13 February 2020
The outbreak and spread of COVID-19 have a significant impact on the global supply chain. Below we have quickly revisited the very legal basis of two relevant doctrines force majeure and frustration in China, Germany as well as under common law and the United Nations Convention on Contracts for the International Sale of Goods (CISG), and shared our practical recommendations:
Black’s Law Dictionary & case law
The parties to a contract may terminate the contract under any of the following circumstances:
(1) it is rendered impossible to achieve the purpose of contract due to an event of force majeure;
A party, who is unable to perform a contract due to force majeure, is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law.
Where an event of force majeure occurs after the party's delay in performance, it is not exempted from such liability.
For purposes of this Law, force majeure means any objective circumstances that are unforeseeable, unavoidable and insurmountable.
If a party is unable to perform a contract due to an event of force majeure, it shall timely notify the other party so as to mitigate the losses that may be caused to the other party, and shall provide evidence of such event of force majeure within a reasonable period.”
Under German law, the legal effects of force majeure depend on the specific force majeure clause in the relevant contract.
Further, German law generally requires fault (i.e. intention or negligence) to establish legal liabilities for breach of contract. The existence of fault is presumed by law. A party might be able to base its "no fault" argument on force majeure event(s).
Section 276: responsibility of the obligor
(1) The obligor is responsible for intention and negligence, if a higher or lower degree of liability is neither laid down nor to be inferred from the other subject matter of the obligation, including but not limited to the giving of a guarantee or the assumption of a procurement risk. The provisions of sections 827 and 828 apply with the necessary modifications.
(2) A person acts negligently if he fails to exercise reasonable care.
(3) The obligor may not be released in advance from liability for intention.
Section 278: responsibility of the obligor for third parties
The obligor is responsible for fault on the part of his legal representative, and of persons whom he uses to perform his obligation, to the same extent as for fault on his own part. The provision of section 276 (3) does not apply.”
Under common law, the legal effects of force majeure depend on the specific force majeure clause in the relevant contract.Force majeure clause is “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable,
esp. as a result of an event or effect that the parties could not have anticipated or controlled.”
Unlike frustration and depending on the relevant clause, force majeure does not necessarily discharge the contract.
In addition, the party relying on the force majeure clause has to take all reasonable steps to avoid its operation or mitigate its results.
|Frustration of Purpose||
Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law
Where any major change, that is unforeseeable, is not a business risk and is not caused by a force majeure, occurs after the conclusion of a contract, if the continuous performance of the contract is obviously unfair to the other party or cannot realize the purposes of the contract and a party files a request for the modification or rescission of the contract with the people's court, the people's court shall decide whether to modify or rescind the contract under the principle of fairness and in light of the actualities of the case.”
Section 313: interference with the basis of the transaction
(1) If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.
(2) It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect.
(3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke.”
“The doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated.”
The doctrine of frustration shall be applied within very narrow limits such that it cannot be lightly invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains. Therefore, mere increase in expense, loss of profit and alternative mode of performance normally will not frustrate a contract.
Some examples of frustrating events:
|Recommendations for the party relying on force majeure and/or frustration (the opposite party may also use them to assess whether both doctrines are applicable)||
Please also refer to our German and English newsletters in this regard:
We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: Coronavirus - legal issues