China Justice Observer

中国司法观察

COVID-19, Enforcing Foreign Arbitral Awards and Force Majeure

Sat, 11 Apr 2020
Categories: Insights
Contributors: Jian Zhang 张建

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How would Chinese courts view arbitral awards where foreign tribunals reject a force majeure claim connected to the coronavirus (COVID-19) pandemic? 
 

In our previous post, the China Council for the Promotion of International Trade (CCPIT) has issued force majeure certificates with respect to COVID-19. Under the pandemic situation, such certificates can be used as important evidence. However, the foreign arbitral tribunals may not necessarily recognize the existence of force majeure or determine the breaching party to be exempt from liability due to such evidence.

When foreign arbitral tribunals refuse to admit the force majeure certificate issued by the CCPIT, will Chinese courts refuse to recognize and enforce such arbitral awards on the grounds of public policy?

The answer is No.

I. Introduction

According to recent media reports, Royal Dutch Shell PLC and French Total Group have already announced that they refused to accept the force majeure notice issued by China National Offshore Oil Corporation, the buyer of liquefied natural gas of the two companies. This is the first time that international suppliers deny a Chinese buyer’s claim to rescind a contract since the outbreak of COVID-19.

Considering that Chinese enterprises often choose arbitration for dispute resolution in foreign-related business, if they possess the aforementioned CCPIT certificates and claim exemption from liability in international arbitration, but such claim is not supported by the arbitral tribunal, can such arbitral awards be recognized and enforced by Chinese courts?

In my opinion, even if the CCPIT has produced the force majeure certificates, the party claiming force majeure cannot be exempted from the burden of proof. In fact, those certificates cannot be considered as conclusive evidence, and they at most can be used as prima facie evidence when the party invokes the pleading/defense of force majeure. The reason is that the CCPIT is more of a non-governmental organization than a governmental one. As its official website indicated, the CCPIT is also named as China Chamber of International Commerce. As a national foreign trade and investment promotion agency, one of the CCPIT’s services is to issue commercial certificates in order to certify the documents and facts relating to commercial activities. The force majeure certificates issued by the CCPIT are to confirm the facts of COVID-19 related to the assessment of force majeure, but to determine whether there is force majeure and whether the party failing to perform the contract may be released from liability, the tribunal still needs to examine the applicable law and the provisions of the contract on a case-by-case basis.

In the field of international commercial arbitration, the power to decide the admissibility of evidence belongs to the tribunal, and the tribunal may use its discretion to assess those certificates issued by the CCPIT. If the tribunal refuses to admit those certificates, the court will not review such matters anymore. In China’s judicial practice on recognition and enforcement of foreign awards, the interpretation and application of public policy have been put into a narrow scope, and it is unlikely for Chinese courts to refuse the enforcement on such grounds.

II. Legal provisions about force majeure and applicable law in the international arbitration

As a very important legal term in the contract law, force majeure originates from the French Civil Code. According to the definition of Black’s Law Dictionary (eighth edition), force majeure is an event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars). Force majeure clause is a contractual provision allocating the risk if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated, avoided or controlled.

When deciding a force majeure issue in Chinese courts or international arbitration, the first crucial factor is the contractual provisions, if there are no such provisions in the contract, the tribunal needs to find the relevant articles from the applicable law. Since force majeure is a legal concept originated from Civil Law countries, if the applicable law is civil law, even though the parties did not stipulate such provisions in the contract, the tribunal may still recognize such pleadings. However, under the common law system, it’s better to describe the force majeure situation as detailed as possible in the contract, rather than to use such wording as “this contract is subject to force majeure clause” in a general way. If “coronavirus pandemic” or “control measures by the government” or “public health events” are not specified therein, the common-law courts will usually make decisions based on precedents and the basic principles of the common law system.

China, as a civil law country, has clearly provided for the force majeure in its legal system. More specifically, as stipulated in Article 180 of the PRC General Provisions of Civil Law, “if the civil obligation cannot be performed due to force majeure, the affected party shall not be liable for civil liability.” This Article further stipulates that force majeure possesses “three attributes” - unforeseeable, unavoidable and insurmountable. At the same time, Article 117 of the PRC Contract Law stipulates that “if the contract cannot be performed due to force majeure, the liability shall be exempted in part or in whole according to the influence of force majeure, unless otherwise provided by the law”. It can be seen that if the Chinese law is applicable, even if the parties do not agree on the force majeure clause in the contract, they can also claim exemption from the contract liability in part or in whole on the grounds of force majeure according to the law in case of unforeseeable, unavoidable and insurmountable events. However, even if the CCPIT has issued a certificate therefor, Chinese enterprises still need to prove to the court or arbitral tribunal that the impact of the pandemic cannot be overcome before they can be exempted from the obligations.

