Legal remedies under the dynamic zero Covid policy in China
Our observation of Shanghai's practice.
Omicron impact
China has largely kept the Covid outbreak under control since early 2020. Covid impact on economic activities were relatively limited although small scale outbreaks in different regions did occur across the country. However, from March 2022, the Omicron variant has broken through the Covid control measures that were effective for previous variants. The new wave of Covid cases directly hit Shanghai, the economic center of China with a population of 25 million and 2021 annual GDP around US$ 650 billion, with severe consequences for domestic and international supply chains, especially in the auto industry. There have been nearly two months of citywide lockdown to implement the dynamic zero Covid policy. And Omicron variants start to show up in other places of the country, such as Beijing. Omicron has caused major disruption in China. Many affected companies are looking for legal remedies to reduce their loss.
Legal basis or principles
Since early 2020, the PRC Supreme Court and provincial level high courts have issued judicial guidelines to provide instructions or references for judges in making decisions in Covid related cases. In addition to the Civil Code (effective on 1 January 2021), judicial opinions covering general commercial and contractual disputes, these Covid specific judicial guidelines or opinions provide more direct guidance in how PRC courts or arbitration tribunals will make a ruling for Covid related disputes.
There are three commonly seen legal bases or principles for PRC courts or arbitration tribunals in dealing with Covid related disputes, namely force majeure, change of circumstances, and fairness.
Force majeure has no specific meaning in English law and is defined only by the terms of the contract. However, under PRC law, "force majeure" is a statutory right. Article 180 of the PRC Civil Code defines force majeure as "any objective circumstances which are unforeseeable, unavoidable and insurmountable". A contractual party suffering a force manure event must (i) timely notify the other party, (ii) take reasonable measures to prevent further losses and (iii) bear the burden of proof of the force majeure event. Where the force majeure event has rendered it impossible to achieve the purpose of a contract, the parties may rescind the contract. The party suffering the force majeure event may be relieved of partial or entire liabilities. However, if a force majeure event occurs after a party delays its performance, then it shall not be exempted from liability for breach of contract.
The change of circumstances principle applies when the basic conditions of a contract undergoes a material change unforeseeable at the time of contract execution, the continuation of performance will cause significant unfairness to one party or will render it impossible to achieve the purpose of contract, then the parties may request the court or arbitration tribunal to modify or rescind the contract. The typical examples include significant devaluation of contract currency, new government policies or laws prohibiting certain types of investment or business operations. Unlike force majeure where the party suffering the force majeure event may delay performance, make partial performance or rescind contract without the other party's approval, a party must apply to the court or arbitration tribunal to obtain a ruling in order to modify or rescind the contract based on change of circumstances.
Another principle used in Covid related disputes is fairness although it is much less applied than force majeure or change of circumstances. Subject to the specific cases, a judge or arbitrator may apply the principle of fairness to allocate losses caused by Covid measures if force majeure or change of circumstances will significantly favour one party over the other.
Shanghai's Practice
In early 2020, Shanghai High Court issued a judicial opinion to address the applicability of laws for Covid related cases. Since the Omicron outbreak from March 2022, Shanghai High Court issued a new judicial guideline on 31 March 2022 and five written replies to certain questions ("Shanghai Rules") regarding the applicability of laws for Covid related cases, which were published from 1 April 2022 to 21 April 2022. These Shanghai Rules represent the current practice of legal remedies for Covid related cases in Shanghai, which cover a wide range of issues, such as statute of limitation, property provision, delivery of legal documents, online/offline hearings, thresholds for criminal offenses, basic principles for reviewing contract disputes, financial services related disputes, intellectual property related disputes, maritime disputes, bankruptcy and restructuring, etc. Although China is a civil law jurisdiction and Shanghai Rules are not mandatory laws or regulations and instead shall only be used by judges or arbitrators as potential reference, in practice, these Shanghai Rules will very likely govern the legal remedies available in Shanghai for the parties affected by Covid.
Some notable opinions are summarised as follows.
Period impacted by Covid measures is generally excluded in the calculation of various time limits as set forth in statute of limitation rules; court hearing dates are generally allowed to be extended; hardcopy materials are not required if photocopy materials meeting online submission standards are provided; and court documents are allowed to be delivered electronically.
Offenses, such as disobey of quarantine measures, spreading of rumour, profiting from false outbreak related information, falsification of PCR test results, violence against government officials, police or volunteers in implementing Covid measures, disturbance of social order in medical facilities, etc., could lead to criminal charges.
If Covid measures have rendered it impossible to achieve contract purpose, the parties may rescind the contract; if Covid measures have caused non-performance, the parties may apply for partial or full exemption of liabilities. The court shall, according to the actual impact of the outbreak time, development period, severity, geographical scope, etc. on the performance of the contract, take into account the intensity of the step-by-step sealing and control measures in sealed areas, controlled areas, and prevention areas; consider factors such as the degree of personnel flow restrictions in different industries and specific disputes and determine the causal relationship between Covid measures and non-performance of contract.
Tenants of privately owned facilities for business operations may request for reduction of rent, extension of rental period or rent payment schedule, where the court may rely on the principle of fairness to modify lease or reduce rent. Tenants of privately owned houses requesting for reduction of rent may be supported by the court based on the principle of fairness. Lessors requesting for termination of leases due to late payments of rents may be denied by court. Operators of hotels, ships or aircraft facing significant drop of customers may request to pay lower fees to owners. E-commerce platforms may at its discretion remove online shops from their platform for suspicion of fake or unqualified products in order to protect public interests (which argument may not stand in normal business operations not affected by Covid measures during a court hearing) where the legal claims from these shop owners against the e-commerce platforms may not be supported by the court.
For cash payment performances, such as credit card bills, mortgages and other financial loans, financial leases, etc., normally the borrower cannot claim force majeure to request reduction or exemption of liabilities especially when electronic payment is widely used these days. That said, for certain cash payment obligations, if an individual borrower is hospitalised or quarantined due to Covid infection which causes him or her unable to make payments on time, such borrower may rely on force majeure to make payments within a reasonable time period after they are released from hospital or quarantine center.
Request for punitive compensation will be supported by court in case of infringement upon intellectual property over supplies for Covid prevention.
Practical advice
Due to the secretive infection nature of the Omicron variant and the high infection rate, the Covid measures, such as temporary closure of factory site, quarantine of employees, suspension of public transport or commercial logistics service, will significantly affect normal business operations in China.
A supplier affected by such Covid measures must timely reach out to its customers to (i) notify the customers of the government measures that may cause it to delay performance or even rescind contract; (ii) negotiate amicably with the customers to find alternative solutions, eg redirect orders to affiliates or partners not subject to the Covid measures, postpone delivery schedule; (iii) take reasonable measures to assist the customers to reduce losses; (iv) gather evidence, eg government issued orders to close factory site, quarantine of employees, mitigating measures taken to reduce the customers' further losses, in order to prepare for potential legal actions the customers may proceed; (v) reach out to legal counsel to evaluate risks in relation to certain high value contracts or customers that are more likely to initiate legal actions.
From the customer perspective, especially for those out of China contracting with China based suppliers located in those areas with hard lock down, supply chain disruption from China due to Covid measures may become to certain extent unavoidable. Therefore, it is advisable to consider expanding or exploring alternative supplier pool, or increasing its inventory to the extent possible in proportion to the relevant impact. Without sufficient evaluation, a customer shall be more cautious in launching official legal actions against the relevant suppliers in China. It may make more commercial sense to conduct amicable negotiation and endeavour to find alternative solutions first.
