UK Pharma Company Handles Force Majeure in China: Case Background

UK Pharma Company Handles Force Majeure in China: Case Background

When a UK-based pharmaceutical company entered into a RMB 85 million clinical trial supply and manufacturing agreement with a Chinese contract research organization (CRO) in 2020, neither party anticipated that a global pandemic and subsequent regulatory changes would trigger a complex force majeure dispute. By 2023, the Chinese CRO had ceased production of two critical drug compounds for 11 months, citing COVID-19 lockdowns and raw material export restrictions as force majeure events. The UK pharma company — facing delayed clinical trials and estimated EUR 14 million in lost drug development timeline value — needed to determine whether the claimed force majeure was valid under Chinese law and what remedies were available. This case study examines how the UK company navigated the force majeure dispute, ultimately recovering RMB 12.8 million through contractual mitigation provisions and strategic renegotiation without formal litigation.

China’s force majeure framework is governed by Article 180 of the Civil Code, which defines force majeure as “objective circumstances that are unforeseeable, unavoidable, and insurmountable.” Article 590 provides that a party unable to perform due to force majeure is exempted from liability, provided it promptly notifies the other party and produces evidence of the event within a reasonable period. The COVID-19 pandemic generated extensive Chinese judicial guidance, including the SPC’s “Several Opinions on Properly Handling Civil Cases Involving COVID-19” (March 2020), which clarified that pandemic-related restrictions could constitute force majeure but emphasized that courts should examine the specific causal relationship between the event and the non-performance on a case-by-case basis.

This case demonstrates that force majeure in China is not a blanket defense — its validity depends on the specific contractual language, the nature of the disruption, and the parties’ mitigation efforts. For foreign companies in regulated industries like pharmaceuticals, understanding these nuances is essential to managing supply chain risk in China.

The Manufacturing Agreement and the Disruption

The agreement between UK PharmaCo (a London-based specialty pharmaceutical company developing treatments for rare neurological disorders) and BeijingClinical CRO Co., Ltd. (BC-CRO) was signed in January 2020. Under the agreement, BC-CRO would manufacture two active pharmaceutical ingredients (APIs) — designated Compound A and Compound B — at its Beijing GMP-certified facility, supplying quantities sufficient for Phase II and Phase III clinical trials. The agreement was structured as a cost-plus manufacturing contract with a total estimated value of RMB 85 million over 4 years.

Key provisions relevant to the force majeure dispute included:

• Force majeure clause: Defined force majeure as events “beyond the reasonable control of the affected party, including but not limited to natural disasters, war, acts of government, public health emergencies, and export/import restrictions.” The affected party was required to give written notice within 7 days and use “commercially reasonable efforts” to mitigate the impact.
• Mitigation obligation: The affected party was obligated to “take all reasonable steps to minimize the duration and impact of the force majeure event and resume performance as soon as practicable.”
• Termination right: If force majeure continued for more than 90 consecutive days, either party could terminate the affected portion of the agreement.
• Supply security: BC-CRO was required to maintain a 90-day buffer stock of both compounds to ensure continuity of supply.
• Change in law: If a change in applicable law or regulation materially affected the agreement, the parties would negotiate in good faith to adjust the terms.
• Governing law: PRC law, with disputes resolved through CIETAC arbitration in Beijing.

In February 2020, BC-CRO notified UK PharmaCo that COVID-19 lockdown measures in Beijing had disrupted its supply chain for raw materials used in the synthesis of Compound A. Production was suspended for 6 weeks. By April 2020, BC-CRO had resumed production and delivered the Q1 2020 batch by June 2020 (6 weeks late). UK PharmaCo accepted the delayed delivery without penalty, acknowledging the unprecedented nature of the pandemic disruption.

The more serious disruption occurred in 2022-2023. In April 2022, BC-CRO issued a force majeure notice citing two events: (1) Beijing’s extended COVID-19 lockdown (April-June 2022), which restricted access to its manufacturing facility; and (2) the imposition of new Chinese export controls on certain precursor chemicals used in the synthesis of Compound B, effective November 2022, under the updated “Catalogue of Chemicals Subject to Export Control” issued by the Ministry of Commerce. BC-CRO claimed both events prevented it from sourcing the necessary raw materials and that production would remain suspended until the export controls were lifted or alternative supply sources could be qualified — a process it estimated would take 8-12 months.

