Nonetheless, recent legislation signifies that Common Prosperity and digital transformation shall continue to dominate forthcoming regulations in 2023 and beyond. For companies, it is crucial to keep abreast of new policies and changes, as provisions can significantly impact business operations and strategies.
Common prosperity (共同富裕 gòngtóng fùyù)

‘Common Prosperity’ is not a 20th-century political term. Its literal translation is to get rich (富裕 fùyù) altogether (共同 gòngtóng) and first appeared in 1953 in People’s Daily newspaper. The term is attributed to the holding of resources for the common and reflects the fundamental collective society in China. Most recently, it resurfaced in President Xi Jinping’s inauguration speech as Party Secretary in 2017, and more predominantly in the Prospect Vision of the year 2035 in the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China (October 2020). The principle refers to prosperity for all people. Namely, socioeconomic development and wealth shall not be obtained by select individuals or groups, rather it is collectively acquired and benefited by the people.

In practice, Common Prosperity underlines socioeconomic reforms to alleviate poverty in the poorer regions and reduce socioeconomic polarisation between the urban and rural areas.

Common Prosperity in legislation

Legislation fostering sustainable economic growth and high-quality development are key to achieving Common Prosperity. For example, the revised Anti-Monopoly Law effective from 1 August 2022 elevates legal liabilities to prevent larger companies from monopolising the market and eliminating smaller competitors. Equally, the revisions prioritise anti-trust policies to ensure sustained market development and fairer market practices.

More recently, the revised Unfair Competition Law, draft for comment (‘Revision’), issued on 22 November, strengthens legal protection for small and medium companies (‘SMEs’) in China. Specifically, Article 13 of the Revision targets companies with comparatively dominant positions and lists forbidden practices that disrupt fair trade and fair competition. Violating companies can face fines of up to 1 million RMB.

Moving into 2023, curbing monopolies, especially in the big tech companies and optimising a fairer market for SMEs shall continue. Common Prosperity promotion within the material, ecological and cultural in a context of high-quality development, as outlined by President Xi Jinping in the Central Committee for Financial and Economic Affairs (2021) will underline national and local policies.

Digital transformation of SME

SMEs are a driving force in China. Accounting for 50% of taxes, 60% of GDP and 70% of technology innovation, SMEs significantly contribute to economic growth. Industrial digital transformation for SMEs can be financially and practically challenging to implement. However, the digital transformation of SMEs is key to long-term development, reducing reliance on the external environment, and accelerating the overall digital economy.

The Circular of the General Office of the Ministry of Industry and Information Technology on Issuing the Guide to the Digital Transformation of Small and Medium-sized Enterprises (‘Guide’), effective from 3 November 2022, calls local governments to advance digital development in SMEs. The Guide reflects Common Prosperity principles in fostering high-quality and sustained development for smaller companies. And provisions focus on lowering investment barriers for SMEs to upgrade software and integrate into a digital ecosystem.

Specific provisions promote the following:

• providing small, fast, lightweight, and precise products and solutions;
• researching, developing, and promoting low-code products and services;
• developing subscription-based software services;
• helping SMEs to create, deploy, use, and adjust digital applications themselves, and
• improving SMEs’ secondary development capability and demand response capability.

Overall, digitalisation plays a vital role in China’s socioeconomic development. In 2023, we predict that local supportive policies should be issued by local governments to expedite internet applications for SMEs, upgrade company infrastructure, and make business operations more efficient and cost-effective. In addition, forthcoming cyber and data security regulations and rules are anticipated across sectors. Cyber security will become increasingly prevalent, as digitalisation accelerates in the business world.

What it means for foreign investment in China

For foreign companies, understanding Common Prosperity and its practical implications are essential.

Aligning business strategies with Chinese politics and policies determines a company’s success and profits significantly.

The days of leveraging cheap labour in China or a western brand story are long gone. Sustainable investments that fulfills Common Prosperity are here to stay.

Moving to 2023, China’s outlook may seem unpredictable, however, it is clear that foreign investment in China has moved into a new era.

