COVID-19’s impact on international trade contracts

Under PRC law, the impact of the COVID-19 pandemic on contract performance involves two regimes: force majeure and rebus sic stantibus (change of circumstances).

Force majeure. According to the Contract Law, force majeure has two main legal consequences for the performance of the contract, namely, the exemption from liability for breach of contract, and the termination of contract.

If parties invoke the force majeure clause to exonerate themselves from liability for failure to perform the contract, the following conditions should be met: (1) the pandemic and its prevention and control measures constitute force majeure; (2) there is a causal relationship between the pandemic, and its prevention and control measures, and the party’s failure to perform the contract; and (3) the party has no fault in the performance of the contract affected by the pandemic and its prevention and control measures.

It should be noted that the pandemic and the government’s prevention and control measures have the characteristics of force majeure, but whether it constitutes force majeure in a case needs to be analyzed in conjunction with the parties’ expectations and the stage of development of the pandemic. To decide whether it has the legal effect of force majeure, it is necessary to analyze the pandemic situation in combination with the case situation, and whether the pandemic and its prevention and control measures have rendered the contract impossible to perform.

If the performance of the contract is affected by the pandemic, and the parties demand termination of a contract, they must satisfy the condition of force majeure rendering the purpose of the contract impossible to achieve, in addition to the above-mentioned conditions of invoking force majeure to claim an exemption from liability.

Doctrine of change of circumstances. According to article 26 of Interpretation II of the Supreme People’s Court on Several Issues concerning the Application of the Contract Law of the People’s Republic of China, applicable requirements of change of circumstances include: (1) a significant change in the underlying conditions of the contract after its formation; (2) such a significant change could not have been foreseen at the time the parties entered into the contract; (3) the significant change is not force majeure and is not a commercial risk; and (4) the continued performance of the contract is manifestly unfair to one of the parties, or fails to achieve its purpose.

Each of these elements should be judged on its own merits. If the pandemic, and its prevention and control measures, constitute a change of circumstances for the performance of a particular contract, the parties may request the court or arbitration body to change or terminate the contract.

Under English law, the impact of the pandemic on contract performance is manifested at two levels: first, the contractual content expressly agreed by the parties is applied (usually force majeure clauses); and second, in the absence of an agreement, the regime of the frustration of contract is considered.

Force majeure clause. There is no concept and regime of force majeure in English law itself. The analysis of the impact of the pandemic on contract performance based on the force majeure clause cannot be generalized. It should be specifically analyzed in the context of the agreement on the impediments to contract performance, the impact of the impediments on contract performance, the duty to give notice, the consequences of the occurrence of force majeure, etc.

Frustration of contract. Frustration of contract refers to the occurrence of unexpected events or accidents in the course of the performance of the contract that could not have been reasonably foreseen by the parties at the time of the conclusion of the contract, which frustrates the purpose of the contract and exempts the parties from liability for failure to perform their contractual obligations.

The judicial responses of English law have always been to support, rather than negate, the validity of contracts, and it is therefore extremely difficult to claim the frustration of contract under English law. Unless the pandemic directly results in circumstances such as the loss of the contract subject, or an export embargo, which are sufficient to render the contract impossible to perform at all, it will be difficult for parties to reduce their liabilities and losses through the frustration of contract regime.