Legal Practice | Conflict between Force Majeure System and Force Majeure Clause

Xu Yi, Partner  Watson & Band Law Offices

According to Article 180 of the newly promulgated and yet-to-be-effective Civil Code of the PRC, “If the failure to fulfill civil obligations is caused by force majeure, no civil liability shall be borne. Where there are other provisions in the law, such provisions shall apply. Force majeure refers to any objective circumstance that is unforeseeable, unavoidable and insurmountable.” Instead of enumerating specific circumstances that fall under the scope of force majeure, the Civil Code only defines the boundary of force majeure with three factors, namely “unforeseeable”, “unavoidable” and “insurmountable”, building up a statutory system of force majeure. This can be regarded, to some extent, as a flexible way of legislation. In practice, however, because the foregoing definition is too abstract to be “down to earth”, parties to a civil/commercial contract usually need to set forth force majeure clauses in the contract in order to clarify the specific scope of force majeure as well as corresponding legal consequences and remedial measures.

This gives rise to an inevitable problem in practice. The force majeure clauses set forth by the contractual parties based on autonomy of will are usually out of kilter with the statutory system of force majeure, meaning that such clauses may either shrink or expand the statutory scope of force majeure, whether such inconsistency is caused by the parties’ perception and understanding of the force majeure system or based on their objective need for setting certain force majeure circumstances in advance. As a result, when a force majeure event provided in the force majeure clause occur during performance of the contract, effectiveness of such clause always becomes the focus of dispute between the plaintiff and the defendant, which entails deliberation and discussion of this issue.

The first point to ponder is whether the force majeure provisions of the prevailing law in China are mandatory provisions on validity. If yes, autonomy of will of the contractual parties will be disregarded and effectiveness of the force majeure clause will be affected, causing complete or partial nullity of relevant clauses in the contract; if the provisions in the prevailing law are not mandatory provisions on effect, the party asserting application of the force majeure clause is entitled to exemption from liability by applying such clause despite that the circumstances, remedies and legal consequences set forth in the force majeure clause are inconsistent with the corresponding legal provisions. According to the guiding opinions of the 2019 Summaries of the National Conference for the Work of Courts in the Trial of Civil and Commercial Cases, several factors should be taken into consideration when determining whether a provision has a mandatory nature, such as the legal interest protected by the provision, legal consequences of law breaking as well as protection of transaction safety. Based on the foregoing criteria, the author is inclined to believe that the statutory provisions of force majeure do not belong to mandatory provisions on validity and should be open for adjustment or waiver by the contractual parties for the following reasons: a) the type of legal interest protected by the force majeure system is the personal property right and interest rather than the public interest; b) with respect to protection of transaction safety, the force majeure system is a beforehand measure adopted by equal civil subjects to share the risk of transaction between them, hence it does not concern any issue of illegality.

Second, in judicial practice, courts tend to conduct substantial examination of the content of force majeure clauses and seem to show different attitudes towards force majeure clauses that narrow and extend the statutory scope. In the construction contract dispute case PD Clothing & Textiles (Zhongshan) Ltd. v. Guangdong Great Wall Construction Group Co., Ltd., the SPC held that force majeure was a statutory cause for liability exemption and was not subject to additional agreement clauses between the contractual parties. In the insurer’s subrogation dispute case PICC v. China National Materials Storage and Transportation Guangzhou Corporation, the Guangzhou Intermediate People’s court regarded force majeure as a statutory provision of liability exemption, holding that whether a force majeure clause is set out in the contract would not affect direct citation of the law; the court also held that, if the force majeure clause is narrower than the statutory scope, the contractual party may still cite the statutory provision for liability exemption, and that the contractual parties should not make an agreement to exclude force majeure as a cause for liability exemption. Based on the above precedents, it is reasonable to believe that the courts commonly hold a negative attitude towards narrowing force majeure clauses, meaning that validity of a force majeure clause will be denied if it utterly abandons application of the statutory force majeure system or rules out certain circumstances or legal consequences thereof. As for extending force majeure clauses, if the circumstances set forth in the force majeure clause by the contractual parties go beyond the statutory range, even though the exceeding parts are not considered as force majeure circumstances, they may still be recognized as causes for liability exemption agreed between the parties and their validity will be determined according to rules governing liability exemption clauses.