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The ongoing epidemic has had a considerable impact on the performance of international trade contracts. International trade practitioners face situations such as "delay in performance" or "inability to perform" in contracts; the "dilemma" of contract performance under the current epidemic situation. Some people claim that force majeure, change of circumstances, or the failure of the contract under the common law system (Contract Frustration,Frustration) can be used as a reason for exoneration. However, in judicial practice, whether the epidemic situation (including epidemic prevention and control measures) is a force majeure, it will be comprehensively judged according to whether there is a direct causal relationship between the new crown epidemic and the performance of the contract, and whether it is sufficient to achieve the impossibility of performance. This article combines judicial cases, precedents, international treaties, and foreign legislative examples to put forward the authour’s humble opinions on the above issues for your reference and hope to be helpful.

1. The provisions of the Chinese Civil Code on force majeure

Article 180 of the Civil Code of the People's Republic of China stipulates that "Force majeure is an objective situation that cannot be foreseen, avoided, or overcome." Force majeure, as a reason for exemption, "must be the cause of the damage. Only when the damage is completely caused by force majeure,it can  be shown that there is no causal relationship between the defendant's behavior and the damage. At the same time, it is shown that the defendant is not at fault and should therefore be exempted from liability."

Article 590 of the Civil Code of the People's Republic of China stipulates that "if one party is unable to perform the contract due to force majeure, part or all of its liabilities will be exempted according to the influence of the force majeure, unless otherwise provided by the law. If the contract cannot be performed due to force majeure, the other party should be notified in time to reduce the losses that may be caused to the other party, and proof should be provided within a reasonable period of time. If force majeure occurs after the party delays performance, its liability for breach of contract will not be exempted. Article 163, Paragraph 1, Item (2) stipulates that "the parties may terminate the contract if the purpose of the contract cannot be achieved due to force majeure."

From the above provisions, we can see that under our civil law system, force majeure has two parts. The first part is the constituent elements of force majeure itself, that is, what is force majeure. The second part is the application of force majeure as an exemption from liability, that is, exemption from liability when certain conditions are met. From the legal point of view, in order to achieve the effect of exemption through force majeure, the following conditions should be met:

First, in terms of force majeure itself, it must meet the "three nos" requirements;

Second, there is a direct causal relationship between force majeure and inability to perform;

Third, fulfilling the obligation of notification and providing proof within a reasonable period of time.

Only when all the above conditions are met, force majeure can be adopted as a reason for exemption, otherwise, even if there is force majeure, the effect of exemption cannot be achieved.

2. Provisions of other countries on force majeure (failure of contracts)

(1) South Korea, Japan, Germany

Force majeure is also exempt from liability in South Korea, Japan, and Germany, but South Korea, Japan, and Germany do not specify the definition of force majeure and its applicable conditions in the Civil Code. The specific application and interpretation of force majeure is left to the doctrine and trial practice for judgment. For example, the South Korean court held that “an event beyond the control of the debtor, if the debtor has exhausted conventional means to prevent the occurrence of the result, but still cannot prevent it, it should be deemed as force majeure.”

The Civil Codes of South Korea, Japan and Germany do not stipulate force majeure, but provide corresponding exemption clauses. It can be directly applied when there is an event not attributable to one party.

Article 390 of the "South Korean Civil Code" stipulates that "if the debtor fails to perform his/her obligations in accordance with the content of the debt, the creditor may demand compensation. However, unless the debtor's intention or negligence causes the inability to perform."

The first paragraph of Article 536 of the Civil Code of Japan stipulates that "except for the circumstances specified in the preceding two paragraphs, if the debt cannot be performed due to reasons not attributable to both parties, the debtor will not have the right to treat the payment."

Section 275 of the German Civil Code states that "(1) As long as payment is impossible for the debtor or for any person, the right to demand for payment is excluded. (2) In the case of paying attention to the content of the debt relationship and the principle of good faith,the debtor may refuse to perform the payment if the payment requires expenses that are extremely disproportionate to the creditor's interest in payment.

