Expert Insight: 

Post-pandemic New Trends in Dispute Resolution in China

The COVID-19 pandemic has resulted in a rapid economic downturn followed by a potentially slow recovery and continued economic challenges, all of which could lead to exceptional uncertainty in the business world. The commercial pressures borne by contract parties may cause an increase in disputes and recourse to national courts, as well as other forms of dispute resolution including arbitration and mediation.

Especially in China, with over a billion people living under lockdown conditions, parties, their advisors, and judicial and arbitral institutions now find themselves in an unprecedented situation. The post-pandemic period could indeed be difficult for everyone. How can parties invoke force majeure or similar clauses to avoid breach of contract under Chinese law? How do Chinese courts respond to the pandemic’s impact on all forms of contracts? How can lawyers adjust to the new ways of litigation/arbitration in the midst of a pandemic? A practical summary of the answers to these questions is set out below.

01

The application of force majeure and the principle of change of circumstances under Chinese law

Under Chinese law, force majeure and the principle of change of circumstances are relevant to events like the COVID-19 pandemic. Article 117 of the PRC Contract Law stipulates that, “a party who is unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except as otherwise provided by law. Where an event of force majeure occurs after the party’s delay in performance, it is not exempted from such liability. For purposes of this Law, force majeure means any objective circumstances which are unforeseeable, unavoidable and insurmountable.” Also, Article 180 of the General Rules of the PRC Civil Law provides that no civil liability is borne in cases of failure to perform civil duties due to force majeure, unless otherwise provided by law. Hence force majeure means unforeseeable, unavoidable and insurmountable objective circumstances.

Meanwhile, the principle of change of circumstances is provided in Article 26 of the Interpretation of the Supreme People’s Court on Several Issues Concerning Application of the Contract Law of the PRC (II) (promulgated in 2009). This article addresses situations in which, after the formation of a contract, a significant change in the objective environment has taken place which could not have been foreseen by the relevant parties at the time of entering into the contract, which does NOT belong to any commercial risk occasioned by any force majeure cause, and which renders the continual performance of the contract manifestly unfair to the relevant party or renders it impossible to realize the purpose of the contract. In such cases, the People’s Court shall confirm whether the contract shall be revised or terminated in accordance with the principle of fairness and actual circumstance, where the party is entitled to apply to a People’s Court for modification or termination of the contract.

The two principles of force majeure and change of circumstances have similarities; however, they are applied accordingly given different circumstances. They both refer to unforeseeable events when the contract was formed, and both have a significant impact on the performance of the contract. In general, if the relevant event is insufficient to constitute force majeure but has impact on the performance of the contract, the parties may try to invoke the change of circumstances clause.

If the parties are bound by a contract governed by Chinese law, and the pandemic has hindered one party’s performance of the contract, the very first thing they should do is to inform the other party promptly, in accordance with Article 118 of the PRC Contract Law, which states that if a party is unable to perform a contract due to an event of force majeure, it shall promptly notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period.

02

The Chinese courts’ response to the cases impacted by the pandemic

The PRC Supreme People’s Court issued Notice of the Supreme People’s Court on Promulgation of the Guiding Opinions on Several Issues Concerning the Lawful and Proper Trial of Civil Cases Involving the COVID-19 (I), (II) and (III) (“Notice I,” “Notice II” and “Notice III,” collectively referred to as “Notices”) during the last three months, in order to guide the courts in dealing with cases involving the pandemic. It is foreseeable that certain cases, such as contract disputes, loan disputes and even labor disputes, will surge during the post-pandemic period. The judicial authorities sensed the trend and promulgated the three Notices to regulate the trial process, which is rather fair, just and reasonable concerning the amount and complexity of the said disputes.

