Can the Coronavirus be considered as Force Majeure and what are the consequences?
Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, in the absence thereof, on the Swiss Code of Obligations respectively its interpretation by the Swiss Supreme Court and further Swiss courts. The statutory rules governing Force Majeure, in particular Article 103 or 119 CO, are of a non-mandatory nature. Therefore, the parties to an agreement may deviate from the statutory principles by, e.g., allocating risks arising out of Force Majeure events to a specific party.
In principle, contracting parties may also freely decide what kind of events shall qualify as Force Majeure. As mentioned above, earthquakes, floods, wars and riots are typical examples of Force Majeure events that are often explicitly listed in Force Majeure clauses. Unless there are indications in a Force Majeure clause that a list of specific Force Majeure events shall be considered as exhaustive, it seems fair to assume that lists of Force Majeure events shall not be exhaustive, meaning that events not explicitly mentioned in the clause may qualify as Force Majeure as well. This holds true, e.g., for epidemics such as the one caused by the coronavirus. It seems rather unlikely that the parties to an agreement intend to exclude global epidemics from the scope of application of Force Majeure clauses.
In the absence of a Force Majeure clause, it seems quite likely that the circumstances caused by the coronavirus qualify as Force Majeure events for the purpose of, e.g., Article 103 CO (concerning delays caused by Force Majeure events), Article 119 CO (concerning situations where the fulfillment of contractual obligations becomes impossible due to Force Majeure events) or Article 163 CO (concerning the unenforceability of contractual penalties in connection with Force Majeure events).
Having said that, it is important to clarify that the Coronavirus itself does usually not qualify as Force Majeure. In the context of trade agreements, rather the circumstances caused by the Coronavirus may qualify as Force Majeure. By way of example, such circumstances may be:
- an involuntary temporary closure of manufacturing facilities (e.g., due to the sickness of numerous employees, numerous employees being put in quarantine and thereby prevented from working, a company being forced to temporarily exclude numerous employees from work in order to eliminate a potential risk to the safety and health of other employees, an order by authorities to close down the manufacturing facility etc.);
- temporary export restrictions (as, e.g., for medical protective equipment, medical devices or pharmaceutical products) or the seizure of goods by authorities; or
- transport interruptions (as, e.g., in case of closing of borders, a suspension of cargo movements or a breakdown of public transportation).
In principle, Force Majeure events may not only relate to a contracting party itself, but also to third party suppliers on whom a contracting party must rely in order to be able to perform its own obligations. If, e.g., a third party supplier has to supply raw materials or components that are a necessary input for the manufacturing of certain goods by the contracting party, the contracting party may be exonerated from its contractual obligations towards the counterparty on the basis of a Force Majeure events relating to the third party supplier. This threshold is quite high though.
There are cases where it might be possible for the contracting party to replace the third party supplier subject to a Force Majeure event with another supplier who is still able to supply. In such a case, the Force Majeure event relating to the third party supplier who was supposed to supply to the contracting party will normally not exonerate the contracting party, since the contracting party could still perform its obligations by relying on other suppliers not subject to any Force Majeure events. This is normally the case, e.g., if the third party supplier has to supply generic goods such as raw materials (e.g., steel or copper); the less alternative suppliers, the more likely that the contracting party will be exonerated on the basis of Force Majeure, and vice versa.
The availability of alternative suppliers depends on numerous factors as, e.g., contractual product requirements set forth in the contract between the contracting parties (e.g., origin requirements) or regulatory requirements or the existence of intellectual property rights. If, for example, a third party supplier supplies components to the contracting party which are (at least partly) protected by intellectual property rights, alternative suppliers are likely missing. For instance, a wholesaler of goods of a specific brand will not be able to fulfill its supply obligations towards retailers if the manufacturer of the branded goods is prevented from manufacturing due to a Force Majeure event. Therefore, the wholesaler will likely be exonerated from its supply obligations towards retailers.
In case a Force Majeure event does not make it impossible for a contracting party to perform its contractual obligations, but performance becomes “just” (much) more costly, the contracting party will usually not be exonerated because of Force Majeure. Such cases must be assessed under the title “hardship” respectively the clausula rebus sic stantibus.
In the event that a contracting party is temporarily prevented from performing its contractual obligations due to a Force Majeure event, the following principles apply:
- First, the debtor is discharged from liability (damages) for late performance to the extent the delay is caused by the Force Majeure event. Indeed, the debtor will not be considered to be in default as long as performance of its obligations is impossible due to Force Majeure (Article 103 para. 2 CO).
- Second, contractual penalties for late performance (including, e.g., a reduction of the purchase price by 1% for each day of delay) will not be enforceable (Article 163 para. 2 CO).
- Third, the debtor will also not assume any liability for random events, as it is the case for culpable delays (cf. Article 103 para. 1 CO).
If performance of an obligation becomes permanently impossible due to a Force Majeure event, the obligation is deemed extinguished and the debtor is exonerated. The debtor must return any consideration already received from the creditor on the basis of the statutory provisions on unjust enrichment and loses its counterclaim against the creditor to the extent it has not yet been satisfied (Article 119 para. 1 and 2 CO).
Having said that, it is important to keep in mind that parties can deviate from these statutory principles, e.g., by allocating the risks arising out of Force Majeure events to one of the parties. Such allocation may not only take place in the Force Majeure clause itself, but also in other provisions of an agreement (e.g., relating to contingency plans). Moreover, a contracting party will usually not be exonerated on the basis of Force Majeure in case there was a prior culpable delay in the performance of its contractual obligations, unless such party can prove that Force Majeure would have occurred anyway, i.e., even if the contracting party had not been in a culpable delay (Article 103 para. 2 CO).