Compensation for business closures unlikely as the law now stands
but not ruled out for hard-hit sectors
*****Update on 9 June 2020: Still unclear whether compensation claims for coronavirus-related business closures are likely to be successful *****
Many industries are suffering from the financial impact of the official business closures enacted to combat the coronavirus crisis. Although the federal states are now allowing a gradual resumption of business while maintaining special safeguards, many business owners, businesspeople and retailers are struggling with the economic consequences of the restrictions. Increasingly, calls for compensation for lost sales are being made in industry circles and corresponding claims are being brought to court. Court decisions on compensation have so far been limited and inconclusive. However, compensation claims still appear possible for hard-hit sectors.
Heilbronn Regional Court: No right to compensation for coronavirus-related business closures in summary proceedings
The decision by Heilbronn Regional Court (Landgericht) was the first time a court had rejected in summary proceedings the existence of statutory and constitutional claims for compensation in favour of a business owner who had filed compensation claims in the form of operating expenses and loss of earnings (Landgericht Heilbronn, decision of 29 April 2020, case no. I 4 O 82/20).
The court correctly rejected a claim for compensation based on section 56(1), (4) Infection Protection Act (Infektionsschutzgesetz (IfSG)) insofar as the business owner was not a direct addressee of the relevant measures. For an analogous application of section 56 Infection Protection Act there is a lack of the required regulatory gap, due to the rescue packages launched at federal and state level, , the court argued. The court also ruled out a right to compensation based on general police law because the court regarded the Infection Protection Act to be lex specialis. The Regional Court rejected the claims for compensation based on constitutional and customary law (enteignender, enteignungsgleicher Eingriff, Aufopferungsanspruch) on the – legally dubious – grounds that lost acquisition and operating prospects did not constitute a firm ownership position as required by the constitutional and customary rules. The court failed to comment on the existence of a possible special sacrifice (Sonderopfer) as a result of the closure of businesses due to coronavirus, which affected some sectors significantly more than others.
In contrast, the Lower Saxony Higher Administrative Court held in an obiter dictum, in the context of an administrative standard-checking procedure against a coronavirus regulation, that a right to compensation could be considered for non-interferers (Nichtstörer) in accordance with general principles of police and regulatory law (Lüneburg Higher Administrative Court, decision of 23 April 2020, 13 MN 96/20), but did not go into detail.
Claims to compensation for special sacrifice applicable in principle
The statutory claims for compensation under sections 56 and 65 Infection Protection Act are not directly applicable to the present situation (see below). Even analogous application of these claims, despite some good arguments, seems at least doubtful.
Claims for compensation established by customary and constitutional law for legitimate sovereign acts (enteignender Eingriff and Aufopferungsanspruch) are also subject to certain concerns. However, in view of the long duration and the severe impact of coronavirus-related business closures, they appear to be relevant and justified for companies in the sectors most affected, in particular the hospitality industry, restaurants and bars, the travel industry, and the event and cultural sector. Company closures also interfere with the right to the established and exercised operation of business, which is protected by the right to ownership. If initially legitimate measures have a damaging effect on business owners while at the same time other companies are excluded from the measures, the threshold of unreasonableness (Unzumutbarkeit, Sonderopfer) is probably exceeded. Difficulties arise from these claims, partly because of a lack of comparable precedents and corresponding supreme-court case law. But they cannot be rejected from the start.
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***** Update on 9 April 2020: Courts confirm business closures due to coronavirus in summary proceedings, but the measures may become unlawful in the medium and long term. In addition: New compensation scheme for parents of children requiring care *****
A large number of courts have rejected applications for summary proceedings against the official business closures ordered to combat the coronavirus pandemic. The decisive factor in these ruling is the supreme value of the legally protected rights to health and life to be safeguarded by the measures. At the same time, the closure of businesses constitutes a serious interference with the rights of business owners and retailers, which cannot be justified on a permanent basis and whose legality is subject to increasing doubts. A new compensation scheme will be available to parents who suffer loss of earnings due to having to care for their children themselves as a result of the closure of nurseries and schools. No compensation for businesses is evident so far.
Summary proceedings against business closures dismissed
In the past few weeks, numerous applications for summary proceedings by business owners, businesspeople and retailers against business closures due to the coronavirus have been rejected by courts in many federal states (e.g. Bavarian Supreme Administrative Court, decision of 30 March 2020, case no. 20 CS 20.611; Higher Administrative Court of North Rhine-Westphalia, decision of 6 April 2020, case no. 13 B 398/20.NE; Administrative Court of Hamburg, decision of 20 March 2020, case no. 10 E 1380/20).
