Impossibility and force majeure – possible legal implications of the Coronavirus epidemic

I. Background

The coronavirus epidemic 2019/2020 (Covid-19) has led to a large number of cities in China being quarantined, affecting several million people. As a result, a number of large companies such as Google, Apple, Samsung, Microsoft and Tesla have closed their offices and factories in China while air traffic to China is heavily restricted. In Europe, regions afflicted by the virus have also been quarantined. People on all continents (except Antarctica) have now become infected with the SARS-CoV-2 virus.

This development has left its mark on international trade, such as closed factories, interrupted transport routes and supply chains. This has understandably resulted in discussions of whether this situation may be considered an event force majeure, i.e. an act of God. These and other legal questions, which are becoming increasingly important due to the worldwide distribution of COVID-19, will be dealt with in the following.

II. Legal scope

The term “Force Majeure” is commonly referred to in order to describe the case of a party through no fault of its own being prevented from performing its contractual obligations due to an external act of interference, such as acts of God. However, in German law the term as such is unfamiliar, since cases as described above fall under the rules of impossibility (§ 275 German Civil Code) or frustration of contract (§ 313 German Civil Code), regulated by the German civil code. Under the UN Convention on Contracts for the International Sale of Goods (CISG) such cases are resolved by applying the principles of hardship (Art. 79 CISG).

1. “Force Majeure” under German Law

§ 275 German Civil Code provides that a claim for specific performance of a contractual obligation is excluded, if the performance is impossible for either specifically the contracting party or for everyone. The obligor may also refuse performance, if the efforts required are objectively seen as unreasonable. 

However, the possibility to refuse performance of a contractual obligation does not mean that the obligor need not worry about further consequences. He is still liable for damages due to culpable breach of contract. The question in point is therefore, whether the obligor is liable for negligently or intentionally causing the impossibility of performance. Burden of proof is here laid on the obligor.

According to § 313 German Civil Code, a substantial change in circumstances which had become part of the contractual basis may give rise to a claim for adjustment of contract. However, this may only be the case if performance of contract as originally agreed has become unreasonable for one of the contractual parties, which is interpreted narrowly. If an adjustment is impossible or would itself be unreasonable, the contract may be terminated. An example of such a case would be the unpredicted general scarcity of certain products, although courts apply very strict standards in such cases.

2. “Force Majeure” under CISG

CISG applies where an international sale of goods is at issue and either the law of a contracting state applies or the parties have agreed on the application of CISG. For example, if a contract regarding an international sale of goods provides for the application of “German law” without excluding the application of CISG, CISG will apply. As opposed to the German civil code, CISG provides for strict liability of the obligor. As a general principle, it is therefore irrelevant, whether the obligor is at fault for the failure to perform his contractual obligation or not.

If the principles of CISG regarding strict liability were to be applied rigorously, the liability of the seller would not differ, regardless of whether his inability to perform was due to acts of God or errors in planning. As such an outcome is undesirable, Art. 79 CISG provides for an exemption of liability in case of a failure to perform, if the obligor is able to prove, that the failure to perform was based on a reason beyond his control. Additionally the seller must prove that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. Art. 79 CISG provides only for the exemption from damages and leaves other claims unaffected. However, if a contractual obligation is objectively impossible, its performance cannot be compelled. This principle is universally acknowledged while its legal rationale is disputed given the clear wording of Art. 79 CISG. For this reason, Force Majeure clauses are often agreed upon in contracts subject to CISG to also provide for an exemption from claims for specific performance.

III. Scenarios 

The principles detailed above may lead to very different results in light of the Coronavirus epidemic, as shown in the following examples:

A German company has a long term supply relationship with a Wuhan based company for a custom-made product; however, the factory of the seller is currently shut due to a government order. In that case it appears fairly obvious that the seller will not be held liable for his inability to supply for the duration of the government order. The outcome of this case may, however, differ, if the factory of the seller is located only in the proximity of Wuhan and was not shut due to a government order but due to a voluntary decision of the seller. In this case the seller would have to prove that the shutdown was necessary in order to be exempt from liability.

If then the German company is unable to supply its customers as a result of the factory shutdown, the question becomes relevant, whether the German company may also rely on Force Majeure if held liable for its own failure to perform. This might be the case if the custom made part could not be obtained elsewhere. The supply and thus the performance of the contractual obligation would be impossible. If, however, an equivalent part is available, but only for a significantly higher price, the German company will seldom be able to rely on Force Majeure, since the seller carries the procurement risk for the products sold by him. Nonetheless, a claim to an adjustment of contract may exist in exceptional circumstances.

The details of the contractual relationship play a significant role in evaluating individual cases. For example, if it follows from the contract that the distributor was to ensure the supply at all times, then the distributor may be required to keep a stock of parts or to source parts from multiple sources. Alternatively, if it follows from the contract that the distributor wanted to provide assurance for the availability of certain products, he may not be able to rely on Force Majeure, unless he has unsuccessfully attempted to secure his ability through further means.

Similar questions may also arise from a different point of view: If a company based in China has purchased products from Germany it would not be relevant whether the buyer still has use for the goods in question. Similarly, the closing of a factory would not always automatically result in the impossibility of payment so that this contractual obligation ought to persist if the goods have been supplied according to contract.

The consequences are more complex, if production has not been entirely shut down as a result of the epidemic, but instead production volumes have been reduced. Under such circumstances the German company may not be able to receive sufficient parts in order to fulfil their contractual obligations to all their customers and will find itself having to choose, which customer will be supplied and to which extent. In such a case the parties contractual agreements for such circumstances as well as the extent of specific delivery obligations would have to be considered.

Given the wide range of possible scenarios it hardly seems possible to conclude generally, whether the Coronavirus epidemic would lead to an exemption from obligations. This may be the case, however the specific contractual agreements and circumstances of the parties must always be considered.