Author: Roberto Gilardino, Managing Partner APAC, Horizons Corporate Advisory

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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Enacted in 1993, the Company Law has been revised several times with the latest adoption in 2018. In the amendment, long standings provisions are changed to simultaneously increase protection for bona fide parties and further regulate unethical practices. Major alterations are outlined below.

Share classes

Joint stock limited companies are permitted to issue other types of shares. Other than ordinary shares, shareholders may issue preferred shares and deferred shares, shares with a different number of voting rights, and determine corresponding rights protection for such shareholders.

Simplified procedures

Provisions to simplify administrative procedures improve the facilitation of company operations. Specifically, capital reduction and simplified deregistration procedures under specific conditions are simplified.

Registration Rules

A company registration chapter is added to enhance the administration procedure. Such addition elevates the Administrative Regulations of the People’s Republic of China on the Registration of Market Entities (effective on March 1, 2022) to the rule of law. In the chapter, further clarification is provided on matters and procedures related to the company’s establishment registration, alteration registration, and cancellation registration, and the company registration authority is instructed to optimise the registration process and improve the efficiency and convenience of registration.
Powers and duties of directors, supervisors, and senior management

The duties of loyalty and diligence of the directors, supervisors, and senior management are further stressed to protect stakeholder interests. Joint and respective liable are provisioned for those who cause damage to others in an intentional act or gross negligence whilst performing duties.

Shareholders’ right to know

Another addition is the right for shareholders to consult the register of shareholders and accounting vouchers. Shareholders can entrust agencies to access information, enable professionals of agencies to collate and analyze information and define reasonable decisions based on such insights.

The Revised Draft is envisioned to be adopted in 2023. For companies, the revisions advance the corporate legal framework in China and provide a greater legal basis for courts to handle disputes.

Furthermore, we foresee forthcoming corporate legislation supplementing the Revised Draft (once adopted) and arising from needs of social development, such as the latest series of laws, regulations, and standards related to information and data protection and security.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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Investment program highlights

Minimum investment amount

Investor may invest 250,000 EURO in real estate either as an individual or company purchase. The number of houses is not limited, if the total value of the properties amounts to 250,000 EURO or more. The property once purchased can be rented out.

Family Reunification

Both spouse and children under the age of 21 years old can be included in the investment program. Furthermore, residency can be extended to parents of both spouses. Both the applicant and family members can access the education, healthcare, insurance policies related to pensions and so forth.

Minimum stay per year

None

Investment Eligibility

Applicants need to meet the following requirements:

• Non-EU/EEA country citizen
• Min 18 years old
• No criminal record
• Obtain medical insurance
• Good character

Author: Maria Georgiou

This content appears as a courtesy of Georgios K Georgiou LLC, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information related to its content, please visit www.georgioullc.com

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• Provisional Regulations on Enterprise Information Disclosure (“Provisional Regulations”), effective from 1 October 2014

• Interim measures for administration of List of Enterprise with Abnormal Operations (“Interim Measures”) effective from 1 October 2014

• Administrative Measures for Market Regulation of the Seriously Illegal and Dishonest Entities List (“Administrative Measures for Dishonest Entities List”), effective from 1 September 2021

• Administrative Measures for Market Regulation of Credit Restoration (“Administrative Measures for Credit Restoration”), effective from 1 September 2021

The Provisional Regulations requires enterprises to submit the annual report for the previous year between the 1st January to 30^th June, and publicly disclose such information. The information submitted and disclosed shall include the address and contact number of the company, operation status of the company (open, closed or liquidated), investment or shares purchasing related information, capital contribution, contribution date and form of contribution by the company’s shareholder, number of employees, total assets, total liabilities, operating income, main business income, total profits, total tax paid, and so forth.

Enterprises who do not submit the annual report on time shall be listed as Enterprise with Abnormal Operations, as stipulated in the Interim Measures.

