Way back in the pre-coronavirus days — October 30-2019 — in Do Not Let Force Majeure be a Major Force In Your China Contract, we did a post warning of force majeure provisions in contracts with Chinese companies. That post began with the following warning/joke;
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.
The point of that post was that “Chinese companies love using force majeure provisions in their contracts and American and European companies consistently let them, to their detriment.”
With the coronavirus, force majeure provisions have come home to roost as Chinese companies as China companies are using those provisions to avoid their contractual requirements with foreign counter-parties.
The Strange Meaning of Force Majeure in China
Force majeure contractual provisions free a party from a legal obligation when an extraordinary event or circumstance occurs. For example, if Seller Party agrees to sell a Buyer Party a car but the day before the sale goes down the car is literally blown away by a tornado, the force majeure provision will likely insulate the Seller Party from liability. Similarly, 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, the contract’s force majeure provision likely will shield the factory from liability for not fulfilling the order.
These examples color how Western companies view force majeure provisions, but this is not how Chinese companies and Chinese courts view force majeure provisions. For example, if you agree to license your technology to a Chinese company for $8 million dollars and the Chinese government then blocks the Chinese company from paying you the $8 million because your licensing agreement was never filed with the Chinese government you should expect the Chinese company to claim force majeure. You will then need to sue this Chinese company in a Chinese or foreign court, depending on the contract’s dispute resolution clause. Whether you sue in China or in the U.S. or the EU or wherever, the odds are great that you will eventually find yourself in a Chinese court for collection purposes and that court will likely enforce the force majeure provision. The Chinese court will likely rule against you if you bring the case there and it will likely not enforce your foreign judgment based on “public policy” grounds if you sue outside China and then try to get your foreign country judgment enforced in China.
The real problem with force majeure provisions is that Chinese companies view them very differently from the standard legal interpretation. The standard approach to force majeure is that the contract is terminated, the parties are taken back to the positions that prevailed before the contract was executed, and the party invoking force majeure is liable for the costs of the other party resulting from going back to that pre-contract status. In the Chinese interpretation, the party that invokes force majeure is typically not obligated in any way BUT the other party may still be 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 needs 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 what the Chinese side seeks by including a force majeure provision in their contracts. It looks like boilerplate and because of this most foreign lawyers just ignore the provision. You should not fall into this trap. It is important you either strike any force majeure provision entirely from your contracts with Chinese companies or — better yet — draft that provision to include all the provisions required to make it reasonable under standard international commercial law. This means you must spell out specifically the procedures for invoking force majeure and the results of doing so. Chinese companies love force majeure provisions that allow them to escape the impact of their own government’s arbitrary actions, which, especially when it comes to getting money out of China, are quite frequent.
If you are thinking 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 will 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.
Force Majeure and the Coronavirus — What’s Happening?
Because the coronavirus is making it difficult for Chinese companies to fulfill their contract obligations, many Chinese companies have asserted force majeure in an effort to excuse their failures. The media has been all over this issue. See e.g., General Counsel Pondering How to Handle China’s Force Majeure Claims (Corporate Counsel), Chinese firms use obscure legal tactics to stem virus losses (The Economist), Chinese copper traders declare force majeure over coronavirus (Financial Times). But I am just not sure whether it is or will be a big deal.
In Coronavirus: doubts raised over whether Chinese companies can use force majeure to counter risks, the South China Morning Post wrote about how the Chinese government has granted more than 3,000 certificates to Chinese companies stating that they are entitled to invoke force majeure. Both the media and our clients are asking what this means and my response is, “not much”.
What it means is that if a Chinese company invokes force majeure a Chinese court will almost certainly find that force majeure frees it of any liability. But that would almost certainly have been true even without the certificate. I cannot imagine a U.S. or British or German or Japan or Australian or Mexican court giving one of these certificates any real credence and so I doubt its impact outside China.
I also think that any foreign company that gets a foreign court judgment against a Chinese company will have trouble enforcing that judgment in a Chinese court. Chinese courts virtually never enforce U.S. court judgments anyway See China Enforces United States Judgment: This Changes Pretty Much Nothing. China does though have judgment enforcement treaties with some countries (France, Italy, Spain and Turkey, for example). See Enforcing Your Judgment In China. We Cop To Ethnocentrism. However, those treaties virtually always allow a country to opt out on public policy grounds and Chinese courts will likely choose not to enforce a foreign court judgment if it believes that judgment should not have been issued because of force majeure. I would expect Chinese courts will similarly invoke “public policy” as their reason for not enforcing arbitration awards as well.
So in the end, certificate or no certificate, I do not see Chinese courts allowing foreign companies to pursue collection against Chinese companies that failed to perform under their contracts for reasons remotely related to the coronavirus. At least for now, I do not see force majeure as the big issue. I say this because our law firm has had countless phone calls from clients seeking our China lawyers help in figuring out when their contract will be fulfilled and advice on what they can do to better ensure it will be fulfilled, but we have not had a single client ask us about suing their Chinese counter-party for non-performance. That is because foreign companies realize that their Chinese counterparts are for the most part doing what they can to perform and their non-performance is because of the coronavirus and the Chinese government restrictions that have come with that. In other words, they are prepared to be patient, at least in the short term.
What are you seeing out there by way of force majeure?