of the contracts that they

have with international companies. So what kind of remedies might come up here particularly for foreign companies who are who are waiting for their Chinese counterparty to perform the contract or for a Chinese party which may be unable to perform and it's gets us into the issue of force majeure. So, maybe you could give us first an introduction of what is force majeure and how does it play into this kind of a situation?



Great. So I think the core issue force majeure, now I'm not French and I'm not fluent in French. It's a French term and there it's interesting because the term that we like to use is French, but in English a lot of times we see it in contracts called an Act of God and then on the other side in in the PRC, it's called, you know something that's unavoidable or unforeseeable circumstances.


So it's a little bit of a different play on words, but I think at the end at the core of it, it's really about uncertainty in the performance of the contract whether it's a Chinese contract whether it's a U.S. contract whether it's a you know, a contract governed under another law like a Hong Kong law or English law. 


What is happening is a contract had been signed.  This outbreak happened and now there's an uncertainty in terms of whether one party or both parties can perform in accordance to the provisions in the contract. And now today with the coronavirus companies are faced with this predicament. 



Do contracts inherently always have a force majeure provision?



It's a pretty standard clause based on my experience and a lot of agreements have them but obviously, you know agreements come in all types and shapes, sizes and forms, some are drafted by lawyers some are drafted by non-lawyers. And so it really depends on the underlying contract. But I generally see them in my line of work. It depends on the level of the sophistication of the parties and the the amount at stake.



It’s kind of you know we call it boilerplate right? It's kind of clause that you see in the contract, which usually you just eyeball over and say oh okay you know hurricane, you know tornado, you know, natural disasters tends to be in there predominantly, although sometimes government regulation can be an issue. So this case is a pretty unique though. I think it would say as far as I could see some force majeure clauses covering a situation like this clearly and some not.



Yeah, no that raises a good point. And this is particularly the circumstance where this fact pattern is causing this discussion and along with a lot of our companies. Our clients are thinking about this does the coronavirus outbreak is it considered a force majeure triggering event? I think under most of the boilerplate standard clauses that I've seen, you know, Acts of God or force majeure triggering events are like fires explosions. It could be a war. It could be a revolution or it could be some sort of, you know, some sort of natural disaster. I have not seen that many agreements that off the top of my head right now that has a public outbreak where it where it goes through and identified it specifically.

Ali things similar to the coronavirus such as a pandemic or global pandemic, but I do know that I've seen some contracts that would include maybe like, you know companies strikes riots and then also some sort of contamination by radioactivity or something or where the where the factory is no longer operational due to some sort of toxic explosion or some sort of hazardous materials that that prevents people from, you know clocking in to work. 



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. So as far as I understand, you know again, 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 you know from like we said for most sophisticated contracts, there should be something in their major business contracts, 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? 



Perhaps. One threshold question that we always want to look at before telling the client or a person that you know, 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, I think you do.

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 event that the coronavirus 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.



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. 



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 majoreure 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 yeah. 



That makes it a high threshold, right if it's literally impossible to fulfill the contract not just more expensive to fulfill the contract.  But we do see a lot of, going back to the earlier point, we do see Chinese regulators issuing these certificates for Chinese trading companies and so forth to say that this in their opinion, they deem this as a force majeure event.  How much value does something like that have, let's say if it's governed by Chinese law or let's say if it's not governed by Chinese law right in the end of the day this is still somewhat of a subjective determination, right?



Yeah, so the certificates I understand that the China Council for the Promotion of International Trade, which is essentially a equivalent of a Chamber of Commerce in China. They're issuing these force majeure certificates as an effort to kind of communicate and be persuasive that there is indeed a force majeure event that has occurred in China and it is made it is unavoidable and unforeseeable and it has made performance on the contract very difficult for some of these companies. 

The latest I've checked the there has been a total of more than 1,500 of these certificates that have been issued two companies and I think it's it. I don't think they're binding but they're definitely going to be persuasive. 