Also, enterprises will be listed as Enterprise with Abnormal Operations in the following cases:

• Failing to disclose information upon alteration as according to Article 10 of the Provisional Regulations, and failing rectify the violation on time after being notified by the administrative management department

• Concealing the real situation or practicing fraud when disclosing enterprise information

• Failing to contact enterprise at the registered address (site of business operation)

If an enterprise is listed as an Enterprise with Abnormal Operations and rectifies such violations on time, may apply to be removed. Specifically, the Interim Measures, provision the specific rectifications:

• Enterprises who fail to submit the annual report on time may apply to be removed upon submitting and publishing the annual report.

• Enterprises who fail to disclose information after alteration on time shall publish the altered information. Then apply to regain its normal operation status record at the administration of industry and commerce.

• Enterprises who could not be contacted at its registered address, may regain its normal operation status record after conducting the regular procedures for alteration of registered address or business operation site, or claimed that the Enterprise can contacted at its registered address.

From the listed date, enterprises listed as Enterprises with Abnormal Operations and exceeding three years will be listed as “seriously illegal and dishonest enterprises”. As “seriously illegal and dishonest enterprises”, enterprises will face severe negative image and reputation.

Therefore, enterprises should take corrective actions promptly when listed as “enterprises with abnormal operations”, and apply to be removed at the competent administration of industry and commerce as according to the aforesaid procedures.

Dishonest Entities List

The Administrative Measures for Dishonest Entities List, defines the Dishonest List as companies that:

• seriously endanger people’s health and life safety,
• seriously destroy the fair market competition order and normal social order,
• refuse to perform legal obligations,
• seriously affect the credibility of administrative organs and companies with other serious illegal and dishonest behaviors.

Generally, enterprises in industries directly related to the people’s life, health and safety are affected including food, drugs, special equipment, and other related sectors.

Similar to the “Enterprise with abnormal operations list”, enterprises, listed as “illegal and dishonest enterprise” for more than one year, may request to be removed at the competent Market Supervision Administration. Specifically, the Administrative Measures for Credit Restoration stipulates the below preconditions:

• The enterprise has fulfilled the obligations provided in the administrative penalty
• The enterprise has proactively rectified the negative impacts and consequences
• The enterprise is no-longer subject to further serious administrative sanctions provisioned by the relevant administrative departments

Removal from the “abnormal operations list” or “illegal and dishonest enterprises list” will not delete the historical record of enterprises being listed. Rather such records are held on the company’s credit file and publicly disclosed.

Therefore, understanding and comply with the Chinese laws and regulations is essential to enterprises’ operations and entire life-circle. Any irregularities detected by the competent authorities will be an irreversible record for the company.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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For employers, understanding salary obligations for employees in quarantine or lockdown can be challenging. Employers must adhere to labour obligations according to the law otherwise may face labour disputes. We provide a Q&A on employer obligations when employees are quarantined or lockdown.

What is the salary obligation for quarantined employees?

Quarantined employees providing  normal work in quarantine or under other emergency measures taken by the government based on  epidemic prevention and control shall be treated as normal attendance and paid normal remuneration.

According to the notice on properly handling the labor relations during the prevention and control of pneumonia infected by novel coronavirus (the “Notice”) issued by the general office of the Ministry of human resources and social security, infected or suspected employees  suspected employees deemed as close contact and cannot provide normal work during quarantine or medical observation, or due to the implementation of isolation measures or other emergency measures by the government, shall be treated as  normal attendance and paid normal renumeration.

For employers, the Notice suggests that employers negotiate with the employee to treated the period as annual leave or rest days. If negotiations are not established, the employer can implement the overall arrangements according to the annual leave of the isolated employees according to law.

What if my enterprise faces difficulties in production and operation due to the impact of the epidemic measures?

Under the Notice, the enterprise may adjust the salary, rotate the post and rest, shorten the working hours and so forth through consultation with the employees.

If the enterprise is shutdown within a wage payment cycle, the enterprise shall still pay the wages of employees according to the standards stipulated in the labor contract.

