COVID-19 & Commercial Law – Nonperformance of contracts in times of crisis

Michael RainerManaging Partner, MTR Rechtsanwälte

The coronavirus pandemic is putting a strain on economic relations throughout the world. In many cases, it is either no longer possible to perform contracts as agreed or performance is completely impossible.

The coronavirus pandemic is having a significant impact on national and international business relations, it no longer being possible in many cases to perform contracts as agreed due to the coronavirus crisis. This has led to the increased prominence of the term “force majeure”. However, it cannot be invoked in every instance of defective contractual performance. The coronavirus has not generally rendered contracts obsolete. We at the commercial law firm MTR Rechtsanwälte note that the parties often have a right to insist on contractual performance.

First, it is necessary to establish why it is not possible to render performance as stipulated in the contract. In view of the crisis surrounding the coronavirus, possible factual grounds include supply bottlenecks and liquidity problems. However, the reasons may also be directly attributable to statutory directives designed, for example, to prevent the spread of the epidemic.

Each contracting party is initially obliged to do everything in their power to render performance as stipulated in the contract. Failure to meet this obligation may entitle their contractual partner to, for instance, withdraw from the contract or claim damages due to nonperformance.

Force majeure then potentially comes into play. If one or more contracting parties is unable to render performance because of the coronavirus, the parties can potentially be partially or fully released from their contractual obligations. Another possibility is that the pandemic gives rise to frustration of contract, thus rendering it impossible to fulfill the contract, though this needs to be assessed on a case-by-case basis given the complexity of contracts. The coronavirus cannot serve as a blanket justification for nonperformance.

Of course, contractual nonperformance may have substantial financial implications for the other parties to the contract. For this reason, it then also needs to be established whether obtaining financial resources as part of the German federal government’s aid package is an option, or whether recourse should be had to loan offers from Germany’s state-owned development bank, the KfW.

It is essential in each individual case to have the specific circumstances examined by lawyers with experience in the field of commercial law.