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This article is shared by Qiu Lin, a senior partner of Longan Law Firm and co-founder of Narwhal, who provided a professional answer to a series of legal issues related to the “force majeure” caused by the new crown epidemic. Help SMEs avoid business risks and reverse business crisis.

Undoubtedly, the impact of the epidemic on enterprises is all-round, and various enterprises are also facing various contracts that are still being performed before and after the outbreak of the new crown. The epidemic will eventually pass. As social operations slowly move towards formality and economic activity restarts again, a series of legal issues will emerge, such as:

• How to reduce or exempt the company from liability for breach of contract due to epidemic situation?

• How can companies effectively control the losses that have been or will be caused by the counterparty’s default?

• How to deal with a large number of contracts involving the new crown epidemic, whether to continue to perform, negotiate changes, or be forced to suspend, terminate, or terminate?

• If there is no agreement with the counterparty, how can companies prepare for subsequent disputes, and should they retain and obtain the corresponding evidence materials from now on? What should I do?
  

  In February last year, the NPC Legal Work Committee pointed out that failure to perform the contract due to epidemic prevention and control was force majeure, so the Xinguan epidemic became an “official certification” force majeure event.

  Many companies are accustomed to using “force majeure” as a “life-saving straw”, but what I want to tell you is that force majeure is not a tried-and-true “life-saving straw”, and its application conditions are more stringent.

  

  Qiu Lin, Senior Partner of Longan Law Firm and Co-founder of Narwhal

  First, from SARS to the new crown “Force Majeure” is not the “life-saving straw” of an enterprise

  1. During the New Crown epidemic: Eggshell apartments completely misinterpreted “force majeure”

  During the epidemic, the article “Landlord rents rent-free tenants to collect rents, and eggshell apartments took advantage of the epidemic to earn” smart money. “The article pushed Internet long-term rental apartment operators eggshell apartments to the forefront. Eggshell apartments require owners to provide rent-free periods ranging from 1 to 3 months.

  On the tenant side, the preferential plan is to provide a 10-day lease extension, or a “care voucher” equivalent to 10.8 days of rent. In this regard, the Shenzhen Municipal Bureau of Housing and Construction formally interviewed the relevant person in charge of Shenzhen Eggshell Apartment, and requested that legal professionals be promptly organized to participate in research and formulate solutions, actively communicate and negotiate with the owner, and properly handle related issues in accordance with legal provisions and contractual agreements.

  In the eyes of a legal person, this NYSE-listed company is too wrong:

  • He misinterpreted government documents and changed the “voluntary” rent reduction to “mandatory” rent reduction;

  • In the absence of contractual agreement and legal basis, he unreasonably terminated the contract unilaterally;

  • He completely misunderstood the “force majeure”. The new crown epidemic does not constitute “force majeure” for the long-term rental model of the eggshell apartment. The eggshell apartment did not use this as a legal basis for claiming rent exemption or termination of contract .
    

    2. Review of the SARS epidemic verdict: there is no “one size fits all” case-by-case determination

    SARS in 2003, the new crown in 2020, the second epidemic is so similar, how it was operated that year is very valuable for today’s enterprises. During the SARS period, the Supreme People’s Court issued a document that turned the SARS epidemic into an “official certification” situation change and force majeure event.

    Searched all the referee documents during the SARS-related period on the internet. Among them, 10 were related to changes in the situation, 2 were identified by the court, 19 were related to force majeure, and 9 were identified by the court; the rest They were rejected by the court.

    There are two comparative cases worth studying:

    • In a dispute over a construction contract for a construction project in Zhejiang Province, the court held that due to the SARS epidemic that occurred during the construction of the construction project, it should be identified as a force majeure event affecting the contract and the contractor in breach of the construction period. No liability for breach of contract;

    • In a dispute over a house rental contract in Shandong Province, the court identified the SARS epidemic as a change of situation affecting the contract, and determined that the lessor should appropriately reduce or exempt the lessee’s rent.
      
      

      The three different judicial evaluations of the same SARS epidemic, force majeure, change of situation, and direct rejection, are the legal consequences of exempting all liabilities for breach of contract, only reducing rent properly, and strictly observing the contract to continue performing. Why?

      Even in the SARS and New Crown epidemic, there is no one-size-fits-all judgement standard. It is determined on a case-by-case basis.
      

      Second, situation changes, force majeure, business risks Which one should I use?

