In China at least 18 cities, including the epicentre the city of Wuhan, have been locked down so far. Companies such as Apple, Samsung and Tesla have closed their Chinese manufacturing plants and offices. Surprisingly, the US Federal Reserve recently lowered its key interest rate in response to the epidemic in order to halt the threat of a global recession. In Italy and Greece schools, universities, theatres and cinemas have been closed. The world's largest mobile phone fair, the World Mobile Congress in Barcelona, the ITB in Berlin, the Geneva Auto Salon and book fairs in Bologna, Paris and Leipzig have been cancelled or postponed due to the outbreak.
The economic consequences are obvious: loss of production due to closed plants and interrupted transportation routes as well as additional costs due to wasted expenses. This raises the question whether companies can be held liable for such damages.
We have also addressed related employment law issues in a blog post (in German language).
Contractual force majeure provisions
Most international business contracts include so-called force majeure clauses. Force majeure refers to exceptional, unforeseeable circumstances beyond the control of the parties, which make the fulfilment of the contract at least temporarily impossible or considerably more difficult. As a rule, these clauses provide a temporary suspension of the relevant contractual duties for the period of time in which a performance restriction due to force majeure exists.
If a contractual party intends to rely on such a provision, it should immediately notify the other contractual party, preferably in writing.
In general, the party relying on the provision is also required to prove the existence of a case of force majeure. Companies can apply for a force majeure certificate in order to prove this. These are usually issued by trade associations or authorities in the region concerned.
Legal situation in Germany
There is no definition of force majeure in German law.
In the case of force majeure, the rules of impossible performance according to § 275 BGB (German Civil Code) and the interference with the basis of transaction according to § 313 BGB are generally applicable.
If a performance is impossible or unreasonable, § 275 BGB leads to an exclusion of the duty of performance or to a right to refuse performance. In general, § 275 BGB is understood to be applicable for the respective time of the impossibility of performance even if it said impossibility is temporarily.
If the performance has become impossible or unreasonable for one party, the compensation claim shall also no longer be valid pursuant to § 326 para. 1 BGB. In this case, however, the other party may revoke the contract in accordance to§ 326 para. 5 BGB. This leads to a reversal of contractual performance.
According to § 313 BGB, contracts can be subsequently adapted if the circumstances which became the basis of these contracts have significantly changed and the parties cannot reasonably be expected to uphold the current contract. If such an adjustment is not possible or reasonable, the contract can also be terminated. However, the provisions of § 313 BGB are regarded by German courts as exceptional provisions and are therefore applied restrictively.
Coronavirus as a Case of Force Majeure
Whether force majeure is applicable depends strongly on the individual circumstances of each case. First of all, the wording of the agreement has to be taken into account. In many cases, epidemics or diseases are covered by the scope of force majeure provisions.
In accordance with the German case law, force majeure shall be given if the incident
Epidemics and pandemics can be considered, in principle, as force majeure. This has been confirmed by various German courts, for example during the SARS virus epidemic in 2003 [Amtsgericht (Local Court) Augsburg, judgement of 9 November 2004 - 14 C 4608/03] or an outbreak of cholera [Amtsgericht (Local Court) Homburg, judgement of 2 September 1992 - 2 C 1451/92-18].
Warnings issued by the German Federal Foreign Office or the WHO should be an indication of the potential risk or the considerable probability of such a risk. However, government sanctions can also be considered as cases of force majeure if they make it impossible or difficult to obtain contractual performance. This may be the case in the event of sanctions, production restrictions or embargoes.
The German Federal Foreign Office has currently published travel warnings due to the coronavirus for various regions in China. The current status can be found here.
Currently, governments world-wide are taking increased defensive measurements against the coronavirus, which may temporarily prevent or make it more difficult for companies to fulfil their contractual duties.
Where the contractual performance is directly or indirectly threatened by coronavirus, all reasonable steps to limit the damage and maintain the performance shall be assessed and adopted.
Relevant contracts should also be checked for force majeure clauses. In addition, the legal situation should be reviewed under the law applicable in each case.
In any case, the contracting parties concerned must be informed at an early stage about performance problems. At the same time, companies should begin to gather evidence and, where appropriate, apply for so-called force majeure certificates.