Covid-19 – Guidelines for Employment & Contracts

Employment Disputes

In April, the Supreme People’s Court of China (“SPC”) issued guidance regarding employment disputes. The most important take away is that the protection of employees is particularly important especially in unprecedented times such as the Covid-19 crisis. Therefore, courts should consider all relevant circumstances including the impact of the outbreak in a particular region where the employment is, as well as the specific measures. The rules and regulations of the various regions differ and should be examined in more detail.

Commercial Contracts

The SPC also recently issued the “Second Guideline Regarding Civil Litigation Related to Covid-19” (Guideline 2). We will discuss some highlights. Keywords are “contract purpose” and “principle of fairness”

Force majeure (Supreme Force) means any occurrence or event which is not in control or is unforeseeable. We can think of fire, drought, terrorist attacks and many more circumstances. Application of Force majeure releases the parties from performing its contractual obligations. Above all, the SPC encourages parties to renegotiate the contract and, to the best of their abilities, continue to perform obligations as set out in the contract. Guideline 2 mentions that when a contract is affected by Covid-19, but the contract purpose can still be fulfilled, parties should not rescind this contract. However, when parties choose to litigate, the court will likely grant a change in price or performance deadline, in accordance with the principle of fairness.

Guideline 2 specifically discusses “Transaction of Pandemic Prevention Goods,” indicating that when the seller breaches the contract by selling the goods to another buyer for a higher profit, such profit will be granted to the original buyer as compensation.

The SPC also notes the following with regard to Property Leasing: courts will likely make changes to rental or leasing arrangements according to the principle of fairness, but normally will not grant a rescission of leasing contracts, unless the purpose of the contract cannot be fulfilled (for instance, when the lease is for a special purpose only, such as an exhibition). This also means that when tenants encounter difficulties pertaining to rental payments, landlords normally are not allowed to terminate the lease with immediate effect.

Regarding Education Contracts, Guideline 2 mentions that when the contract purpose cannot be fulfilled by online education (e.g. arts education or sports education), courts will likely grant a rescission, especially when students or parents apply for a refund. However, when e-learning is possible, courts will not grant a rescission.

The SPC refers to Medical Insurance Contracts, noting that many patients were unable to go to the hospitals designated by their insurance companies in their contracts. Even so, the insurance companies should nevertheless fulfill their obligation to make insurance payments. Guideline 2 explains further that patients infected with Covid-19 are considered to have a “major illness,” which means that the insurance payment should be made accordingly.

A special paragraph in Guideline 2 is reserved for Online Payment Made by Children. During the outbreak, many children who stayed at home made payments without the permission of their parents, in online games or other online entertainment. In principle, Guideline 2 supports the idea that parents whose children did this should be allowed to claim for a refund.

 Finally, Guideline 2 proposes to use the Bankruptcy Legal System as a protection for companies who are on verge of bankruptcy due to the outbreak. This means that these companies can be revived by measures such as restructuring.

Legal implications

Covid-19 continues to have severely impact global economies. The legal implications are enormous. Parties will need to consider their contractual obligations carefully and must be prepared to take proper mitigation measures. Please feel free to contact our lawyers to discuss the possibilities.