The judicial review programme of summary proceedings is particularly relevant here: this is limited to a summary review which is based on an assessment that weighs up the consequences of repealing the contested legislation against the consequences of maintaining it for all the rights concerned. These impact assessments are relevant here in view of the predominant value of the protected rights concerned, health and life. (Article 2(2), first sentence, German Basic Law (Grundgesetz)). In consequence, the law grants wide discretion to the public authorities to take effective coronavirus protection measures, to the detriment of business owners and retailers which wish to stop the closure of their operations. The Federal Constitutional Court has also upheld the Bavarian general coronavirus regulation in summary proceedings, for the same reasons (decision of 7 April 2020, case no. 1 BvR 755/20).
Other administrative orders that have led to significant restrictions on public life because of the fight against coronavirus (such as restrictions on leaving home or bans on events) have also been largely confirmed in fast-track court decisions (e.g. Higher Administrative Court of Schleswig-Holstein, decision of 2 April 2020, case no. 3 MB 11/20, prohibiting the use of second homes; Bavarian Supreme Administrative Court, decision of 9 April 2020, case no. 20 NE 20.704, on banning religious services at Easter). However, there are also decisions that overrule individual administrative measures in the fight against coronavirus (most recently the Higher Administrative Court of Mecklenburg-Western Pomerania, decisions of 8 April 2020, case no. 2 KM 268/20 OVG et al., on a ban on outings over the Easter holiday weekend).
Doubts as to the legality of individual business closures: Unspecific and unequal
In this context, the orders are subject in some cases to considerable doubts regarding their legality. Many orders for business closures fall below the level of specificity required by law. To the extent that the orders for closure provide for exceptions for certain business groups, they contain unequal treatment with respect to other businesses, the justification for which seems doubtful in many cases. These doubts were also raised by the courts in some cases. However, in view of the judicial review programme in summary proceedings, even possible illegality does not lead to a repeal of the legislation. We therefore advise ensuring judicial protection in the principal proceedings in individual cases in order to prepare possible claims for damages.
Permanent closures inadmissible: The maintenance of lawful closures is becoming more doubtful from day to day, and compensatory measures appear necessary
Even those closure orders which were lawful at the time of their adoption can become unlawful as their duration extends. The legal rights to health and life, which are to be protected by business closures, outweigh the legal rights of economic operators which are affected by business closures (Article 12(1) German Basic Law, and possibly Article 14(1) German Basic Law). However, the continuing business closures constitute most serious forms of interference in the latter legal rights, which in many cases jeopardise companies’ economic existence and therefore also cannot easily be maintained on a permanent basis.
Accordingly, courts including the Federal Constitutional Court have cited the temporary nature of the measures as a key reason for their continuation. This also means that each day that the original lawful closures of a business continue, these closures move towards being unlawful, although it is difficult to determine when they become unlawful, and largely unforeseeable. However, what is crucial is whether the public authorities will adopt effective compensatory measures in order to cushion the severity of the intervention, in particular the consequences of the closure which jeopardise the existence of businesses.
New compensation scheme for parents’ loss of earnings due to closure of nurseries and schools, but no further compensation for businesses yet
Since 28 March 2020, there has also been a new right to compensation for loss of earnings by parents due to the closure of nurseries and schools (section 56(1a) German Protection against Infection Act (IfSG)). According to this provision, working parents or guardians of children who have not yet reached the age of 12 or who are disabled and dependent on assistance are entitled to compensation in cash as long as they themselves are caring for children as a result of the closure of childcare facilities or schools for disease control reasons and because they are unable to ensure other reasonable care, thereby suffering a loss of earnings.
No other new rights to compensation have been created, in particular no independent claims to compensation for the business owners and retailers affected by the closure of their businesses. To date, they have continued to be referred to the coronavirus aid measures taken by the federal government and the federal states, specifically grants, loans and guarantees. The statutory right to compensation under section 65 German Protection against Infection Act is not applicable to this situation (see below). The customary rights to compensation for lawful sovereign actions (claims arising from expropriation and claims for sacrifice) do not appear to be enforceable in this case either (see below), but their application is unclear in a situation such as this one. It remains to be seen whether the legislator will adopt further compensation measures.
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***** Updated on 20 March 2020: German government is working on a rescue programme for large sections of the German economy *****
The German government is working on a rescue programme for large sections of the German economy which are experiencing the severe negative fallout from the corona crisis and the subsequent government shutdown measures. The programme, the precise conditions of which are yet to be established, will encompass wide-ranging rescue measures on top of the liquidity support already announced, ranging from guarantees for private-sector liabilities to direct financial subsidies and to what are effectively partial privatisations in order to save companies and businesses from insolvency. Small businesses and microenterprises are also planned to benefit from these. At the moment, a programme worth around €500 billion is being discussed. The German government appears to be determined to contain the devastating effects of the corona crisis with a comprehensive rescue package similar to the one during the financial crisis.