In determining the efforts that can reasonably be expected from the debtor, consideration must also be given to whether the debtor is responsible for the impediment to performance. "

(2) United Kingdom

Under the common law system, force majeure is not a statutory exemption from liability. If a party to the contract claims exemption from liability under force majeure, it must be clearly agreed in the contract in advance, and the scope of force majeure and specific exemption conditions must be specified in detail. If the contract does not expressly stipulate a force majeure clause or the agreed force majeure clause is unclear, under the common law system, theories such as the Doctrine of Frustration or the hardship of performance will be adopted to solve the problem of liability exemption.

Frustration of the contract (Contract Frustration,Frustration) means that after the conclusion of the contract, some unexpected events beyond the control of each contracting party have caused the contract to be unenforceable. The contracting party can invoke this principle to terminate the contract. Frustration of contract is a remedy higher than the force majeure threshold. Frustration generally refers to the loss of the subject matter of the contract, cancellation of anticipated events, delays, changes in law, death or incapacity of a contracting party, etc..

3. CISG's provisions on force majeure (impediment)

CISG Article 79 states:

"1. A party is not responsible for failure to perform an obligation, if he or she can show that such failure to perform is due to some obstacle beyond his or her control. And such an obstacle was not reasonably expected that he or she can take into account or can avoid or overcome it or its consequences at the time of the conclusion of the contract.

2. If a party's non-performance is due to non-performance by a third party whom he or she has hired to perform all or part of the contract, the party is exempt from liability only if:

(a) he or she will be exempt from liability under the preceding paragraph;

(b) If the provisions of that subsection also apply to a person whom he or she employs, that person will also be exempted from liability.

3. The disclaimers provided for in this article are valid for the period in which the obstacle exists.

4. The party who fails to perform the obligation must notify the other party of the impediment and its effect on his or her ability to perform the obligation. If such notice is not received by the other party within a reasonable time after the party in default has known or should have known of the impediment, he or she will be liable for damages caused by the failure of the other party to receive the notice .

5. Nothing in this Article will prevent either Party from exercising any right other than to claim damages under this Convention. "

CISG is the product of negotiation and compromise between civil law system and common law system. Most of the provisions in the CISG incorporate the principles and provisions of contracts under civil law and common law. The CISG does not directly use the expression of force majeure or the failure of the contract, but uses the neutral wording "impediment". But this also leaves the question of "impediment" in CISG Article 79 not clear enough. Therefore, the legal background of the referee affects the interpretation and application of CISG Article 79. For example, adjudicators with a common law background will involuntarily adopt the "failure of contract principle" for interpretation and application. This is also reflected in most CISG cases.

4. Cases of Force Majeure or Frustration of Contracts

(1) If the government issues a prohibition order, resulting in the failure to deliver the goods on time, can the liability be exempted based on force majeure

 Judging Body: American Arbitration Association

 Applicable Law: CISG

· Case Name：Macromer Srl. v. Globes International Inc.

· Case Summary： A US seller (globes) signed a contract for the sale of chicken thigh meat with a Romanian buyer (Macromex). At the time of delivery, Romania had an outbreak of bird flu, and the Romanian government issued a ban on the import of chicken meat that has not been certified since June 7, 2006. The U.S. seller delayed the delivery, and the Romanian buyer suggested shipping to other alternative ports for delivery, but the U.S. seller believed that the "government injunction" constituted force majeure under Article 79 of the CISG. The American seller eventually sold the drumsticks to another buyer at a more lucrative price.

The arbitrator found that the Romanian government's "injunction" was beyond the control of the U.S. seller and could not have been foreseen at the time the contract was concluded. However, the U.S. seller could reasonably have avoided the ban by shipping to an alternative port proposed by the buyer. Accordingly, the arbitrator held that the US seller could not be exempted from liability under Article 79 of the CISG.

Lawyer's Analysis

Article 79 of CISG does not have the requirements of our country's "Civil Code" in terms of requirements, and also requires the "three no" requirements, but in terms of specific application, there is no essential difference with our country's force majeure requirements. Courts and arbitration institutions have adopted strict liability to confirm exemptions. When invoking CISG Article 79, it must be proved that there is a "sole" or "exclusive" causal relationship between the impediment suffered and the inability to perform, and the impediment cannot be overcome or avoided. If the obstacle can be overcome by other effective means, it will be deemed not to comply with the disclaimer stipulated in CISG Article 79.

