China Contract Law Force Majeure

Pull out and look at your contract with your Chinese counter-party. Does it have a force majeure clause? If it does not, put it away and count yourself lucky. If it has a force majeure clause, pour gasoline or lighter fluid or nail polish all over it and light it.

JUST KIDDING.

Well only sort of. Chinese companies love using force majeure provisions in their contracts and American and European companies consistently let them, to their detriment.

Force majeure provisions are often included in contracts to free a party from a legal obligation when an extraordinary event or circumstance occurs. For example, if party A agrees to sell Party B a car but the day before the before the sale goes down the car is stolen, Party A will almost certainly not be held liable for not selling the car due to a force majeure provision. Example 2, if Party A contracts to make 100,000 widgets for Party B but a war breaks out and Party A must abandon its factory and therefore cannot make the widgets, Party A will almost certainly not be held liable for having provided the 100,000 widgets due to a force majeure provision. These examples rightly color how Western companies view force majeure provisions.

This though is not how Chinese companies and often the Chinese court view force majeure provisions. For example, if you enter into a contract that requires your Chinese counter-party to pay you a $5 million dollars to license your technology and your Chinese counter-party is then blocked by the Chinese government from sending you the $5 million because your licensing agreement was never filed with the Chinese government and the Chinese government never approved your Chinese counter-party sending out $5 million in hard currency, you should expect your Chinese counter-party to claim force majeure. What will then happen if you have to sue your Chinese counter-party in a Chinese court? Even though everyone knows it can be difficult for Chinese companies to get money out of the country and even though the Chinese company could have planned so as to be able to get the money out (which essentially should negate its ability to rely on a force majeure defense), you will be in for a tough fight and you very well might lose.

The real problem with these provisions is that Chinese companies interpret the provision in a way that is completely different from the standard legal interpretation. The standard approach is that the impact of force majeure is: a) the contract is terminated, b) the parties are taken back to their position that prevailed before the contract was executed and c) the party invoking force majeure is liable for the costs of the other party resulting from going back to that pre-contract status. Chinese companies interpret in an entirely different way. In the Chinese interpretation, when the invoke force majeure, they are not obligated in any way BUT the other party is still obligated to perform. That is, if a payment is required but is blocked by the Chinese government, the Chinese side does not have to pay but the foreign side still has to perform. Moreover, any costs incurred by the foreign side are not reimbursed.

This is “force majeure with Chinese characteristics”. The position is not consistent with law and is  completely unacceptable as a commercial matter. But this is always what the Chinese side means when they include a force majeure provision in their contracts. It looks like boiler plate, and most lawyers just ignore the provision. But the real intent is to set a trap for the unwary.  You should not fall into this trap. It is important that you either strike any force majeure provision entirely from your contracts with Chinese companies or — better yet — draft the force majeure clause to include all the provisions required to make it reasonable under standard international commercial law. That is, you have to go beyond a definition of what is or is not force majeure. You must spell out specifically the procedure for invoking force majeure and the result. Those results will depend on the specific nature of the underlying business deal. Note also that most Chinese companies are seeking to use force majeure so that they can escape from the impact of arbitrary actions on the part of their government. Parties should recognize that arbitrary government action is now common in the international trade system. Dealing in a practical way with the impact of those decisions is now an essential component of all trade deals. The old practice of just throwing in a bolier plate standard term will no longer serve a useful purpose.

If you are thinking that you can solve the China force majeure problem by having your contract provide for disputes to be resolved before a court or arbitration panel in your home country, you would probably be wrong. Chinese courts almost never enforce foreign judgments and they also can choose not to enforce foreign arbitration awards on public policy grounds. So even if you choose a foreign court or a foreign arbitration, you will almost certainly need to confront the force majeure issue at some point in a Chinese court.

Bottom Line: Beware of “force majeure with Chinese characteristics”  provisions in your contracts with Chinese companies.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.