If the employee is still unable to provide normal work beyond one wage payment cycle, the enterprise shall pay living expenses, and the standard of living expenses shall be implemented in accordance with the measures of the provinces, autonomous regions and municipalities directly under the central government.

What if employee’s labour contract expires during quarantine?

In the event that the employee’s labor contract expires during quarantine, the date shall be postponed till the  employee finishes the quarantine or medical observation period.

How to determine the arbitration statutory limitation during epidemic measures?

Under, the Labor Dispute Mediation and Arbitration Law of the people’s Republic of China the statutory limitation for application of labour disputes arbitration is limited to one year (‘the period’). The period shall be calculated from the date the parties recognise or should recognise the infringement of rights. However, if the parties are unable to apply for arbitration within the  period due to force majeure or other justified reasons such as epidemic measures, the period shall be suspended and the period shall be recalculated from the date the force majeure or other justified reasons finishes.

Equally, If the labor and personnel dispute arbitration institution cannot hear the case within the period due to the impact of the epidemic measures, the hearing time limit may be postponed accordingly.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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E-CNY

In 2020 China launched the digital yuan pilot program within four cities. Today, the program has been extended to more than 20 cities and national areas including Shanghai, Beijing and Shenzhen. E-CNY is a digital legal tender issued by China’s central bank, the People’s Bank of China (PBOC) and equivalent to physical renminbi (RMB).

Storing and using E-CNY

E-CNY is stored on a digital wallet which is available on iOS and Android Chinaapp stores. Users located in the piloted areas can download the APP and pay for goods and services with E-CNY, similar to physical money.

Data Privacy

Personal information of E-CNY Users will be encrypted during small transactions such as eCommerce purchasers. In this manner, e-commerce platforms can obtain and mishandle personal information related to the users.

Anti -money laundering

Establishing a cashless society through E-CNY can reduce illegal activities such as anonymous counterfeiting, money laundering and terrorist financing. Through big data, Chinese authorities can directly analyze and track transactions to identify suspicious accounts.

Offline payment

E-CNY supports offline payment through near-field communication technology. Therefore, e-CNY unlike online payments such as Alipay and WeChat works in many underdeveloped and remote areas with limited wireless access.

Operators

The following commercial banks are able to provide e-CNY:

ICBC
Agricultural Bank of China
Bank of China
China Construction Bank
Bank of Communications
Postal Savings Bank of China
China Merchant’s Bank

E-CNY Expansion in China

Both Tecent and Alibaba have announced the integration of E-CNY on their platform, respectively WeChat pay and Alipay. As an additional payment option for pilot areas, WeChat pay and Alipay users can utilise the E-CNY as an alternative to pay for goods and expand E-CNY usage in the mainstream market.

According to People’s Bank of China, there were 261 million users in the extended trial period who had transacted for USD 13.8 billion at the end of 2021.

E-CNY offers a safer and accessible digital payment option and further a cashless society. Equally, digital currencies can reduce money laundering, corruption and terrorist financing and improve the efficiency of financial transactions.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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Namely foreign niche brands or those with a high IPRs value should be equipped with the right safeguard tools before entering the China market. For example, prioritising the registration of your brand name and associated graphics and text as trademark (‘TM’).

However, many may find that through an anteriority search, a third party may have registered their trademark registration priorly. Under such circumstances, brands may be highly concerned about the following aspects:

• Who is the third party that registered my trademark? And what is the purpose?
• It that still feasible to register my trademark in China?
• If not, would it be possible to purchase my trademark from such third party?

In the below, we highlight the key issues in China trademark protection.

1. Determining a malicious intention

Firstly, trademark protection is “territorial” based and trademarks registered in their original country should be registered within the territory of China. Secondly, the China follows the principle of “first to file” rather than the ‘first to use’. Therefore, third parties can register trademarks identical or similar to foreign brands in China before company applies. Such applicant will be the legitimate owner of the trademark once it will be approved for registration.

