As China already made significant progress in its fight to contain the coronavirus, the Chinese economy is still not back to business as usual. As an effort to provide protection to the Chinese companies from being held responsible for impact on commercial contracts, the China Council for the Promotion of International Trade (CCPIT), a foreign trade and investment promotion agency of the Chinese government, issued 6.400 force majeure certificates. To what extent can Chinese companies rely on such certificates to invoke any force majeure clauses under international sale contracts?
In this article we describe how force majeure operates under Dutch law and the UN Convention on Contracts for the International Sale of Goods (CISG) and analyze the effect of the Chinese force majeure certificates.
The term ‘force majeure’ is commonly referring to situations in which fulfilling the contractual obligations can no longer be expected from a party. Under Dutch law, there is no general definition of force majeure. Whether this is the case depends on the circumstances of the case and the interpretation of the contract provisions. Under the CISG, the term ‘impediment’ is an elastic word that covers a wide range of force majeure events.
Position under Dutch law
Under Dutch law, the general rule is that parties need to fulfill their obligations under the contract. When a party fails to do so, it can be held liable for all damages resulting from the breach of contract (article 6:74 Dutch Civil Code). Pursuant to article 6:75 of the Dutch Civil Code, a breach cannot be attributed to the contracting party if it cannot be blamed, nor if it is not accountable by means of law, legal act or generally accepted standards.
Dutch law does not formally define the concept of force majeure. Parties can contractually define for themselves what qualifies as a force majeure situation. To the extent that contracts describe force majeure events, it is usually referred to unexpected events which is outside the control of either party, such as terrorist attacks, natural disasters or epidemic. There are also common contractual provisions pursuant to which transport problems due to governmental measures are considered as a force majeure event.
When the contract does not specify the events which will constitute force majeure, then the circumstances of the case need to be taken into account. Any claim for specific performance of a contractual obligation may be excused if the performance is impossible by the defaulting party and/or for everyone, or the efforts of the defaulting party will objectively be considered as disproportionate. Whether this is the case depends on the actual facts and circumstances of the case.
Successful reliance on a force majeure clause may have as consequences that:
- obligations under the agreement are suspended;
- extra time is given to fulfil obligations;
- no compensation is due for suffered damages;
- entitlement for termination of the agreement.
Position under CISG
The CISG applies to international sales of goods between parties whose relevant places of business are in countries which have adopted the UN Convention for the International Sale of Goods or have not particularly excluded the application of the CISG. It often occurs in practice that contracting parties have opted for the application of Dutch law, but not excluded the application of the CISG. In those circumstances, the CISG is applicable.
Under the CISG, the buyer respectively the seller may claim compensation if the other party fails to perform either under the agreement or the CISG (articles 45 paragraph 1 sub b and 61 paragraph 1 sub b CISG). Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the defaulting party foresaw or ought to have foreseen at the time of the conclusion of the contract (article 74 CISG).
Pursuant to article 79 CISG, a party is not liable for a failure to perform any of its obligations if it can prove that the failure was due to an impediment beyond his control. In addition, the defaulting party must prove that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome it or its consequences. The objective standard of a competent and reasonable person acting in the same circumstances will be applied.
The CISG does not refer to the legal term of force majeure but to impediment. It is well accepted that natural disasters and epidemics are seen as causes for exemption from liability under article 79 CISG. This may also apply in the event of epidemic diseases. Parties have the freedom to include contractual force majeure clauses and could agree on other terms and consequences for force majeure events. Ultimately, the true intention of parties is decisive, with taking into account the actual circumstances of the case including negotiations, usages and best practices between parties (article 8 CISG).
In comparison with the Dutch Civil Code, the party in default is dealing with a higher level of burden of proving exemption from liability due to force majeure under the CISG. In addition, article 79 CISG will only excuse the defaulting party from liability for damages. It does not eliminate the other CISG remedies, such as termination of the agreement or reduction in price. Depending on the circumstances of the case, it could be more favorable for the purchaser to claim damages relying on the CISG instead of the Dutch Civil Code.
Force majeure certificates
Following the CCPIT, officials, government and enterprises of more than 200 countries recognize the Chinese force majeure certificates. Under Dutch law, these certificates does not have any independent meaning. While it may offer some evidentiary support to a party invoking the existence of a force majeure event, it ultimately depends on the phrasing of the force majeure clause (if any), the other provisions of the contract and the actual circumstances of the case. Thus, it is not given that reliance on a force majeure based on the force majeure certificate will succeed under Dutch law. This also applies to a party seeking reliance on force majeure under the CISG.
It is important for companies that face Chinese force majeure certificates to carefully review the facts, the provisions of the contract and the applicable rules of law. Sometimes it could be more beneficial to renegotiate the terms of the contracts instead of getting into a legal battle regarding the applicability of the force majeure certificates. In the long term it could save your guanxi with Chinese counterparts.
Marxman is a member of the China Collaborative Group (CCG). The CCG is an international network which enables to facilitate trade with and investment into China, as well as investments from China to abroad.