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Perspectives

The coronavirus and its consequences for German-Chinese trade

The legal impact on supply and production relationships

This article was produced in January 2020, when the outbreak was largely contained in China.

The coronavirus epidemic forced a stress test on cross-border trade relationships with companies based in China. From a legal perspective, companies will be concerned with how to handle epidemic-related disruptions to production and supply chains appropriately. These “Force Majeure” clauses, common in supply agreements, are of particular relevance.

Originating from the Wuhan region, the coronavirus has already overtaken the severity of the 2002/2003 SARS crisis, and the responses have been dramatic. The Chinese government’s quarantine-related measures imposed significant restrictions to public life in large parts of the country. The resultant economic consequences are slowly becoming clear. The crisis affects a huge number of companies based in China, which either had to cease trading, or move their production. European companies operating in, or purchasing goods from, China experienced significant supply chain disruptions.

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In addition, the legal implications arising from the epidemic are plentiful – the handling of affected employment relationships, the insurance coverage of epidemic-related damages, or the consequences relating to travel law. However, given the substantial volume of Chinese-European trade, many companies are taking a closer look at “Acts of God” and “Force Majeure” clauses.

What does “Force Majeure” mean?

Contracts such as supply agreements often include “Force Majeure“-clauses or provisions regarding “Vis Major” or – under Common Law or US law – clauses with respect to “acts of God”. In general, these clause aim to govern the consequences of circumstances or events beyond the control of the contracting parties. The term “Force Majeure” is not always defined by statute. Typically, the contractual clauses provide an abstract definition, illustrated by a number of non-exhaustive examples (e.g., natural disasters such as earthquakes or floods, and events such as terrorist attacks, armed conflicts or strikes).

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In standard cases, the legal consequence of a “Force Majeure” event is, at least, the temporary suspension of the affected contract and a waiver of liability or obligation for both parties. Formally, it is often stipulated that the party affected by such an event, is obligated to notify the other party. In some cases, “Force Majeure” clauses provide extraordinary termination rights in favor of either one or both parties. Note that “Force Majeure” clauses also regularly stipulate the obligations and requirements which must be observed by the other contracting party not directly affected by the event. Typically, the party not directly affected (in most cases: the recipient) is obliged to limit its own damages using its best reasonable efforts.

COVID-19 as “Force Majeure?"

Each specific contract clause will need to be examined to determine whether the novel coronavirus epidemic meets the applicable definition of a relevant “Force Majeure” event. Although commonly used standard clauses seem to imply the occurrence of a “Force Majeure” event, it is to be checked carefully, which law and legal understanding would apply in the agreement. The applicable law can be of material influence on the interpretation of the clause and the results can be ambiguous. It would be advisable to consider conflicting legal requirements in connection with a related legal assessment. For the avoidance of unintendedly non-compliant conduct, a thorough review of the specific clause is essential.

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With respect to the agreements subject to Chinese law, , the PRC’s Supreme Court determined during the 2002/2003 SARS-epidemic, that defaults, either directly relating to the epidemic or to the government’s related measures, would be considered as “Force Majeure”-situations within the understanding of the legal definition of the term “Force Majeure” under Chinese civil law.

In the current crisis, the legal assessment seems to be that it is now possible to obtain, upon application, so-called “Force Majeure-certificates” from CCPIT (China Council for the Promotion of International Trade) which can be used as proof in court proceedings vis-à-vis contracting partners. This could turn out useful to companies with production plants in the affected regions of China, which may now not be able to comply with their supply obligations due to epidemic-related production disruptions, and may consequently face damage claims from the contracting partners.

In addition, efforts are being undertaken in China to address the consequences of the current crisis through special regulation. For instance, Chinese authorities are planning the implementation of sector-specific regulations for the financial services sector.

However, what if there is no “Force Majeure” clause included in the agreement? If the agreement is subject to German law, then statutory provisions covering the respective default situation (such as the German civil law concepts of the temporary impossibility (vorübergehende Unmöglichkeit) or frustration of contract (Störung der Geschäftsgrundlage) apply. In such a scenario, a thorough legal assessment of the individual case is required to determine which possible option – either an adjustment or a termination of the agreement – is the most suitable, especially from an economic standpoint.

What next?

The coronavirus-epidemic has – from a medical point of view – still not reached its peak. From an economic perspective, the full picture of the epidemic’s consequences (particularly for China’s internationally interwoven supply and production relationships) is not yet clear.

Parties affected by epidemic-related supply or production disruptions can benefit from a precise assessment of the underlying contractual framework. Possible “Force Majeure” clauses should be reviewed with particular care. Even though standardized versions of these clauses are often used, generalized statements cannot be made. Depending on which law applies in the specific agreement, the wording of the “Force Majeure” clause needs to be clarified in terms of whether the current crisis meets the contractual definition of a “Force Majeure” event and, if so, what the legal consequences are. Where no “Force Majeure” clause was provided, the general statutory regulations under the applicable governing law would apply. The options for achieving an economically reasonable result should also be considered. Either party to an agreement should evaluate and comply with the legal frame for its own conduct (“Does my conduct comply with the agreement?”).

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For companies with production facilities in PRC (affected by epidemic-related production defaults), it is advisable to check whether the obtainment of a “Force Majeure-certificate” from CCPIT would be useful. This could be the case if existing supply relationships with recipients are either subject to Chinese law or provide for a China-based place of jurisdiction. Deloitte China would be happy to support you with the obtainment of a “Force Majeure-certificate”.

In any case, it would be wise to have a proactive approach in connection with the handling of the economic consequences of the coronavirus epidemic. To use medical terminology: Only a careful and thorough anamnesis of the possible legal risks as well as of the potential options will reduce the risk of being unexpectedly confronted with the negative diagnosis of a court.

This piece was produced originally by Deloitte Germany.

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