By：Yong Kaichang King & Wood Mallesons
The Novel Coronavirus outbreak has significantly affected the world. The situation remains volatile, with new and evolving measures being imposed rapidly to tackle quickly changing circumstances. Companies and businesses are taking cost-cutting and remedial measures, assessing the state of their existing contractual rights and obligations, and restructuring their businesses in response to the present situation.
Nevertheless, life, and we, must go on. Businesses must continue to function and adjust to the new environment to survive. There has been much discussion on whether and how companies may legally suspend or cease performance of their contractual obligations according to the laws of various countries. Apart from that, given the present Coronavirus situation, it is equally important for companies to review their existing contracts and their terms, to adjust to a new commercial reality moving forward. Different approaches will be needed depending on the type of contract, whether the contracts are domestic or international in nature, and what their governing laws and jurisdictions are.
In this article, we briefly set out some practical suggestions on recalibrating your contract strategy in a new Coronavirus world.
A. Evolve your force majeure clause
Consider inserting a force majeure clause that specifically caters for the Coronavirus situation into your contracts, as legal and statutory protections provided under the doctrine of frustration under common law and force majeure（不可抗力）under PRC law are difficult to obtain.
By way of background, the doctrine of frustration under common law allows for a contract to be discharged if a supervening and unforeseen event occurs, which makes the performance of the contract impossible, illegal, or something radically different from that originally contemplated. However, the doctrine operates within narrow confines and the courts are generally reluctant to invoke frustration. Common law requires that the frustrating event be fundamental and strike at the root of the contract, there must be no fault by the party seeking to invoke frustration, and the effect of the frustrating event must be total or near-total. As such, mere increases in costs and hardship, temporary unavailability of subject matter, failure of one source of supply, impossibility of merely one method of performance, mere delay within the commercial risks undertaken by the parties etc., are generally insufficient factors to invoke frustration.
PRC law has a similar statutory concept of force majeure (不可抗力). It states that where there is an objective circumstance that is unforeseeable, unavoidable and insurmountable, a contract may be terminated if the purpose of the contract cannot be achieved, and liability may be exempted in part or in whole if the contract cannot be performed. Again, it is difficult to invoke force majeure (不可抗力) before the courts in practice and the chances of success are low.
As such, inserting a force majeure clause into your contracts (not to be confused with the statutory protection of force majeure/不可抗力 under PRC law) would elevate the certainty and protection accorded to the parties. In particular, such a clause should provide not just for disease outbreaks or epidemics, but also specifically for changing circumstances within the ongoing Coronavirus outbreak. Otherwise, given that the Coronavirus situation is already a known and ongoing event, it would be incongruent to argue that it is unforeseeable under a standard force majeure clause. Other factors to consider when drafting the force majeure clause would include: (a) whether performance should be suspended or terminated in a force majeure event; (b) if performance is to be suspended first, how long the suspension period should be before performance can be terminated; and (c) loss allocation and other financial consequences of suspension and termination.
B. Re-examine your material adverse change/effect clause
Consider relooking at your traditional material adverse change/effect (MAC) clause to see if it can be negotiated and amended to fit into the present Coronavirus situation.
There is no specific legally defined concept of MAC under common law. Whether MAC applies, and to what extent it is applied, depends on whether it is incorporated into the contract. A MAC clause typically provides that in the event of any change, event, or circumstance that has a material adverse effect on the business, operations, or financial condition of a target company/party, the other party would have the right to exit the agreement, with limited or no obligation to compensate the first-mentioned party. A MAC clause is usually qualified in that changes that generally affect everybody as a whole do not constitute a MAC (e.g. changes affecting the entire industry or market, or changes to general economic or political conditions).
PRC law recognizes a loosely related concept that allows parties to exit a contract in the event of a change of circumstances (情势变更), although there is no direct legal equivalence with MAC. Where any major change due to objective circumstances occurs after the formation of a contract which was unforeseeable, is not caused by force majeure (不可抗力) under PRC law, and is not a business risk, and if the continued performance of the contract would be obviously unfair to a party or would not achieve the purpose of the contract, a party may request the court to modify or terminate the contract, whereupon the court shall decide whether to do so in the principle of fairness and considering the actual circumstances of the case. The concept of change of circumstances (情势变更) can appear to be like a fall back provision to force majeure (不可抗力) under PRC law, because it can be applied to the situation where the underlying event is not severe enough to constitute a force majeure (不可抗力) event under PRC law (i.e. performance of the contract is still possible), but is still serious enough to justify contract modification or termination. However, the boundary between force majeure (不可抗力) and change of circumstances (情势变更) in PRC law is less clear in practice. Just like force majeure (不可抗力) under PRC law, it is in practice difficult to invoke change of circumstances (情势变更) under PRC law, and there is the added obstacle of requiring specific court approval before it can be applied.
Adjusting your MAC clause to include certain forward-looking elements could provide protection against possible and sudden deteriorating circumstances in the Coronavirus situation. For example, provide that a MAC event is also one: (a) which would reasonably be expected to have a material adverse effect on the target company/party; and (b) which affects the prospects of the target company/party. Consider also excluding changing circumstances within the ongoing Coronavirus outbreak from the said usual qualification in MAC clauses. Bear in mind though that this could be an aggressive negotiating approach that realistically may only be achieved by those with strong bargaining positions, and certainty of the underlying commercial transaction could be undermined. As such, assess your approach after considering the specific context of your commercial transaction, and the interplay of the rights and interests of each party to it.
C. Develop your limitation of liability clause and negotiate its components
Consider inserting a limitation of liability clause that sets out details such as a minimum threshold, basket threshold, maximum threshold for claims etc.