• (2) Whether the closure of the Suez Canal will      fundamentally change the contract and lead to the failure of the contract

• Case Name：Tassioglou & Co Ltd v      Noble Thorl GmbH
       
       

• Case No.：[1962] A.C. 93

• Applicable Law：United Kingdom

·        Case Summary：November-December 1956, the two parties signed a contract for the sale of Sudanese nuts. The usual route from Sudan to Hamburg is via the Suez Canal. But the canal was closed due to the Suez Crisis in 1956. The alternative route at the time was to circumnavigate the Cape of Good Hope in South Africa, which was more than double the original itinerary and increased costs. Ultimately, the seller refused to ship the nuts.

The court held that the supplier was obliged to deliver the agreed goods by the conventional route or, if no such route was available at the time of shipment, by another reasonable route. At the time, detouring around the Cape of Good Hope in South Africa was still a viable option, this alternative did not fundamentally change the contract, and the court found that the contract was not frustrating (Frustration)。

Lawyer’s Analysis

In fact, the buyer and the seller in this case stipulated a force majeure clause in the contract, specifically, "After the occurrence of force majeure, the contract can be extended for two months, and if the force majeure persists after two months, the contract can be terminated." However, the seller in this case directly chose to refuse to deliver the goods, which was not in line with the agreement between the two parties. As in the case of this case, if Chinese law is applicable, it may be considered to invoke the "change of circumstances" provisions. If the route to the Cape of Good Hope in South Africa is obviously unfair, the court may actually be asked to rescind or modify the contract.

(3)Defective third-party supply does not necessarily exempt the contract seller from the responsibility

Referee：Tribunal de Commerce de Besançon

• Applicable Law：CISG

• Case Name：Christian Flippe v.      Sarl Douet Sport Collections

·        Case Summary： The buyer's Swiss company signed a contract for the sale of judo clothing with the seller's French company. After the judo suit was seriously shrunk after washing, the buyer Swiss company reported the relevant situation to the buyer Swiss company after receiving the customer's complaint, and requested a friendly negotiation solution. However, the French company did not give any reply. The buyer, the Swiss company, authenticated the clothing, and the experts confirmed that the clothing did not meet the standard, and subsequently filed a lawsuit to demand compensation from the seller, the French company, for the purchase price and losses.

In determining the amount of damages, the French court held that the buyer did not prove that all the goods received were defective and that the buyer profited from at least some of the goods. The court further stated that the seller’s failure to perform its obligations was due to an impediment beyond its control, as the goods were manufactured by a third party and there was no evidence that the seller’s French company acted in bad faith (Article 79 CISG). Accordingly, the court ordered a 35% reduction in the purchase price and ordered the seller to indemnify the buyer.

Lawyer’s Analysis

This case is similar to the "Vine Wax" case heard by the German court applying CISG, but the two cases have diametrically opposite judgments. In the Grattenla case, the German court failed to recognize that the defective goods delivered by the third-party supplier were factors beyond the seller's control, thus denying the seller's claim of force majeure immunity. However, in this case, the French Commercial Court recognized the third party's provision of defective goods as an "impediment", but did not completely exempt the seller from liability, but instead compensated the buyer by reducing the sales price.

(4) Whether the shortage of raw materials caused by the new-crown epidemic and the inability to supply on time is a force majeure

• Referee：The People's Court of Bao'an District, Shenzhen      City, Guangdong Province

• Applicable Law：China

• Case Name：Dongguan Youxiang Company      and Shenzhen Daohe Company Sales Contract Dispute Case

• Case No.：(2020) Yue 0306 Min Chu      No. 25132

Case Summary： On February 24, 2020, the buyer and the seller signed the "Product Sales Contract", stipulating that the seller Shenzhen Daohe Company will supply 200,000 temperature sensors and deliver the goods before 24:00 on March 31, 2020. After the seller supplied 25,000 sensors, due to the closure of the factory in Malaysia, the main raw materials for the sensors could not be supplied, resulting in a complete shutdown of the sensors, and then the contract was terminated due to force majeure.

