COVID19 – How this could affect your contractual rights
If you do business in other countries, it could be important to consider how Coronavirus disruption affects your business contracts. Clearly we are in unprecedented times and a lot of events, activities and parts of normal day to day life will be cancelled due to the Coronavirus.
Some of the firms in our international network have come together to explore some of the legal issues which arise from contracts which can’t now be fulfilled in Belgium, England, France, Germany and Italy.
As you can see, there are differences between these countries’ rules, so it’s important to check with an adviser which country’s ‘governing law’ will apply to a cross-border contract and how those rules will affect your contract.
Covid-19 – Coronavirus and force majeure in Belgium
In the absence of a force majeure clause in your Belgian contracts, force majeure can be invoked under Belgian Law.
In principle, compensation is due to the injured party in the event of non-performance, late performance or improper performance of contractual obligations. However, if a failure in fulfilling contractual obligations is a result of a force majeure event, the defaulting party might not be liable.
An event or circumstance will constitute a force majeure event where:
- by reasonable standards, it renders the performance of the obligation (permanently or temporarily) impossible for the party. (For example if it is impossible to find a supplier prepared to deliver the goods at normal conditions in a short notice);
- it is not due to, nor accompanied by, a fault by that party (i.e. the event is unforeseeable and unavoidable).
If the force majeure event is a permanent impediment to the fulfilment of the contractual obligation, the obligation will be treated as absolutely null and void. However, if the force majeure event is a temporary hindrance, the performance of the obligation will be suspended for the duration of that event, unless the contract in question has lost any meaning or usefulness as a result of this delay.
COVID-19 – Coronavirus and force majeure in England
If you have an English law contract (for example to supply or receive goods or services), and the contract is affected by Coronavirus, you could still have rights or obligations. This could be the case even where the problem is caused by government restrictions or suppliers letting you down. This note briefly looks at some issues that could be relevant for English law contracts.
Many English contracts have a force majeure clause about what happens if something stops or delays you or someone else performing the contract due to factors outside your or their control. It’s important to carefully check the contract wording as this would have a big impact on whether Coronavirus disruption excuses you or another party from obligations.
If there is no force majeure (or similar) clause in the contract, English law does not currently imply such a clause. Force majeure clauses differ, but you may need to show:-
- the specific Coronavirus disruption is covered by the actual wording;
- the outbreak caused performance of the contract to be prevented or delayed due to factors mentioned in the clause; and
- all reasonable steps have been taken to mitigate or minimise those factors.
You might need to think about whether there are other ways of performing contractual obligations, such as sourcing staff, equipment or materials elsewhere. There might also be important rules about the information that needs to be given to other parties.
If the actual disruption is covered by the force majeure clause, the contract might also deal with:-
- extension of timescales;
- rights to terminate;
- who bears extra costs of the disruption;
- whether someone is liable for non-performance or delay.
You might also benefit from a legal concept called frustration. If this applies, a contract could be terminated where a big change in circumstances makes it impossible to perform the contract or performance would be radically different. But frustration only applies in narrow circumstances and only offers limited remedies, so it needs to be assessed on a case by case basis.
You might also be protected under insurance and the policy wording should be carefully checked.
COVID-19 – Coronavirus and force majeure in France
In a fact sheet published on 17 March 2020 on its website, the French Ministry of the Economy confirmed that Coronavirus would be considered a force majeure event for companies, particularly with regard to State and local authority public contracts. As a consequence, penalties for late performance will not be applied to these contracts.
But what about contractual relations between private parties: does the Coronavirus constitute a force majeure event under French law?
For contracts between private parties, it will be necessary to consider on a case by case basis whether Coronavirus will constitute a force majeure event.
Firstly, it will be important to check whether or not the parties have excluded these circumstances as a force majeure event. An analysis of the contract and of the relevant force majeure clause makes it possible to verify, for example, that the parties did not intend to expressly exclude the effects of an epidemic from force majeure events.
Next, in the absence of a contractual exclusion, the Coronavirus must meet the conditions of Article 1218 of the French Civil Code. According to this article, force majeure is defined as an event beyond the party’s control, preventing the execution of his obligation and "which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures".
In order for force majeure to be established, it must therefore be proved that the Coronavirus epidemic is an unpredictable event, but also unavoidable, both in its occurrence and its effects. This requires, in particular, that the contract was entered into before to the start of the epidemic, and also that the party invoking the force majeure has no alternative means to perform its contractual obligations.
In any case, classification of Coronavirus as a force majeure event will be at the discretion of the French judges. In view of the global scale of the epidemic and the unprecedented measures adopted by the French Government, it cannot be ruled out that the judges may, in certain cases, recognise that the Coronavirus may constitute a force majeure event.
