what we think

By: Molly Luo, Maarten Roos

R&P China Lawyers is a Chinese law firm that supports foreign business in China. R&P is full-service with a strong litigation department, and represents foreign and foreign-invested companies in litigation and arbitration in China. For more information how we can represent your interests, please reach out to your usual contact at R&P or email to [email protected].

On 20 April 2020, the Supreme People’s Court (SPC, China’s highest court) released the Guiding Opinions on the Proper Handling of Civil Cases Involving the Novel Coronavirus Outbreak in Accordance with the Law. Published soon after a batch of rulings issues on 24 March and 2 April, the Guiding Opinions emphasize a preference to have disputes resolved through mediation, but also reviews the conditions of the application of force majeure when handling civil cases involving the novel corona virus and the disease it causes, COVID-19.

The Guiding Opinions also includes measures to help small, medium-sized and micro businesses to survive the current pandemic and firmly protect the rights and interests of employees and consumers during this special period.

Contractual Disputes and the Application of Force Majeure

One of the key points of the Guiding Opinions is related to the settlement of contractual disputes arising from the coronavirus outbreak. Respecting the autonomy of will is a fundamental principle of the application of civil law. If the parties have a prior agreement on what should happen in case of an epidemic or pandemic, the dispute should be settled based on the terms of that agreement.

In the absence of any prior agreement, if the application of force majeure has been proposed by either or both parties, then the handling court shall strictly examine the conditions for its application. In general, courts must comprehensively consider the impact of the coronavirus on different regions, industries and cases, and accurately understand the causal relationship of the virus, COVID-19 or their prevention and control measures with the failure to perform contractual obligations. Specifically:

• If the virus or the prevention and control measures directly lead to the inability of the contract performance, courts shall examine whether any party should be liable for non-performance of the contract or increase of losses, and decide whether to partially or wholly exempt liability. Where the purpose of a contract cannot be realized at all due to the virus or subsequent prevention and control measures, then courts shall support a party's request for termination of the contract.

• If the virus or subsequent prevention and control measures only lead to difficulties in performing the contract, courts shall not support a party's request to terminate the contract. In that case, courts should actively mediate, guiding the parties to renegotiate on continued performance.

• If continuing performance is obviously unfair to a party that therefore requests a change in the term of performance, method of performance, price, etc., courts shall consider the actual circumstances of the case to decide whether to support such a claim. Once a contract has been modified accordingly, courts shall not support a further claim for partial or full exemption from liability.

• Subsidies from government departments, tax reductions or exemption, or other financial assistance from others, or debt relief due to the virus or subsequent prevention and control measures, may serve as a reference factor for courts in determining whether or not a contract can continue to be performed.

In addition to the above, the Guiding Opinions also stress that parties concerned should bear the corresponding burden of proof; for example, with regards to timely notifying the counterpart on the application of force majeure.

Protecting the Rights and Interests of Employees, Consumers and Small, Medium-sized and Micro Businesses

The Guiding Opinions also throw light on disputes between corporations and employees, and between operators and consumers. For employment disputes caused by the virus, the Guiding Opinions make it clear that employers cannot terminate because an employee is a confirmed or suspected-to-be COVID-19 patient, is infected but asymptomatic, has been quarantined, or is from a region where COVID-19 is relatively widespread. In other words, such a situation cannot be the basis for an argument that “the objective conditions on which the employment contract is based when it is concluded have changed significantly, resulting in the inability to perform the labor contract” as per the PRC Labor Law (Art 26) and the PRC Labor Contract Law (Art 40).

As for the protection of rights and interests of consumers, the Guiding Opinions clarify that if a business operator engages in any fraudulent activity, or produces or sells food that does not meet safety standards, or produces or sells counterfeit or substandard drugs, the courts shall support the consumer’s claim for punitive damages in compensation.

Many small, medium-sized and micro businesses in China have been greatly affected by the current pandemic. Besides fiscal subsidies, the SPC provides that where such businesses are involved in disputes, courts applying property preservation measures should give consideration to their situation, and offer flexibility so that to reduce their burden and help them to resume work and production. The message seems to be, that courts should try to give such businesses sufficient room to continue operating even if they subject to claims from business partners and employees.

Conclusions

As early as February, some provincial high courts have already issued guidance documents or comments on handling civil and commercial disputes caused directly or indirectly by the outbreak of the coronavirus. The SPC’s Guiding Opinions elaborate on the application of force majeure, and guide on judicial protection of the rights and interests of employees, consumers and small, medium-sized and micro enterprises. China is a civil law country and so the Guiding Opinions are not law, but courts are fully expected to use the Guiding Opinions as reference when adjudicating virus-related claims.