COVID-19 - FAQ force majeure - KPMG Law

COVID-19 – FAQ
force majeure

 You would like to know what “force majeure” means in connection with the
 coronavirus for your contracts?

 1. Is the coronavirus outbreak a case of "force majeure" and what does it mean?
 Force majeure means a non-operative external event which is unforeseeable and even with utmost care
 cannot be prevented. Force majeure clauses in contracts and general terms and conditions usually are
 based on this definition. Examples of force majeure are war, natural events, sovereign orders, contagion,
 pandemics and epidemics (regarding the SARS virus: Local Court Augsburg, judgment of 09 November
 2004, case no.: 14 C 4608/03 and cholera: Local Court Homburg, judgment of 02 September 1992 – 2 C
 1451/92-18).

 On 11 March 2020, the World Health Organisation (WHO) classified the coronavirus outbreak at its current
 level as a pandemic (https://www.who.int/dg/speeches/detail/who-director-general-s-opening-
 remarks-at-the-media-briefing-on-covid-19—11-march-2020). The risk assessment of the Robert Koch
 Institute is also based on this classification.
 (https://www.rki.de/DE/Content/InfAZ/N/Neuartiges_Coronavirus/Risikobewertung_Grundlage.html).
 Federal Government and the Robert Koch Institute have been using the term “epidemic” at least since 10
 March 2020. However, to date there have been no court decisions as to whether the coronavirus is a case of
 “force majeure” and if so, since what point in time and for which regions this should be the case in detail.

 In legal terms, in cases of force majeure, the obligated party usually is temporarily excused from its
 obligation to perform for the duration of the force majeure event or performance deadlines may be
 extended. The effects and damages of the force majeure event therefore affect the parties themselves.
 Depending on the drafting of the clause, the parties may also be permitted to cancel the contract in the
 event of prolonged impediments to performance. However, it must be taken into account that the party
 obliged to render the characteristic performance (delivery, execution of an event, transport etc.) must do
 everything reasonable to prevent or overcome the occurrence of the force majeure event. You or your
 company insofar have the obligation to take, in particular, precautions, exercise due care and, under certain
 circumstances, to procure replacements. A general force majeure event therefore does not simply rule out
 claims for damages by the contractual partner. This is the case, in particular, if a guarantee or a special
 performance risk has been assumed.

 Also, even though at this stage of the outbreak, the coronavirus has the character of a general pandemic,
 the following must always be assessed on a case-by-case basis:

Does the respective contractual relationship include a force majeure clause?
  Does it explicitly or by way of interpretation cover pandemics and epidemics?
  Is the specific impediment to performance (loss of production or non-delivery, transport issues, event
  cancellation, etc.) directly (e.g. due to an official order to shut down the production plant or a ban on
  events) or only indirectly attributable to the coronavirus? The boundaries can be fluid – also due to the
  constantly changing factual situation and knowledge.

In addition, force majeure clauses, which are too broad may be invalid as general terms and conditions.
Under certain circumstances, this may have the effect that the party providing the general terms and
conditions cannot invoke “force majeure” because of the effects of the coronavirus.

Finally, the Party invoking force majeure because of the coronavirus must satisfy all obligations to furnish
information, notification and proof. A plea of force majeure therefore should not only be made in due time
but should also be legally and factually substantiated.

2. What if a contract does not contain a force majeure provision, the force majeure clause does
not apply or if it even is invalid?
If the contract does not contain a force majeure clause, if such clause is not pertinent or possibly invalid,
other contractual provisions must be examined which grant the parties cancellation or amendment rights
(e.g. “hardship” clauses). Moreover, the contractual parties’ rights and duties are subject to the relevant
statutory law. The respective choice of law clause in international contractual relations insofar also plays an
important role when assessing the legal situation.

For example, the UN Convention on Contracts for the International Sale of Goods (CISG) provides for a
separate force majeure rule in the international trade of goods. The seller’s obligations in the individual
case are also determined by this, in particular with regard to reasonable additional expenses and procuring
replacement. Some contracts explicitly rule out the application of the CISG. Otherwise, the CISG applies in
many – but by no means all – cross-border contracts, even if the contractual parties may not even be aware
of it.

The BGB does not contain a separate force majeure provision. However, a contractual party may be
excused from its obligation to perform if it is unable to perform (Section 275 BGB). If this is the case, the
other contractual party is also released from consideration under the law (Section 326 BGB). Whether
claims for damages can be asserted in spite of the impossibility of performance depends on the contractual
provisions and on whether any duties to exercise due care, take precautions or procure replacements have
been observed. A claim for damages under German law generally requires responsibility
(“Vertretenmüssen”). Responsibility may be assumed even without actual fault if a guarantee or a special
performance risk has been assumed.

Events resulting from the coronavirus outbreak possibly may also lead to an interference with the basis of
the transaction or frustration of contract (Section 313 BGB). This requires that the affected circumstance
has become the basis of the contract and that this has changed profoundly, with the consequence that after
weighing up the interests involved, it is unreasonable for a contractual party to adhere to the contract. This
contractual party can request an amendment to the contract or – in the extreme case – cancel it. In
particular, the criteria of risk distribution, predictability and unfairness must be considered and weighted.
Only in extremely rare cases do the courts assume frustration of contract and apply strict criteria.

Should your company anticipate that it may have to invoke force majeure or frustration of contract with
regard to existing contracts, it is advisable to keep detailed records of the circumstances which in the event
of a dispute would have to be presented in court. Moreover, in order to maintain business relationships in
the long term, a proactive review of the legal situation and a search for amicable solutions with all parties
involved makes sense, especially in times of legal and factual uncertainty.

Support-Hotline: +49 30 530199-288

E-Mail Support: de-covid-19@kpmg-law.com

Contact:
KPMG Law

 Dr. Christine Heeg-Weimann, LL.M.                                         Dr. Philipp Asbach
 (Sydney)                                                                  Senior Manager
 Partner
                                                                                 040 3609945170
       +49 211 4155597272
                                                                                 Contact
       Contact

© 2020 KPMG Law Rechtsanwaltsgesellschaft mbH, assoziiert mit der KPMG AG Wirtschaftsprüfungsgesellschaft, einem Mitglied des KPMG-
Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative ("KPMG International"), einer juristischen Person schweizerischen
Rechts, angeschlossen sind. Alle Rechte vorbehalten.

KPMG International erbringt keine Dienstleistungen für Kunden. Keine Mitgliedsfirma ist befugt, KPMG International oder eine andere Mitgliedsfirma
gegenüber Dritten zu verpflichten oder vertraglich zu binden, ebenso wie KPMG International nicht autorisiert ist, andere Mitgliedsfirmen zu
verpflichten oder vertraglich zu binden.