Published March 19, 2020
Force majeure 2 – in (German) practice
As the spread of the coronavirus continues to increase and to reach ever more European countries, companies and professionals are facing more often the problem of not being able to deliver goods or services as per the contracts they’ve closed.
We’ve already pointed out, that such exceptional circumstances may represent a “force-majeure” event, i.e. an event that makes it impossible to perform a contract, without implying any liability for either party. But is this always true? And what does that mean in practice?
We’ll have a look at the practical relevance of these principles in German law.
The question about liability
Let’s sort out one fundamental aspect first. Whenever two (or more) parties close a contract, it’s perfectly possible that one of them eventually isn’t able to fulfil the contractual obligation: think of a family that at some point stops paying the rent because both parents lose their jobs. Or an airline sells you a ticket but eventually doesn’t board you because they overbooked.
If such things happen, however, debtors are usually liable, i.e.: not only do they have to fulfil their contractual obligation, but they also have to compensate damages suffered by the other party due to their failure to fulfil the contractual obligations.
The airline that refused to board you because it (culpably) overbook the flight has to find an alternative flight at its own expenses and compensate the damage you've suffered because you were denied boarding (e.g. expenses for food and accomodation at the airport, cancellation of the meeting you were heading to, loss of vacation days etc.).
The exceptional aspect about a “force-majeure” event, is that it releases both parties from their obligations without resulting in any liability.
If we stick to the example above, let’s say the airline cancels your flight because a travel ban has just been imposed: that would be a force-majeur event.
“Impossibility” and § 275 BGB
The German Civil code doesn’t mention “force-majeure” explicitly. Instead, § 275 states that, if the performance of a party’s contractual obligation becomes impossible or requires an effort which, taking into account the specific circumstances, is grossly disproportionate, the other party loses the claim, i.e. it cannot demand the obligation to be performed.
If a travel ban is imposed, which obliges the airline to ground the airplane and cancel the flight, passengers do not have a right to have the flight operated.
On top of that, as long as the event that’s causing the impossibility is not attributable to one of the parties (i.e. it’s nobody’s responsibility), the parties are released from the contractual obligations and must not compensate damages. However, if the obligation affected by impossibility has already been paid for, that price or fee has to be reimbursed.
The airline wouldn't have to pay damages (as in the overbooking-example), but it still has to reimburse the ticket price.
Is the COVid-19 spread a “force-majeure” event?
As we lawyers love to say, it depends. In some cases it’s pretty clear: if, due to the epidemics, a government has imposed restrictions (travel bans, closure of production plants, schools etc.) that make performance of a certain obligation impossible (airlines cannot operate flights, cleaning personnel cannot clean the school, etc.) such governmental action would be regarded as a force-majeure event.
But what about a dance school that decides to suspend lessons out of precaution? If there is no governmental act imposing the suspension, it’s the very risk of infection that could respresent a “force-majeure” event. If that might work for a dance lesson, where many people get together and have physical contact, it might not be applicable to – say – a language lesson, that could also take place via internet. In such a case, cancelling all lessons would not necessarily exempt the provider from liability for damages.
Here are some examples of force-majeure cases under the current circumstances:
companies that must deliver goods produced in one of the COVID-19 affected areas that have been put under governmental lockdown, such as Italy, Spain, some part of China: if factories are closed, transport is impossible and those goods cannot be retrieved elsewhere (or can only be retrieved elsewhere at disproportionate effort and cost), force-majeure will likely apply;
companies that must deliver goods produced in one of the COVID-19 affected areas but those goods can be retrieved elsewhere at a higher price: in these cases – and as long as such higher price is not “disproportionate” – a force-majeure event will most likely be denied. Having to buy a somewhat more expansive good to resell it is simply part of the business risk.
companies that cooperate in the organisation of events that got cancelled or postponed due to the spread of COVID-19 (e.g. teatre performances, festivals, trade fairs, the European Football Championship etc.). Unless the event could reasonably be adjusted to the circumstances (e.g. take place without live audience), these would be force-majeure cases, and all players involved would be affected the same way (organisers, sponsors, PR and advertising agencies, production companies, travel companies, broadcasters etc. etc.).
companies that have to shut down entirely or massively reduce their activities and therefore have no use for most of the employees: in employemnt law, the force-majeure principle is applied even more restrictively (it actually hardly applies at all), since it would result in the employee losing its salary. § 615 BGB states clearly that the employer has to bear a broad “business risk”. Courts consider natural phenomena – such as floods – or governmental action – such are forced closure of a factory – to be part of such business risk. This means that employers have, practically speaking, no possibility to invoke a force-majeure event with respect to their employees. There is only a limited exception to the rule (set forth by § 616 BGB) in cases where it’s the employee him/herself to be affected by a force-majeure event (e.g. the employee is drafted to military service).
There are, however, other solutions that employers can adopt to mitigate the effects of force-majeure events on employment contracts, such as the “Kurzarbeitergeld”.
what to do
If you think the contract you have closed cannot be performed because of a force-majeure event, first of all check if the contract includes a force-majeure clause: if that’s the case, the clause will most likely establish the procedures and consequences of such an event. If it doesn’t, you should communicate to the other contracting party without undue delay in writing, that your obligation cannot be performed, stating the reasons. Failure to notify this immediately could result in inapplicability of the force-majeure exception.
In most cases, there will be ample comprehension and possibly even the option of closing an alternative agreement or postponing performance. The other party is, however, also entitled to terminate the contract.
Feel free to reach out for us if you need assistance.