According to Article 2 of Notice I, the courts shall apply the specific rules of force majeure precisely, and strictly understand the conditions for application. That means the COVID-19 pandemic falls under the scope of force majeure event under the PRC law. In particular, Article 3.2 of Notice I stipulates that if the pandemic or its prevention measures only lead to difficulties in the performance of the contract, the parties concerned may re-negotiate; if continuing to perform is possible, the courts shall encourage mediation and actively guide the parties to continue performing the contract. Nevertheless where a party requests to terminate the contract due to the difficulty in performance, the courts shall not uphold the request; where continuing to perform is evidently unfair to either party, and the party concerned requests to amend the contract’s performance period, performance method, price amount etc, the courts shall decide whether to support the request, taking into account the actual conditions of the case. If the purpose of a contract cannot be achieved due to the pandemic or its prevention measures, and the party concerned requests to the contract, the courts shall uphold the request.

Notice II, on the other hand, further regulates the trial of disputes over various contracts and financial matters, covering sales of goods and medical supplies, leases, construction, training, investment, insurance and bankruptcy etc. The Notices have addressed issues that have arisen primarily because of the pandemic. Such guiding opinions offer the courts specific standards which could highly enhance the efficiency of the courts themselves, as well as of the parties and their advisors.

03

The new era of courts and arbitral institutions

Courts and arbitral institutions have been making changes to their operations in order to respond to the effects of the pandemic with respect to reducing risks regarding their employees and legal practitioners.

Key words for the changes are “e-filing,” “virtual hearing” and even “AI.” The technology available has advanced year by year and, with the right technical support in place, can be used very effectively within the legal industry.

The pandemic is also affecting the creation, collection and transmission of evidence in international arbitration. The parties now have to search, review and draft documents by electronic means. Arbitrators who used to require submission of written documentation have gradually given way to those willing and able to handle documents electronically.

China’s mediation system has been developing as well and has efficiently resolved many trade disputes among commercial enterprises during the pandemic. For example, the Mediation Centre of the China Council for the Promotion of International Trade has specially developed an online mediation system to facilitate enterprises. There is no time limit for online consultation and mediation application. The expert mediation services during the pandemic period are free of charge. Such measures can assist enterprises in resolving disputes faster. During the specific dispute resolution process, much time will be saved through avoiding complicated and arduous legal processes. At the local level, the “Shenzhen Benchmark Chambers International & Benchmark International Mediation Center” promoted “contactless mediation” during the pandemic period through “online mediation” and “online judicial confirmation,” which handled a host of domestic and foreign-related commercial disputes efficiently. At the international level, the International Center for Settlement of Investment Disputes (ICSID) announced that it adopted electronic filing starting from March 16, 2020.

It is fair to conclude that the pandemic has brought significant changes to the methods of submission/filing and hearings, as evidenced by the increasing number of online dispute resolutions. There might even be other new, advanced technologies which will be introduced into the legal world in the future. Lawyers and practitioners are thus required to constantly keep up with the latest methods for arbitrating and litigating.

TEAM MEMBERS

Wei Lin

Managing Partner of 

P.C. Woo & Zhonglun W.D. LLP

Dr. Wei Lin is a legal expert who specializes in cross-border M&A, international trade remedies and dispute resolution. He has been an arbitrator at multiple commissions and centres in China, and has full experience in CIETAC, CMAC, HKIAC, SIAC and ICC Arbitration. He was also selected in the panel of “One Thousand Foreign-related Business Talent Lawyers” by Chinese Ministry of Justice in 2019.

Dr. Lin completed his Doctor's degree in law at Paris II University (Panthéon-Assas) after he obtained both Bachelor's and Master's degrees in law in China. He also participated in Harvard Law School Executive Education in 2014. Dr. Lin is capable of providing legal services for clients in Chinese, English, French and Fujian dialect proficiently.

Ning Ning

Paralegal of 

P.C. Woo & Zhonglun W.D. LLP

Miss Ning graduated from University of Reading with bachelor in law and University of Edinburgh with LLM in International Banking Law and Finance. She also passed Legal Practice Course in England.

Her main practice areas are foreign-related business, M&A and IPO etc.