The court held that the seller, Shenzhen Daohe Company, terminated the sales contract with the buyer, Dongguan Youxiang Company, on the grounds that Malaysia had closed the factory and the country, and the main raw materials of the sensor could not be supplied, resulting in a complete shutdown of the sensor. In March 2020, due to the impact of the epidemic, the objective situation of the supply of raw materials did occur, which is a force majeure. Therefore, the seller has the right to rescind the contract without being liable for compensation.

Lawyer’s Analysis

Whether there is a direct causal relationship between the closure of factories and countries affected by the epidemic and the inability to perform the contracts involved is debatable. The seller should justify its inability to obtain "raw material" from other sources. If it is only because the factory is closed and the country is closed, there will be a shortage of raw materials and cannot be supplied on time. This obviously does not meet the requirements of force majeure. In addition, the epidemic had already begun when the contract involved was signed, and the seller had already recognized the subsequent risks. If the cost of purchasing raw materials from other channels rises sharply due to the shortage of raw materials, which is obviously unfair, it is more reasonable to cancel or change the contract through a change of circumstances, rather than exempting from force majeure.

• (5) Whether the delay in delivery of goods caused by      the upgrade of the Indian customs system can be exempted based on force      majeure

• Referee：Beijing Higher People's      Court

• Applicable Law：China（negotiated）

• Case Name：China State Investment      Corporation and India SRV Company International Goods Sales Contract Case

• Case No.：（2014）Gao Min Zhong Zi No. 1246

·        Case Summary： On February 24, 2011, Indian SRV Company and China SDIC signed the "Sales Contract", stipulating that SRV would sell 100 tons of cotton linters first-class cotton and 200 tons of second-class cotton to China SDIC, and the unit price of the goods is CIF US$1,365/ton, and the total contract value is US$409,500. The payment terms are that China SDIC will open an irrevocable letter of credit within 3 working days after the signing of this contract, the shipping port is Chennai port, India, the destination is Shanghai port, China, and the last shipment date is March 18, 2011 . China State Investment Corporation applied to ICBC to open a letter of credit according to the agreement.

Due to the system software upgrade of the Chennai port customs in India, the import and export procedures for port goods were forced to be interrupted. To this end, 300 tons of cotton linters must be shipped in two batches, of which the first batch of 100 tons of cotton linters was shipped on March 16, and the second batch of 200 tons of cotton linters could only be shipped on March 21. After the second batch of cotton linters was shipped, SRV asked China SDIC to revise the latest shipment terms in the L/C. However, China SDIC did not modify the letter of credit, nor did it notify ICBC to accept the discrepancies in the documents. On April 5, 2011, ICBC refused to pay USD 273,000 for the second batch of cotton linters on the grounds that the documents did not match. Therefore, SRV requires China SDIC to compensate for the losses caused by its breach of contract.

The court held that SRV claimed that its delayed shipment was caused by the upgrade of the Indian customs system, but the evidence submitted by SRV could not prove that its failure to ship the goods before March 18, 2011 was related to the upgrade of the customs system. Therefore, SRV Company claimed that its delayed shipment was not established due to force majeure. Although SRV Company as the seller delayed the delivery, its delivery time was only four days later than the time agreed in the contract, and the goods in this case were not goods with a short shelf life and were easily deteriorated. Therefore, SRV Company’s delayed delivery did not constitute a fundamental breach of contract.

Lawyer’s Analysis

According to the sale and purchase contract signed by both parties, the latest shipment date of the Indian company should be before March 18, 2011. There is no evidence to prove the close connection and causality between the system upgrade and the delayed shipment. System upgrades are neither natural disasters nor social contingencies. Even if there is cause and effect, it remains doubtful whether the emergency can be considered force majeure.

As far as the outcome of this case is concerned, the Indian SRV Company made a conscious choice to apply Chinese law. Our civil law always runs through the principle of good faith, so it will also be reflected in the performance of the contract. The principle of good faith is also an imperial clause of civil law. Therefore, the court found that the Indian company's 4-day delay in loading the ship did not constitute a fundamental breach of contract, which was not sufficient to overturn the contract in this case, and did not further pursue the responsibility of the Indian company SRV. If the law of a common-law country were to apply, the case could have had the opposite outcome. Because under the common law system, the principle of good faith (good faith) does not have a guiding role in the contract. The common law system pays more attention to autonomy of will and strict contractual liability.

