Supply Relationships During the Coronavirus Pandemic: Force Majeure, Impossibility and Contract Adjustment

Is the coronavirus a case of force majeure?

The rapid spread of the novel coronavirus – referred to at the time as COVID-19 or SARS-CoV-2 – created major practical challenges for businesses worldwide. Illness and staff shortages, government-ordered shutdowns, restricted areas and transport disruptions could interrupt supply chains in an increasingly interdependent global economy.

The key question for companies was therefore:

Can a party rely on force majeure after a pandemic-related production or delivery failure and thereby be released from its contractual obligations?

The answer does not depend on the existence of a pandemic alone. It depends on the wording of the contract, the applicable law, the actual effect of the event and whether performance has become impossible or merely more difficult or expensive.

Key points

• German contract law does not generally provide a single statutory definition of force majeure that automatically releases a party from its obligations.
• International supply contracts often contain force-majeure clauses that define triggering events and their legal consequences.
• Depending on the circumstances, a pandemic, official shutdown or supply-chain disruption may result in impossibility under Section 275 BGB.
• If performance remains possible but the contractual basis has changed fundamentally, an adjustment under Section 313 BGB may be considered.
• Where the CISG applies, Article 79 CISG may provide an exemption if the party proves an impediment beyond its control and the other statutory requirements are met.
• A general reference to “COVID-19” or “force majeure” is not enough. The concrete effect on the specific contractual obligation is decisive.

1. Force majeure under German law

Apart from specific statutory provisions, German law does not generally use force majeure as a comprehensive statutory exemption. In general terms, force majeure refers to an external, unavoidable and unforeseeable event for which the affected party is not responsible and which prevents performance despite reasonable care.

Events typically associated with force majeure may include:

• war and civil unrest,
• natural disasters,
• epidemics and pandemics,
• government intervention and official restrictions.

Whether a particular event qualifies as force majeure must nevertheless be determined by reference to the contract and the facts. A pandemic does not automatically release a party from every contractual obligation.

If the parties have not agreed an overriding contractual rule and German law applies, the relevant legal concepts may include impossibility under Section 275 BGB and a fundamental change of circumstances under Section 313 BGB. If the CISG applies, Article 79 CISG must be considered.

2. Force-majeure clauses in supply contracts

International supply contracts often contain force-majeure clauses. These clauses generally define the relevant events and establish the consequences for the parties.

A clause typically addresses:

• Triggering events: The clause may refer to epidemics, pandemics, government action, transport disruption, natural disasters, war or strikes.
• Legal consequences: It may provide for suspension of performance, an extension of delivery periods, exclusion or limitation of damages, notice obligations, mitigation duties, termination rights or withdrawal rights.

2.1 The contract comes first

If a supply contract contains a force-majeure clause, the clause should be interpreted first. Important questions include:

• Does it expressly cover an epidemic, pandemic or official shutdown?
• Is the list of events exhaustive or illustrative?
• Must performance be impossible, or is substantial difficulty or unreasonableness sufficient?
• What notice and evidence requirements apply?
• Must the affected party seek alternative sources or transport routes?
• What happens in the case of partial delivery or prolonged delay?
• Are termination, withdrawal or damages rights available?

The express inclusion of epidemics may make classification easier, but it does not necessarily mean that every pandemic-related delay is excused. The event must still affect the specific obligation in the manner required by the clause.

2.2 The specific causal impact matters

An official restricted area containing the supplier’s only production facility may support a force-majeure defence more strongly than a voluntary reduction of the workforce as a precaution. The decisive issue is the causal connection between the event and the failure to perform.

The supplier should therefore be able to explain and document the precise production, personnel, procurement or transport obstacles and why alternative performance was impossible or unreasonable.

3. Impossibility under Section 275 BGB

A pandemic-related event may, in individual cases, make performance impossible under Section 275 BGB. The statutory requirements must be assessed carefully.

Performance may be excluded or refused where:

• performance is impossible for the debtor or for anyone,
• performance would require an effort grossly disproportionate to the creditor’s interest, or
• personally performed services cannot reasonably be expected after balancing the interests of both parties.

If a single specialised factory produces the goods and an official order has forced it to close, performance may be impossible. The analysis may be different if many competitors can manufacture the same product. In that case, the availability and reasonableness of substitute sourcing must be considered.

In the event of impossibility, the debtor will generally lose its claim to the counter-performance, such as payment, and the creditor may have a right to withdraw. If the debtor is not responsible for the impossibility, damages for non-performance may not be owed, subject to the facts and the contractual framework.

4. Fundamental change of circumstances under Section 313 BGB

A pandemic-related disruption does not necessarily make performance impossible. However, Section 313 BGB may be relevant where the circumstances forming the basis of the contract have fundamentally changed after the contract was concluded and it is unreasonable for a party to remain bound to the unchanged contract.

Depending on the circumstances, possible adjustments may include:

• partial deliveries,
• extended delivery periods,
• price adjustments,
• alternative transport arrangements,
• temporary suspension of certain obligations.

Section 313 BGB is not a general right to renegotiate every economically disadvantageous development. The change must be sufficiently serious and the unchanged contract must be unreasonable to maintain.

5. Article 79 CISG in international sales

For international supply and sales contracts, the applicable law must be determined first. The CISG may apply by agreement, by operation of the Convention or because it has not been validly excluded.

Article 79(1) CISG may exempt a party from damages if it proves that the failure was caused by an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account when the contract was concluded or to avoid or overcome the impediment or its consequences.

The exemption generally applies only for as long as the impediment exists. Epidemics, government measures and natural disasters may qualify as impediments depending on the facts.

5.1 Notice under Article 79(4) CISG

The affected party must notify the other party of the impediment and its effect on performance. Failure to give the required notice may lead to liability for losses caused by the lack of notice.

Companies should therefore provide timely, specific and verifiable information about the cause, expected duration and proposed mitigation measures.

6. Practical assessment: no automatic pandemic defence

Whether a delivery failure caused by a pandemic constitutes force majeure cannot be answered in the abstract. The entire supply relationship must be examined.

The review should address:

• the wording of the supply contract,
• any force-majeure clause,
• whether the particular event is covered,
• the precise obligation affected,
• the actual cause of the failure,
• whether performance is impossible, merely more difficult or only more expensive,
• substitute sourcing and transport options,
• the applicable law,
• the possible application or exclusion of the CISG,
• notice, documentation and mitigation obligations,
• the contractual consequences of delay or non-performance.

7. Practical checklist for companies

For existing supply relationships, companies should:

• review the contract, incorporated terms and all relevant annexes;
• identify force-majeure, delivery, notice, mitigation, withdrawal and termination provisions;
• document official measures, production restrictions, personnel shortages, supplier failures and transport barriers;
• assess whether substitute sourcing or alternative transport is reasonable;
• notify the contractual counterparty within the required period;
• explore partial delivery, revised schedules and other interim solutions; and
• determine the applicable law for international supply relationships, including the CISG.

For future contracts, force-majeure clauses should be drafted with the relevant industry and supply chain in mind. They should address triggering events, notice requirements, evidence, mitigation, suspension periods and the point at which termination or withdrawal becomes possible.

Legal notice

This article is general information reflecting the law and legal practice as at 20 March 2020. It is not a substitute for reviewing the individual supply contract and factual circumstances. Whether a party may rely on force majeure, impossibility, a fundamental change of circumstances or Article 79 CISG depends on the contract, applicable law and facts.