Chinese companies love using China-style force majeure provisions to take advantage of foreign companies unfamiliar with Chinese law. Our China lawyers (mostly our China contract and dispute resolution lawyers) see this all the time. It is common for international contracts to include a force majeure provision, but those proposed by Chinese companies are anything but standard.
Wikipedia does a very good job explaining the whys and the hows of standard force majeure provisions:
Force majeure, meaning “superior force”, also known as cas fortuit (French) or casus fortuitus (Latin) “chance occurrence, unavoidable accident”, is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, war, strike, riot, crime, or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.
Force majeure is generally intended to include occurrences beyond the reasonable control of a party, and therefore would not cover:
- Any result of the negligence or malfeasance of a party, which has a materially adverse effect on the ability of such party to perform its obligations.
- Any result of the usual and natural consequences of external forces.
- To illuminate this distinction, take the example of an outdoor public event abruptly called off.
- If the cause for cancellation is ordinary predictable rain, this is most probably not force majeure.
- If the cause is a flash flood that damages the venue or makes the event hazardous to attend, then this almost certainly is force majeure, other than where the venue was on a known flood plain or the area of the venue was known to be subject to torrential rain.
- Some causes might be arguable borderline cases (for instance, if unusually heavy rain occurred, rendering the event significantly more difficult, but not impossible, to safely hold or attend); these must be assessed in light of the circumstances.
- Any circumstances that are specifically contemplated (included) in the contract—for example, if the contract for the outdoor event specifically permits or requires cancellation in the event of rain.
Under international law, it refers to an irresistible force or unforeseen event beyond the control of a state making it materially impossible to fulfill an international obligation, and is related to the concept of a state of emergency.
The above is all true, but for China, not so much.
Chinese companies LOVE force majeure provisions that put all risk on the foreign company by being broad enough for just the Chinese company to drive a truck through. Let me explain.
Our China contract lawyers often see contracts with force majeure provisions that essentially excuse the Chinese company’s failure to pay for pretty much any reason. By way of an example, a European company once came to us after having sold a large amount of foodstuffs to China and not getting paid. The European company wrote the Chinese company regarding its failure to pay. The Chinese company responded by saying, “sorry, but the Bank of China will not allow us to send you the money.” The European company wanted our international litigation lawyers to help it determine whether to pursue litigation or not. Our answer was that the contract’s force majeure clause would make litigation extremely risky. What led our international litigators to this conclusion?
The European company had used its regular domestic lawyer to review the contract with the Chinese company. This lawyer had used our blog (we get this surprisingly often) to determine that the contract calling for disputes to be resolved in a Chinese court would be okay. Having your disputes with a Chinese company resolved in a Chinese court usually does make sense, but not always. In this case, the provision did actually make sense and, standing alone, was not the problem with the contract. The problem with the contract was that the lawyer who agreed to the disputes being resolved in a Chinese court did so without knowing a thing about Chinese law. The problem with the contract was that under Chinese law, the Chinese side was greatly favored. Our advice to this European client was what our advice so often is when our lawyers are tasked with analyzing a Chinese contract gone wrong: we suggested our client retain counsel in its own country to explore pursuing a malpractice action against their lawyer that had failed to warn them about the contract they would sign because he worked on a contract for China without knowing the first thing about China law. See Worthless China Contracts: First, Let’s Sue All The American Lawyers.
The big problem with this specific contract was its force majeure provision that said the Chinese company’s failure to pay the European company due to a bank or government not granting it the approval to make such payments would be treated as a force majeure event that would excuse the Chinese side from paying. This same provision even said that if the Chinese company could not pay the European company for force majeure reasons, the European company would not be permitted to terminate the contract. So arguably, if the Chinese company were to require the European company to keep shipping foodstuffs to China and the European company refused, it could be sued by the Chinese company for breaching the contract by refusing to deliver.
And guess what, this sort of force majeure provision is common.
A force majeure provision that requires one side (pretty much always the foreign side) to perform even though no payment is made by the other side (pretty much always the Chinese side) is not standard force majeure. But since force majeure is so often viewed as just “boilerplate,” it is often not read carefully or understood by lawyers not experienced with China.
The key to a standard force majeure provision is that the force majeure event means neither party is required to perform; if the force majeure condition continues, the affected party is required to return the matter to the pre-contract status quo. But in Chinese contracts these provisions are often written to turn the standard force majeure provision upside down by providing that if the Chinese government or its agents make performance by the Chinese side impossible, the Chinese side is not obligated to perform but the foreign party is still obligated to perform and the Chinese side is not obligated to return the matter to its pre-contract status quo.
It is also important that I mention that our lawyers often see contracts that say one thing for force majeure in the Chinese language portion of the contract and something very different in the English language portion. Because the Chinese language portion of the contract inevitably will control, the foreign company literally does not have a clue as to what it has signed. See Dual Language China Contracts: Don’t Get Fooled! When this happens, the Chinese language portion will greatly favor the Chinese side and the English language portion will be much more neutral.
Do not let this happen to you!