The current health crisis linked to the coronavirus epidemic with the lockdown measures ordered in many countries will provoke difficulties for the execution of commercial contracts.
Which legal solutions are available to the contracting party who cannot perform its contractual obligations because of this crisis, or who can only perform its obligations with a delay or with significant financial consequences?
Conversely, what can the other party demand in such a context? What attitude should be adopted?
Discussions will undoubtedly focus on whether or not it is possible to invoke a case of force majeure.
Beyond the question of force majeure, companies could also try to invoke a cause of hardship.
To put it more precisely, what is the legal and judicial context in France and Germany? What are the particularities of each country and each law?
First, the contracting parties must, of course, have another look at their contract and analyse its contractual clauses.
If the terms of the contract are not clear and/ or not precise enough, or if the contract simply does not contain any clause of force majeure, a legal analysis according to the law applicable to the contract will be carried out in a second step.
- The situation of a contract subject to French law
- Preliminary analysis of the contract clauses
Analysis and verification of the force majeure clause in the contract:
The parties are free to define the concept of force majeure in the contract by specifying what they do or do not consider as a case of force majeure (an epidemic, in particular).
In their contract, the parties could also have provided for the effects and consequences of the occurrence of a case of force majeure on the execution of the contract (obligation to provide information; possible adjustments; time limit before possible termination of the contract etc.).
Analysis and verification of a hardship clause in the contract:
The contract should also be checked in terms of whether the parties have excluded the application of article 1195 of the French Civil Code relating to hardship or whether they have adjusted its conditions (conditions of renegotiation etc.).
The new article 1195 of the French Civil Code defines hardship as follows:
« Si un changement de circonstances imprévisible lors de la conclusion du contrat rend l’exécution excessivement onéreuse pour une partie qui n’avait pas accepté d’en assumer le risque, celle-ci peut demander une renégociation du contrat à son cocontractant. Elle continue à exécuter ses obligations durant la renégociation.
En cas de refus ou d’échec de la renégociation, les parties peuvent convenir de la résolution du contrat, à la date et aux conditions qu’elles déterminent, ou demander d’un commun accord au juge de procéder à son adaptation. A défaut d’accord dans un délai raisonnable, le juge peut, à la demande d’une partie, réviser le contrat ou y mettre fin, à la date et aux conditions qu’il fixe »
“If a change of circumstances unforeseeable at the time of the conclusion of the contract makes performance excessively expensive for a party who had not agreed to bear its risk, that party may request a renegotiation of the contract from its co-contractor. It shall continue to perform its obligations during the renegotiation phase.
If the renegotiation is refused or fails, the parties may agree to terminate the contract on the date and under the conditions they determine, or may, after mutual agreement, ask the court to adjust it. If no agreement is reached within a reasonable time, the court may, at the request of one of the parties, revise or terminate the contract on the date and under the conditions it shall determine.”
The contract clause may include the terms and conditions for renegotiating the contract in the event of a change in circumstances unforeseeable at the time of signing the contract.
If the contract does neither contain force majeure nor hardship clauses, or if these clauses are not precise enough, reference should be made to the provisions of the law applicable to the contract to assess the rights and obligations of the contracting parties.
- Cases of force majeure under French law
The conditions of force majeure
The case of force majeure is defined under article 1219 of the French Civil Code:
« Il y a force majeure en matière contractuelle lorsqu’un événement échappant au contrôle du débiteur, qui ne pouvait être raisonnablement prévu lors de la conclusion du contrat et dont les effets ne peuvent être évités par des mesures appropriées, empêche l’exécution de son obligation par le débiteur. »
“There is force majeure in matters relating to a contract when an event beyond the obligor’s control, which could not be reasonably foreseen at the time of the conclusion of the contract and the impacts of which cannot be avoided by appropriate measures, prevents the obligor from performing his obligation.”
Therefore, the conditions of force majeure are:
- the existence of an event beyond the obligor’s control (exteriority);
- that could not be reasonably foreseen at the time of the conclusion of the contract (unpredictability);
- and the impacts of which cannot be avoided by appropriate measures (irresistibility).
The mere existence of an epidemic such as the Coronavirus is not sufficient in itself to constitute a case of force majeure.
The party invoking force majeure must therefore prove that the situation it is confronted with is, indeed, a case of force majeure.
In practice, the French courts will decide depending on the circumstances of each case if the three conditions provided for under article 1218 of the French Civil Code are met.
