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Force Majeure Arguments and Coronavirus under Taiwanese laws

  • Insights 2020/02/21

By Hung Ou Yang

 

According to Bloomberg, China National Offshore Oil Corp. (“CNOOC”) as an importer invoked the force majeure clause in the liquefied natural gas (“LNG”) contracts against the exporters, Royal Dutch Shell Plc and Total SA, because of the impact of novel coronavirus[1]. CNOOC took this legal action as it probably has difficulty to take delivery of LNG with multiple cities under quarantine. CNOOC’s force majeure arguments have already been rejected by the two energy companies[2]. However, similar to CNOOC’s acts, other Chinese firms such as PetroChina Co. probably will also take the same move or delay the LNG delivery when they cannot find sufficient workers to take delivery of LNG. So far, some of the LNG ships have already been requested to delay the LNG arrival, divert to other ports, or wait offshore[3].

 

In the field of international trade, not only Chinese companies located in the areas with transmission of novel coronavirus may take such dramatic move to reduce their damages, but also other companies located in the areas without the transmission of  novel coronavirus may be negatively impacted because of the travel bans and factories shutdown in China. When the import and export of the commodities in China may have been deeply impacted by the outbreak of novel coronavirus, we can anticipate that more and more companies in different jurisdictions will have to deal with the force majeure clause and the relevant arguments in contractual disputes. When most of the Taiwanese companies’ suppliers or factories are located in China, the Taiwanese companies may have already encountered problems to export their products to overseas purchasers absent materials and parts from China. To solve the problems, the Taiwanese companies probably will try to use similar arguments against foreign purchasers when they cannot meet their contractual obligations.

 

First Step: Checking The Express Provision for Specific Force Majeure Event

When the force majeure arguments occur, you must start from checking whether the international trade contract at issue has an express provision for the specific unpredictable or unforeseeable event. In a typical international trade contract under the U.S. laws, for example, the force majeure events may encompass (a) acts of God; (b) flood, fire, earthquake or explosion; (c) war, invasion, hostilities, terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns or other industrial disturbances; (i) shortage of adequate power or transportation facilities; and (j) other similar events beyond the reasonable control of the party impacted[4]. Here, the outbreak of novel coronavirus  or similar languages such as epidemic or pandemic generally would not be clearly listed as a force majeure event in the international trade contract. Absent the terms like epidemic or pandemic as the force majeure event, the issue will be whether the outbreak of novel coronaviruses falls into the scope of “national or regional emergency”. The party impacted by travel bans or factories shutdown because of novel coronavirus may argue that they are facing a national emergency. Since the World Health Organization has already decided that novel coronavirus is a Public Health Emergency of International Concern (“PHEIC”) on January 31, 2020, probably it qualifies as a national emergency.

 

Second Step: Checking The General Wording for Unforeseeable Event

Moreover, even though the international trade contract at issue lacks the specific wording like national or regional emergency, usually the force majeure clause would have some general wording to cover any unpredictable or unforeseeable event. Here, the impacted party may argue they are facing “other similar events beyond the reasonable control”. It is worth noting that the Chinese companies have already obtained their government support for this argument. On January 30th, 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it would give force majeure certificates to the Chinese companies impacted by novel coronavirus[5]. Apparently, the Chinese companies with such force majeure certificates at hand may prevail in a contractual breach lawsuit in front of the Chinese courts.

 

No Force Majeure Certificate Issued in Taiwan

The Taiwanese companies may have been deeply impacted when the Chinese companies fail to perform their contractual duties. As stated above, the reason is that the Taiwanese companies cannot produce or export their products when their factories or suppliers are located in China under quarantine. Unlike CCPIT giving support to the Chinese companies, the Taiwanese government has not considered issuing similar force majeure certificates in a way to protect the Taiwanese companies from the risk of breaching international trade contracts. Thus, foreign companies doing business with the Taiwanese companies will not have extra difficulty imposed by the Taiwanese government.