***** News published on 13 March 2020 *****
The federal and state governments of Germany are currently taking numerous measures to limit the effects and spread of Covid-19. Several states have ordered the closure of all retail stores except those critical for supplying the population with essential goods. The other states are likely to follow suit.
The question which companies, businesses and commercial landlords are now asking is whether they can claim compensation for government-ordered business closures. As the law stands, the answer to this legally complex question will disappoint: no. The onus is now on lawmakers.
Compensation for lawful administrative acts not the rule in Germany
German administrative law normally provides only for extremely basic compensation claims for lawful acts by the public administration. Such cases are rare and limited to extraordinary individual burdens. The legal framework provides that the affected party is only entitled to compensation if it is required by lawful sovereign intervention to make a ‘special sacrifice’. A special sacrifice is presumed if the affected party has to tolerate a special burden going beyond the general limits of sacrifice and which is not imposed on others. Although the government measures, especially business closures, will have very serious consequences, in some cases putting firms out of business, these do not appear to count as a special sacrifice in the legal sense, since the measures affect all companies in the sector concerned. Under the law on public compensation, compensation claims are also rare and normally precluded where lawful actions are taken.
Sub-constitutional right of compensation under section 65 German Protection against Infection Act does not apply
In addition, such narrowly limited reimbursement rights are precluded in any case if there are special statutory rules and these are in turn definitive. This appears to be the case here: In section 65(1) German Protection against Infection Act (Infektionsschutzgesetz, ‘IfSG’) there is a compensation rule for, among other things, not merely insignificant pecuniary disadvantages caused by measures to prevent infectious diseases (measures under sections 16 and 17 IfSG).
The relevant measures in this case by the states and local councils, however, are being taken on the basis of section 28(1) IfSG, because given the nationwide outbreak of Covid-19, these are measures to combat infectious diseases. The compensation provision of section 65(1) IfSG does precisely not apply to such measures. Extending the provision of section 65(1) IfSG to the current measures is not possible either, due to the clear wording and for systematic and origin-related reasons.
Also, the compensation provision of section 56(4) IfSG does not appear to be broadly helpful either. According to its wording and systematic context, it only applies to individuals concerned by the individual compensation of section 56(1) IfSG.
Legality to be examined case by case; authorities have broad discretion
In light of all this, it cannot be ruled out that the increasing numbers of government-ordered business closures are at least partly disproportionate and thus unlawful, not least because of their most extensively negative effects on businesses. In such cases, compensation claims provided by law may be possible.
However, it must be taken into account that the competent authorities are granted broad discretion by the IfSG regarding the epidemic protection measures to be taken. This is because of the extremely important objects of protection and in view of the unclear factual situation, especially in view of the growth in infection numbers and infection routes of Covid-19. Thus, as things stand, there are good reasons why the measures taken appear to be overwhelmingly lawful.
Typically, the general decrees ordering business closures specify that the competent authorities can grant exceptional permits on request for other shops necessary to supply the population if reasonable in an individual case from the perspective of protecting against infection. We recommend examining such exceptions on a case-by-case basis.
Please also see our News "Closure of business facilities by administrative order due to the coronavirus" from 11.03.2020.
Onus now on lawmakers
There is reason to assume that the relevant provisions of the IfSG did not have a pandemic on the current scale or the severe economic and social effects brought on by the measures taken during such a pandemic on the basis of the Act in mind when they were created. Furthermore, a variety of legal questions have not been fully clarified yet, such as the extent of a claim under section 56 IfSG or the relationship of the compensation provision in section 65 IfSG to compensation claims under general regional police law (such as section 59 of Berlin’s General Security and Public Order Act (Allgemeines Sicherheits- und Ordnungsgesetz Berlin) or section 39 of NRW’s Public Order Authority Act (Ordnungsbehördengesetz NRW)). However, an extensive compensation regime that could provide relief for the large number of companies and businesses affected by the protective measures cannot be based on the existing rules of the IfSG.
In light of all this, it is up to the lawmakers to introduce compensation for companies and businesses affected by closures because of the pandemic. Apparently the German government is discussing setting up a compensation fund, but the exact details are not yet known. Other EU Member States appear to have already taken such measures and the EU Commission generally considers such measures admissible under state aid law.
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Any questions? Please contact: Holger Schmitz, Carl-Wendelin Neubert
Practice group: Regulatory & Governmental Affairs