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Panel: Roberta Chan, LI Haifeng, Professor LIU Qiao (Guest Speaker), Rico Chan
Moderator: Jonathan Isaacs | February 2020
Tackling Force Majeure and Material Adverse Change in Hong Kong and Mainland China
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Nikkei Montage / Source photo from Reuters
Rise of unpredictability
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Volatility – the new normal?
Epidemics, natural disasters, financial shocks, geopolitical tensions, social conflicts, terrorist attacks
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Jonathan Isaacs
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Introduction
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Jonathan IsaacsRegistered Foreign Lawyer
Head of China Employment
Practice
Baker McKenzie
Professor LIU QiaoProfessor
City University of Hong Kong
School of Law
Rico ChanPartner
Head of China Real Estate
Group
Baker McKenzie
Roberta ChanPartner
Dispute Resolution
Hong Kong
Baker McKenzie
LI HaifengPartner
Dispute Resolution
Beijing
FenXun
Meet the panellists
ModeratorGuest Speaker
Panel Speakers
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Agenda
1 FORCE MAJEURE AND MATERIAL ADVERSE CHANGE –
HONG KONG AND MAINLAND CHINA REGIMES
2 CASE STUDIES OF FORCE MAJEURE SITUATIONS AND CLAIMS
3 TACKLING IT NOW
4 NOW AND GOING FORWARD
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HK: Minimal
2003 SARS outbreak:
No reported cases on
force majeure.
PRC: Many
2003 SARS outbreak:
Many force majeure
cases.
Compare – 2014 Ebola
outbreakDeclaration of force
majeure in a number of
construction projects in
West Africa.
Epidemics in the courtroom
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Jonathan Isaacs
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Force majeure and material adverse change – Hong Kong and Mainland China regimes
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Force majeure under Hong Kong regime
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Overview
No force
majeure
doctrine – force
majeure clause
is a creature of
contract
Variants of force
majeure clauses
– e.g. material
adverse change
(“MAC”) clauses
Contract law
and common
law principles
apply
Definition, scope
of application
and effect of
invocation all
depend on
contract
provisions
Consider
language and
interplay with
other clauses
Roberta Chan
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Force majeure under Mainland China regime
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Statute-based, and strict statutory requirements
Force majeure is codified:
■ Article 180, PRC General
Rules on the Civil Law
(中国《民法总则》)
■ Article 117, PRC Contract
Law
(中国《合同法》)
The force majeure event must strictly satisfy the
principle of “three Impossibles”:
■ Impossible for the affected party to have foreseen the
event at the time of contracting; and
■ Impossible for the affected party to avert the event by
its reasonable efforts; and
■ Impossible for the affected party to overcome the
impact of the event.
LI Haifeng
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Force majeure under Mainland China regime
Process: Must follow the steps required by statute to claim force majeure (discussed below).
Outcome 1: If purpose of contract becomes impossible (frustrated), contract is terminated by law.
Outcome 2: If contract is not frustrated, exemption of liability in respect of those contractual obligations hindered by the force majeure event.
Achieving the above outcomes: (1) by negotiation and supplementary contract, and (2) by court / arbitration proceedings.
Process to successfully claim force majeure and legal outcomesLI Haifeng
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Change of Situation under Mainland China regime
Must satisfy 3 key requirements:
the change was beyond normal commercial risk for contracts;
the change must have been unforeseeable at the time of contracting; and
it would be manifestly inequitable if the original contract was strictly followed
through under the changed situation.
Court may equitably adjust the obligations of the parties.
LI Haifeng
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Force majeure – Hong Kong v Mainland China
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Conceptual and practical differences
Freedom of
contract v
Fairness
Sanctity of
promises v
Good faith
Differences in
approach to
interpretation
Tension: Detailed
contract provisions
on supervening
events v rules of
the governing law
on force majeure
Professor
LIU Qiao
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Case studies of force majeure situations and claims
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Hong Kong: Invoking force majeure
Check the definition of “force majeure”
Wide v narrow
Reasonableness / Foreseeability
Determine the scope of application of the force majeure clause
Non-performance in whole or in part
Delays and hindrances to performance
Causation
Consider the nature of the performance
Consider the languageRoberta Chan
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Hong Kong: Invoking force majeure
PJ van der Zijden Wildhandel NV v Tucker & Cross Ltd [1975] 2 Lloyd's
Rep 240
“Should the sellers fail to deliver the contracted goods or effect the
shipment in time by reason of war, flood, fire, storm, heavy snow or any
other causes beyond their control, the time of shipment might be
extended, or alternatively a part or whole of the contract might be
cancelled but the sellers have to furnish the buyers with a certificate
attesting such event or events.”