However, under the common law system, there is no written law on force majeure. The judicial practices of impossibility, practicability, and frustration of contract performance developed from practical cases have the same effect as the force majeure in the civil law system, but it is more difficult to meet their application conditions. According to the U.K. law, if there is a material change of circumstance (such as strike or export ban with unknown duration), the parties will still have to fulfill the obligations in the contract, only the performing time can be extended or delayed. Only when the change is enough to frustrate the contract can the parties be exempted from the obligations. However, it’s very difficult to meet the application conditions of contract frustration, the consequence of which is to kill an effective contract.

In addition, if the parties agree to use international conventions and commercial practices in the contract, the related provisions shall apply. For example, Article 79 (1) of the CISG stipulates that “a party is not liable for a failure to perform any of its obligations if he proves that the failure was due to an impediment beyond his control and that he 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.” Even if the CISG does not stipulate force majeure directly, but the effect of the impediment clause is similar to that of force majeure. Moreover, Article 7.1.7 of the UNIDROIT Principle of International Commercial Contracts (2016), Article 8.108 of the PECL, the Principles of European Contract Law, ICC Force Majeure and Hardship Clauses 2003 and its updated 2020 edition have stipulated force majeure clause.

Therefore, when evaluating whether the force majeure rules can be applied, given the principle of autonomy in a contract is observed in both the civil law system and the common law system, it is necessary to first find out whether there are express terms on force majeure in the contract; secondly, if there are no such terms, it is necessary to judge whether the force majeure rules are directly applicable according to the applicable law; or the judgment shall be made according to the applicable law of the contract and the provisions of relevant conventions and practices.

Compared to domestic arbitration, an international arbitration usually takes place in a country that is ‘neutral’, in the sense that none of the parties to the arbitration has a place of business or residence in the seat.[1] However, seat and governing law are separable matters, and they are not necessarily identical. The law that governs the substantive matters in issue (and which goes by a variety of names, including the ‘applicable law’, the ‘governing law’, or sometimes the ‘proper law’) may be a different system of law altogether. In China, in foreign-related arbitration, it is not unfamiliar for parties to agree on a different combination of governing law and arbitration seat. [2]

For example, an arbitral tribunal sitting in Beijing or Shanghai may well be required to apply the law of New York as the applicable or substantive law of the contract. This ‘applicable’ or ‘substantive’ law will generally be a designated domestic law system, chosen by the parties in their contract. But this is not necessarily so. The parties or, in default, the arbitral tribunal on behalf of the parties may choose other systems of law, for example a blend of domestic law and public international law, or a collection of rules known as ‘international trade law’, ‘transnational law’, the ‘modern law merchant’ (the so-called lex mercatoria). In CIETAC arbitrations, the CISG and the UNIDROIT Principles are very common to be designated as the applicable rules, and there is not any difficulty in enforcing such awards. So, we may say that even if it is a force majeure case, the parties may still stipulate foreign laws as applicable law rather than Chinese law.

III. What will the Chinese court perceive the force majeure certificates

i. In China’s domestic litigation

The CCPIT has collected and published a series of compilations of cases on their force majeure certificates. [3] In Chinese courts, such certificates will have a strong probative force. However, these certificates may not produce absolute effect even in a Chinese court. To what extent may the force majeure certificates work depends on the applicable law of the contract. Under the Hong Kong law, if a contract is silent about force majeure matters, a contracting party will need to demonstrate that the epidemic frustrated the purpose of the contract.[4] According to Article 10 of the New Provisions of the Supreme People’s Court on Evidence in Civil Procedures (2019) (最高人民法院关于民事诉讼证据的若干规定), the parties are not required to prove the following facts: (i) the laws of nature and the theorems and laws; (ii) well-known facts;……Since the pandemic is a well-known fact, the parties do not need to acquire the CCPIT certificates in Chinese courts, but they still need to prove that COVID-19 has caused damages and their non-performance of contract.

ii. In cases of recognition and enforcement of foreign arbitral awards in China

Whether Chinese courts will invoke the public policy exemption to refuse enforcement?