The unpredictability of the Coronavirus epidemic will undoubtedly be assessed depending on the date of the conclusion of the contract. It might be more difficult to get it accepted if the contract was concluded at a time when the first cases were declared in Europe, and more specifically in France, which will probably give rise to discussions.
Concerning the irresistibility, it will have to be proven that there are no alternative solutions, that the party cannot implement appropriate measures to enable it to perform its obligations.
The impacts of force majeure
If an event is analysed as being a case of force majeure, two situations are provided for in article 1218 paragraph 2 of the French Civil Code according to which the impediment is either temporary or permanent.
« Si l’empêchement est temporaire, l’exécution de l’obligation est suspendue à moins que le retard qui en résulterait ne justifie la résolution du contrat.
Si l’empêchement est définitif, le contrat est résolu de plein droit et les parties sont libérées de leurs obligations ».
“If the impediment is temporary, the performance of the obligation shall be suspended unless the resulting delay justifies the termination of the contract.
If the impediment is permanent, the contract is terminated by law and the parties are discharged from their obligations.”
- Hardship under French law
If the presence of a case of force majeure seems questionable, the parties may attempt to invoke hardship.
As stated above, the legal framework of hardship is defined in article 1195 of the French Civil Code.
« Si un changement de circonstances imprévisible lors de la conclusion du contrat rend l’exécution excessivement onéreuse pour une partie qui n’avait pas accepté d’en assumer le risque, celle-ci peut demander une renégociation du contrat à son cocontractant. Elle continue à exécuter ses obligations durant la renégociation.
En cas de refus ou d’échec de la renégociation, les parties peuvent convenir de la résolution du contrat, à la date et aux conditions qu’elles déterminent, ou demander d’un commun accord au juge de procéder à son adaptation. A défaut d’accord dans un délai raisonnable, le juge peut, à la demande d’une partie, réviser le contrat ou y mettre fin, à la date et aux conditions qu’il fixe »
“If a change of circumstances unforeseeable at the time of the conclusion of the contract makes performance excessively expensive for a party who had not agreed to bear its risk, that party may request a renegotiation of the contract from its co-contractor. It shall continue to perform its obligations during the renegotiation phase.
If the renegotiation is refused or fails, the parties may agree to terminate the contract on the date and under the conditions they determine, or may, after mutual agreement, ask the court to adjust it. If no agreement is reached within a reasonable time, the court may, at the request of one of the parties, revise or terminate the contract on the date and under the conditions it shall determine.”
Contrary to force majeure, hardship does not allow a party to suspend its obligations but to request a renegotiation of the contract. If this request fails, the parties may ask the judge to adjust, revise or terminate the contract.
The party suffering the consequences of the epidemic will have to argue that such circumstances were not foreseeable when the contract was concluded, but, above all, that performance has become very difficult (financial investments, much greater efforts).
- The obligation of good faith
During their discussions and exchanges on the consequences of the Coronavirus epidemic, the parties shall, in any event, keep in mind the necessary compliance with their obligation of good faith when performing their contract which the parties may not violate (article 1104 of the French Civil Code).
- Caution: Fate of penalty clauses, resolutory clauses during a state of health emergency
It should be noted that by Order n°2020-306 of 25 March 2020, the government specified in particular that penalty payments, penalty clauses, resolutory clauses as well as forfeiture clauses, when their purpose is to sanction the non-performance of an obligation within a given period, are deemed not to have taken effect or to have taken effect, if this period expires within a period of one month from the date of termination of the state of public health emergency set to date at 24 May 2020, i.e. if the period expires before 24 June 2020.
- The situation of a contract subject to German law
- Preliminary analysis of the contract clauses
Just as it is the case under French law, verifying the content of the contractual provisions agreed between the parties is also the first priority according German law (force majeure clauses “höhere Gewalt”).
If no provisions are made in the contract, or if its terms are not precise enough, the provisions of German law shall apply.
- The provisions of German law
German law does not contain any specific legal provisions regarding force majeure.
In the event of an exceptional crisis linked to the Coronavirus epidemic, the following provisions of the German Civil Code (BGB – bürgerliches Gesetzbuch) may be invoked where appropriate.
Article 275 of BGB (rules regarding the impossibility to perform: “Unmöglichkeit”) stipulates:
(1) Der Anspruch auf Leistung ist ausgeschlossen, soweit diese für den Schuldner oder für jedermann unmöglich ist.
(2) Der Schuldner kann die Leistung verweigern, soweit diese einen Aufwand erfordert, der unter Beachtung des Inhalts des Schuldverhältnisses und der Gebote von Treu und Glauben in einem groben Missverhältnis zu dem Leistungsinteresse des Gläubigers steht. Bei der Bestimmung der dem Schuldner zuzumutenden Anstrengungen ist auch zu berücksichtigen, ob der Schuldner das Leistungshindernis zu vertreten hat.
