The recent Wuhan Coronavirus will indeed be a stress test for many supply chains given that the effect is not only restricted to Wuhan but has also spread to many parts of China. There is lot of information readily available and which can be viewed at Mr Anuj Velankar’s1LinkedIn post2. The other interesting post which we chanced on was the post3 on the Chinese Government offering to provide force majeure certificates to factories / entities that breach supply contracts. This article touches on the validity of force majeure for contracts which may be in force between Chinese and other International entities4.
- The Chinese Legal System is a socialist system of law primarily based on the civil law model5. As mentioned in our earlier article “Force Majeure revisited”6, civil law countries allow a party to plead “force majeure” as of right irrespective of whether such a clause is incorporated into the contract. Hence, the major difference between civil and common law7 is that in civil law, a party is entitled to the defence of force majeure as of right whereas in common law, this is only available if the contract provides for the same. If the choice of law in the contract is not Chinese but say English Law, the application of “force majeure” could be denied if the contract does not provide for such eventualities.
- Based on the above, if a party does get a judgement / award against a Chinese based entity, would they be able to enforce the judgement / award? We take each scenario in turn:
- Judgement: A foreign judgement can be enforced in China provided there is a treaty signed with the country where the matter is litigated or on the basis of reciprocity8. Assuming this barrier can be surpassed, the Chinese Courts would review the foreign judgement to confirm that they comply with the primary principles of Chinese Law. It is submitted that the Chinese Courts would not recognise the foreign judgement given that Chinese Law allows a party the force majeure defence as of right.
- Arbitration Award: China is a contracting state to The New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards9 (commonly known as the “New York Convention”). Accordingly, a foreign award can easily be recognized and enforced in China provided it fulfills the requirement of the New York Convention. Article V 2(b) of the New York Convention10 states “Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of the country”. It is submitted that the Chinese Courts would view the application of force majeure defence as a matter of right allowing the use of the public policy defence11.
- Enforcement in other Common law jurisdictions: Enforcement in other common law jurisdictions always remain available provided the other party has some assets available.
- Accordingly, a party based in China would generally be able to avoid enforcement irrespective of the choice of law of the contract due to “public policy” defence. While this may not be the bargain entered, a contract is not entered in a vacuum but with compulsory rights as provided in the jurisdiction where a party is registered together with additional rights and obligations as may be provided under the contract. Hence, in the majority of the cases, it would be futile to pursue any recovery against Chinese entities due to the spread of the Coronavirus epidemic. Instead, it would be best to work with them in their movement of need and ensure that they are able to spring back with vigor when this exceptional situation is contained or dealt with.
- In conclusion, parties should be aware of the disruptions which would arise due to the prevailing epidemic and the limited opportunities for recovery against a Chinese party. It may indeed be an opportunity to build and strengthen relationship with Chinese counterparts during this time of need so that all can spring back once the epidemic has been contained or dealt with.
- Mr Anuj Velankar is employed as a Director/ Sr Loss Prevention Advisor to the UK P&I Club and is based at Singapore. His details can be viewed at https://www.linkedin.com/in/velankar/
- We would assume that a similar certificate would be issued to a Charterer / Shipper who is to perform a contract for the shipment of goods with a Vessel Owner / Operator should the Coronavirus outbreak raise issues in manufacturing / supply of goods.
- The English law is based on precedence and known as The English Common Law
- We believe that this should also apply to other civil law jurisdictions.