Although the government does come out and say that the force majeure. This is an unforeseeable unavoidable event. It's not going so far as to you know absolve a company of liability. You still have to go back to the PRC law and make the determination in accordance applicable rules and regulations.



Right and you hit on a good point which leads into my next question. What about you know companies in the US or at least outside of China are themselves trying to figure out you know, what to do. And how bad is the situation in China and how long will it persist and you know, a lot of these companies have long-term relationships with the with their Chinese suppliers and value those relationships and I think the tricky part here is got to be clearly the two sides are already talking to each other all through this time as this situation is going on. How would a situation transfer over from? Let's say informally back and forth kind of like, hey, we really feel for you guys what's going on over there, you know do your best, you know will work on this together to the company saying look, we really, you know, the foreign companies saying we really don't know when these guys are going to be able to deliver it to us or do you know do what they're supposed to do under the contract and we need to look at it on an alternative supply or so forth. 

There's some formalities involved when you're using a force majeure clause with notice and so forth. So if you're let's say one of your clients, how would you advise them on having these conversations in real time with counterparties now and what steps do they need to sort of be looking out for if in the back of their mind they think they might be seeing a force majeure clause invoked by their Chinese counterpart at some point. 



So I think that touches on a lot of different issues both from a business strategic standpoint and also legal standpoint. I'll just start because I'm a lawyer with the first piece. I would say you want to re-review your contracts or agreements with these third party suppliers vendors in China. You want to take a look at not just the force majeure clause or the Act of God Clause, but look at the entire agreement in its totality. 

There might be a master framework agreement or some other overarching agreement. There might be other factors to consider in terms of ways to mitigate risk and really thinking about the issue business partner to business partner rather than looking at it from each and every agreement.



That said I still think you want to look at some of the basic mechanics as such as notice, right?



Right. When should they be providing the notice? How did they provide the notice and if they do you think ahead and anticipate what sort of documentation would you like to see what sort of evidence what sort of support would you like to see to make you comfortable that this non-performance on the agreement is a result of this outbreak or this coronavirus and then that might be able to better help you put yourself in the shoes of your vendor or supplier and understand you know, one of the challenges that they're trying to face at the same time. I think 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.

Cover a difference or some amount of difference and that's something you probably want to review and if your shirts coverage doesn't have that or maybe that's something you want to consider moving forward. So so I you know the solutions get as creative as as you can imagine depending on you know, what the specific risks are and what the exact relationships are and things like that. Hmm. Yeah. It's I

It's hitting that time where people are, you know, thinking about next steps, you know, I think probably the beginning it was just reacting and kind of a shock a bit too for this to come up a bit all out of the blue. But now I agree. I'm sure companies that have it already are quickly starting to go back and look at their contracts insurance coverage etc. 



Well, I think you know, we've covered a lot of good ground on this episode and hopefully we've given people a good kind of 101 coverage of what force majeure or Act of God is.

The situation obviously is still evolving rapidly and could affect more and more contracts. So I think your advice overall was great, you know got to go back to look at the contracts. See if you have force majeure kind of language in there and then map out your different scenarios. As you said worst case most likely case and plan and talk to your business partners and evaluate what your options are.I's a difficult time for everybody and you know like I said, there's the personal health issue but business needs to go on and companies need to keep delivering and keep, you know, keep performing for their customers as best they can so I want to thank you Jason for coming on and I think really giving people a good understanding of the all of these issues here. 

How often do you come back to China? Because I know you come back quite a bit and a lot of our listeners are here. So what's a good way, you know, if people have follow-up to reach out to you should they find you on the web site or for sure they reach out to you on LinkedIn? What's a good way for people to contact you? 



Yeah. No, thank you art for inviting me on your podcast. It's always a pleasure. I think the best way to reach is just yeah LinkedIn is good email you can find me at my website I'm usually in China several times a year, including Shanghai.  I'm in San Francisco and Palo Alto and sometimes in DC for my clients.