The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Germany

How are Force Majeure and Hardship regulated under German law?

Force Majeure is a term used in German law in several places within and outside the German Civil Code (Bürgerliches Gesetzbuch = BGB), such as in § 206 BGB, § 651 h para. 3 BGB, § 703 para. 1 BGB and § 7 para. 2 StVG. However, the legislator has not defined “Force Majeure” itself.

According to the jurisprudence of the highest German court, the Federal Court of Justice (BGH), Force Majeure is:

  • an external event
  • that has no operational connection
  • and cannot be averted even by the utmost care that can reasonably be expected,
  • so it is beyond the control of the parties.

Hardship is not a term that is used in the BGB, but it resembles a concept named “Wegfall der Geschaeftsgrundlage”, which means the discontinuation of the legal basis of an agreement. This concept applies, if:

  • unforeseen circumstances,
  • which have become the basis of a contract,
  • have changed substantially after the conclusion of the contract
  • and the contract would have been concluded with a different content if the contracting parties had foreseen this change.

However, it does not apply if the unforeseen circumstances fall into the usual contractual risks of one of the parties. This concept can result in the possibility to terminate the contract or demand a change of the contractual conditions.

Can the Coronavirus be considered as a Force Majeure or Hardship in Germany?

The most important criterion to consider is whether a contract contains a Force Majeure clause.  

If positive, it must first be examined whether the clause is applicable for events related to the Coronavirus outbreak.

  • The situation is clear if the clause refers to an epidemic or pandemic.
  • On the other hand, the clause cannot be deemed applicable if it exhaustively lists cases that are to be considered as cases of Force Majeure, but does not list an epidemic or pandemic.
  • If the Force Majeure clause is rather general, a pandemic is to be understood as a case of Force Majeure under German law, because it is an unforeseeable and unavoidable event. In this respect, the term Force Majeure includes not only events such as war, riots and natural disasters but also epidemics and therefore even more so pandemics. This has already been pointed out by the German legislator in the statement of reasons for a law which used the concept of Force Majeure. Also in German jurisdiction, especially in the area of travel, it is already recognized that diseases can fall under the concept of Force Majeure. This is to be assumed in particular if the infection spreads rapidly and is associated with considerable health risks. Moreover, the Federal Foreign Office has also already issued a virus warning, which is to be regarded as a further significant indication of Force Majeure.

Usually the agreed Force Majeure clause will be worded very similarly to this understanding in German law. Therefore the Force Majeure clause normally contains the following content:

  • First, the event is beyond the control of the parties.
  • Second, the circumstance affecting the fulfillment of the contractual obligation (here: the Coronavirus) was an unforeseeable event at the time the Force Majeure clause was contractually agreed upon. In the case of the Corona pandemic, this will certainly apply to all contracts concluded before December 2019 (the first time a Coronavirus infection in China became known). For contracts concluded after this date, this is not certain.
  • And last but not least, some clauses add as a third condition the inevitability and/or insurmountability of the situation

A pandemic such as the Coronavirus should, therefore, be covered by a standard Force Majeure clause, at least if the contracts are not from the recent past.

If there is no Force Majeure clause in the contract, the concept of Force Majeure is not applicable. On the other hand, if it is impossible to fulfill the respective contractual obligations, the debtor is released from his duty to perform pursuant to the general regulations in the BGB, and is not obliged to compensate for damages, provided he is not responsible for the impossibility of performance of the contract.

However, it has to be ascertained on a case by case basis  whether the fulfilment of the contractual obligation is really impossible or, for example, can be postponed.

The Coronavirus outbreak may be considered also an event of Hardship (as explained above), which shall lead to a fair and reasonable settlement between the parties in the event of unforeseen circumstances.

This only does not apply if it can be inferred from the contract that one of the parties had assumed the contractual risks affected by the virus outbreak, or if the contractual consequences are of a minor nature.

How to prove Coronavirus as Force Majeure in Germany?

In general, each party must prove the facts that are favorable to it before German courts. According to this rule, therefore, the debtor who wishes to suspend his contractual obligations on the grounds of Force Majeure must be able to prove that the Coronavirus is to be regarded as a case of Force Majeure or that the conditions of “WGG” are met.

The situation is usually simple if a Force Majeure clause refers to an epidemic or pandemic: The Coronavirus falls within this category, and given the current facts, there is no need to provide further evidence regarding the applicability of the clause. However, the party invoking Force Majeure needs to prove that the performance of the respective obligation was objectively impossible because of the circumstances.

If a pandemic is not listed explicitly, the party invoking a case of Force Majeure must prove that the Coronavirus meets the conditions of the clause. In the case of a standard clause, this proof can usually be successfully provided, at least if the contract was concluded before December 2019 and the outbreak of the virus was therefore unforeseeable.

If there is no clause in the contract and the statutory concept of impossibility applies, the debtor of a contractual obligation must also prove that the performance of the respective obligation was objectively impossible because of the circumstances. Regarding damage claims, the law provides for the assumption that the party who does not perform a contractual obligation is at fault, which means that the debtor needs to prove that the damage could not be avoided by reasonable precautions.

What to do in case of notice of Coronavirus Force Majeure in Germany?
  • Contact your business partners at an early stage and discuss the current situation and your arrangements, to avoid delivery bottlenecks. For this purpose, it is advisable to draw up customer information letters that communicates whether the company can regularly fulfill its obligations or not and explains the measures you have specifically taken to face the emergency (ban on business travel, conversion to home office, replenishment of inventory, etc.).
  • The contract should also immediately be checked for the existence of a Force Majeure clause, as the further procedure will depend on this.
  • If a Force Majeure clause exists, the further steps depend to a large extent on the legal consequences provided for in the clause. Usually, the postponement of contractual obligations (such as the postponement of fixed delivery dates), liability exclusions or rights of withdrawal are agreed here. Under certain circumstances, possible termination of the contract may also be provided for. It should also be examined whether the clause contains certain procedural provisions, such as an obligation to notify the contractual partner about the Force Majeure case, the written form of the assertion or giving notification within a certain period. This is important, as a breach of this could harm the perception of the debtor’s rights.
  • If a Force Majeure clause does not exist, it should be examined whether the principles of the impossibility to perform the contractual obligations or the concept of Hardship (as explained above) can help.
  • In general, it is advisable to take all possible measures to minimize damages, as stipulated by German law in § 254 para. 2 sentence 2 BGB. This may make it necessary to seek alternative sources of supply for the period of delayed deliveries if this can prevent the entire production from failing otherwise.
  • There are also some things to consider when concluding new contracts: it is no longer possible for contracts concluded around February 2020 and onwards to invoke Force Majeure. The supply shortages threatened by the virus were already foreseeable at that time. Since February 2020, the contracting parties have thus had the possibility and the obligation to contractually hedge the risk of delivery difficulties. This means that neither German law nor a clause can cover the case of Force Majeure for these contracts. In order to contractually secure the current uncertainty, from the supplier’s point of view delivery dates should be non-binding with immediate effect and delays due to the Corona pandemic should at least be excluded from negative contractual consequences. Contractual penalties should also be avoided in case of a violation of fixed delivery dates.
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