COVID-19 Coronavirus Business Impact: China’s Supreme People’s Court Recently Issued its Judicial Guidance Opinions on Adjudication of COVID-19 Related Cases

May 08, 2020

On April 16, 2020, the Supreme People’s Court of China (the “SPC”) issued the Guiding Opinions of the SPC on Several Issues Concerning Proper Trial of Civil Cases Involving COVID-19 (I) (the “COVID-19 Opinions”), providing a more detailed guidance and specific measurement of standards for lower Chinese courts to follow in their adjudication activities. The COVID-19 Opinions were issued as a “judicial interpretation” of the SPC, which in practice has the effect of law in China.

The COVID-19 Opinions encompass COVID-19 related disputes arising from contract non-performance, labor disputes and protection of consumers’ rights, and also deal with procedural issues including suspension of statute of limitations and special arrangement for asset preservative measures.

Pursuant to the COVID-19 Opinions, a party’s requests for termination or variation of a contract, reduction or exemption of liabilities for non-performance, and for suspension or postponement of a statute of limitations, based on grounds of COVID-19 or COVID-19 related control measures, may be supported by Chinese courts or international arbitral tribunals applying Chinese law, if such requests satisfy certain conditions set forth under the COVID-19 Opinions.

Legal Characterization of COVID-19 and COVID-19 Measures under Chinese Law

Under the current Chinese legal regime, generally speaking, whether COVID-19 or COVID-19 measures could be characterized as a force majeure event shall first be decided by the contractual terms between the parties, and failing which, by the applicable law.

On February 10, 2020, the spokesperson of the Legislative Affairs Committee of the Standing Committee of the National People’s Congress, i.e. China’s legislative authority, stated at a press conference that COVID-19 or COVID-19 measures taken by Chinese authorities can be regarded as a force majeure event under Chinese law.

Two months later, the COVID-19 Opinions were issued, which further clarified that the People’s Courts shall strictly apply, in their adjudicating activities, required legal tests in deciding force majeure claims. The COVID-19 Opinions adopted a pro-contract performance and contract-validation approach, stating that if there is only difficulty but not impossibility in contract performance, the court shall try to facilitate parties’ continuing performance, and may further allow variation of the contract terms upon a party’s request. Under these circumstances, contract termination will not be granted.

Contract Non-Performance Related Claims

In general, the Chinese legal characterization of force majeure is that there has been an objective circumstance that is unforeseeable, inevitable and insurmountable. For contract disputes directly caused by COVID-19 or COVID-19 governmental measures, whether a claim for force majeure as well as exemption of default liabilities could be granted will depend on factors including first, the agreement between the parties, and second, the measurement of the impact of COVID-19 or the measures in the relevant district, industry, or type of contract. The court is also required to consider the causation nexus and amount of influence upon contract performance.

If performance is impossible or the purpose of the contract is frustrated – force majeure is constituted, and an exemption of default liabilities and the termination of the contract are allowed.

Under this circumstance, proper delivery of notice obligation and taking mitigating measures are important – otherwise, the claiming party may be required to bear certain liabilities if the damage caused is partly contributable to itself, or, in a worse case be precluded from invoking the force majeure claim. The party claiming relief for a force majeure event shall take the burden of proving the impossibility of performance, the negative impacts of the COVID-19 or COVID-19 measures, the causation nexus and its satisfaction of the notice obligation.

The impossibility and/or frustration of the purpose must be directly caused by COVID-19 or the control measures. 

If the contract can be performed but with great difficulties – pro-contract performance and a variation of the contract are allowed.

Under this circumstance, the court is required to conduct conciliation and guide the parties to continue performance, although a request for variation of, for instance, performance timeline, method or contract price could be allowed. 

Once variation has been granted, a party’s subsequent request for partial or whole exemption from breaching liabilities will not be allowed.

Special Procedural Arrangements

Statute of Limitation

For a party who is unable to file a civil claim due to impacts of COVID-19 or related governmental measures and when the statute of limitations is within its last six months before expiry, Chinese courts shall support the party’s petition for tolling the statute of limitations. 

Extension of Litigation Period

To protect a party’s procedural right of action, a party which is unable to exercise its procedural rights could be allowed to apply to extend the relevant litigation time period (e.g. the deadline for filing submissions to court, the deadline for filing an appeal or an application for retrial).

Flexible Property Preservation Measures

The court may adopt property preservative measures against enterprise defendants and accept counter securities from enterprise plaintiffs (especially small and medium-sized enterprises) that have been swept into financial crisis as a result of COVID-19 in a more relaxed and flexible manner, with the aim to reduce the financial burden on small and medium-sized enterprises.

Other Notable Issues 

Protection of Employees

Employers shall not terminate labor relationships with employees merely on the grounds that the employee is a case, or suspected case of COVID-19 (including those who are asymptomatic), or because the employee is in quarantine or from a high-risk area.

Protection of Consumers

Consumers are entitled to claim for punitive damages against business operators dealing in masks, goggles, protective clothing, disinfectants and other virus control products, as well as food and drugs.

Conclusion

Prior to the issuance of the COVID-19 Opinions, several Higher People’s Courts of local provinces in China, including the Higher People’s Courts of the Jiangsu, Shandong, Zhejiang and Hubei provinces, had issued their own guiding opinions respectively regarding COVID-19 cases within their jurisdiction. Those local guidance opinions all recognized doctrines of force majeure, change of circumstances and principles of fairness. However, in reality, there are certain deviations from one to another.

The SPC’s COVID-19 Opinions unify the adjudication standards of Chinese courts and provide more clarity to parties of potential disputes in assessing the outcome of their cases. Notably, the COVID-19 Opinions are issued as the first in a series of judicial interpretations by the SPC. It is expected that more SPC judicial interpretations relating to similar subjects will be issued in the near future. 

We would also like to thank Ke Wu for her contributions to this article.