The outbreak of the coronavirus is affecting economies worldwide. What are the legal consequences under German law if the coronavirus makes your contract difficult or even impossible to perform?
I. Starting Point: Contract Provisions
The intent of the parties is primarily essential. Thus, you should always first start to look at the contract and ascertain what the parties have actually agreed. Force majeure clauses (in Germany "höhere Gewalt") are commonplace in various contracts, including supply contracts and leases. If your contract contains a force majeure clause, the specific contractual stipulations at issue will govern the legal consequences. If, for instance, the force majeure clause at issue explicitly includes epidemics, serious illnesses or plagues, diseases, emergencies, outbreaks, quarantines or governmental measures, there is a good chance that the parties may successfully claim "force majeure" due to the coronavirus. Force majeure clauses will often excuse or defer performance. The specific legal implications, however, must be determined on a case-by-case basis.
II. What if Your Contract Does Not Contain a Force Majeure Clause or the Clause Does Not Cover COVID-19?
Under German law, the rules of impossibility (§ 275 German Civil Code) or frustration of contract (§ 313 German Civil Code) will apply.
§ 275 German Civil Code provides that the performance of a contract duty is excluded, if the performance is objectively or subjectively impossible. This is a very important distinction to many common law jurisdictions, where the defense of impossibility very often is only available when the destruction of the means of performance by an act of God makes performance of the contract objectively impossible.
§ 313 German Civil Code provides another legal remedy: If circumstances upon which a contract was based have materially changed after the contract was formed and if the parties would not have made the contract or would have done so upon different terms if they had foreseen that change, the parties may seek for an adjustment of the contract. If, however, an adjustment is impossible or would be unreasonable, the contract may be terminated (§ 313 para. 3 German Civil Code).
III. bottom line
While COVID-19 may constitute "force majeure" or provide an excuse not to perform contract duties according to § 275 German Civil Code or a claim for adjustment of contract according to § 313 German Civil Code, there is no general "right" approach to this issue. The "right" approach must be determined on a case-by-case basis in order to avoid liability and financial losses.
The Covid-19 (coronavirus) pandemic has implications for the entire global economy. However, what are the legal implications under German law if the coronavirus results in contract performance being made difficult or even impossible?
I. Always start with the specific contractual agreements
The will of the contracting parties is always primarily decisive. What did the contracting parties want? Therefore, it is always necessary to first check what the parties have specifically agreed in the contract. Thus, contractual clauses on so-called "force majeure" are often agreed in many contracts (e.g. also in supply and rental contracts). If the respective contract contains a corresponding contractual clause, the concrete legal consequences are determined on the basis of the respective concrete contractual agreement. If, for example, the contractual clause explicitly names as "force majeure" epidemics, serious diseases or plagues, emergencies, epidemics or official orders, there is a good chance of success that a contracting party can successfully invoke "force majeure" due to the Covid-19 pandemic. Appropriate contract clauses will often result in a waiver of performance or justify a delay in contract performance. The exact legal implications, however, must be determined based on the precise circumstances of each individual case.
II. What happens if the contract does not contain any clause or Covid-19 does not establish "force majeure
In this case, the general statutory provisions shall apply, in particular the provisions of § 275 BGB and § 313 BGB.
According to Section 275 (1) of the German Civil Code (BGB), the claim to contractual performance is excluded insofar as it is impossible for the debtor or for anyone. Here, there is an important difference to many common law (common law is a predominant area of law in many English-speaking countries (e.g. USA), which is not exclusively based on codified law, but rather primarily characterized by case law) jurisdictions, where often only objective impossibility is recognized as an exemption from performance.
§ Section 313 of the German Civil Code (BGB) provides that in the event of a serious disruption of the circumstances that have become the basis of the contract, an adjustment of the contract may be demanded if the parties had not concluded the contract or had concluded it with different content if they had foreseen this change. If an adjustment of the contract is impossible or unreasonable, termination or rescission may even be considered under Section 313 (3) of the German Civil Code.
The Covid-19 pandemic may well constitute "force majeure" or also lead to an exemption from performance under Section 275 (1) of the German Civil Code (BGB) or the right to adjust the contract under Section 313 (1) of the German Civil Code (BGB). However, no generally binding statement can be made here as to how to behave "correctly" as a contracting party in this case. This will have to be determined on the basis of the respective circumstances of the specific individual case in order not to expose oneself to claims for damages.