Sales, Procurement & Deliveries: Legal consequences of the coronavirus

The outbreak of the coronavirus has a significant impact not only on healthcare systems but also on the economy as a whole. Air and sea traffic to China has been severely restricted, offices and factories have been closed, trade fairs cancelled. supply chains and transport routes interrupted. As a consequence, there are countless legal disputes on the horizon between companies. Therefore, we would like to outline civil law consequences of the corona pandemic by reference to the examples below.

• “Force Majeure”

Frequently, the term “force majeure” is referred to in connection with the corona pandemic. Force majeure meansan act of nature, i.e. an external, externally induced event that is unforeseeable and uncommon and that cannot be prevented or rendered harmless by economically acceptable means, even with the utmost care that can reasonably be expected. However, the concept of “force majeure” is alien to German law (apart from travel law) and therefore cannot be relied upon.

• Precedence of the contract

The provisions of the respective contract are initially decisive for examining any (compensation) claims. So-called “force majeure” clauses are regularly found in supply contracts. These clauses are subject to interpretation. It must be examined whether the corona pandemic constitutes a case of force majeure within the meaning of the respective clause. Depending on the content of the clause, the legal consequences may then be any rights of withdrawal, a (temporary) suspension of the contract or claims for damages.

• 79 CISG

The United Nations Convention on Contracts for the International Sale of Goods (CISG) shall apply if the sale of goods is an international sale of goods and the parties have explicitly agreed to the applicability of the CISG or the parties have agreed to the applicability of the law of a contracting state and have not explicitly excluded the applicability of the CISG. For example, the CISG also applies if the parties to an international sale of goods have agreed on the applicability of German law but have not explicitly excluded the applicability of the UN Convention on Contracts for the International Sale of Goods.

Sec. 79 CISG provides that a party is not liable for the non-performance of its obligations if it proves that the non-performance is due to an impediment beyond its control. As a result, Sec. 79 CISG explicitly regulates only the exemption from claims for damages, but this should also apply to the exemption from primary performance obligations.

Pandemics as well as embargoes and export and import restrictions are generally recognised as obstacles like that. However, if an obstacle exists, one is not directly exempt from all contractual obligations. It rather depends on the extent in the individual case.

• Sections 275 and 313 German Civil Code (BGB)

If the contract is subject to German law and if it contains no overriding contractual provisions, the scope of rights and obligations shall be determined in accordance with sections 275 and 313 of the German Civil Code (BGB).

Section 275 BGB provides that the claim to performance is excluded if performance is impossible for the debtor or for anyone else. Furthermore, the debtor may refuse performance if it requires an effort that is grossly disproportionate to the creditor's interest in performance.

According to section 313 BGB, an adjustment of the contract can be demanded if circumstances which have become the basis of the contract have subsequently changed so seriously that one party cannot be expected to adhere to the unchanged contract. If the adaptation of the contract is not possible or reasonable, the disadvantaged party may also withdraw from the contract.

• Case studies

The legal consequences surrounding the corona pandemic can vary greatly from case to case. We would like to show you the possible consequences with the help of just a few examples.

My manufacturer from China has stopped production — what now?

Many German companies are currently facing the problem that their suppliers from China or other countries are closing down their factories and stopping production, so that no more goods are coming to Germany. A distinction has to be made here as to whether the Chinese company was closed down by order of the authorities or voluntarily.

In the first case, the Chinese supplier is not at fault. As a rule, a company should then automatically be released from its obligation to perform, as the production of goods is objectively impossible. In this case, the German company is also released from its obligation to pay, but has no claim for damages against the Chinese contract partner, as the latter is not responsible for the impossibility of performance.

The situation is different if the Chinese supplier voluntarily ceases production due to the corona pandemic. The supplier would then have to prove that closing the  production site was at times objectively necessary. If he is unable to do so, claims for damages by the German company are conceivable. In view of the considerable current risk situation, presumably the standard applied might not be quite so strict when assessing whether closing a plant is necessary.

I can no longer supply my customers due to missing supply parts — what now?

If a Chinese company has shut down its production site and ceased production, German customers often have difficulties in supplying their own customers due to a lack of supply parts. However, the German company cannot simply invoke the impossibility of supply to his customers due to the closure of the Chinese supplier. Rather, the company must first try to purchase the missing supply parts elsewhere, possibly at a significantly higher price. In principle, the company bears the procurement risk. It is only impossible if the parts are no longer available on the market. If the German company is able to purchase the supply parts elsewhere, but only at significantly higher prices, the company can only demand an adjustment of the contract with his customer in blatant exceptional cases.

If the German company invokes impossibility of performance vis-à-vis his customers although he could procure the supplied parts elsewhere, he may be liable for damages.

Can I request delivery by airfreight?

If sea routes are closed due to the corona pandemic, the Chinese company cannot directly invoke the impossibility of supply. Rather, alternative reasonable means of transport must be used, even if these entail high financial losses for the supplier. The German company can, for example, also request delivery by airfreight instead of sea freight. The limit, however, is again found in what is reasonable. In blatant exceptional cases, it may then be necessary to adjust the contract.

My goods “are stuck” in transit — what now?

A further problem in the context of the corona crisis is that goods often do not arrive at the buyer, for example because shipping containers are “stuck” at the port. The question then naturally arises as to who is responsible for transporting the goods. In principle, the contractual agreements between seller and buyer are again decisive for this. If there is no contractual agreement, it depends on whether the buyer is a consumer or a company. In the former case, the seller is basically responsible for the transport; however, if the buyer is also a company, the buyer basically bears the transport risk.

If the goods do not reach the buyer in time due to the corona pandemic, the buyer is in any case not entitled to claim damages for delay, because the seller is not responsible for the delays.

Do I have to send my employees to a risk area?

If a company is obliged to carry out service work on site at a customer's premises, e.g. on the basis of a maintenance contract concluded with a customer, tension may arise between the obligations arising from the maintenance contract and the duty of care towards its own employees under labour law. This tension can go so far that a case of legal impossibility can exist if the customer's plant is located in a corona risk area and no third party is willing or able to take over the service work.

The trade fair is cancelled — what now?

Due to the rapid spread of the coronavirus, countless trade fairs in Europe and worldwide are currently being cancelled. The damage amounts to billions. But who is going to bear these costs? Again, a distinction must be made as to whether the trade fair was cancelled due to an official order or voluntarily by the organiser.

In the former case, the organiser is not responsible for the impossibility of holding the fair. In this case, the organisers of the fair do not have to reimburse any costs to the exhibitors and visitors. The exhibitors remain stuck with their own costs, such as stand fees and ticket costs. In this case, however, they are not obliged to pay their own service providers, such as stand builders, either, as the exhibitors can invoke impossibility on their part. Usually, it is the booth builders whose business suffers the most.

If the organiser voluntarily cancels a trade fair without an official order, the situation may be different. In this case, the organiser is responsible for proving that it is impossible for him to hold the fair. If he cannot prove this, he may be liable for damages to the exhibitors, as the exhibitors would have been willing and able to fulfil the contracts with the organiser.

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