V. How to prevent contract performance difficulties caused by the epidemic and avoid losses

(1) Fulfill the obligation of notification, and actively communicate and negotiate solutions

If you are suffering from contract performance difficulties, you should first check the content of the contract to confirm whether there are provisions such as force majeure, exemption from liability, and applicable law. Then, in combination with specific terms, it is evaluated whether the incident or epidemic prevention and control currently being suffered is in line with force majeure. Secondly, collect the evidence and proof of force majeure, and notify the counterparty of the contract according to the situation. During this period, the new situation of contract performance difficulties should be continuously updated and sent to the counterparty of the contract, so as to reduce the expansion of losses. Otherwise, in the event of a dispute in the future, the company will still be liable for the enlarged part of the loss. Finally, after the notice is issued, if the other party does not recognize the defense of force majeure, it can try to negotiate to change, supplement or terminate the contract. If an agreement cannot be reached, the notice, force majeure evidence, proof and other contents should be retained, and then professional help such as a lawyer should be sought to further resolve the dispute.

(2) Autonomy of will is the primary principle of contracts, which should be fully utilized in contracts

Whether it is a convention or the laws of various countries, if there is an agreement in the contract, in principle, the agreement takes precedence over the legal provisions. This is the embodiment of the "principle of autonomy of will" in the contract. Regardless of the civil law system or the common law system, only by specifying the reasons for exemption in the contract can it be beneficial to protect its legitimate rights and interests. Rather than relying on statutory force majeure or the failure of the contract after unexpected events such as natural disasters. If there is no express agreement in the contract, if you directly invoke force majeure clauses, contract failure, impractical, impediment, etc., and put forward a defense, the probability of being supported is very low.

Therefore, it is necessary to strictly distinguish the concepts of force majeure and exemption clauses. Force majeure is only one of the reasons for exemption, and it may not be 100% exempt. Force majeure itself is a statutory matter. In our country, if the "three noes" requirements are met, it will be recognized as force majeure. Therefore, the two parties agree on force majeure (expanding or narrowing the scope) through autonomy of will, which may lead to the invalidity of the agreement. However, the exemption clause is a category of autonomy of will, and more detailed exemption clauses can be made in combination with force majeure or unexpected events, including the rescission, termination and modification of the contract, which can be stipulated in the contract in detail.

[1] Supreme People's Court Civil Code Implementation Leading Group,   

"Understanding and Application of the General Provisions of the Civil Code of the People's Republic of China (Part 2)", People's Court Press, 2020, p. 905.

[2] Supreme Court Decided on August 23, 2007, 2005da59475.

[3] Korean Legal Compilation Research Society, <Petit Code>, Beopmun Books,  

    2019, p. 68. 

[4] Wang Aiqun (Translation), "Japanese Civil Code", Law Press, 2014, p. 92.

[5] Chen Weizuo (Annotation), "German Civil Code (4th Edition)", Law Press, 2015, p. 93.

[6] https://www.51lvh.com/article/articleDetail/7284.html#（Access on：2022.4.19）

[7] https://lawv3.wkinfo.com.cn/topic/61000001056/44.HTML

（Access on：2022.4.19）

[8] http://www.unilex.info/cisg/case/1346（Access on：2022.2.20）

[9]https://simplestudying.com/tsakiroglou-co-ltd-v-noblee-thorl-gmbh-1962-ac-93/（Access on：2022.4.21）

[10] https://www.trans-lex.org/311500/_/tsakiroglou-co-ltd-v-noblee-thorl-gmbh-the-law-report-1962-at-page-7-et-seq/（Access on：2022.4.23）

[11] http://www.unilex.info/cisg/case/416（Access on：2022.4.21）

[12] http://www.unilex.info/cisg/case/384（Access on：2022.4.21）

[13]https://wenshu.court.gov.cn/website/wenshu/181107ANFZ0BXSK4/index.html?docId=13b233a7254a47ecb55cadde009e6058（Access on：2022.4.22）

[14] MSC Mediterranean Shipping Company S.A.v. Cottonex Anstalt[2016]EWCA Civ 789.