I. Status quo

The current limitation of economic activities to contain the Covid-19 pandemic leads to companies increasingly facing restrictions or even disruptions in supply chains, production flow or their sales potential. In particular, the main questions that arise for the decision makers involved are: How should one react when a contractual partner reports that due to a crisis he is unable to provide his services in accordance with the contract? Which possible courses of action are there, if the own company is no longer able or even willing to comply with contractual obligations (including payment obligations)?
For current transactions is it also necessary to evaluate how the economic distortions to be feared can be legally taken into account.

II. Impact on existing contractual relationships

1. Reliance on contractual provisions

If the proper fulfillment of contractual obligations is threatened by the Covid-19 pandemic, the first step ought to be to check whether the underlying contract contains provisions that can be applied to this situation.
Especially the so-called force majeure clauses should be on the forefront of the mind, as they are often part of international economic agreements. Typically, such force majeure clauses exempt the party concerned upon occurrence of an event of “force majeure” for the duration of the effects thereof from their obligation to provide services. In case the event continues beyond an agreed period, force majeure clauses also frequently grant rights of termination to the contracting parties. But what is considered a “force majeure” event? And: Is the Covid-19 pandemic such an event?
The concrete contractual definition is always decisive. If, as is not uncommon, this expressly lists diseases, epidemics or pandemics as examples of rules, the corresponding force majeure clause applies to the current situation. In the event that the contractual definition for “force majeure” is missing, the definition developed under liability law and travel law can be used for interpretation under German law, according to which it must always be an “external, unforeseeable, unavoidable and extraordinary event”. In principle, these conditions should be fulfilled in the current situation, especially since court decisions in the field of travel contract law have expressly classified the occurrence of epidemics (cholera, SARS-CoV) as a case of force majeure in the past (cf. Bad Homburg Local Court, judgment of 2 September 1992 – file no. 2 C 145/92, Augsburg Local Court, judgment of 9 November 2004 – file no. 14 C 4608/03).
However, caution must be exercised against making generalized reference to force majeure clauses. Since SARS-CoV2 virus is spreading with a regional time lag, the debtor who is required to provide evidence in this context should always check on a case-by-case basis whether the impediment to performance is actually based on the outbreak of the virus before asserting force majeure claims, and should endeavor to document this causal relationship accordingly. This is easier if one is directly affected by sovereign measures to curb the COVID-19 pandemic (border closures, plant closures, curfews, etc.) than if one is only indirectly affected, for example due to the quarantine of individual employees ordered by the authorities. If this examination comes to the conclusion that there is a case of force majeure, the affected contractual partner must be informed immediately to avoid claims for damages. In a mirror image, creditors concerned should closely examine whether the debtor has complied with his obligations of conduct agreed upon for an event of force majeure, in particular his obligation to give prompt notice thereof.
If the COVID-19 pandemic leads to an interruption of the supply chain with the consequence that a supply necessary for the fulfillment of own contractual obligations is missing, it should first be examined whether the contract agreed with the customer contains a valid reservation of self-delivery. A reservation of self-delivery limits the principle that the procurement risk is solely the responsibility of the seller or service provider and grants the seller the right to withdraw from the contract if he cannot fulfill his contractually owed performance due to the failure of delivery.
However, if a contractual partner invokes a self-delivery clause, its effectiveness and applicability under the law on general terms and conditions should first be critically examined. It is true that the case law applies less strict standards to the effectiveness of reservations of self-delivery agreed in business transactions than in the “B2C” area. However, even if such a reservation has been effectively agreed, case law links its applicability to special prerequisites not necessarily listed in the clause in order to ensure that the reservation only applies to future, uncertain risks and only if the seller or service provider was not able to procure the necessary resources despite reasonable efforts. It is therefore particularly necessary that a congruent cover transaction has been concluded with the supplier (see Federal Court of Justice (BGH) judgement of 14 November 1984 – file no. VIII ZR 283/83, Stuttgart Higher Regional Court judgement of 16 February 2011 – file no. 3 U 136/10) and this can also be proven (disclosed).
Instead of force majeure or self-delivery clauses, so-called MAC (Material Adverse Change) clauses are regularly used in the financing area. These allow the lender to terminate a loan agreement without notice if the borrower’s financial situation deteriorates significantly. Sometimes MAC clauses are also used in M&A transactions to enable the acquirer of the target company to rescind the agreement in the event that unexpected material adverse changes occur in the period between signing and closing. The possible varieties of MAC clauses in the context of corporate transactions are manifold and range from so-called Business MAC, which are based on the business of the company to be acquired, to so-called Market MAC, which refer to the development of the market environment of the target company, to so-called Finance MAC, which are linked to the securing of the financing of the transaction (cf. Kästle/Haller, NZG 2016, 926). Whether the effects of the COVID-19 pandemic will lead to the use of possible MAC clauses in the areas mentioned above thus depends decisively on the concrete form of the respective MAC clause and the individual (economic) impact. The question as to when there is a “substantial” deterioration is a question of valuation which, as a rule, can only be answered on the basis of an overall assessment of the circumstances of the individual case.

