As China’s lockdown policy against Omicron upscales into a new level, more and more foreign clients come to consult for their defaulting orders from Chinese suppliers. Does the delay and failure of shipment caused by the lockdown still constitute breach of contract? Can your Chinese suppliers exempt their liabilities based on force majeure? Or do you have the right to terminate your sales contract and claim damages?
A recent judgment rendered by Beijing Railroad Intermediary Court indicated the mainstream viewpoint of Chinese courts on the application of force majeure to international sales of goods contract.
Heli Company purchased ventilators from Demeirui Company for export to the Portuguese Republic. The two parties signed two Sales Contracts on April 29, 2020 and May 1, 2020 respectively. In one of the “sales contracts” the goods are 140 ventilators. The two parties agreed that due to the impact of the new crown epidemic, the goods can be shipped batches and the specific delivery time is subject to the time notified by Demeirui, but all 140 units shall be delivered no later than June 10.
From June 20, 2020 to July 4, 2020, only 50 ventilators under the contract have been shipped.
On July 15, 2020, July 20, 2020, and July 22, 2020, Heli Company requested Demeirui Company to continue to deliver 60 units of goods and return the payment for 30 units of goods. On July 27, Heli Company proposed to terminate the contract and demanded the refund for 90 units.
Getting no response from the DMR Company, LIHE Company lodged the case for termination of the contract, refund of price, liquidated damages and other direct losses. And DMR argued that LIHE had been informed of non-fulfillment as a result of force majeure before the delivery date is due, so it is entitled to postpone the delivery and not pay the damages of LIHE.
The court summarized four ISSUES in this case include (1) Whether CMR can claim to delay its performance or not to perform with the defense of force majeure; (2) Whether CMR is in breach of contract; (3) Whether LIHE can terminate the contract; (4) Whether CMR shall undertake the damages caused by the termination. Among them, the main issue is identification of force majeure.
Reasoning and Decision
Under SPC’s Opinion on judgment of civil cases related to new crown epidemic, the party who asserts the force majeure as defense shall furnish evidence proving that new crown epidemic directly causes its inability to perform the contract. Under Article 117 of Contract Law, the force majeure is the circumstance that is “objectively unforeseeable, unavoidable, and insurmountable”. So CMR has to prove the new crown epidemic is objectively unforeseeable, unavoidable, and insurmountable and it is the only reason that causes nonperformance of the contract.
CMR submitted the statement from its supplier, YIAN Company. In this statement YIAN Company asserted that the raw material for production of ventilators can not be imported as a result of epidemic, which caused the limitation of productivity.
The court holds that both parties had expected the influence of epidemic since the contract had mentioned it and set out a flexible period of shipment by such prediction. As a result, the epidemic is not the circumstance that both parties can not foresee. Besides, during June 20, 2020 to July 4, 2020, DMR had shipped 150 ventilators, including the 50 ventilators under this contract. Based on this fact, the court holds that the epidemic is not the only factors that affects the performance of this contract.
The court holds that the evidence from DMR can’t meet the standards of force majeure, DMR can not excuse the performance and liabilities.
Points: When the contract is executed in the period of epidemic, it is supposed that both parties has anticipated the influence of lockdown. The epidemic or the prevention and control measures shall not constitute force majeure.