In practice, comprehensive limitation of liability clauses are typically found in sale and purchase agreements in M&A transactions, where sellers give a list of representations and warranties to buyers. As the risk of being sued for breaching such representations and warranties can be high given their lengthy and extensive nature, sellers typically seek to limit their payment risk and exposure through such clauses. Apart from that, liquidated damages clauses or maximum claim threshold clauses are sometimes seen in certain commercial contracts.
Given the volatility and uncertainty of the Coronavirus situation, a well-thought out limitation of liability clause will help parties allocate their risks, manage their potential exposure, and achieve greater certainty. For example, whilst liability for breach of contract will still accrue, it can be provided that damages arising from, or aggravated due to, the Coronavirus situation are not claimable.
Note that in several common law jurisdictions, liability for certain matters cannot be excluded or restricted (e.g. liability for death or personal injury resulting from negligence, liability for other loss or damage resulting from negligence unless the contract term or notice is reasonable). In the PRC, exclusion of liability clauses in a contract relating to personal injury, and relating to property damage due to deliberate intent or gross negligence, are invalid. In addition, under common law, a liquidated damages clause would be voided if the court finds that the clause is a penalty rather than a genuine pre-estimate of loss at the time of contract formation. In the PRC, if the agreed liquidated damage is lower than or far exceeds the actual damage, the court may adjust the damages awarded; nevertheless, the court would be cautious in exercising such discretion.
D. Develop your further assurance clause
Consider inserting a further assurance clause, but ensure that it works in tandem with, and does not counteract, the force majeure clause.
A typical further assurance clause requires parties to carry out all further acts and execute all further documents necessary (or reasonably required) from time to time in order to give effect to the intended purpose of the contract. The concept is not specifically defined in common law or PRC law, and is commonly found in contracts where: (a) the subject matter is definite and unique (e.g. sale and purchase of shares or land), where ensuring the contract is fulfilled is more important than allowing it to fall apart and thereafter suing for damages; and (b) there is uncertainty regarding the complete or exact actions that may be required to fully achieve the purpose of the contract.
A further assurance clause in the context of the Coronavirus situation will need to dovetail in with a force majeure clause, so that they do not end up opposing and contradicting each other. A well-drafted further assurance clause will streamline with a force majeure clause and act as a countervailing weight against it. For example, whilst parties may be temporarily excused from performing their contract due to force majeure, once the underlying force majeure event abates, they will be required to take all further necessary acts to fulfil the contract once more.
E. Reassess your dispute resolution clause
Consider building in an alternative dispute resolution mechanism into your contract, before litigation or arbitration can be enabled.
The midst of the Coronavirus situation is not an appropriate time to start contentious legal proceedings. Court or arbitration proceedings are by nature adversarial and involve several processes such as discovery, interlocutory applications, witness testimony, hearings, and trials. These processes can be time-consuming, expensive, and burdensome, particularly for international disputes. These difficulties can be exacerbated in an epidemic given the control and preventive measures in place across many countries. Technology may alleviate some of these problems, but it will not eliminate them.
Mediation is an alternative dispute resolution approach that is gaining increased popularity in recent times, particularly with the 2018 United Nations Convention on International Settlement Agreements Resulting from Mediation establishing a harmonized legal framework to invoke and enforce settlement agreements worldwide. Unlike the formal and confrontational nature of litigation and arbitration, mediation is a less formal negotiation process with the assistance of a neutral third party. Mediators do not find fault or judge a case, but instead help parties to reach an amicable and mutually beneficial solution through facilitating communication and exploring options. In an already-tense world wrought by the Coronavirus epidemic, a quicker, inexpensive, more relaxed option that is mediation is worth considering.
Notwithstanding the present difficulties, just like how the Chinese word for crisis (危机) has one character that represents danger and the other that (colloquially at least) represents opportunity, the existing adversity brings with it an opportunity for companies and businesses to rise to the challenge, adapt to new and evolving circumstances, and evolve their legal strategy. And in so doing, emerge from the present turmoil stronger, savvier, and more resilient.
 The discussion in this article is in broad and general terms in order to assist readers to acquire a basic understanding of the subject matter in question, and should not be construed as legal advice. If you have any specific or further questions, please feel free to contact the author to discuss.
 Davis Contractors Ltd v Fareham Urban District Council  AC 696.
 J Lauritzen AS v Wijsmuller BV, The Super Servant Two  1 Lloyd’s Rep 1; Bank Line Ltd v Arthur Capel & Co  AC 435; Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal  1 AC 854.
 Davis Contractors Ltd v Fareham Urban District Council  AC 696.
 FA Tamplin Steamship Co., Ltd. and Anglo-Mexican Petroleum Products Co., Ltd  UKHL 433.
 Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd  1 KB 540.
 Tsakiroglou & Co Ltd v Noblee Thorl GmbH  AC 93; Ocean Tramp Tankers Corporation v V/O Sovfracht  2 QB 226.
 Davis Contractors Ltd v Fareham UDC  AC 696.
 Article 180, PRC General Provisions of the Civil Law; Articles 94 and 117, PRC Contract Law.
 Article 26, Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Contract Law of the PRC
 In the United Kingdom, the Unfair Contract Terms Act 1977 (Cap. 50). In Singapore, the Unfair Contract Terms Act (Cap. 396). In Hong Kong SAR, the Control of Exemption Clauses Ordinance (Cap. 71) and Unconscionable Contracts Ordinance (Cap. 458).
 Articles 40 and 53, PRC Contract Law.
 Article 114, PRC Contract Law.
 See the United Nations Commission on International Trade Law website at https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_agreements.