General Counsel Pondering How to Handle China's Force Majeure Claims

As China struggles to control the impact of the coronavirus on its residents and its economy, general counsel around the world are deciding how to deal with Chinese companies that seek emergency exemptions from their contracts.

China reportedly has already certified some 100 businesses to invoke so-called force majeure exemptions from contract duties, citing the coronavirus outbreak as a qualifying disaster.

Experts told Corporate Counsel on Wednesday that outside companies and their general counsel have three options: grant the exemption, fight the exemption in court, or try to negotiate a compromise.

“I feel like I’m dealing with this [coronavirus impact] 24/7,” attorney Dan Harris, of Harris Bricken in Seattle, told Corporate Counsel. “It’s all-consuming.” Harris had just left a client meeting where they talked of force majeure.

The term generally refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations, such as delivering goods or paying invoices, among other things. With over 700 million workers ordered to stay at home, many Chinese companies are making the legal claim.

Harris, a frequent contributor to his law firm’s China Law Blog, said China has always used force majeure as an easy way out of a problem. “Suing is probably not going to be the way to go,” he said.

If suing in China, Harris warned, a loss is very possible. If suing in the U.S. results in a win, China “will laugh in your face” when trying to enforce the judgment.

“The best way to go is to meet with the company in China and try to convince them, with money or otherwise, to put you first on their list” once business has resumed.

In the end, Harris said, “A lot of American and European companies are going to lose a lot of money and product over this. Some companies, here and in China, are going to disappear.”

Various news reports support Harris’ view. China’s biggest importer of liquefied natural gas, China National Offshore Oil Corp., has invoked force majeure to suspend contracts, as have several Chinese copper buyers.

Harris raised the issue of insurance. “Coverage is going to depend on individual policies,” he said, “but my guess is most won’t pay. They’ll say this isn’t force majeure.”

Another expert, Mark Duedall, a partner in the Atlanta office of Bryan Cave Leighton Paisner, recently blogged that the impact of the coronavirus “and its current effects on Asian and international supply chains are unprecedented.”

Duedall, who could not immediately be reached for comment, wrote, “Unfortunately, no contract clause may be less scrutinized during the drafting process than the force majeure provision.”

His blog said, “If widespread disease and a resulting quarantine can disrupt your supply chain, then you need to include specific and appropriate language in the agreements with those to which you supply goods, materials, or services.”

Duedall advised general counsel to “use this opportunity to figure out what you must do now on existing contracts and matters, and also what you must do in the future to improve your drafting processes, mitigate your risk, price in the risk you are actually taking, or offload your risk to third parties.”

He, like Harris, also recommended checking the company’s insurance policies. “Clients are routinely surprised as to coverage they thought would be there, but is not—and coverage they never thought would exist, but does,” Duedall wrote.