      From the perspective of the system of liability for breach of contract, force majeure and changes in circumstances are both parties’ remedies for breach of contract. In other words, when performance risks occur during the transaction, these legal means can play a role in redistributing the risks of both parties in the transaction. Effect:
      

      • When the event leading to a transaction is deemed to be force majeure , it means that the breaching party has the right to mitigate or exempt it according to the extent and scope of the force majeure event > Both parties have the right to terminate the contract if the event of force majeure directly leads to the inability to achieve the contract;

      • When the event that caused the transaction to be out of danger is deemed to be a change of situation , it means that the defaulting party can negotiate with the counterparty of the transaction based on the objective situation of the change of situation In order to achieve the purpose of changing, suspending, or even terminating the transaction without being liable for breach of contract. If the two parties cannot reach an agreement through negotiation, they should resort to the court or arbitration institution to change or terminate the contract between the two parties;

      • When the event that caused the transaction to be out of business is deemed to be a commercial risk , it means that both parties to the transaction no longer have any legal “privileges”, and should be Agreement and legal requirements , continue to perform the contract on the principle of good faith.
        

        What is force majeure, what is changing circumstances, and what is business risk? After a comparative analysis of the three, let’s take a look at what value the law can bring to enterprises in this particular period. Of course, legal tools are not only in special periods, but also when there is no epidemic, they can also affect various types of transactions of enterprises, including but not limited to having a significant impact on gambling.

        1. Force Majeure: Unforeseeable, unavoidable, insurmountable, unfulfillable

        Article 180 of the General Principles of the Civil Law stipulates that those who cannot perform civil obligations due to force majeure shall not bear civil liability. LawIf there are regulations, they shall be followed.

        Force majeure is an objective situation that is unforeseeable, unavoidable, and insurmountable.

        Article 117 of the Contract Law stipulates that if the contract cannot be performed due to force majeure, according to the influence of force majeure, the liability shall be partially or wholly exempted, unless otherwise provided by law. In the event of force majeure occurring after the parties’ delayed performance, the liability cannot be relieved.

        Force majeure referred to in this law refers to objective circumstances that cannot be foreseen, unavoidable, and insurmountable.
        

        From the legal provisions, force majeure is four “no”, that is, unforeseeable, inevitable, insurmountable, and incapable of fulfillment. When an event has these four “nos,” its impact on the transaction has a legal prerequisite that constitutes force majeure. Even if there is no agreement in the contract, it will not affect the application of both parties to the transaction.

        In terms of appearance, force majeure can be divided into three categories:

        • Natural disasters, such as earthquakes, typhoons, floods, tsunamis, etc.;

        • Government actions, such as new policies, regulations, or administrative measures promulgated by government authorities;

        • Social anomalies, such as war, strikes, riots, etc.
          

          In the past 20 years, these situations often appear in various contracts signed by students, but only SARS epidemic cases and new crown epidemic cases are considered “qualified” as force majeure events, In such a special period, enterprises should make good use of force majeure to avoid risks and reduce losses for themselves.

          The key to the application of force majeure is that the party that has suffered force majeure can require directly without necessarily going through a court or arbitration institution The counterparty to the transaction mitigates the impact of the force majeure event, waives its liability for breach of contract, and even directly requests termination contract.

          2. Situational changes: unforeseen, non-commercial risks, continuing to perform unfairness

          Article 26 of the Interpretation of the Contract Law (2) stipulates that after the establishment of the contract, the objective situation has occurred in which the parties could not foresee when the contract was concluded, and caused a major change that was not a business risk caused by force majeure, and continued to perform the contract. Where a party is obviously unfair or cannot achieve the purpose of the contract, and the party requests the people’s court to change or terminate the contract, the people’s court shall determine whether to change or terminate the contract in accordance with the principle of fairness and the actual situation of the case.

          Article 533 of the Civil Code (Draft) stipulates that after the contract is established, the basis of the contractThe basic conditions have undergone major changes that the parties could not foresee at the time of entering into the contract, which are not a commercial risk. If the continued performance of the contract is obviously unfair to one of the parties, the affected party may renegotiate with the other party; The parties may request the people’s court or arbitration institution to change or terminate the contract. The people’s court or arbitration institution shall change or terminate the contract in accordance with the actual situation of the case in accordance with the principle of fairness.
          