Case law examples – need to show causation?Roberta Chan
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Hong Kong: Invoking force majeure
Ford & Sons (Oldham) Ltd v Henry Leetham & Sons Ltd (1915) 21 Com
Cas 55
Sellers had option to cancel the contract “in case of prohibition of export
blockade or hostilities preventing delivery of wheat” to the UK
Case law examples – need to show causation?Roberta Chan
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Hong Kong: Invoking force majeure
Showing that non-performance was caused by force
majeure event, or that performance was prevented /
hindered / delayed by the force majeure event
Higher standard: Showing that but for the force
majeure event performance could have and would
have been carried out
Classic Maritime Inc v Limbungan Makmur Sdn Bhd
& Anor [2019] EWCA Civ 1102 (UK Court of Appeal)
Establishing causationRoberta Chan
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Hong Kong: Invoking force majeure
Abatement. If:
(i) the said building or the said premises or any part thereof shall be destroyed or so
damaged by fire, typhoon, Act of God, Force Majeure or other cause so as to be
rendered unfit for use and occupation; or
(ii) the said building is made the subject of a closure order or demolition order,
then provided the insurance on the said building shall not be vitiated by the act, neglect,
default or omission of the Tenant, the rent or a part thereof proportionate to the
damage sustained shall cease to be payable until the said premises shall have been
restored or reinstated.
Sample: Rent abatement clause in tenancy agreementRoberta Chan
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Mainland China: Invoking force majeure
Notify the other party as soon as practicable.
Collect and keep evidence of:
occurrence of the event (e.g. government order, CCPIT certificate);
impact of the event; and
efforts taken to mitigate the impact of the event (e.g. any enquiries
made to substitute suppliers and their responses).
Actions required to invoke force majeureLI Haifeng
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Mainland China: Invoking force majeure
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Sample CCPIT certificate (dated Feb 2020)LI Haifeng
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CCPIT certificate
“Force majeure: Should seller fail to deliver the contracted goods or
effect the shipment in time by reason of war, flood, fire, storm, heavy
snow or any other causes beyond their control, the time of shipment
might be duly extended or alternatively a part/the whole of the contract
might be cancelled, but the seller has to furnish the buyer with a
certificate issued by the China Council for the Promotion of
International Trade (the CCPIT) or an independent and competent
Chinese authority attesting such event or events.”
Hoecheong Products Co. Ltd v Cargill Hong Kong Ltd [1995] 1 WLR 404Roberta Chan
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Tackling it now – commercial and legal strategies
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Tackling it now
MAC clauses feature more prominently in one-off contracts,
e.g. share purchase agreements.
One-off contract – short exercise period post signing and
pre completion
More specific than general force majeure clauses
Subject to the same contractual interpretation principles
Hong Kong law governed contracts: “One-off” contractsRoberta Chan
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Tackling it now
MAC elements – examples:
Business, operations or financial
condition of target
Seller’s ability to close the
transaction
Buyer’s ability to close the
transaction
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MAC carve-outs – examples:
Changes in the economy
Changes in general industry conditions
Changes in securities markets
Acts of war or major hostilities
Acts of terrorism
Changes in laws or regulations
Hong Kong law governed contracts: “One-off” contractsRoberta Chan
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Tackling it now – referencing the past2003 SARS outbreak: Summary of 16 PRC court cases on leases
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% of cases PRC court verdicts Court’s legal reasoning
56%
(9 of 16)
Substantially or partially
supported tenant’s request for
rent abatement
Applying legal principles of (1) force
majeure, (2) MAC (change of
situation) or
(3) equity
25%
(4 of 16)
Only allowed relief from late
payment penalties, but did not
support rent abatement
Principles of equity
19%
(3 of 16)No relief granted to tenant
Limited duration and business
impact; within the risk allocation
agreed between the parties
Rico Chan
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Now and going forward –drawing experience from the real estate sector
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Now and going forward
Business interruption insurance coverage may evolve.
Fine to continue to fuse Hong Kong and Mainland China operations, but
not to confuse the vastly different force majeure legal baselines in Hong
Kong and Mainland China.
Advisable to be commercially reasonable in side letter negotiations.
Market norms re risk allocation may evolve in some sectors: e.g.
tourism and retail shop leasing.
Business and legal teams will be asked to morph existing force majeure
clauses into more elaborate MAC clauses, for both “one-off” and
“ongoing” contracts.
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Tackling, strengthening and evolving contract termsRico Chan
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