Despite that the “first to file” principle for trademark registration, if solid evidence can prove that the trademark application was filed with malicious intention, then invalidation of such trademark registration can be applied according to Article 4, 19, 32 of the Trademark Law of the People’s Republic of China (“Trademark Law”). Invalidation is determined by whether the registrant/applicant is a trademark squatter. Generally, the nature and number of trademarks registrations/applications that has been registered or filed under the name of the same registrant/applicant can be investigated. “Trademark squatter” refers to a legal person or natural person who accumulates in mala fede trademark registrations to be connected or profit from the brand-value by improper means.

For trademark registrations filed from a legal person or an organization, retrieving all the trademark registrations or ongoing trademark applications can be relatively easily conducted through the online Chinese Trademark Office search system. Whilst natural persons could be more challenging to retrieve due to likely duplication of names. In such case, we need to identify the registrant/applicant through other means.

We have encountered many cases in which the “partners” or “potential partners” in China have registered the foreign brands’ trademark. Foreign brands may have meet with potential partners at industry exhibitions prior to launching in China. Under such cases, if the foreign brand entered a certain relationship or collaboration with the third party who filed their trademark registration. The foreign brand may apply to invalidate the registered trademark before the Chinese Trademark Office for violation of Articles 4, 7, 19 and 32 of the Trademark Law.

2. Cancellation for non-use in three consecutive years

Besides claiming malicious intention of trademark squatting, the foreign brands may also apply to cancel the disputed trademark by non-use cancellation for three consecutive years. Trademarks are unlikely to be used by trademark squatters since they only accumulate them and may resell to the interested parties. If the disputed trademark has been registered for over three years without any usage, then there is higher probability to cancel the registration.

After the non-use cancellation application is submitted, the registrant of the trademark can provide relevant evidence (‘defense’) within the defense period. Under this circumstance, the applicant should analyze the authenticity and rationality of the defense and determine whether it should be deemed as “post-factum” evidence or symbolic evidence (generated intentionally solely or mainly to maintain the trademark effectiveness).

Equally, the non-use cancellation for three consecutive years regulates if the trademark holders’ uses the trademarks on designated products/services an actual, legal, compliant, open and effective manner. In other words, proper utilisation of trademarks is conducted by the holder and relevant customs can distinguish any products/services that derive from different sources. Therefore, symbolic use is generally not deemed as true, reasonable and regular use of the trademark by the Trademark Office or Intellectual Property Court.

3. Purchasing the registered trademark or “transfer with compensation”

Brands may face tougher challenges if the non-use cancellation for three years cannot be applied and no solid evidence can demonstrate a malicious trademark registration. Under such situation, brands may wish to purchase the disputed trademark. Although, purchasing the trademark from the registrant is not recommended for two main reasons noted below.

Firstly, trademark squatters mainly register and maliciously accumulate trademarks with the objective of reselling to the highest bidder. Many perfectly understand the importance of trademarks in brand promotion and sales in a specific market. As a result, trademark squatters will likely transfer the ownership of their registered trademarks to the highest bidder. If foreign brand contacts the trademark’s owner to purchase the ownership back, it would be a likely entrapment.

Secondly, foreign brands wishing to purchase back their trademark can be victims of “fruit from the poisonous tree”. Namely, if the trademark registration was applied in violation of the Trademark Laws, such as registered by fraud or other improper means, then the brand foreign will bear responsibility once the trademark is transferred. For example, after the trademark is assigned from its original registrant (the “Assignor”) to other entity or individual (the “Assignee”), a third party can raise an invalidation application against the said trademark for violation of the articles 4, 10, 11, 12 and 19 paragraph 4 of the Trademark Law. Though the Assignee may claim that the assignment of the trademark has been conducted in bona fede, and request approval for the trademark registration or remain effective is unlikely to be supported by the court.

Therefore, if the registered trademark has violated the Trademark Laws upon its application of registration after the transfer, the foreign brand will still face the invalidations risks.

In conclusion, we do not recommend purchasing the registered trademark from the trademark squatter. Such approach may not guarantee the validity of the trademark and could risk unnecessary economic losses for the brand.

