The following cruise ship dispute occurred at the height of the previous SARS outbreak. In today’s post we will be sharing with our readers the judgement （Case No: (2007) Er civil Four Final No. 47）and the reasoning behind it. As a result we hope you might be on sound footing and know how Chinese judges may legally approach the issue of “force majeure”.

Dongjiang Company (the complainant, hereinafter “Dongjiang”) and Changjiang Overseas Company (the defendant, hereinafter “Changjiang”) signed a cruise ship lease contract on August 10, 2001 (hereinafter the “lease contract”) for the duration of six-years. Changjiang leased five cruise ships to Dongjiang to operate them for tourism purposes on the Yangtze River. During the performance of the lease contract, SARS broke out in China. As a consequence, the National Tourism Administration issued a travel ban in April 2003. On 3 April 2003, Dongjiang sent a letter to Changjiang asking to stop performance of the lease contract in April, but Changjiang didn’t agree. Therefore, on 5 April 2003, Dongjiang formally informed Changjiang that they terminated the lease contract. All five cruise ships ceased operations on 13 April 2003.

Later on the dispute was brought to the local court culminating in the question whether Dongjiang can terminate the lease contract, or whether Dongjiang is obliged to continue to pay a leasing fee and in addition damages for breach of contract.

On 16 December 2008, the High Court of Hubei Province (hereinafter the “Appellate court”) rendered its final award. According to the award, the Appellate court summarized the merits of the dispute and provided the parties with its reasoning accordingly:

(1) Legal characterization of SARS outbreak.

The Appellate court held that the judgment whether the SARS outbreak constitutes an event of force majeure can only be made under certain conditions in light of time and space, i.e. whether such an event is unforeseeable, unavoidable and is not able to be overcome (please check our previous post: Force Majeure? – To be, or not to be, that is the question!), all judgement has to be made according to the scientific and technological level at that time. Based on the level of science and technology during the epidemic period, if the “SARS” outbreak is considered as an event of force majeure, then it is. The characterization of SARS would not change just because the outbreak disappeared or was subsequently controlled. As to whether the lease contract can be terminated due to the event of force majeure, is another matter. It is irrelevant to whether the outbreak of SARS is an event of force majeure.

(2) Whether Dongjiang is entitled to terminate the lease contract in accordance with its provisions?

The lease contract has specified that:

1. The party shall give six months written notice if it intendeds to terminate the contract.

2. The party shall reimburse the other party for their losses.

Then the contract may be terminated through negotiation on the premise that the first two conditions are met.

However, Dongjiang failed to meet the above-mentioned requirements.

(3) Whether Dongjiang can unilaterally terminate the contract on the grounds of statutory termination?

Dongjiang claimed that they are entitled to a statutory termination and the Appellate court reasoned as follows:

a) Dongjiang holds that: Since Article 94 (1) of the Contract Law of the People’s Republic of China gives the parties the right to terminate the contract unilaterally as a result of an event of force majeure, as long as there exists such event, it of course has the right to terminate the contract unilaterally.

The Appellate court held that, despite the aforementioned provision, the provision also specified that, the parties may unilaterally terminate the contract only when the event of force majeure affected the realization of the purpose of the contract. Otherwise, the parties to the contract are not entitled to any legal termination.

b) Dongjiang believes that: because of the “SARS” outbreak, the purpose of the lease contract cannot be achieved anymore and was hence terminated by Dongjiang via written notice.

The Appellate court held that, the time when performance of the contract was affected by the SARS outbreak can start as early as 13 April 2003 (earlier than the time the Government issued a travel ban, i.e. 28 April 2003), and ended on 1 August 2003, when Dongjiang gradually resumed its operations (actually, this time is later than the time when the World Health Organization announced lifting the travel warning for Beijing, which was, 24 June 2003). The time for suspension of operations during the “SARS” outbreak was 109 days, this amounted to merely 10 per cent compared to the remaining 1,078 operating days of the five cruise ships involved. Therefore, the Appellate court held that, the SARS outbreak had a great impact on the performance of the lease contract, however this impact had not yet reached such an extent that the purpose of the contract could not be achieved anymore. Therefore, the court did not support Dongjiang’s practice of terminating the contract unilaterally and its unilateral termination constituted a breach of contract.

(4) Whether the leasing fee should be reduced, if yes, how?

During the outbreak of SARS, Dongjiang is unable to perform the contract in accordance with the terms originally agreed upon, it has the right to suspend the lease contract, or ask Changjiang to reduce the leasing fee at its discretion. The legal basis of such a claim is Article 117 (1) of the Contract Law of the People’s Republic of China: “If the contract cannot be performed due to force majeure, it shall be partially or completely exempted from liability according to the influence of force majeure”. As mentioned earlier, Dongjiang’s full obligations under the lease contract has been affected by the SARS outbreak, Dongjiang has the right to claim partial exemption from its liability of non-performance. That is, the number of days that have been suspended due to the outbreak shall be deducted from the number of days to pay a leasing fee.

In summary, the Appellate court held that, the “SARS” outbreak constituted an event of force majeure, which has had an impact on the performance of the lease contract involved, and Dongjiang has the right not to pay the rent during the time when performance of the contract was impacted by the “SARS” outbreak. However, there was no such stipulation that any party can unilaterally terminate the contract due to the event of force majeure. At the same time, the “SARS” outbreak’s impact on the contract has not yet reached the extent that the purpose of the contract cannot be achieved anymore, therefore, according to the contractual stipulations or the provisions of the law, Dongjiang has no right to unilaterally terminate the lease contract. Dongjiang’s unilateral termination of the contract, and its act of refusing to pay the leasing fee constituted a breach of contract, so it should pay damages for breach of contract.

Useful link:

The Supreme People’s Court of The People’s Republic of China