Foreward by Andrew Chilvers
The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.
During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.
As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.
Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.
Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?
There’s an issue worth defining here between the civil code and common law. We have doctrines that are named differently but work in a similar way. While the common law legal system originates from a precedent standpoint, the German legal system has evolved by statute. Nowadays I think that both systems are fairly similar.
We’ve come from a statutory state basis and we need case law to interpret this. The statutes that we’re applying in cases of force majeure have been around for quite a while. Consequently, what we call an ‘impossibility to perform’ is very much like ‘frustration’. We’re talking about the primary obligations under contract that are the duty to perform; for example, with the supply obligation of the contract where this is an obligation to pay an agreed price. Whenever there’s a disruption in the supply chain, we have to assess whether this was imposed on the parties from the outside and how this was imposed on the contracting parties. For the COVID-19 pandemic we would argue or plead that this was imposed on the parties by force majeure, as the name says, by a higher force. An event like this pandemic (hopefully) is not permanent, so you can’t argue that this obligation will be lifted forever so as long as the pandemic endures; the obligation to deliver the goods will be halted, but not entirely lifted.
This is particularly true if you have a contract for a fixed term with a delivery on a fixed schedule and you can argue that it was impossible to meet because of the pandemic. You can claim that this contract was frustrated in a way that the delivery was impossible to perform at the due time.
As for secondary claims, that is damages especially, neither party had an influence over this event, so neither party bears any responsibility. However, the latter is an element of such claims.
In any case other than providing for strictly agreed points of delivery a contract amendment will be likely to prevail over the doctrine of impossibility. So we are more likely to plead a contract adjustment allowing for new delivery deadlines, for instance. If, under any circumstances, the adjustment is not feasible under the contract, the breach of the obligation to delivery may entitle the other party to the cancellation of the contract.
Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?
I think from a risk allocation point of view, the risk for the initial phase of the pandemic is largely past. But that doesn’t mean there will not be a second wave and if that’s the case companies will need to factor this into their business operations going forward. There are going to be a lot of insolvencies, so businesses need to be extra careful how they plan ahead in the next few months.
Regarding the second wave, companies with international supply chains will be the most affected. For instance, particularly in Germany, there’s the automotive industry and it will be impacted by a second wave disrupting supply chains once again. You need to understand what you mean by the force majeure clause when it comes to analysing risk. Everyone conducting business globally right now has to think about this.
For most businesses the pandemic is very new and is very ill defined. Many will have to look carefully at the future and also understand what is really pretty unforeseeable in the courts. For example, in the future you can’t possibly argue that any pandemic of the kind we are experiencing right now was unforeseeable ever again. Supply contracts have been providing for abstract “unforeseeable” events. Any pandemic of the current dimensions probably used to be unforeseeable, but now that it has occurred, businesses will be held liable for not regulating this from this point forward. And so how a court views force majeure will be different in the future so that the outcome of lawsuits will depend very much on the force majeure clauses that will be drafted in present or future contracts. That is why we strongly advise to have all those contracts reviewed for an adjustment to the current situation.
Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?
This overlaps with the first question. Coming back to that, we do essentially have that doctrine but we don’t call it ‘frustration’ in Germany. We call it an ‘impossibility’, referring to an impossibility to perform your obligations under the contract and then we differentiate between the different kinds of impossibility, which can affect you individually or everybody as a whole. For instance, you could be able to procure a shipment from another source, but this one supplier that you have entered into a contract with is unable to deliver because there are different restrictions in different countries. For your supplier, performance of his duties may be considered impossible due to closed borders while suppliers based in less restricted countries would still be ready for shipment.
Any Chinese supplier, for instance, may have their goods ready for shipment while the country may still be in lockdown but you need the shipment. In this case, the Chinese supplier would be considered impossible to perform his contractual supply obligation.
As a result, the obligation would lapse along with the buyer’s obligation to pay for the lost supply if the delivery date was agreed as a fixed date beyond which the shipment would be considered (and contractually agreed) useless by the buyer. However, this will be held as nobody’s responsibility in that case and consequentially damages will likely result for neither party. But in general, that is, with no strict supply time agreed, this is only true if you can argue that this impossibility is of permanent nature.
These cases would not fall under “frustration”, but under a doctrine that you might translate into a “disturbance” of the basis of the contract with the basis being the parties’ initial motivation to enter into the contractual relationship. This doctrine allows us to amend the obligations of both parties to ensure the contract survives the pandemic because this will be the major goal for German legislators. This goal, by the way, is the doctrine “pacta sunt servanda” (contracts are to be fulfilled) deriving from ancient Roman legislation. The German legal system values this doctrine over any rights to claim damages.