          “Situation” usually refers to all objective facts related to the contract, such as war, economic crisis, policy adjustment, etc. The focus here is on “contract-related” qualifications.

          At the same time, common scenarios of “situation” include currency depreciation; legal changes and government administrative actions such as levy and tax law changes; natural disasters such as SARS epidemic and new crown epidemic; changes in other economic factors such as cost surge And technical development.

          After case retrieval, we found that from the guidance case of the Supreme Court, the identification of the “situation” scene does not seem to be so clear. For example,

          The following situations are considered changes in situation:

          • Government policy adjustments, such as national policy price adjustments;

          • Financial turmoil (crisis);

          • Abnormal incidents such as SARS, new crown, bird flu, etc.
            

            The following situations were not recognized as a change of situation:

            • Tax policy adjustment;

            • Industrial policy adjustments, such as the real estate industry;

            • Attributable to a third party, such as an IPO.
              

              According to the above analysis, can price fluctuations and financial crises be considered the same as SARS and the new crown? The answer is no, or at least uncertain.

              Because, the Guiding Opinions on Several Issues in the Trial of Civil and Commercial Contract Disputes under the Current Situation issued by the Supreme Court on July 7, 2009 (Fafa [2009] No. 40) states: When changing the principles, it should be fully noted that the global financial crisis and changes in the domestic macroeconomic situation are not entirely a sudden process that has caught all market players off guard, but a process of gradual evolution. In the evolution processIn China, market entities should have a certain degree of foresight and judgment on market risks. People’s courts should grasp the applicable conditions of the principle of changing the situation in accordance with the law, strictly review the “unforeseen” claims put forward by the parties, and for commodities that have lively market attributes such as petroleum, coke and non-ferrous metals and have long-term price fluctuations The contract of the subject matter and the subject matter of venture capital financial products such as stocks and futures must be applied with caution. “

              Therefore, there is no one-size-fits-all determination of situational change. Everything is relative. Under the premise that the legal provisions appear to be clear and clear, their application is extremely “subtle”, and indeed has strong judicial discretion. Subjective factors such as the free evidence of judges are mixed.

              To sum up, I would like to emphasize that Situational changes are not as rare as force majeure. Enterprises should pay attention to how to make the “situation” that makes transactions out of insurance fall into the scope of “contract-related”. With the help of a court or arbitration agency, the content of the contract can be changed or the contract can be terminated, so as to effectively avoid risks and reduce losses for the enterprise.

              3. Commercial risks: inherent risks of commercial activities, foreseeable

              The Supreme People’s Court in the Guiding Opinions on Several Issues in the Trial of Civil and Commercial Contract Dispute Cases under the Current Situation (Fafa [2009] No. 40) held that: And commercial risk. Commercial risk is inherent in the risk of engaging in business activities, such as changes in supply and demand that have not yet reached the level of abnormal changes, and price changes. “

              Understanding the non-legal definition of business risk, entrepreneurs are more accurate than I am, because you seek survival and development on the battlefield every day. However, when the transaction is impeded and judicial intervention is required, legal evaluation becomes particularly important. The purpose of legal person definition is to distinguish it from the situation change from the level of judicial application.

              So, the Supreme People’s Court holds that, compared with commercial risks, “change of situation is a risk inherent in non-market systems that the parties could not foresee at the time of contracting. When the people’s court judges whether a major objective change is a change of situation, it should pay attention to measuring risk Whether the type belongs to the general unpredictability of the general concept of society, whether the degree of risk is far beyond the reasonable expectations of normal people, whether the risk can be prevented and controlled, whether the nature of the transaction belongs to the usual ‘high risk and high return’ range, and other factors, combined with the market Specific circumstances, identify situational changes and business risks in individual cases. “

              Three, conclusions

              In fact, when the performance risk occurs during the transaction, these several legal methods can have the effect of redistributing the risks of both parties to the transaction, and the specific type of use should be tailored to local conditions.

              A review of the judicial rulings during the SARS epidemic found that the court, on the premise of adhering to the organic unity of political, social and legal effects, proceeded from the principles of honesty, credibility and fairness, on the one hand, it would balance the imbalance of interests of both parties to the transaction caused by abnormal social changes It strives to share the risks caused by abnormal damage between the two parties to the transaction; on the other hand, it will protect autonomy and contract freedom under normal commercial risks and maintain transaction stability to the maximum. … p