What obligations remain in place and what has changed over the last few weeks? And what are your options to help protect your company, your employees and still meet your duties as a director?
Businesses across the world run according to private agreements – supply contracts, leases, employment contracts and financing arrangements – and a local framework of laws. Some of the duties under those agreements and local laws have suddenly become impossible (or very difficult) to discharge.
Government responses to the pandemic have choked off many businesses' revenues while leaving them liable to pay the rent, their staff and their suppliers. In normal times, a business with no revenue and a lot of obligations would be required to place itself into insolvency very quickly.
Insolvency and company law and the rules governing commercial contracts vary from jurisdiction to jurisdiction across Europe, but in our experience across Europe, the fundamental tension between the need for businesses to do what they agreed to do and the need to preserve good businesses and avoid unfair and destructive outcomes is the same across the continent.
Different systems will attempt to reach a fair outcome by different mechanisms, and this can lead to very different results. For example, in many jurisdictions, the Civil Code will set out a definition of 'force majeure', 'hardship' or 'unforeseen change' which may excuse a party from performing all or some of his obligations under the contract.
On the other hand, in Common Law jurisdictions, the courts will be very reluctant to interfere in the operation of a commercial contract on the basis that the outcome has become unfair, though in some jurisdictions extraordinary legislative measures have been implemented to support commercial parties in these challenging times.
Some of the areas where we're seeing a lot of companies struggling to keep up with the rapid changes to local legislation include:
- Large transactions: both buy-side and sell-side to unwind or push through specific transactions. This will involve a mixture of local law and an understanding what is strategically and commercially achievable in that environment.
- Financing issues: in particular security enforcement issues and margin calls. There are already significant issues in this area.
- Directors' duties: particularly in the context of potential insolvencies. Company directors face very volatile market conditions only partly mitigated by government support packages. Advice on these issues requires a detailed understanding of local insolvency and corporate law, but also the dynamic local political environment.
Our disputes lawyers across Europe have local expertise that can help cut through the complexity of the many local and international changes, and can keep you updated on what your options are and what duties have changed or remain firmly in place.
Current restrictions as per order of 22 March 2020
- Citizens are urged to reduce contacts with other people outside the members of their own household to an absolutely necessary minimum.
- In public, wherever possible, a minimum distance of at least 1.5 m must be kept from persons other than those mentioned under the first bullet.
- Being in public areas is only permitted alone, with one other person (so not more than 2) not living in the household or in the circle of members of one's own household.
- The way to work, emergency care, shopping, visits to the doctor, participation in meetings, necessary appointments and examinations, help for other or individual sports and exercise in the fresh air as well as other necessary activities remain possible.
- Groups of people celebrating in public areas, in apartments and private facilities are unacceptable in view of the serious situation. Violations of the contact restrictions should be monitored by authorities and the police and sanctions are imposed in the event of infringements.
- Catering establishments will be closed. This does not include the delivery and collection of take-away food for consumption at home.
- Personal hygiene service providers such as hairdressers, beauty salons, massage parlours, tattoo studios and similar establishments will be closed, as physical proximity is essential in this area. Medically necessary treatments remain possible.
- In all establishments and especially those open to the public, it is important to comply with hygiene regulations and to implement effective protective measures for employees and visitors.
All these measures will have a minimum duration of two weeks.
Effects on existing contracts
- IMPORTANT: The effects arise primarily from the specific wording of a contract.
- German law does not know the term “force majeure”. Therefore, it only becomes relevant through a specific clause in the contract. It must be examined whether the corona pandemic constitutes a case of force majeure within the meaning of the respective clause. In case the clause just mentions “force majeure” without listing any special cases, jurisprudence defines it as an “external event that cannot be avoided even by exercising the utmost care that can reasonably be expected”. In several decisions, epidemics have already been classified as such force majeure. 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.
- In case of no overriding contractual provisions, the scope of rights and obligations is determined in accordance with sections 275 and 313 of the German Civil Code (BGB).
- Section 275 BGB provides that a claim for performance is excluded if performance is (also just temporarily) impossible for the debtor or for anyone else. Furthermore, the debtor may refuse performance according to this section if it requires an effort that is grossly disproportionate to the creditor's interest in performance. However, debtor is obliged to first try to purchase the missing supply parts elsewhere, even if only possibly at a higher price.
- According to section 313 BGB, an adjustment of the contract can be demanded if circumstances that 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. This provision, however, is the absolute exception since the seller bears the procurement risk.
- If non- or late-performance is caused due to restrictions based on the corona crises the debtor will most likely not have to pay damages due to lack of fault.
Read more: https://deutschland.taylorwessing.com/en/insight/rechtliche-konsequenzen-des-corona-virus and https://deutschland.taylorwessing.com/en/coronavirus-implications-on-agreements
NEW: The Federal government introduced a “moratorium” on the fulfilment of contractual claims for a transitional period, which will entail fundamental amendments to contract law. On March 25th the Germanl Parliament (Bundestag)unanimously adopted the law that now needs to be approved by the Federal Council (Bundesrat) which is planned for Friday March 27th . Key elements are:
- With respect to contracts concluded before March 8th, the defaulting party may in principle be granted a temporary right to refuse performance of the contract (Leistungsverweigerungsrecht) until 30 June 2020 if the defaulting party can no longer fulfil its contractual obligations as a result of the pandemic, without jeopardising its livelihood or the economic basis of its business. This right to refuse performance of the contract shall, however, only be granted to consumers, very small businesses, small businesses and medium-sized companies, i.e., to companies with fewer than 250 employees and a turnover of less than EUR 50 million or with an annual balance sheet below EUR 43 million.
- With regard to arrears of rent existing for the period from 1 April 2020 through 30 June 2020, landlords may not terminate the lease if the arrears exist due to a pandemic.
- For consumer loan agreements, the lender's claims for repayment, interest or redemption of a loan falling due between 1 April 2020 and 30 June 2020 are deferred for a period of three months by operation of law from the date on which they fall due. This shall apply to the extent that the borrower suffers a loss of income due to the crisis, which makes it unreasonable to expect the borrower to provide the services owed, whereby a connection between the loss of income and the pandemic is presumed by law.
- The statutory obligation to file for insolvency is to be temporarily suspended until 30 September 2020 if the reason for insolvency is based on the effects of the corona crisis and there is a reasonable prospect of restructuring.
If it turns out that the period from April through June 2020 is not sufficient to cushion against the economic consequences of the crisis, the possibility is granted to extend the periods mentioned above.
Read more: https://deutschland.taylorwessing.com/en/insight/gesetzesentwurf-zur-abmilderung-der-folgen-der-covid-19-pandemie-im-zivilrecht
- Civil courts predominantly postponed oral hearings, however, due to their judicial independence they are free in their determination. All other procedural handlings continue.
- Criminal courts also reduced to urgent cases.
- Arbitration tribunals are still in operation and increasingly use modern ways of communication including case management conferences and hearing per video conference.