(3) Der Schuldner kann die Leistung ferner verweigern, wenn er die Leistung persönlich zu erbringen hat und sie ihm unter Abwägung des seiner Leistung entgegenstehenden Hindernisses mit dem Leistungsinteresse des Gläubigers nicht zugemutet werden kann.
(1) A claim for performance is excluded to the extent that performance is impossible for the obligor or for any other person.
(2) The obligor may refuse performance to the extent that performance requires expense and effort which, taking into account the subject matter of the obligation and the requirements of good faith, is grossly disproportionate to the interest in performance of the obligee. When it is determined what efforts may reasonably be required of the obligor, it must also be taken into account whether he is responsible for the obstacle to performance.
(3) In addition, the obligor may refuse performance if he is to render the performance in person and, when the obstacle to the performance of the obligor is weighed against the interest of the obligee in performance, performance cannot be reasonably required of the obligor
Article 275 BGB therefore exempts a party to the contract from performing its obligations in the event of objective (paragraph 1) or economic (paragraph 2) impossibility.
Regarding objective impossibility, a distinction is made between factual impossibility (e.g. loss of the thing to be performed) and legal impossibility. This legal impossibility may result, for example, from a text adopted as a result of the Coronavirus epidemic.
Of course, the other party to the contract will not be obliged to perform its agreed consideration either (cf. article 326 paragraph 1 BGB).
Whether the party who is unable to perform is liable for damages depends on whether or not it is at fault, unless the contract provides otherwise. Pursuant to article 276 BGB, fault presupposes intent or negligence from the party at fault.
However, such fault shall not exist if one of the parties’ failure to perform is due to an event of force majeure. The Coronavirus epidemic can be regarded as such an event. In the past, for example, the SARS epidemic has been described as an event of “force majeure” by various German courts.
Article 313 of BGB (rules regarding the interference with the basis of the transaction: “Störung der Geschäftsgrundlage”)
Even if it is still possible to execute the contract, the circumstances which form the basis of the contract may have seriously and unforeseeably changed after the conclusion of the contract in such a way that compliance with it can no longer be required of either or both parties.
In this case, article 313 of BGB confers a right to adjust the contract, especially in the event of a cause of hardship, as it is the case according to French law:
(1) Haben sich Umstände, die zur Grundlage des Vertrags geworden sind, nach Vertragsschluss schwerwiegend verändert und hätten die Parteien den Vertrag nicht oder mit anderem Inhalt geschlossen, wenn sie diese Veränderung vorausgesehen hätten, so kann Anpassung des Vertrags verlangt werden, soweit einem Teil unter Berücksichtigung aller Umstände des Einzelfalls, insbesondere der vertraglichen oder gesetzlichen Risikoverteilung, das Festhalten am unveränderten Vertrag nicht zugemutet werden kann.
(2) Einer Veränderung der Umstände steht es gleich, wenn wesentliche Vorstellungen, die zur Grundlage des Vertrags geworden sind, sich als falsch herausstellen.
(3) Ist eine Anpassung des Vertrags nicht möglich oder einem Teil nicht zumutbar, so kann der benachteiligte Teil vom Vertrag zurücktreten. An die Stelle des Rücktrittsrechts tritt für Dauerschuldverhältnisse das Recht zur Kündigung.
(1) If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.
(2) It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect.
(3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke.
On a case-by-case basis, an outbreak of Covid-19 may be considered as being a serious and unforeseeable change in circumstances. If this is the case, article 313 of the German Civil Code allows either party to request an adjustment of their contract. Depending on the individual case, the disadvantaged party may only rescind or terminate the contract if a contractual adjustment is not possible or cannot be demanded from one of the parties.
- The case of contracts subject to the provisions of the Vienna Convention on the International Sale of Goods
It should be noted that for contracts for the international sale of goods, the provisions of the United Nations Convention on Contracts for the International Sale of Goods (CISG) of 11 April 1980 shall apply unless the application of the Convention has been excluded by the parties.
In the case of the Coronavirus, the parties could therefore refer to the provisions of article 79 paragraph 1 of the said Convention, according to which:
“A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and 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.”
Article 79 paragraph 4 of the Convention adds:
“The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.”
The EBA team is at your disposal for any further questions related to your specific issues.
Muriel MAZAUD
Anke SPRENGEL
Tim JAKOBS 10th April 2020