UK PharmaCo faced a critical situation. Compound B was the active ingredient in its lead drug candidate for a rare pediatric neurological disorder, and the delayed clinical trial (already scheduled to begin in Q3 2022) would need to be postponed by at least 12 months. The estimated cost of the delay was EUR 14 million in lost drug development timeline value, including extended patent costs, additional clinical site fees, and delayed revenue projections.

Legal Analysis of the Force Majeure Claim

UK PharmaCo’s legal team — Freshfields Bruckhaus Deringer’s Shanghai office in coordination with PRC-qualified counsel from JunHe Law Firm — conducted a detailed analysis of whether BC-CRO’s force majeure claim was valid under Chinese law and the contract terms.

The analysis focused on three elements from Article 180 of the Civil Code:

1. Foreseeability: The COVID-19 lockdowns — by April 2022, China had experienced multiple waves of lockdowns over two years. UK PharmaCo argued that pandemic-related restrictions were no longer “unforeseeable” by April 2022, as the Wuhan lockdown of January 2020 had established a precedent that BC-CRO could and should have anticipated. The SPC’s 2020 COVID-19 guidance specifically distinguished between the first wave of lockdowns (early 2020 — generally unforeseeable) and subsequent waves (late 2020 onward — potentially foreseeable). Courts in Shanghai and Beijing had already rejected force majeure defenses for COVID-19 disruptions occurring after 2021 in several construction and supply contract cases.
2. Avoidability: The export controls on precursor chemicals — BC-CRO argued that the November 2022 export controls were an unforeseeable regulatory change. UK PharmaCo countered that BC-CRO had a contractual obligation to maintain a 90-day buffer stock of both compounds. Had BC-CRO maintained the buffer stock as required, it would have had sufficient Compound B inventory to cover the period from November 2022 (when export controls took effect) through February 2023 (when alternative suppliers could potentially be qualified). The failure to maintain buffer stock meant the disruption was partially avoidable — and therefore not a valid force majeure defense for the portion of the delay attributable to BC-CRO’s own contractual breach.
3. Mitigation: BC-CRO’s force majeure notice stated that it would take 8-12 months to qualify alternative raw material suppliers. UK PharmaCo’s legal team investigated whether alternative suppliers existed and found two qualified Chinese chemical manufacturers — one in Zhejiang Province and one in Shandong Province — that could supply equivalent precursor chemicals without export control restrictions (as they used different synthesis pathways). BC-CRO had not contacted either supplier. This failure to pursue reasonably available alternatives violated the contractual mitigation obligation requiring “commercially reasonable efforts” to minimize the impact.

Based on this analysis, UK PharmaCo determined that BC-CRO’s force majeure claim was likely invalid on two of three grounds: the lockdowns were foreseeable (not force majeure for the second disruption), and the mitigation efforts were inadequate (breach of the contractual mitigation clause). However, the export controls represented a genuine change in law that the force majeure clause specifically contemplated as a covered event. To avoid litigation uncertainty, UK PharmaCo adopted a negotiation strategy rather than immediately filing for arbitration.

Negotiation Strategy and Resolution

Rather than pursuing immediate arbitration, UK PharmaCo’s legal team designed a multi-track strategy to pressure BC-CRO while preserving the manufacturing relationship:

After 3 months of negotiations (April to July 2022), the parties reached a settlement agreement in August 2022 with the following terms:

• Production resumption: BC-CRO would resume manufacturing Compound B within 60 days using an alternative precursor chemical pathway that was not subject to export controls. BC-CRO would bear the cost of requalifying the new synthesis route (estimated at RMB 1.8 million).
• Price adjustment: The manufacturing price for Compound B was increased by 12% to reflect the higher cost of the alternative precursor chemicals, with this increase split 70:30 between BC-CRO and UK PharmaCo.
• Buffer stock increase: BC-CRO agreed to increase its minimum buffer stock from 90 to 120 days for both compounds, with UK PharmaCo having the right to conduct quarterly buffer stock audits.
• Force majeure clause amendment: The force majeure clause was amended to: (a) exclude pandemic-related lockdowns from the definition (unless specifically designated by government order affecting BC-CRO’s facility); (b) require BC-CRO to identify and pre-qualify at least two alternative raw material suppliers within 12 months; and (c) reduce the force majeure notice period from 7 to 3 days.
• Compensation for delay: BC-CRO paid a lump sum of RMB 12.8 million representing: RMB 4.2 million for the incremental cost of UK PharmaCo’s clinical trial delay (extended patient recruitment costs), RMB 6.3 million for lost drug development timeline value (discounted at the parties’ agreed rate), and RMB 2.3 million for UK PharmaCo’s legal and consulting fees incurred in connection with the dispute.

