Is the Coronavirus a Case of "Force Majeure"?

The outbreak of the coronavirus poses challenges for companies with Chinese business activities.

International contracts (e.g. purchase, sup­ply and construction contracts) often con­tain clauses pertaining to “force majeure” or “acts of God”, according to which certain events lead to an exclusion of liability or to an extraordinary right of termination.

Such clauses are permissible and valid under both Swiss and German law as well as un­der Chinese law, whereby "force majeure" is generally qualified as an unforeseeable, unavoidable and insurmountable event. For example, in 2016 the highest Chinese court qualified the outbreak of the SARS-virus as a case of "force majeure".

Based on these considerations, we are of the opinion that the coronavirus epi-demic can be qualified as a case of force majeure.

What does this mean for your business relations with China?

We recommend companies with Chinese business relations to take the following steps:

• Check whether your contracts contain an explicit “force majeure” clause. In the absence of such a clause, the Chinese contractual partner may still invoke force majeure under Swiss, German or Chinese law, de­pending on the wording and structure of the contract.

• If the contract contains an explicit or im­plicit “force majeure” clause, you may ex­pect the Chinese contracting party to invoke this clause, should he be unable to perform. Specifically, he may be able to withdraw from his obligation to deliver without being liable for damages, or to terminate the con­tract on extraordinary grounds. If you are obliged to pay in advance, check whether you may similarly invoke force majeure. In both cases, “force majeure” may be assert­ed with regard to a personal or material per­formance; however, this is less certain with regard to a monetary performance.
  
  Joint venture and framework agreements often contain such clauses as well. With respect to these so-called “continuous ob­ligations”, however, the bar for the applica­tion of such a “force majeure” clause is set higher; for it to be invoked, performance would have to be hindered on a permanent or long-term basis, which, at the current stage, is deemed unlikely.

• Depending on the circumstances, dis­cussing the issue proactively with the Chi­nese partner, or if necessary, with a pro­fessional advisor, may be worthwhile and contribute to risk reduction. If you have any questions or inquiries, please do not hesi­tate to contact us.

Kellerhals Carrard
Cheng Chen, Of Counsel
Sabine Neuhaus, Associate