4. In summary, we recommend the following:

• The trademark registration of the related marks (device or words) shall be applied as soon as possible – upon the establishment of the brand
• In the initial brand promotion and prior to the application of trademark registration, brands shall be very prudent when working with “potential partners”, and adequately evidence any discussion or information exchange concerning the brand cooperation including but not limited to name cards exchanged, group photos, correspondence etc.
• Seek qualified and experienced Chinese local IP lawyer to strengthen the protection of intellectual property rights.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

The post What foreign brands should know about trademark protection in China appeared first on China Collaborative Group.

1. What is the salary obligation for quarantined employees?

Quarantined employees providing normal work in quarantine or under other emergency measures taken by the government based on epidemic prevention and control shall be treated as normal attendance and paid normal renumeration.

According to the notice on properly handling the labor relations during the prevention and control of pneumonia infected by novel coronavirus (the “Notice”) issued by the general office of the Ministry of human resources and social security, infected or suspected employees suspected employees deemed as close contact and cannot provide normal work during quarantine or medical observation, or due to the implementation of isolation measures or other emergency measures by the government, shall be treated as normal attendance and paid normal renumeration.

For employers, the Notice suggests that employers negotiate with the employee to treated the period as annual leave or rest days. If negotiations are not established, the employer can implement the overall arrangements according to the annual leave of the isolated employees according to law.

2. What if my enterprise faces difficulties in production and operation due to the impact of the epidemic measures?

Under the Notice, the enterprise may adjust the salary, rotate the post and rest, shorten the working hours and so forth through consultation with the employees.

If the enterprise is shutdown within a wage payment cycle, the enterprise shall still pay the wages of employees according to the standards stipulated in the labor contract.

If the employee is still unable to provide normal work beyond one wage payment cycle, the enterprise shall pay living expenses, and the standard of living expenses shall be implemented in accordance with the measures of the provinces, autonomous regions and municipalities directly under the central government.

3. What if employee’s labour contract expires during quarantine?

In the event that the employee’s labor contract expires during quarantine, the date shall be postponed till the employee finishes the quarantine or medical observation period.

4. How to determine the arbitration statutory limitation during epidemic measures?

Under, the Labor Dispute Mediation and Arbitration Law of the people’s Republic of China the statutory limitation for application of labour disputes arbitration is limited to one year (‘the period’). The period shall be calculated from the date the parties recognise or should recognise the infringement of rights. However, if the parties are unable to apply for arbitration within the period due to force majeure or other justified reasons such as epidemic measures, the period shall be suspended and the period shall be recalculated from the date the force majeure or other justified reasons finishes.Equally, If the labor and personnel dispute arbitration institution cannot hear the case within the period due to the impact of the epidemic measures, the hearing time limit may be postponed accordingly.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

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What is force majeure?

A force majeure clause exempts one or both parties from liability or obligation since an extraordinary event, such as war, strike, crime, or “Act of God” prevents one or more parties from fulfilling their obligations under the signed contract. Epidemic measures enacted to contain COVID-19 (such as lockdown) which directly restricts companies from performing contractual obligations may constitute as a force majeure, since the original terms can no-longer be performed. For instance, as the citywide lockdown in Shanghai continues, manufacturers unable to resume work cannot fulfil their contractual obligations, and such manufacturers may invoke the force majeure clause.

Invoking force majeure during or after lockdown

The legal basis for force majeure is provisioned under The Civil Code of the People’s Republic of China

Articles 180, 563 and 590.

Article 180
A person who is unable to perform his civil-law obligations due to force majeure bears no civil liability, unless otherwise provided by law. “Force majeure” means objective conditions which are unforeseeable, unavoidable, and insurmountable

Article 563
The parties may rescind the contract under any of the following circumstances:
(1) the purpose of a contract is not able to be achieved due to force majeure;

Article 590
Where a party is unable to perform the contract due to force majeure, he shall be exempted from liability in whole or in part according to the impact of the force majeure, unless otherwise provided by law. The party unable to perform the contract due to force majeure shall promptly notify the other party to mitigate the losses that may be caused to the other party, and shall provide proof of the force majeure within a reasonable period of time. Where the force majeure occurs after a party’s delay in performance, such party’s default liability shall not be exempted

Under such provisions, companies invoking force majeure are not wholly exempted from contractual obligations. Rather companies are required to prove that the lockdown measures directly impacted their contractual terms. For example, a manufacturer could not deliver the goods as agreed within the contract since the factory was lockdown and manufacturing could not continue, therefore, the manufacturer could be exempted from such obligation and breach of contractual term.

