To contain the spread of the COVID-19 (Coronavirus) pandemic, governments have closed ports and “non-essential businesses”, restricted travel and imposed “lockouts” or “stay-at-home orders” . In cases where the COVID-19 virus or government measures have disrupted commercial contracts, it is necessary to carefully analyze the situation to determine the appropriate remedy. This article briefly summarizes the legal status of commercial contracts affected by the COVID-19 pandemic in the civil law jurisdictions of Germany, France and Switzerland, which are generally applicable to commercial contracts.
In accordance with article 275 of the German Civil Code (BGB) a party is not bound to perform its obligations to the extent that performance is impossible. Article 275 of the German Civil Code applies not only if the performance of the obligation is technically or legally impossible, but also in cases where the performance is still technically and legally possible, but would require expenditure and effort which, taking into account the purpose of the obligation and the good faith requirements, would be clearly disproportionate to the performance interest of the obligee. In addition, article 275 of the German Civil Code governs temporary impediments, ie a claim for enforcement is excluded as long as enforcement is impossible. However, German courts respect the legal principle agreements must be kept and therefore strictly apply Article 275 of the German Civil Code, in order to avoid infringing the agreed contractual obligations.
1.2Frustration you but
The doctrine of “frustration of purpose” (German Störung der Geschäftsgrundlage) may be relevant in cases affected by the COVID-19 pandemic. Frustration of purpose under Article 313 of the German Civil Code will apply when the balance between performance and counter-performance of a contract is significantly altered in a way that was not foreseeable by the parties when concluding the contract. Such a “failed contract” allows the disadvantaged party to request modification of the contract. If a modification of the contract is not possible or unreasonable, the disadvantaged party may terminate or terminate the contract. According to case law, the principle of “contractual loyalty” requires a strict interpretation of Article 313 of the German Civil Code.
German courts interpret Articles 275 and 313 of the German Civil Code restrictively, as the parties are – in principle – bound by their agreement. Notwithstanding the above, the consequences of the COVID-19 pandemic may fall within the scope of impossibility and the doctrine of goal frustration, as COVID-19 and subsequent government actions may have altered the basis on which the parties have concluded their commercial contract.
Article 1218 of the French Civil Code (Code civil) deals with the concept of force majeure. According to article 1218 of the Civil Code, the execution of the debtor is prevented by an event of force majeure if three cumulative criteria are met:
- The event must be beyond the control of the debtor;
- It must be an event which could not have been reasonably foreseen at the time of the conclusion of the contract; and
- The effects of the event could not be avoided by appropriate measures.
The legal consequence of article 1218 of the Civil Code is that if the performance of the obligation is temporarily prevented, the performance is suspended unless the delay justifies the termination of the contract. In the event of definitive prevention, the contract is automatically terminated and the parties are released from their obligations.
The recently introduced article 1195 of the civil code imposes the renegotiation of a contract if unforeseeable circumstances at the time of the conclusion of the contract make the execution excessively onerous for a party who has not agreed to bear this risk. If the renegotiations fail, the parties can agree to terminate the contract or ask a court to review or terminate the contract.
Overall, French courts tend to be quite strict on the criteria of force majeure and hardship. The hardship conditions are broader than those of force majeure, but mainly oblige the parties to renegotiate the contract and – only if the renegotiation fails – provide for termination as the default rule. The question of whether the COVID-19 virus leads to a case of force majeure or to difficulties under French law is notably determined by the extent to which the impact of the pandemic on the commercial contract was foreseeable.
Swiss law does not contain any legal provisions for force majeure events. In the absence of a force majeure clause in a contract, the applicable legal regime depends on the fact that the execution of the contract is impossible.
In accordance with article 119, 62 Swiss Code of Obligations (Obligation rights), the impossibility of performing a contract – due to circumstances not attributable to the debtor – releases both parties from their obligations to perform and leads to the termination of the contract according to the rules of unjust enrichment.
3.2Impossibility for a limited period
In the event that the inability to perform the obligation lasts only for a limited period, the default provisions of Articles 107 to 109 of the Swiss Code of Obligations apply. They provide that if one party is in default, the other party may set an appropriate time limit for performance. If no performance is rendered within such a period, the other party may terminate the contract.
3,3Not quite impossible
Where the performance of a contract is not entirely impossible, but has become extremely onerous, a party may rely on legal doctrine The clause counts (adaptation of the contract). This must be a situation not only extremely onerous, but also unforeseeable when entering into the contract. In such circumstances, the parties may agree to modify or terminate the contract. In the event that one party insists that the contract remain unchanged, the other party may refer the matter to a court or arbitral tribunal. If the requirement of The clause counts are met, the court or arbitral tribunal may order a modification or termination of the contract.
The impossibility releases the two parties from their respective contractual obligations or authorizes one party to terminate the contract if the other party was in default and the fixed deadline has expired. Whether COVID-19 or government action actually made the performance of a commercial contract impossible differs depending on the circumstances of each case, but the trigger point is rather high. When the execution of the contract is possible but “only” expensive – as in most commercial cases concerned by COVID-19 – the doctrine The clause counts rarely leads to judicial termination or contract adjustment, as courts restrictively apply its requirements to ensure that contractual equivalence is not subsequently altered.
4.Commercial contract affected by COVID-19?
In order to determine whether the spread of the COVID-19 pandemic and actions taken by governments have impacted a commercial contract, it is usually essential to first establish what actually affected the performance of the contract and on the other hand to determine what is the direct cause. of this problem was. The more the root cause of the performance problem is impossibility rather than difficulty and the more objective rather than subjective the direct cause of the problem, the stronger the force majeure event under applicable law or contractual clauses.
5.Key points to remember
The impact of the COVID-19 pandemic on the parties’ commercial contracts depends mainly on the wording of their force majeure clause. In the event of a force majeure event, the arbitral tribunals and the courts grant the terms of a commercial contract primacy over the applicable law. If a commercial contract does not contain a force majeure clause or if the force majeure clause does not cover pandemics, the applicable laws determine the remedies available. Remedies and legal requirements for commercial contracts affected by the COVID-19 pandemic differ in Germany, France and Switzerland. They have in common that their legal doctrines, which modify or terminate contractual agreements or release the parties from their obligations to perform the contract, are interpreted restrictively. The underlying consideration is that courts and arbitral tribunals are only exceptionally allowed to “rewrite” the contractual obligations of the parties. It is therefore decisive whether the contractual provisions include a force majeure clause covering the COVID-19 pandemic. In this context, the parties should commercially assess their options – on the basis of the facts of each case – either to invoke the defense of force majeure to modify or terminate their commercial contract or to perform their commercial contract.
Given the high thresholds for a defense of force majeure in German, French and Swiss law, it is essential to ensure legal certainty by including a force majeure clause in commercial contracts covering epidemics and pandemics. In our globalized world, the next epidemic or pandemic will spread sooner or later – therefore a lege artis force majeure clause must cover epidemics and pandemics as force majeure events. Where epidemics and pandemics are included in a force majeure clause, parties should refer to an objective criterion such as an epidemic or pandemic declared by the World Health Organization to define when epidemics and pandemics trigger. the consequences of force majeure. However, given the current second wave of the COVID-19 virus, the parties may also agree that the effects and government actions due to COVID-19 are not covered by their force majeure clause. In any case, a good starting point for future “tailor-made” force majeure clauses in commercial contracts is the ICC balanced force majeure clause.