Jiangsu High Court’s Views on the Contract Performance under COVID-19

By SONG Zhengping and XU Xinyun, Yun Ya Law Firm

13 April 2020

 

Wuxi Intermediate Court wrote an article about contract performance in the circumstance of the novel coronavirus epidemic outbreak. This article is published on Jiangsu High Court’s Wechat Platform. 

 

 

Failure to perform contractual obligations can be divided into three types: (a) full failure; (b) partial failure; and (c) delay. 

 

The legal consequences of failure to perform could be contract alteration or cancellation, postponed performance partial performance or non-performance, and the corresponding liabilities for breach of contract. 

 

 

Force Majeure means a situation which, from an objective view, is unforeseeable, unavoidable and is not able to be overcome.

 

Change of Circumstances means any significant change in the objective environment taken place after the formation of a contract, which could not be blamed on either party of the contract, rendering the continual performance of the contract manifestly unfair to the relevant party or making it impossible to achieve the goal of the contract.

 

Both of the two principles are based on unforeseeable events, resulting in the overlapping part for the application. However, Force Majeure is mainly applied by the contractual party to partially or completely exempt the liability for breach of contract, while Change of Circumstances focuses on solving the problems of changing or terminating the contract in the event the purpose of the contract is fundamentally affected due to the unforeseeable events. Therefore, the contractual parties may take Force Majeure as the ground to get released from performing the contractual obligation and liability for the failure to perform or take Change of Circumstances to claim for change or termination of contract.

 

 

No. The COVID-19 outbreak may impact some of the contract, but it does not absolutely result in difficulty or failure of contract performance. The contractual parties who claim for exempt from performing the contract obligations shall take the burden of proof to show the specific extent of the impact of the COVID-19 outbreak on the contract performance. It is a case-by-case analysis and the following issues should be considered accordingly, such as the date of singing the contract, the period for performing the specific contractual obligation, the existence of alternative ways of performing, etc.

 

 

(1) Notify in time. The affected party shall notify the other party instantly the difficulty of performing contracts to reduce the possible losses.

 

(2) Provide proof. The reason for failure of contract performance shall be provided to the counterparty, such as the restriction order on the re-open date for enterprises and travel bans.

 

(3) Provide alternative plans on performing contracts. The affected party has the duty to take positive measures to reduce the losses and liabilities. 

 

(4) Negotiating actively with the counterparty. Both parties shall negotiate with each other actively in order to reduce the cost and prompt the continual contract performance.  

 

 

If the contract can still be performed by delaying the delivery and the continual performance of the contract is not manifestly unfair to the relevant party, we suggest both parties continue to perform the contract by changing the period, means and content of the contract on performance after negotiation. Termination of contract is not likely to be supported by the court.

 

If the contract is impossible to be performed continuously or the continual performance is obviously unfair to the relevant party, then the parties may consider terminate the contract. Appropriate measures should be taken to prevent the loss from widening and the losses caused by the termination should be allocated to both parties by following the principle of fairness. It is suggested that both parties should share the loss reasonably through negotiation or make up for the loss by reaching a new agreement.

 

 

Yes. The production and stocking cycle are absolutely affected by the shutdown of enterprise during the novel coronavirus outbreak, which shall be considered as an objective event which is unforeseeable and unavoidable to prevent the contract performance. We suggest both parties take the measures such as delivery in batches or overtime work to reduce the losses caused by delay of performance. 

 

 

No. It is presumed that both parties are aware of the impact of COVID-19 outbreak, so the characteristic of unreasonableness is not satisfied when applying Force Majeure or Change of Circumstances, so the court will not support the corresponding claims. 

 

 

If the contract is eligible for continued performance, the court is likely to reject buyer’s claim for increase in contractual price, unless the seller proves the cost of performance increases significantly due to COVID-19 outbreak.

 

 

No. WHO experts have made it clear that the virus will not infect by package transit since it can not survive on the surface of the object. The rejecting party may incur liabilities for breach of contract with respect to its rejection.

 

 

No. Since the failure of inspection is due to the novel coronavirus outbreak, instead of the own fault of the relevant contractual party, the inspection period shall be extended accordingly. The legal consequence of deemed qualified will not occur under this situation.

 

 

The contractual obligation of repayment is not likely to be unable to overcome for parties based on the multiple payment channels. The defaulting party will bear the liability for overdue payment unless otherwise agreed by both parties. Under the current situation, many enterprises are facing financial pressure, so we suggest enterprises to take measures to release the burden of repayment after friendly negotiation and go through the hard times together.