Force Majeure Stipulations in Contracts
With the spread of Coronavirus (COVID-19) the potential impact of force majeure clauses in contracts has come under increased scrutiny.
What is a Force Majeure Clause?
Force majeure clauses seek to deal with the impact of events which are out of the control of the contracting parties on contracts. They regulate the relief that is available when a party is not able to perform their obligations under the contract as the result of an ‘Act of God’ because the reasons for non-performance was out of his control. "Force majeure" is therefore characterized by the following features:
- exceptional circumstances.
To successfully claim relief under a force majeure clause, the performance of your contract duties must be impossible. It is not enough that performance may have become inconvenient or too costly; the service itself must be forbidden or the activities relevant to the performance must not be allowed. Typical examples are:
- if a vital contractual partner / employee is affected by an official closure
- a party does not receive the necessary raw materials/goods himself due to border closures,
Force Majeure Clauses as a Contractual Term
Contracts that include a force majeure clause define the events that trigger the clause. You will typically find them in the fine print. As a general rule Act of God clauses will not be implied into contracts. Therefore, first examine the terms of your contract. Does it have such stipulation? The German wording for this is “höhere Gewalt” and will often be found in the middle or towards the end of a contract. In the absence of a force majeure clause, do not despair! Keep on reading! Don’t forget that German law is very strongly codified. In some law or regulation, there will almost certainly be a solution.
When your contract provides a clause relating to an Act of God for disturbances, then as a rule this stipulation will supersede what the statues provide – unless the clause itself is invalid.
What to do if your contract does not have a force majeure clause?
You may need to consider whether your contract has been “frustrated”. A contract can be frustrated where an event occurring after the contract was entered into has occurred through no fault of the contracting party. If your contract provides no provision, then civil law determines the solution. Civil law deals with this through the legal doctrine of impossibility (§275 BGB). It is generally expected that somebody who owes a delivery or service is responsible for being able to perform and for making a bona fide effort to ensure that performance is made. In the event of temporary impossibility and thus delay in performance, the debtor is released from his primary obligation to perform for the duration of the obstacle.
Like now during “Corona”, if we can assume that a vaccine will be developed soon curbing the spread of the virus and so ending any quarantine and / or shutdown, we can regarded this as temporary obstacles which will not permanently exclude deliveries in the future, but will lead to a temporary impossibility. In other words, Corona is an excuse to deliver belatedly but only for the period of quarantines or curfews. Afterwards, you have to perform without undue delay.
It is difficult to deal with a situation in which there is a lack of binding official measures and companies only implement official recommendations for health care - and only then is it impossible to provide services. In the current exceptional situation, in which the responsibility of each individual is being appealed to, it is to be expected that courts will not impose any disadvantages under liability law on a company that follows clear recommendations from the authorities in a later assessment.
The legislature only intended a cessation of the basis of the business transactions for exceptional cases. According to § 313 BGB it is possible to amend or cancel a contract if circumstances have changed after the conclusion of the contract which the parties have expressly made the basis of their business and the parties, knowing the changed circumstances, would not have concluded the contract or would not have concluded it with this content. The legal consequence of the loss of the basis of the transaction is an adjustment of the contract to the changed circumstances or - if this is not reasonable for at least one of the parties - a cancellation of the contract. In each case, it is a matter sensitive to subsequent disturbances of the equivalence interest between performance and consideration. It must therefore be examined whether the Corona pandemic or associated protective measures have changed circumstances which were expressly the basis of the supply relationship in such a lasting way that an adjustment or cancellation of the contract is necessary. Such a case could arise, for example, if the purchaser recognizably purchases the product for the seller exclusively for a specific use which is now no longer permitted, at least for an extended period of time, due to an official order. On the other hand, the mere change in consumer behavior as a result of the Corona pandemic and its economic consequences should not, however, justify the discontinuation of the basis of the contract. Similarly, short-term closures of operations, which may also occur for other reasons and are part of general business risk, do not generally justify an adjustment or cancellation of the contract. Price increases in the wake of the corona pandemic (construction companies report significant price increases for raw materials such as steel) only justify the loss of the business basis in an absolutely exceptional case.
When will COVID-19 Trigger a Force Majeure Clause?
When your contract defines the events that trigger a force majeure clause, diligently read it. You will find the contractual triggers laid out there! Read and try to understand them, as they provide the best guidance for your rights.
The contract may contain references to defined events, natural disaster, government intervention, epidemics and even pandemics. The last of course is particularly relevant given that on 11 March 2020 the World Health Organization declared Coronavirus a pandemic.
In the event that your contract contains a force majeure clause but does not define the events then the scope for you to apply the clause is in fact far broader. If one of the contracting parties is from another country and that country is affected with a consequential impact on your ability to fulfill a contract you may be able to at least stall performance if not cancel the contract outright. Current examples would be China and Italy; in fact, the China Council for the protection of international trade announced on 30 January 2020 that it would issue “force majeure certificates” where Chinese entities were contracted to foreign entities.
What Should you do now?
In the event you wish to rely on your force majeure clause you will need to carefully examine your contract to determine which relevant notice provisions trigger the clause.
You need to bear in mind that if you do not want to perform because you deem it impossible to complete due to Corona, you will have to be able to prove the Act of God, if it goes to court.
Before canceling the contract, you should carefully consider all of the available options including any possible alternatives for completion. This may involve considering whether the entire contract is affected or whether there are parts of the contract that you can still complete. If it is only a temporary, then best inform your customers and ask for patience.
What if the Contracting Party is an Overseas Entity?
Some countries do codify what happens in the event of a force majeure event. You will need to examine your contract to see whether it contains any clause seeking to define which jurisdiction's law governs the performance and interpretation of the contract. The Chinese government has announced that it would issue force majeure certificates.
Will a contractual duty be time barred during the period of an Act of God hindering me to perform?
§206 BGB says “Limitation is suspended for as long as, within the last six months of the limitation period, the obligee is prevented by force majeure from prosecuting his rights.” Let's have a scenario. Jack owes Jill € 100 and courts are barely operational. Let's look at two scenarios: in the first case, this will be for only 1 year and in the second case for 3 ½ years. Remember, time limitation kicks in after three years have elapsed (§195 BGB).
In the first scenario Jack won't lose any time to pay because the limitation period is still running for two more years. The second scenario can bring Jill time benefits. Let us further assume that court will not resume again until next January. In normal cases, her claim will be time-barred at the turn of this year. Since the legal system is currently out of order, she can still file her complaint until June 2021. If her complaint comes in on July 1st, that will be exactly one day too late and the claim is limited.
What does it mean when a claim is time-barred in Germany? This limitation means that though the claim exists, you have a very simple defense in court. In most cases, a claim becomes time-barred after three years. When your contractual partner sues you for such an old claim, you just have to say “time-barred” in court and you won. If you already paid the bill then unfortunately you have no right to get the money back. The claim remains as such valid.
Show Solidarity and Reliability
In these difficult times of shutdowns and “stay home”, remain courteous when it comes to delays or unforeseen obstacles. You might have to bear with delays in deliveries caused by protective measures against Corona. The reasons for any delays in delivery should be carefully documented. Again, “Covid” is no overall excuse for non-performance.
For a start-up, the objection of "force majeure" raised by the contracting party itself or by the other party is a double-edged sword, as the suspension of contractual obligations leads to a standstill in the business relationship, which usually quickly endangers the existence of a start-up. You can read about the duties of the management, in particular the duty to monitor solvency and the resulting liability risk, here.
Let us remain sympathetic and practice solidarity.