Germany: What to do (preventively) if the Coronavirus paralyses the business?

The coronavirus is currently hitting the headlines worldwide. The German economy is already feeling the effects because many production facilities, especially in China, are no longer able to supply and business with other Chinese partners is also faltering considerably. If the coronavirus continues to spread epidemically in Germany, the economic impact in Germany and Europe will be even more drastic.

In particular, internationally operating companies must be prepared for the coronavirus to have a temporary negative impact on their own business, regardless of whether the underlying cases of the disease are to be found within their own ranks or with business partners or anywhere else in the supply chain.

Many companies are already receiving large numbers of force majeure notices from suppliers. These ads are likely to become commonplace in the near future.

In this context, the question arises as to whether and to what extent the coronavirus leads to a suspension of suppliers’ obligation to supply and what steps the affected customers must take to avoid errors and major damage, possibly even threatening their existence, as far as possible.

Legal classification

Usually, national as well as international supply contracts contain so-called force majeure clauses, which provide that in cases of force majeure the supplier’s obligation to deliver is temporarily suspended. In return, the customer is regularly entitled to terminate the supply contract extraordinarily if the delivery stop exceeds a period agreed in the force majeure clause.

In this context, it must first be examined whether the specific supply contract is to be assessed at all under German law. The following statements apply exclusively to this case. If, on the other hand, the supply contract is subject to another legal system, an examination must be carried out on the basis of the foreign law applicable in each case.

German law does not contain any special provisions on cases of force majeure. Courts must therefore refer to the general regulations when assessing obstacles to performance. In principle, the following applies: Whether a case of force majeure exists is, according to case law, strongly influenced by the individual case. As far as is known, there is no comparable reference case in German jurisdiction to date in which a decision has ever been made as to whether a failure to supply as a result of a pandemic outbreak constitutes a case of force majeure. Only travel contract law and UN sales law recognise that epidemics fulfil the requirements for classification as force majeure.

There are certainly good arguments for classifying the outbreak and the consequences of the coronavirus as a case of force majeure, also in the context of supply contracts. But that is not certain.

What is clear, however, is that a case of force majeure will in any case only be present if the supplier cannot avoid the delivery stop, i.e. if the supplier cannot eliminate the delivery stop with reasonable measures.

Important from the supplier’s perspective

Against this background, the primary concern for suppliers is to ward off customer terminations of supply contracts and claims by customers for damages or payment of contractual penalties due to failure to deliver. In doing so, the supplier should not rely on a mere display of force majeure at the time of its inability to deliver:

Firstly, this is not the case because in practice most force majeure clauses do not explicitly provide for pandemics as a case of force majeure.

Secondly, in a possible later legal dispute a court will ask whether the supplier has taken all reasonable measures to prevent the failure to deliver. The supplier who “with his eyes open” for a long period of time does nothing, despite the ever-increasing Corona problem, until his own inability to deliver is established, will not be able to stand up to this question. On the supplier side, it is therefore already important to look into alternative possibilities for securing one’s own ability to supply. This includes, for example, identifying alternative resources and transport routes in good time, drawing up emergency plans within the company, etc. It is advisable to document the search for and results of alternative possibilities accordingly. If the supplier is able to present a comprehensible and verifiable argument in later disputes (also in court), liability can also be excluded due to lack of fault. In this case one must know: It is also reasonable for the supplier to take measures even if they involve additional financial expenditure for him, for example in the form of higher transport costs due to the changeover from sea to air freight. Similarly, customers can demand the procurement of replacement goods as a reasonable measure.

Thirdly, the supplier should inform his customers in good time of any concretely emerging delivery bottlenecks, even if he is not expressly contractually obliged to do so. This is because such information enables the customer to prepare for the delivery shortfall and to avert his own damage early and as effectively as possible. This can have just as much of a damage-reducing effect as allowing the customer to participate in the development of solutions to problems and to have a say in decisions.

Important things from the customer’s point of view

From the customer’s point of view, it is a high priority to avoid own damages as far as possible or to hold the supplier harmless. Since the supplier does not owe any compensation in the event of a delivery stop, if it is a case of force majeure, and since customers must also probably also prepare themselves for the fact that their risk of default is likely to increase, even in the case of justified claims against suppliers, if suppliers see their existence threatened as a result of the claim, customers should prepare themselves as early as possible for the possibility of delivery stops due to the coronavirus. If a customer wants to keep open the possibility of taking action against a supplier due to a delivery failure at a later date, he is advised to document any damage that occurs as well as possible. After all, it is ultimately the customer who must explain and prove in detail all breaches of duty by the supplier and the resulting damages in order to successfully assert claims.