China has issued a record number of force majeure certificates in an attempt to exempt local exporters from fulfilling contractual agreements with overseas buyers as the country struggles with the fallout from the coronavirus outbreak.
Companies that have already been issued with the legal “exemption” papers include steelworks, electronics companies, carmakers and auto parts suppliers.
The China Council for the Promotion of International Trade, a quasi-governmental body, said on Friday last week that it had handed out 3,325 certificates covering contracts worth a combined Rmb270bn ($38.5bn) since the beginning of February. A CCPIT official confirmed the organisation had never handed out so many for a single reason.
But there are concerns that the boom in force majeure certificates could undermine Beijing’s credibility. A ministry of commerce adviser, who declined to be identified, said it was bad practice for local governments to promote force majeure because it would lead foreign buyers to “look elsewhere” for suppliers.
Importers typically pay 30 per cent of the value of the goods when they place the order and pay the remainder when they arrive. Both importers — and even exporters, if the company has begun working on the order — could suffer a loss if the contract is not delivered. However, sometimes the banks facilitating the trades have to absorb the losses.
Chinese courts tend to support local companies in force majeure cases, so western companies draw up contracts in jurisdictions such as the US and UK and seek to sue their Chinese counterparts abroad.
“The success rate [in court] for declaring force majeure is very low because of its strict conditions,” said a Beijing-based policy adviser who declined to be named. “It is irresponsible for the Chinese government to give the document to anyone who asks for it.”
However, China’s export sector, led by small factories, is still struggling to return to normal production after local governments extended the lunar new year holiday break and imposed lockdowns to stem the epidemic. The Ministry of Industry and Information Technology said on Monday that less than 30 per cent of small and medium-sized enterprises had resumed operation.
The CCPIT began issuing the force majeure certificates this month to provide proof of holiday extension or lockdowns to disease-hit factories that wanted to revise their contracts.
In a statement posted on its website, the trade promotion agency said the document could partially or fully free recipients from fulfilling business contracts. “[The certificate] has significant execution power abroad,” said the CCPIT.
However, lawyers interviewed by the Financial Times disputed that statement. “That certificate probably means a lot in a Chinese court. It’s probably decisive,” said Dan Harris, a lawyer who has worked on force majeure cases against Chinese companies. “Outside of China, it doesn’t really have any legal means.”
The legal provision is traditionally used to protect parties in a contract from “acts of God” such as earthquakes.
“Nobody denies that the problem in China is harrowing,” said Brian Perrott, a London-based partner at law firm Holman Fenwick Willan. “But when it comes to cold contractual rights, one has to be focused on the terms of the written contract.”
Yet, even if a company wins against a declaration of force majeure, it might be hard to recoup lost payments unless the exporter has an overseas subsidiary, lawyers warned.
“Let’s say . . . a US court says this Chinese company owes you $4m. Are you going to take that judgment to China and get it enforced?” said Mr Harris. “No. China won’t enforce it. It’s against public policy. You are going to have to go after assets of the Chinese company outside of China and that is not easy.”
Mr Harris added that most of his US clients had agreed to have delivery postponed when their Chinese suppliers declared force majeure.
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Source: Economy - ft.com