 

Third Step: Checking Whether The Non-Performance of Contracutal Duties Are Directly Caused by Coronavirus 

However, in Taiwan, the Taiwanese companies may argue that their non-performance of the contractual duties or their delay is due to “change of circumstance” so that their contractual duties can be excused to a certain extent. Article 227-2 of Taiwanese Civil Code provides that “if there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation.” Because Article 227-2 states that the party which is impacted by “change of circumstances” may request the court to “alter[] the original obligation”, it seems that the impacted party may even assert that the contract at issue can be terminated to alter their original obligation therein. If this is the case, the so called “change of circumstance” is a more powerful weapon than the force majeure clause in the international trade contracts.

 

Change of Circumstance Arguments in Practice per Taiwanese Laws

When applying Article 227-2 of Taiwanese Civil Code, the Taiwanese courts take a relatively conservative perspective. That being said, although the influence of novel coronavirus may easily constitute “change of circumstance”, the Taiwanese courts would carefully examine whether the influence of novel coronavirus can directly cause the non-performance of the contractual duties. The Taiwanese judgments in the SARS era could be very good examples to understand the courts’ view. In 94 Taiwan High Court Shang (上) No. 86 (2005), the court stated that the impact of SARS did not directly cause impracticability of the leasing contract with regard to a parking lot so that the lessee could not terminate the contract because of SARS. However, the court held that the liquidated damages might be reduced since SARS is unpredictable change of circumstances. Moreover, in 97 Taiwan High Court Chungshanggeng One (重上更一) No. 148 (2008), the court held that electric equipment supplier shall still be liable to the delay of delivering the equipment because the delivery date was prior to the date of SARS epidemic decided by the Ministry of Health of Taiwan. Further to this, in 98 Taiwan High Court Tainan Branch Court Chungshang (重上) No. 29 (2009), the court rejected the impacted party’s claim, stating that the income of business operation did not become better after World Health Organization removed Taiwan from the list of areas with transmission of SARS so the impact of SARS was merely one of the causes for the bad income of business operation. Therefore, using “change of circumstance” under Article 227-2 is not very easy to convince the court to exempt the duties in a contract. A direct causal link between the influence of novel coronavirus and the non-performance of contractual duties or delay must be clearly established.

 

Conclusion: Not Easy to Use Force Majeure or Change of Circumstance Arguments per Taiwanese Laws

Under the same logic, using the force majeure clause may also face the same problem. That being said, unless the international trade contracts at issue provide otherwise, the direct causal link still has to be established. Therefore, the foreign companies doing business with the Taiwanese companies can make counter arguments that the Taiwanese companies bear the burden of proof that the force majeure clause covers the outbreak of novel coronavirus and that the direct causal link needs to be established. Further to this, you can point out that it is hard to satisfy the strict standard used by the Taiwanese courts. We hope these arguments can give foreign companies some useful tips for the negotiation in the era of novel coronavirus.

 

Authour: Hung Ou Yang

Managing Partner
Taipei
+886-2-2707-9976
mark@btlaw.com.tw

 

Copyright Brain Trust International Law Firm

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

 


[1] See Stephen Stapczynski, China LNG Force Majeure Rejected as Virus Chaos Sparks Dispute, Bloomberg News (Feb. 7, 2020), available at https://www.bloomberg.com/news/articles/2020-02-07/china-lng-force-majeure-rejected-as-virus-chaos-sparks-dispute (last visited on Feb. 20, 2020).

[2] Id.

[3] Id.

[4] See  Laura Luo, Matthew Dickerson, Daniel He & Nicole Chin, Coronavirus and Force Majeure Clause under New York Law, available at https://www.chinalawinsight.com/2020/02/articles/corporate-ma/coronavirus-and-force-majeure-clause-under-new-york-law-february-2020/#_ftn1 (last visited on Feb. 20, 2020).