Legal Framework for Force Majeure in China: Key Principles

This case illustrates several important principles of Chinese force majeure law that foreign companies should understand:

1. Force majeure is not a blanket immunity. Chinese courts and arbitration tribunals examine each claimed force majeure event on its specific facts. In 2022 alone, approximately 38% of litigated COVID-19-related force majeure claims in China were rejected — most often on foreseeability grounds (the disruption occurred too long after the pandemic began) or causation grounds (the claimant failed to prove that the pandemic specifically caused the non-performance). The SPC’s 2020 guidance emphasized a strict causal nexus requirement: the force majeure event must be the direct and proximate cause of the inability to perform.
2. The burden of proof is on the party claiming force majeure. Under Article 590 of the Civil Code, the party seeking exemption must: (a) provide timely notice to the other party; (b) produce evidence of the force majeure event within a reasonable time; and (c) demonstrate that the event directly prevented performance. In this case, BC-CRO bore the burden of proving that (i) the COVID-19 lockdowns made it impossible to access its facility (not merely difficult or expensive), and (ii) the export controls left no viable alternative supply pathway. UK PharmaCo’s ability to identify alternative suppliers significantly undermined the causation element of BC-CRO’s defense.
3. Contractual force majeure clauses can expand or limit Civil Code protections. The Civil Code’s force majeure provisions (Articles 180 and 590) are default rules — parties are free to define force majeure more broadly or narrowly in their contracts, subject to the general limitation that contractual exclusions of liability for intentional misconduct or gross negligence are void under Article 506. In this case, the force majeure clause specifically included “acts of government” and “export/import restrictions” — language that was favorable to BC-CRO. UK PharmaCo’s counterargument relied not on excluding these events from the clause but on demonstrating that BC-CRO’s response to them was inadequate under the contractual mitigation obligation.
4. Mitigation obligations are enforceable and measurable. The contractual obligation to use “commercially reasonable efforts” to mitigate force majeure impact is not merely aspirational. Chinese courts have enforced mitigation obligations through: (a) reducing the damages or penalties claimed by the party that failed to mitigate; (b) limiting the duration of the force majeure exemption to the period during which the affected party was actively mitigating; and (c) imposing liability for damages that could have been avoided through reasonable mitigation efforts. BC-CRO’s failure to contact alternative suppliers or explore alternative synthesis pathways was a clear violation of this obligation.
5. The foreseeability of repeated events diminishes over time. By April 2022, Chinese courts in several jurisdictions had held that COVID-19 lockdowns were foreseeable events for contracts entered into or performed after 2020. The Shanghai High People’s Court’s 2022 guidance on pandemic-related commercial disputes stated that “the COVID-19 pandemic was an unforeseeable event in January 2020 but has become a foreseeable operational risk for contracts signed or performed after June 2020.” This principle applies to other recurring disruptions — foreign companies should track Chinese judicial guidance on the evolving foreseeability of specific types of disruptions.

Practical Recommendations for Force Majeure Risk Management

The UK PharmaCo case demonstrates that force majeure disputes in China are rarely won or lost on the pure definition of force majeure. Instead, the outcome depends on: (1) the specificity of the contractual language defining force majeure events, notice requirements, and mitigation obligations; (2) the parties’ conduct in responding to the disruption, particularly the adequacy of mitigation efforts; and (3) the evolving judicial guidance on the foreseeability of specific types of disruptions. Foreign companies with well-drafted force majeure clauses and disciplined contract management practices are significantly more likely to prevail in such disputes — or, as in this case, to negotiate a favorable settlement without formal proceedings.

The RMB 12.8 million settlement UK PharmaCo achieved represented approximately 91% of its provable losses from the 11-month disruption — a recovery that would have been substantially lower if the contract had lacked the specific mitigation obligation and buffer stock requirements that formed the basis of the UK company’s strongest legal arguments.