The answer is No.

China Justice Observer has published an article in Jan. 2020, which discussed the only two cases that Chinse courts refused to enforce foreign awards on grounds of public policy, i.e., the case of Hemofarm (2008) and the case of Palmer Maritime Inc., both deciding that the ignorance of judicial sovereignty may be considered as the violation of public policy.[5] Overall, Chinese courts use a very narrow interpretation of public policy. Even if the foreign awards violate some mandatory provisions of Chinese law, or there are misinterpretations or improper evaluation of Chinese laws, we will not easily draw the conclusion that such foreign awards violate the public policy.

IV. How can enterprises claim force majeure caused by COVID-19

Both COVID-19 and SARS involve the force majeure matters. For Chinese courts, after the occurrence of the force majeure event, the party claiming force majeure shall provide evidence to the other party to prove the relevant facts, including: (1) whether the event occurred belongs to the event defined in the force majeure clause (in contract or in law); (2) whether the performance of the contract is adversely affected by the occurrence of the force majeure event; (3) whether the party affected by the force majeure event has already taken measures to avoid or alleviate the effect, but is still unable to perform the contract.

According to Article 118 of the PRC Contract Law, if one party is unable to perform the contract due to force majeure, he shall notify the other party in time to mitigate his potential losses, and shall provide proof within a reasonable period of time. With regard to how to prove and which kind of proof to provide, the legislation does not give a clear indication. There are no provisions on such burden of proof in relevant national laws, conventions, and practices.

Under the current pandemic circumstances, does the relevant enterprise have to apply for certificate from the CCPIT, and show it to the opposite party concurrently or shortly after sending the force majeure notice? In my opinion, such certificate is important but not necessary. It depends on different situations:

Firstly, if it is a purely domestic commercial activity, there isn’t any need to acquire such certificates. In this case, the notices to postpone the work resumption issued by all provincial or municipal governments are in public. According to Article 10 of the Provisions of the Supreme People’s Court on Evidence in Civil Proceedings, “the parties need not prove the following facts: … (2) well-known facts”. Therefore, domestic courts or arbitration institutions don’t need the certificates to determine the relevant facts.

Secondly, as far as foreign commercial activities are concerned, the force majeure statements made by domestic enterprises may not be recognized by some foreign governments, chambers of commerce, enterprises, courts or arbitration institutions, so supporting documents with credibility are required as evidence. However, the certificate on force majeure issued by the CCPIT is only a proof of the fact, proving the authenticity of the objective facts confirmed by the relevant supporting materials. In addition to such fact-proving certificates, other relevant evidence, such as government announcements and media information, are still needed. For example, in one case, the Judicial Committee of the Privy Council (JCPC) of the United Kingdom held that the proof of force majeure issued by the CCPIT was not conclusive, and the JCPC was still entitled, on its own discretion, to determine whether the relevant parties could invoke the defense of force majeure based on the facts.

In addition, whether these certificates need to be provided should also be subject to the contract terms, that is, whether the terms explicitly require that such certificate must be issued as evidence when providing the supporting document of force majeure. If the contract terms not so clearly require, the certificates will not be necessary.

 

 

[1] Nigel Blackaby et al., Redfern and Hunter on International Arbitration, Sixth edition, Oxford University Press, 2015, p.166.

[2] 上海市高级人民法院民事裁定书(2009)沪高民(四)海终字第 58 号

[3] 贸促会不可抗力事实性证明案例汇编(一),http://www.ccpit.org/Contents/Channel_4324/2020/0304/1244780/content_1244780.htm, last visited on April 2nd, 2020.

[4] Perkins Coie LLP, “Is SARS a Force Majeure Event? A Brief Overview of Hong Kong and PRC Law”, https://www.martindale.com/business-law/article_Perkins-Coie-LLP_13314.htm, last visited on April 2nd, 2020.

[5] Meng Yu, Judicial Review of Arbitral Awards in China: How Courts Apply Public Policy?, https://www.chinajusticeobserver.com/a/judicial-review-of-arbitral-awards-in-china-how-courts-apply-public-policy , last visited on April 2nd, 2020.

 

Cover Photo by Nick Bolton(https://unsplash.com/@nickrbolton) on Unsplash

Contributors: Jian Zhang 张建

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