07 December 2017

Is It Possible to Allege "Force Majeure"? -- Prevention of Legal Risks in Environmental Protection for Supply Chain

This article was written by Wu Qing(Partner) and Linda Liang(Partner).

One day, lawyer L received an emergency call from Ms. K, the head of the EHS department of a Shandong company. Ms. K said that the company has suffered frequent shutdown recently because of the "heavy air pollution stop working order" issued by the environmental protection department, which has seriously affected the company's capacity. At the same time, the company's suppliers are also affected by the order and unable to supply the company in time. Although this circumstance is not as serious as the "Schaeffler Incident," the impact on the company cannot be ignored. Therefore, the whole company is very worried about this.

Accordingly, Ms. K raised two questions to lawyer L: 

  • Can an enterprise invoke the "force majeure" clause in the business contract as a reasonable excuse of failure to perform obligations if it is ordered to stop production due to the environmental protection problems? 
  • How to prevent and reduce the risk for supply-chain breaking due to the environmental protection problems? 
  • Lawyer L provided solutions to these two questions.

Can an enterprise invoke the "force majeure" clause in the business contract as a reasonable excuse for failure to perform obligations if it is ordered to stop production due to the environmental protection problems?

According to the law, force majeure means unforeseeable, unavoidable, and insurmountable objective circumstances. Lawyer L holds the view that whether a stop working order issued by the government to an enterprise due to the environmental protection problems is a force majeure needs to be discussed in different scenarios. 

First of all, if an enterprise is ordered to stop production by the government because of its own violation of environmental laws and regulations, a court will not order that force majeure is a ground of reasonable excuse of failure to perform obligations, the reason is that the enterprise has the responsibility to obey the law. Provided by clear laws and regulations, if an enterprise still engages in illegal activities and obtained the stop working order, it shall not be classified as “an unforeseeable, unavoidable, and insurmountable objective circumstance”. 

Secondly, if the enterprise obeys the law, the government orders the enterprise to stop production due to the contingency plans for heavily polluted weather, and the enterprise alleges this shall be a force majeure, it is still very unlikely to be supported by the court.

The reasons can be summarized as follows. In recent years, from laws and regulations to normative documents, it has long been clearly provided that relevant enterprises shall stop working under the heavily polluted weather. Atmospheric Pollution Prevention and Control Law of the People's Republic of China (2015 Revision) provides that “the local People's Governments at and above the county level shall, in according to the early warning grades for heavy air pollution weather, promptly activate their contingency plans in time, and may take emergency measures, such as ordering relevant enterprises to suspend or restrict production… ”. Each province and city has also laid down its own measures for the implementation of contingency plans for heavily polluted weather. Take Jing-Jin-Ji (Beijing, Tianjin, Hebei) and its surrounding areas as an example, on August 21st, 2017, the Ministry of Environmental Protection issued Action Plan for Comprehensive Treatment of Air Pollution in Autumn and Winter of 2017-2018 in Beijing-Tianjin-Hebei Region and its Surrounding Areas (the "Plan"). The plan raised requirements for the control of PM2.5 concentration and number of days of heavy pollution in Jing-Jin-Ji and its surrounding areas (including Shanxi, Shandong, Henan and some other counties and cities) from October 2017 to March 2018. The plan also restricts the production in various industries, such as iron and steel, nonferrous metal, chemical, building material, pharmaceuticals, etc. in certain extent. 

It can be seen that there are clear and certain laws, regulations and policy authorities for the government to order relevant enterprises to stop producing under the heavily polluted weather. This has formed a systematic and normal practice. The enterprise should understand relevant regulations and operations and be reasonably foreseeable to the stop working requirements caused by the heavily polluted weather. In this case, the enterprise has the responsibility to prepare contingency plans and enhance its own risk resistance capacity. Therefore, if the enterprise alleges it shall be exempted from default liabilities by the reason of force majeure, such allegation is very unlikely to be supported by the court.

How to prevent and reduce the risk for supply-chain breaking due to the environmental protection problems?

Ms. K asked, her company has a huge number of suppliers, and the company has compliance requirements for them, but the problem remains unsolved, so the question for the company is how to prevent and reduce the risk for supply-chain breaking due to the environmental protection problems? 

Lawyer L holds the view that in practice, a lot of companies select the suppliers and review their compliance in a very simple and basic way. With the rapid change of laws and regulations in the field of environmental protection and the more stringent law enforcement in recent years, the company’s previous review standards are generally unable to help to prevent and reduce the risk for supply-chain breaking due to the environmental protection problems. Hence, lawyer L recommended a "three-step" supplier management measure to reduce risks, that is, a comprehensive investigation, a focused “physical examination”, and a periodic follow-up

  • A comprehensive investigation—The company conducts a comprehensive investigation on environmental protection compliance of all suppliers in the form of the questionnaire, and classified the suppliers in according to the answers. This kind of questionnaire can be designed by lawyers specialized in this area on the basis of understanding the company’s detailed information. It is to ensure that the questionnaire contains the latest requirements of laws, regulations and law enforcement practices in the field of environmental protection. The questionnaires filled in by the suppliers will be reviewed and evaluated by lawyers in order to provide the most accurate rating of the suppliers and the suitable suggestions on subsequent processing of suppliers at all levels. 
  • A focused “physical examination”—The company conducts in-depth reviews of the suppliers that are considered to be at high risks in environmental compliance after the comprehensive investigation. The “physical examination” can be conducted in various forms, such as document review and field visit. For the problems discovered by "physical examination", lawyers can assist the company in proposing specific risk control plans. 
  • A periodic follow-up—The company updates the supplier's environmental protection compliance status periodically. As the laws, regulations, and law enforcement practices in the field of environmental protection is changing rapidly in recent years, it is suggested that companies should periodically and continuously trace the supplier's environmental protection compliance status, such as update the status in every six months or each year, and pay special attention to the suppliers who are considered to be at higher risks in environmental protection compliance at the time of the comprehensive investigation. 

In the end, lawyer L summarized that with the expansion of environmental protection storms, the legislative department, the government and all the communities have raised higher requirements for the environmental protection compliance to the enterprises. These requirements not only strengthened the enterprises’ own environmental protection compliance obligations but also raised higher requirements for the management of enterprises’ green supply chain. In this circumstance, enterprises should pay special attention to the prevention of legal risks in environmental protection for supply chain whilst ensuring their compliance with environmental protection requirements so as to promote their healthy and sustainable development.

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