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In recent years, international developments such as the US-China trade tensions and the Russia-Ukraine conflict have led to the expansion of economic sanctions, directly impacting numerous cross-border transactions and contract performance. This raises a critical legal question: can sanctions that render contract performance impossible be deemed force majeure under Chinese law?

This article examines the relevant provisions of the Civil Code and judicial practices, analyses the legal and factual considerations underpinning court decisions and provides legal strategies and recommendations for mitigating sanction-related risks.

Legal practice

Article 180 of the Civil Code establishes the fundamental principle of force majeure, defining it as “an objective circumstance that is unforeseeable, unavoidable and insurmountable”. It includes the following core characteristics: objective externality (not caused by the subjective actions of the parties); unforeseeability (the event’s occurrence or impact could not be reasonably anticipated at the time of contract formation); and unavoidability (the event’s impact on contract performance could not be prevented even with reasonable care or all feasible measures).

While the law provides a degree of exemption for parties in cases of force majeure, it also emphasises the principles of good faith and reasonable care. If a party fails to mitigate losses after the event occurs, or if the event does not actually render contract performance entirely impossible, claims of force majeure are often difficult to establish. Courts assess the nature of the event, the foreseeability of the event by the parties and the reasons for the impediment to performance to determine whether force majeure applies and the specific allocation of liability.

Determining force majeure

Economic sanctions, imposed by governments or international organisations through laws, administrative orders or blacklists, restrict or freeze trade, including financial and investment activities involving specific countries, entities, or individuals. Their mandatory and unpredictable nature can significantly impact contract performance.

However, whether sanctions are “unforeseeable” depends on a comprehensive assessment of the contract’s signing date, the international situation at the time and the parties’ commercial judgement. If clear political or diplomatic developments indicating potential sanctions were evident when the contract was signed, the unforeseeability criterion may not be met.

In Chinese judicial and arbitration practice, economic sanctions are generally regarded as objective facts causing performance obstacles, rather than matters requiring domestic courts or tribunals to assess the legality or legitimacy of foreign public law. Courts examine whether sanctions constitute force majeure within the framework of the governing law. If Chinese law applies, all requirements under the Civil Code for force majeure must be satisfied to claim exemption.

Once sanctions are imposed, parties find it difficult to circumvent them through conventional commercial means. If a party has exhausted all reasonable efforts but remains unable to overcome the obstacle, the condition of “unavoidability” may be deemed fulfilled.

Attitude of Chinese courts

Based on a review of sanction-related cases in Chinese judicial databases, courts have yet to uphold a force majeure defence based on the impact of sanctions when Chinese law governs.

In Sulzer Shanghai Engineering & Machinery Works v Shandong Qiwangda Petrochemical (2020), the defendant argued that sanctions under US extraterritorial jurisdiction, which led to the freezing of overseas accounts, constituted force majeure. However, the court held that currency is a fungible asset, and the freezing of accounts did not amount to an insurmountable obstacle preventing the fulfilment of contractual obligations. Therefore, it did not meet the statutory criteria for force majeure.

In Zibo Kunde Logistics v Shandong Qiwangda Petrochemical (2020) and China Construction Bank Qilu Petrochemical Branch v Shandong Qiwangda Petrochemical et al (2020), the courts rejected the defendants’ claims that their inability to pay freight charges due to sanctions constituted force majeure.

These rulings indicate that, in most cases, sanctions are not recognised as force majeure if they are not sudden or if alternative means for reasonable performance remain available to the parties.

In international trade, economic sanctions imposed by the central government on foreign entities or individuals may lead Chinese companies to refuse or become unable to fulfil contracts with sanctioned foreign counterparts.

In such “reverse sanctions” scenarios, if a Chinese company seeks to invoke force majeure to terminate or refuse performance of a contract, the following factors should be carefully examined: (1) whether the sanctions were foreseeable at the time the contract was signed; (2) whether the sanctions have indeed created performance obstacles or compliance risks that cannot be reasonably overcome; and (3) how the contract addresses sanction risks or dispute resolution mechanisms.

Given the lack of established judicial precedents for such “reverse sanctions” cases, companies drafting or revising cross-border contracts should thoroughly assess related risks and clearly define provisions regarding potential sanctions, dispute resolution methods and applicable law. This can help avoid compliance conflicts or significant breach disputes during contract performance. However, the author believes that Chinese courts may adopt a more proactive stance in recognising force majeure in such cases, aiming to maintain overall judicial stability in China.

In summary, under Chinese law, there is no absolute standard for determining whether sanctions can be invoked as force majeure. Against this backdrop, Chinese companies should prioritise compliance and contract design in advance. This includes conducting thorough due diligence on counterparties’ sanction risks and explicitly stipulating sanction clauses, dispute resolution mechanisms and applicable law in contracts.

In the event of sudden sanctions, companies should promptly gather evidence, engage in proactive communication and explore feasible alternatives to minimise performance obstacles and dispute risks. By implementing these measures, businesses can safeguard their interests in an intensely competitive and uncertain international environment.