Member Article

The COVID-19 pandemic distinctly reminds us that during their term, contracts may be exposed to influences beyond the parties’ control, which may unforeseeably complicate their performance or make it impossible. Examples include civil wars, natural disasters, terrorist attacks, or pirate attacks on cargo ships. The current official closures of business and production premises, event cancelations, quarantine and contact restrictions, as well as high sickness rates throughout the country due to the COVID-19 pandemic, however, also have a direct influence on many contracts.

Events of the aforementioned nature are referred to as "force majeure" if they are unforeseeable, unavoidable, and exceptional. These characteristics will likely be present in many contracts that were concluded prior to the COVID-19 pandemic and whose performance has now been made considerably more difficult or even impossible.

If provisions on force majeure have been rather neglected in drafting and negotiating contracts to date, the pandemic should be used as an occasion to take greater account of the risk of massive external influences on contract performance in the future.

It is therefore strongly recommended to include appropriate provisions in contracts. When drafting such clauses, the following questions, among others, are of importance:

1. WHAT EVENTS ARE RECOGNIZED AS FORCE MAJEURE?

A force majeure clause should initially describe the conditions of force majeure in general terms, followed by an exemplary list of individual events. Such lists are usually expressly referred to as non-exhaustive, so that the clause may also be applied to events that are not explicitly mentioned.

An exhaustive list of relevant events, on the other hand, is at least risky, because it is easy for loopholes to arise in the provisions. For instance, an armed conflict is not automatically considered war under international law, and certain weather phenomena are designated differently depending on the region. In addition, the existence of a “pandemic” requires a worldwide epidemic and is not present if the disease is regionally limited. In case of doubt, the parties should therefore include more rather than fewer examples, so that in the event of force majeure they do not have to rely on achieving an agreement with the other side.

For contracts within a supply chain, for example, it should be clarified whether a strike at a supplier is also considered a force majeure event for the manufacturer.

2. WHAT ARE THE LEGAL CONSEQUENCES IN THE CASE OF FORCE MAJEURE?

In relation to the legal consequences of a force majeure clause, it will first and foremost be necessary to stipulate whether the obligation to perform affected by force majeure should cease or remain in force.

If the latter is the case, it must be established for how long the obligation to perform is suspended or whether it should only be adapted after a certain period. Each of these solutions has its advantages and disadvantages, so that a contractual clause must always take into account the specific situation. If the parties decide to continue the contract with temporary exemption from performance, force majeure clauses frequently contain a right of withdrawal from the contract if the relevant event continues beyond a defined period or if it has become clear that the event or its consequences will not be terminated over such a period.

If the contractual obligations are suspended for the period of force majeure, the parties should also be obligated to take all reasonable steps to minimize damage. This will avoid that one party unfairly benefits from the disruptive event in light of the force majeure clause.

The debtor’s liability for damages for the non-performance or delay of the owed performance will usually not be applicable in force majeure events. In the Anglo-American legal system, many events of force majeure are summarized under the collective term of “Act of God,” which is an expression of the debtor’s lack of liability for the reduced ability to perform. If debtors are not responsible for the non-performance, it is in line with local legal opinion not to obligate them to compensate any damages of the contractual partner.

3. SHOULD THERE BE INFORMATION AND NOTIFICATION DUTIES IN THE CASE OF FORCE MAJEURE, AND WHAT FORM SHOULD THEY TAKE?

A force majeure clause typically imposes an obligation on the relevant party to notify the other party without delay of the reasons preventing it from performance. Such an information duty should also include the future extent of the effects of the impediment and should apply if the impediment ceases to exist.

The purpose of such an obligation is to enable creditors to make arrangements at an early stage on the basis of changed expectations, for instance as relates to the future handling of the delay or failure to perform. Timely notification of the other party is indispensable for mitigating and limiting damage. This is the only way to initiate discussions about alternative services or the commissioning of replacement companies, where necessary.

4. WILL FORCE MAJEURE CLAUSES IN NEW CONTRACTS HELP AGAINST THE EFFECTS OF THE COVID-19 PANDEMIC?

Future impacts of the COVID-19 pandemic are currently entirely uncertain. It is foreseeable, however, that the pandemic will continue to affect the performance of contracts for many months to come. Because of this predictability, invoking force majeure will likely only be possible in individual cases for new contracts to be concluded now or in the event of another massive deterioration of the situation. For this reason, contracting parties should under no circumstances rely on force majeure clauses in new contracts to provide a safety net against the effects of the COVID-19 pandemic. Instead, many companies are currently choosing to include special corona clauses in their new contracts or to adapt existing contracts. The content of these clauses can be similar in structure and legal consequences to force majeure provisions. Of course, special corona rules may also be stipulated.

By covering this potential risk, the parties to a contract ensure that they intend to make joint arrangements to deal with and overcome any difficulties during this exceptional period, which is frequently considered a good start to the (future) term of the joint contract.

5. CONCLUSION

Prior to conclusion of a contract, the parties should determine the legal consequences that apply in the event of a force majeure event. If, during the term of a contract, performance is lacking or delayed as a result of such an event, it will frequently be difficult to find an amicable solution. The COVID-19 pandemic shows that such events are not only theoretical, which is why contractual force majeure clauses deserve special attention.

From today’s perspective, future effects of the COVID-19 pandemic may no longer be classified as a force majeure event in every case, because the pandemic already exists in the world. Therefore, only special corona rules may provide the desired protection against the pandemic’s uncertain effects and the relapse into applying the national legal system governing the contract. While the legal system – such as the German Civil Code – does contain general provisions on how to deal with delayed or lacking performance, it almost exclusively stipulates “all or nothing” provisions, i.e., one party bearing the burden of the pandemic alone, which in many cases is perceived as unsatisfactory. This is where force majeure and special corona clauses can be of assistance.