The COVID-19 virus (commonly known as the “coronavirus”) is affecting companies’ commercial activities around the world, with particular impact on supply chains and employment and insurance law. There is also a question around the measures the competent authorities may impose to prevent or contain the spread of the coronavirus.
A. Effects on the supply chain and recommendations for action
- Under German law, “force majeure” requires three criteria to be satisfied: unforeseeablity, inevitability, and exceptionality. These criteria may be fulfilled, for instance, if a supplier is directly affected by a shut-down imposed by the authorities or if it is situated close to a quarantine area identified by the authorities and its employees predominantly come from a quarantine area. If a supplier invokes force majeure in the event of non-delivery or delayed delivery, the right to raise this defense should be examined based on evidence and information about potential alternative production sources.
- Under German law (cf. section 275 German Civil Code (BGB)), an incidence of force majeure may result in a (temporary) impossibility to deliver irrespective of any contractual provisions in the supply agreements. In that case the supplier is relieved of its performance obligation for the duration of the incident.
- In the event of force majeure, the supplier is not liable for any delayed deliveries or non-deliveries. It is therefore not liable for any losses incurred by the contractual principal – unless a (strict-liability) delivery guarantee has been agreed, however, this is not the norm.
- The contractual principal may also successfully invoke force majeure vis-à-vis its purchasers in a wide range of circumstances. However, under the case law of German courts, companies are required to organize their supply chains so that any outages can be compensated for. It therefore depends on the individual case as to whether a contractual principal is liable to its customers for any delays in delivery that may occur. A crucial factor here is whether the contractual principal can provide documentation and prove the impossibility of providing an alternative service.
- As a rule, therefore, it makes sense for a company to ask its suppliers whether they are anticipating delivery bottlenecks, delays or other issues, in particular in connection with the coronavirus/COVID-19 and to document such inquiries. These responses should then be assessed taking account the risks arising within your own company (due to staff absences etc.). If this assessment shows a greater likelihood of delivery difficulties, alternative suppliers should be considered. At the same time, customers should be proactively notified as soon as any risk becomes apparent, i.e. before a delay in delivery becomes certain. Any such warning should be made as specifically as possible (“in particular, a delay in delivery of around two weeks is anticipated for product XY”). Companies that communicate risks in this way and proactively notify their customers increase their chances of being able to invoke “force majeure” at a later stage. Such inquiries should be made of suppliers and information provided to customers at regular intervals.
B. Effects on employment law
The effects of the coronavirus epidemic on employment relationships and company organization can be manifold. Our employment law working group has therefore published a special newsletter with frequently asked questions around employment law.
C. Official measures
- The German Protection Against Infection Act (Infektionsschutzgesetz, IfSG) grants competent public authorities extensive powers to take “necessary measures” to avert the risks arising in connection with diseases such as the COVID-19 virus. These measures start with the reporting obligation of attending physicians, which has already been ordered, through to the option of imposing tests and quarantine measures for individuals, to a potential ban on events and possibly also shutting down companies. The justification for individual measures can be challenged in individual cases under regulatory criteria. In particular, responses must always be proportionate.
- If gainful workers are prohibited from earning their livelihood on these grounds, they may be entitled to claim compensation under section 56 IfSG. For employees, this may be a claim for the amount of their wage, which the employer is often obliged to pay in advance for a maximum of six weeks. The employer can then apply for a reimbursement of the compensation, which must be done within three months.
- Additionally, claims for compensation and expenses are also possible in the event of other official measures under section 65 IfSG.
- Furthermore, the German Federal Ministry for Economic Affairs has ordered, on the basis of German export legislation, a ban on the export of certain types of medical protective equipment, such as surgical masks and certain types of gloves, to prevent shortages of these in Germany. Special rules are also in place regarding passenger transport.
COVID-19 is also having a wide-ranging impact on the insurance sector. For more information on this topic, please refer to the Update on insurance law of 4 March 2020.
E. Effects on Public Shareholder Meetings
The annual shareholder meeting is a time and cost intensive yearly measure, in particular for stock corporations with shares listed on a stock exchange. On the background of the spreading coronavirus, board members are wondering: What options do we have? What are the do’s and don’ts? Our update capital markets date 11 March 2020 provides insights on this topic.
F. General remark
Please note: the foregoing statements represent a generally valid summary of the legal situation. Individual assessments of the specific legal effects on contractual relationships must always be individually reviewed. Please contact us if you have any specific questions.
further reports which may be of interest to you