China offers force majeure escape clause for factories that breach supply contracts as coronavirus shutdowns leave assemblies idle

The Chinese government has come to the rescue of a car parts supplier facing potential legal action for failing to fulfil an overseas order because of the coronavirus crisis, as the rapid spread of the disease heightens the risk of contractual defaults by the country’s exporters.

The unnamed manufacturer, based in the eastern province of Zhejiang, faces the risk of being unable to meet its contractual obligations with Peugeot’s African plant because of the outbreak and could face claims for damages of up to 30 million yuan (US$4.27 million). All companies in Zhejiang have been ordered to halt operations until at least February 10 as the authorities wrestle to contain the novel virus.

The agency that promotes China’s foreign trade and investment issued a force majeure certificate to the Zhejiang-based manufacturer in a bid to forestall any contractual claims against it. The certificate, the first to be issued in the wake of the current health crisis, effectively exonerates the company from legal liability by proving it was the victim of events beyond its control.

The move is the latest by Beijing to shield companies from legal liabilities related to the disease, which has now claimed more lives than the Sars (severe acute respiratory syndrome) outbreak of 2003. The virus has taken hold in every province in China, forcing at least 15 cities including the epicentre, Wuhan, to enforce quarantining and travel bans.

Most trade contracts contain a force majeure clause that excuses a party that is not able to perform obligations that have become impossible or impractical because of an event that the parties could not have anticipated or controlled. These often include natural disasters, or wars.