On The Case

Chinese force majeure certificates presage complexity of resolving post-crisis disputes

It’s impossible to predict with even a sliver of certainty what the litigation fallout will be from the economic havoc of the coronavirus pandemic. I’ve read dozens of law firm memos advising clients on everything from the risk of shareholder fraud suits to tort liability for businesses that turn out to be viral hubs. The legal wrinkles seem to multiply every day as federal, state and local authorities impose new restrictions. It’s hard to imagine that litigation alone will mitigate the damage to some of the hardest-hit industries.

But there will be litigation and, in disputes between business, commercial arbitration. And for many businesses, there will be international complications. To begin to get an idea of the scope of those complications, I talked to lawyers from Wilmer Cutler Pickering Hale & Dorr and Arnold & Porter Kaye Scholer about recent client alerts they issued about intriguing tactics by Chinese authorities in anticipation of international supplier contracts.

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China’s Council for the Promotion of International Trade (CCPIT), a quasi-governmental organization that promotes foreign trade has issued thousands of force majeure “certificates” to Chinese companies, affirming that these businesses were affected by government policies to contain the COVID-19 epidemic. According to Arnold & Porter partner Anton Ware, who is based in Shanghai, the CCPIT has issued nearly 5,700 certificates, addressing international contracts worth about $73 billion. The certifications, he said, have ranged from small-bore attestations that, for instance, a Chinese company was unable to send a representative to Argentina because the executive was under quarantine to verification that a medical supply company could not fulfill its contract because the Chinese government requisitioned its factory for domestic production.

And the force majeure certifications are not the only measure undertaken by Chinese authorities. As both the A&P and Wilmer alerts noted, the legislative affairs commission of China’s National People’s Congress announced last month that businesses prevented from performing their contractual obligations because of Chinese measures to contain the virus should be entitled to relief under force majeure.

Clearly, Chinese authorities are anticipating contractual disputes between Chinese businesses and foreign counterparties and are attempting to streamline analysis of whether the COVID-19 pandemic constitutes a force majeure, or unforeseeable event that precludes contract performance. (Interestingly, according to Kenneth Zhou and Lester Ross, Shanghai-based Wilmer partners, it has not been common practice to include epidemics in force majeure provisions involving Chinese companies, even after the SARS outbreak in 2003.) So for foreign counterparties, the question is going to be whether China’s pre-emptive measures will be enough to get Chinese companies off the hook.

Zhou, Ross and Ware agreed that the CCPIT certificates and the Congressional declaration will carry significant weight with Chinese courts or arbitrators applying Chinese law. Businesses asserting a force majeure defense for their failure to meet contractual obligations will still have to show that coronavirus (or the government’s containment measures) blocked them from fulfilling the contract. Chinese authorities took similar action to solidify the force majeure defenses of Chinese companies after the SARS outbreak, said Zhou. History shows that if international disputes over contracts disrupted by the coronavirus are resolved in China, he said, those force majeure declarations are likely to be recognized.

But many companies that do business in China have contracts that call either for disputes to be heard in jurisdictions other than Chinese courts or arbitration forums or to apply laws other than China’s. In litigation or arbitration outside of China or under non-Chinese law, said Zhou, it’s not clear how much weight the force majeure certificates and Congressional declaration will carry.

That could be particularly true when Chinese companies have invoked force majeure on the demand side. Last month, as Reuters reported, the French liquefied natural gas producer Total rejected a force majeure declaration by Chinese counterparties that claimed they could not complete a purchase because of the COVID-19 crisis. Zhou and Ross said courts and arbitrators may be wary that Chinese buyers are asserting force majeure just to see if prices drop for the products they were contracted to purchase.

So far, Ware, Ross and Zhou said they haven’t heard from clients that have received force majeure notifications from Chinese counterparties. But it’s only a matter of time, they said, before supply chain disputes end up in arbitration and litigation – and as the pandemic affects economies beyond China, the consequences will broaden.

Even if many broken contracts end up being addressed amicably, without formal proceedings, “there will still be a huge overhang,” he said. “This is so messy. The spillover effects are going to take a very long time to unwind.”