In the absence of any French judicial decision on this subject, parties should seek legal advice before acting, especially since French case law to date has refused to accept that an epidemic constitutes a force majeure event. In recent years, the Ebola virus, the H1N1 virus and Chikungunya have not been classified as force majeure events in France.
Covid-19 Coronavirus and force majeure in Germany
Many German contracts – often in General Terms and Conditions – contain a “force majeure clause” regulating the consequences of the parties’ failure to perform their contractual duties due to factors outside of their control. It is thus crucial to check the contract wording to be able to assess whether disruptions due to the coronavirus will excuse a party from performance.
If the actual disruption is covered by the contract’s force majeure clause, the contract might also deal with the consequences of a force majeure event, e.g. if there is a right to terminate, or if there is any liability.
If there is no force majeure clause in the contract, the German Civil Code does currently not imply such a clause. Rather, it must be examined whether the coronavirus constitutes an event which is regarded by German jurisdiction as force majeure. German jurisdiction defines force majeure as an external event, which
- is not related to the company and is caused from the outside; and
- is unpredictable and unusual; and
- cannot be avoided or remedied by economically viable means.
In the case of the coronavirus, the existence of force majeure in supply relationships depends on whether the company bears the procurement risk of the goods at hand. Just because, for example, one supplier can invoke force majeure due to the coronavirus, this objection cannot automatically be passed along in the supply chain.
As a result, the issue of the existence of force majeure cannot be answered in a general way, but will depend on the circumstances of the individual case.
If a contractual party cannot invoke the existence of force majeure due to the coronavirus, it is threatened with termination of the contract due to delay in delivery on the one hand, and on the other hand it is exposed to possible claims for damages by the contractual partner.
If a contractual party, however, can invoke the existence of force majeure, this will result under German law in the claim for performance of the contract being generally excluded as the performance is deemed to be impossible (§ 275 German Civil Code), or the business basis of the contract being disturbed (§ 313 German Civil Code). Consequently, the contractual service does not have to be provided, at least temporarily.
The issue whether disruptions due to the coronavirus constitute force majeure has not yet been decided by German courts. Thus, the legal situation needs to be assessed for any individual case separately. However, if one party is prevented from performing a contractual obligation due to orders issued by competent state authorities, there is a strong argument for the existence of force majeure.
Covid-19 – Coronavirus and force majeure in Italy
First of all it is important to point out that no specific definition of force majeure exists under Italian law.
Therefore unless a specific regulation addressing this kind of clause has been incorporated into the contract by the parties, the general provisions of the Italian Civil Code will apply. In particular, these general provisions relate to the termination of a contract. The Italian Government, with its last Law Decree dated 17 March 2020, under art. 91 has specified that “respecting the provision of this decree (e.g. shut down of companies) shall be considered to the extent of excluding any responsibility with respect to certain breaches of contract”. It appears therefore from an initial interpretation that the termination of contracts because of breaches deriving from the implementation of the provision of law aimed at containing the coronavirus cannot be excluded, however compensation for damages could.
Getting back to the general provisions of law, pursuant to Art. 1256 of the Civil Code, a party is released from performing his contractual obligations whenever he is unable or prevented from doing so due to exceptional circumstances (permanent impossibility). On the other hand, whenever contractual performance becomes only temporarily impossible, the party is not released from his contractual obligations, but will not be liable for the delayed performance. Nevertheless, should, as a result of a prolonged delay, the other party lose interest in the defaulting party’s performance, the contractual obligation of the non-defaulting party shall also lapse.
Further to the above, Art. 1467 of the Italian Civil Code provides for a second category which applies whenever a party is affected by unexpected circumstances which render its obligations too expensive, it will then be entitled to demand the termination of the contract. However, this principle only applies to contracts which remain in force over prolonged periods of time, such as supply agreements or contracts that provide for the continuous performance of certain obligations (contracts for continuous, periodic or deferred performance).
The Italian Civil Code does not define what constitutes or does not constitute an excessive burden, which is why cases must always be assessed on the merits of their specific circumstances. Furthermore, the above provisions are not applicable if the subsequent burden is within the average contractual risk, or if it is a speculative contract.
The information contained in this document is for general information only. The information provided is not intended to be comprehensive and does not constitute legal advice. If you require assistance in relation to any issue please seek specific professional advice regarding your particular circumstances. No responsibility shall be accepted by the independent firms that have contributed to this document, their associated businesses or the authors for any losses arising from reliance on any material contained in or accessible from this document. No part of this document may be published, distributed, extracted or reproduced in any material form, except with our prior written consent.