Tackling Force Majeure and Material Adverse Change in Hong ... · Panel: Roberta Chan, LI Haifeng,...

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

© 2020 Baker & McKenzie FenXun (FTZ) Joint Operation Office

Nikkei Montage / Source photo from Reuters

Rise of unpredictability


Volatility – the new normal?

Epidemics, natural disasters, financial shocks, geopolitical tensions, social conflicts, terrorist attacks

3

Jonathan Isaacs


Introduction

4

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


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


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

6

Jonathan Isaacs


Force majeure and material adverse change – Hong Kong and Mainland China regimes

1


Force majeure under Hong Kong regime

8

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


Force majeure under Mainland China regime

9

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


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

© 2020 Baker & McKenzie FenXun (FTZ) Joint Operation Office 10

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


Force majeure – Hong Kong v Mainland China

12

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


Case studies of force majeure situations and claims

2


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



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



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



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



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


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


Mainland China: Invoking force majeure

20

Sample CCPIT certificate (dated Feb 2020)LI Haifeng


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


Tackling it now – commercial and legal strategies

3


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


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

24

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


Tackling it now – referencing the past2003 SARS outbreak: Summary of 16 PRC court cases on leases

25

% 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


Now and going forward –drawing experience from the real estate sector

4


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.


Tackling, strengthening and evolving contract termsRico Chan

Questions?Scan the QR code and send us your questions.


This presentation has been prepared for clients and professional associates of Baker & McKenzie FenXun (FTZ) Joint

Operation Office. Whilst every effort has been made to ensure accuracy, this presentation is not an exhaustive treatment

of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action

as a result of material in this presentation is accepted by Baker & McKenzie FenXun (FTZ) Joint Operation Office.

Baker & McKenzie FenXun (FTZ) Joint Operation Office is a joint operation between Baker & McKenzie LLP, an Illinois

limited liability partnership, and FenXun Partners, a Chinese law firm. The Joint Operation has been approved by the

Shanghai Justice Bureau. In accordance with the common terminology used in professional service organisations,

reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. This may qualify as “Attorney

Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.


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