Member Article

The rapid spread of COVID-19 (Coronavirus) throughout the world and the impact of administrative measures to contain it represent a growing challenge for the management of companies.

On 11 March 2020, the World Health Organization declared the existence of a pandemic. The main focus is now to guarantee the safety of workers and employees. However, the potential repercussions for the activities of companies – in the short and medium term – are vast, complex and, in certain cases, they conflict with each other.

PLMJ has created a multidisciplinary team dedicated to analysing the problems facing businesses. This team will share its thoughts, some technical, some practical, which it believes will contribute to finding solutions to mitigate the risks and relieve the pressure that businesses are under.

Businesses must assess the extent to which the impact of the Coronavirus could affect their ability to comply with the contractual obligations they have assumed. They must also evaluate the mechanisms available to them to react if the other party breaches a contract. This analysis should have a double focus: (i) on the contract the parties have made with each other, and (ii) on the legal rules that apply to it on a supplementary basis.

Depending on the terms of the contract in question, the breach could amount to an event of default. Alternatively, the breach could meet the conditions of clauses that protect the non-defaulting party. These clauses include moratoriums and suspension of the duty to perform. They also include clauses that make it possible to terminate the contract if there are events outside the control of party under an obligation to perform. Examples include force majeure clauses and MAC (material adverse change) clauses.

On a supplementary basis and depending on the law specifically applicable to the situation in question, it is important to consider whether any general provisions of the civil law apply. In particular:

• The party under an obligation to perform is bound by an ancillary obligation, imposed by good-faith, to inform the other party of any current or potential impossibility to comply with the obligations undertaken.

• In complying with this obligation, the party under an obligation to perform must be aware that this communication could amount to an advance declaration of non-compliance. Depending on the specific case, this could lead to the early maturity of the obligation to perform, to default, or even to definitive breach.

• Not performing the obligation on its due date may constitute unlawful conduct. In this case, however, the party under an obligation to perform may, depending on the circumstances of the case, prove that it is not at fault for the breach. If it succeeds, it will escape the duty to compensate.

• In general, one should always ask whether the failure to perform obligations because of the existing pandemic can be considered as resulting from a “case of force majeure”. This is because the unpredictable, exceptional and abnormal nature of the situation could lead to the termination of the obligation. As a consequence, the party in question would be released from having to perform their obligation towards the other party.

• However, to produce those effects, the performance of the obligation must have become objectively impossible, and not only “more onerous”. If this situation occurs, it can give rise only to the application of the rules on a change in circumstances. In exceptional cases, these rules allow the party prejudiced by the change to ask for either (i) the termination of the contract, or (ii) its modification based on equity.

• Impossibility is not to be confused with greater difficulty in performing. Nonetheless, in certain cases, one could also consider whether the excessive burden of performance should be equated with impossibility.

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