In conclusion, affected companies can be exempted from for the breach of contract in part or in whole according to the influence of the force majeure – such as an epidemic measure.

Terminating contracts under force majeure

Contracts can only be terminated if the fundamental purpose of the contract cannot be achieved due to force majeure. Namely, where the contract cannot be performed or cannot be performed in accordance with the agreed terms defined in the contract.

The Circular of the Supreme People’s Court on Issuing the Guiding Opinions (II) on Several Issues concerning the Proper Trial of Civil Cases Related to the COVID-19 Epidemic According to the Law (“the guiding opinions of the Supreme Court (II)) provides further guidance on contract termination.

If the epidemic situation or epidemic prevention and control measures cause the parties to fail to perform the sales contract within the agreed time limit or the performance cost will be increased, and the continued performance does not affect the realization of the purpose of the contract, if either party request to terminate the contract, the people’s court will not support.

Under such example, though the continued performance of the contract has been adversely affected by the epidemic measures, the force majeure does affect the purpose of the contract. Hence, the contract cannot be terminated.  Instead, both parties to the contract shall still perform their contractual obligations in accordance with the agreement in accordance with the principle of good faith.

The affected party in such instance may apply the change of circumstance to renegotiate the contractual terms, if the epidemic situation or epidemic prevention and control measures significantly increased the performance costs of labor, raw materials and logistics, or significantly reduced the price of products.

Change of circumstances

The Civil Code of the People’s Republic of China revised in 2020 includes epidemic within the provisions in change of circumstances. Specifically, parties to a contract adversely affected by the epidemic may renegotiate the conditions for the performance of the contract. If the negotiation fails within a reasonable period of time, each party may request the people’s court or arbitration institution to change or terminate the contract.

The Civil Code stipulates parties to renegotiate new terms in the first instance and continue to perform according to the negotiated terms. However, if the negotiation fails each party may request the people’s court or arbitration institution to change or terminate the contract by applying to the principle of fairness.

Where the people’s court or arbitration institution decides to change the contract, the party shall continue to perform the contract according to the changed conditions based on the agreement of the parties or the effective judgment document.

Case Study

Epidemic prevention and control measures directly restricted the delivery of  goods within the agreed time limit defined in the contract. Parties failed to negotiate new terms and the seller requested the people’s court to change the conditions of performance time limit. The people’s court changed the performance time limit according to the principle of fairness in combination with the actual situation of the case.

Consequently, companies should note that invoking force majeure clause for lockdown measures can be complex, which requires proof of the force majeure directly impacting the contractual obligation. Under certain circumstances, the party is exempted from the breach of contract, but the performance of the contract shall continue. Terminating contracts under force majeure should demonstrate the purpose of the contract is affected by the force majeure, otherwise the people’s court may not support such case. Alternatively, companies may utilise the change of circumstances provisions to renegotiate more suitable terms or apply to the people’s court to change or terminate the contract.

This content appears as a courtesy of Horizons Corporate Advisory, a proud member of the China Collaborative Group (CCG Association). It is informational in nature and does not constitute legal advice or establish an attorney-client relationship between you and its author, publisher or any member of CCG. For more information, please visit www.horizons-advisory.com. 

The post Invoking force majeure in commercial contracts during lockdown appeared first on China Collaborative Group.

Lowered percentages

Effective from the 27 March till the 31 December 2022, the percentage related to two types of social security have been lowered.

The post Recent social security insurance policies in Shanghai appeared first on China Collaborative Group.