03-30-2020  | Special newsletter coronavirus

Effects of the COVID-19 pandemic on contractual relations




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For all parties, the question arises at present as to what effects COVID-19 will have on existing contractual relationships – specifically, who will bear the economic burden of the pandemic. In the following is a brief overview:

1.
If binding delivery, performance, or acceptance deadlines are agreed and due in the contract and if the debtor is permanently unable to perform or only able to perform the contractual obligations with unreasonable efforts, this constitutes a case of impossibility. In such cases, the law relieves the debtor from the obligation to perform the contractual duties. In return, however, the creditor may not demand remuneration for the service that was not performed. At the current time, this provision relates to such obligations that are made permanently impossible, e.g., by official decrees (holding a major event, accommodating tourists in hotels, serving restaurant guests). The debtor is normally only liable for damages resulting from the failure to render a service, if the impediment to performance was intentionally or negligently caused by the debtor. If there are no indications that the impediment to performance has other causes than the pandemic, the debtor should therefore not be expected to be liable for damages.


On the other hand, the law relieves the debtor from obligations whose performance is only made temporarily impossible by the effects of the pandemic (such as temporary closure of a production plant) only for the period of the impediment to performance. Upon the federal government's initiative, consumers and micro-enterprises which, due to the pandemic, are no longer able to perform their contractually owed services in permanent debt relationships may now benefit from an exemption from their obligation to perform contractual duties. This is primarily intended to ensure that basic services (electricity, gas, telecommunications, water) are not cut off because recipients or users are unable to meet their payment obligations due to the crisis. The relevant provisions will initially apply until June 30, 2020.

2.
In some cases, contracts even provide for sanction-free termination, allowing for an exit without losses. Even where this is not the case, contracts may contain (tacit) provisions on how the parties intend to deal with the sudden occurrence or lack of certain circumstances (such as the occurrence of a pandemic). Specifically, this relates to special provisions on events of force majeure. These usually include a right to adapt contractual remuneration and performance deadlines, rights of termination or rescission, or a duty of the parties to jointly seek an acceptable solution to the newly developed situation.


Force majeure characteristics (unforeseeability, unavoidability, exceptional nature) should at least be given for contracts concluded prior to the occurrence of the COVID-19 pandemic. This is suggested by a comparison with the 2002/2003 SARS pandemic. Despite its milder effects, the SARS pandemic was mostly classified as a force majeure event. Thus, if a force majeure clause is not limited to specific events (e.g., war, earthquakes, embargoes) or even explicitly names a pandemic, it is likely to cover the current events.


Where such a clause applies, the notification obligations usually contained therein are of great importance. Accordingly, an affected party must notify the other party of the special circumstances impeding or even preventing it from providing the service without undue delay. Such notification should not be waived even in times of continuous media coverage so as to be able to prove own contractual loyalty in the event of a dispute.

3.
In cases where a contract cannot be terminated or suspended in the aforementioned ways, the parties may, where applicable, refer to interference with the basis of the transaction (Section 313 German Civil Code). If such interference exists, at least an adaptation of the contract may be demanded. If an adaptation of the contract is unreasonable, termination of the contract can be brought about via Section 313 Civil Code.


To presume an interference with the basis of the transaction, fundamental and common presumptions of the parties must have seriously changed or not have occurred after conclusion of the contract. The changed circumstances must lead to unacceptable hardship and to a result that is no longer compatible with law and justice. Neither party may be obligated to contractually assume the risk of the occurrence of such circumstances or to bear it by law.


Statutory requirements for interference with the basis of the transaction are therefore high and may only rarely be affirmed in normal times. In times of corona, however, things may be different. For events that tend to be comparable to the COVID-19 pandemic, courts have presumed interference with the basis of the transaction in the past, such as in the case of officially ordered cancelations of events due to attacks that were feared or in connection with the acts of terrorism of September 11, 2001. Depending on the further development of the pandemic, it therefore seems conceivable that interference with the basis of the transaction may be presumed in many cases.

4.
It is strongly recommended for the negotiation of new contracts that the entirely uncertain development of the pandemic be appropriately taken into account by including specific clauses. In the current situation, all contracting parties are likely to have an interest in such provisions to maintain business life at all.

Additional, daily updated information on the corona crisis is also available on our focus page.

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