What To Do When You Receive A Coronavirus-Related Force Majeure Notice

Author:Mr Anton A. Ware, Yingxi Fu-Tomlinson, Jeffrey Yang and Timothy C. Smyth
Profession:Arnold & Porter
 
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  1. Introduction

    While China already has made considerable progress in its fight to contain the novel coronavirus disease (COVID-19), the protracted disruption to the Chinese economy is severely impacting businesses and economies around the world in ways that are only beginning to be felt and understood. In an effort to protect Chinese companies from being held responsible for such impacts, the Chinese government has been encouraging Chinese companies affected by COVID-19 to claim force majeure protection. To aid in that effort, the China Council for the Promotion of International Trade (CCPIT), a People's Republic of China (PRC) non-governmental organization with deep government roots, is reported to have issued thousands of "force majeure certificates" to companies that have claimed that their ability to perform contracts has been prevented by the COVID-19 outbreak. In this Advisory, we describe how force majeure operates under PRC law and explain the role of the CCPIT certificates (section 2); analyze the potential effect of a COVID-19 force majeure notice (which may be accompanied by a CCPIT certificate) where the governing law is English law (section 3) and New York law (section 4); provide guidance on steps to take after receiving a force majeure notice (section 5); and then offer some concluding thoughts (section 6).

  2. Force majeure under PRC law and force majeure certificates issued by CCPIT

    The Legislative Affairs Commission of the PRC National People's Congress Standing Committee has clarified that a party that is prevented from performing its contract obligations as a result of government measures taken to contain COVID-19 should be entitled to force majeure relief under PRC law.

    As of February 21, 2020, in an apparently coordinated effort with the PRC Ministry of Commerce, CCPIT and its local branches have issued 3,325 force majeure certificates to companies affected by the COVID-19 outbreak, according to a report by the Xinhua News Agency. The value of the relevant contracts is approximately RMB 270 billion (equivalent to approximately $39 billion). Such certificates purport to relieve companies from contractual duties, either in part or in full, by proving that the companies are suffering from circumstances beyond their control. But even for contracts governed by PRC law and providing for dispute resolution in China, such certificates would be only one factor in the analysis. Under PRC law, whether or not a force majeure can be established—and if so the scope of relief—depends on a fact-specific analysis of the contract provision in question, the nature of the contractual obligation sought to be excused, and the extent to which the event in question (here, the COVID-19 outbreak) has specifically impacted the party claiming relief. The most that can be said with confidence is that CCPIT certificates likely would be given at least some weight by a Chinese court or arbitration tribunal in determining whether a force majeure event has occurred.

    What impact...

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