2. Statutory Law

If none of the above-mentioned contractual arrangements exist, a second step should be to examine whether the applicable statutory law contains legal instruments that can be used in the current exceptional situation.
First of all, the Act to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law (Federal Law Gazette [BGBl.] 2020/I, p. 569), which was passed by the Bundestag on 25 March 2020, provides for certain protective mechanisms for selected areas of contract law. What all these protective instruments have in common, however, is that – if applicable at all – they do not lead to an elimination of the obligation to perform, but merely suspend it for a certain period in the sense of a moratorium. This makes legal mechanisms all the more important, which can also lead to a permanent suspension or adjustment of the obligation to perform.
In the field of international sale of goods, the United Nations Convention on Contracts for the International Sale of Goods (CISG) contains a provision according to which a contracting party is not liable for the non-fulfillment of its obligations if it proves that the non-fulfillment is due to an impediment beyond its control and that it could not be expected of it to avoid or overcome this impediment or its consequences (cf. article 79 CISG). This essentially describes the principles of force majeure. However, article 79 CISG directly covers only the exemption from claims for damages. Whether article 79 CISG also leads to an exclusion of the claim for fulfillment is disputed. In addition, the validity of the UN Convention on Contracts for the International Sale of Goods is regularly excluded by contract, with the consequence that national law becomes the sole decisive basis for assessment.
Under German law, the regulations on the inability to perform (section 275 German Civil Code [Bürgerliches Gesetzbuch – BGB]) and on the so-called interference with the basis of the transaction (section 313 BGB) are of primary importance.
If the contractually obligated party is unable to perform due to the effects of the COVID-19 pandemic, the obligation to perform may be permanently and, according to the dominant opinion, also temporarily waived due to so-called subjective impossibility of performance (section 275 para. 1 BGB). At the same time, the obligation of the other party to the contract to provide consideration also becomes null and void (section 326 para. 1 BGB). A subjective impossibility of performance is conceivable above all from the point of view of the passage of time in the case of absolute fixed transactions, i.e. transactions in which the provision of the service up to a certain point in time is essential to the contract, and as a (temporary) legal impossibility of performance, for example due to the ordered closure of business facilities.
If the current crisis situation results in the fact that the performance of the contractually owed service would be theoretically possible but – for example due to considerable difficulties in the supply chain – would involve an effort that is disproportionate to the interest of the contractual partner in the performance of the service, the debtor may refuse performance by raising an objection (section 275 para. 2 BGB). Whether these conditions are met must be determined on the basis of all the circumstances of the individual case by comparing the effort to be made by the debtor and the interest of the creditor in the performance of the service. If the debtor’s production costs have increased excessively but the creditor’s interest in performance has remained constant, section 275 para. 2 BGB applies. However, even a drastically increased effort or enormous cost increases on the part of the debtor are not sufficient for the objection of impossibility, if the creditor also has an increased interest in performance, for example due to the lack of alternative sources of supply.
In such a situation, however, the principles of interference with the basis of the transaction (section 313 BGB) may, under certain circumstances, allow for an adjustment of the contract. This legal institution – also developed on the occasion of an exceptional economic situation, namely the hyperinflation rampant at the beginning of the 20th century – is applied by the courts only under strict conditions. However, a contract may be adapted if circumstances beyond the debtor’s control and risk create such a blatant disproportion between performance and consideration that the debtor cannot reasonably be expected to adhere to the contract. This constellation, also referred to as equivalence disruption or economic impossibility of performance, should be applicable, inter alia, in the event of unforeseeable excessive procurement difficulties. However, case law only assumes on the basis of comprehensive balancing of interests that the adherence to contractual duties cannot be reasonably expected. Within this balancing of interests, it should also be relevant whether the debtor has taken reasonable measures to avoid or mitigate the disturbance (e.g. timely consideration of alternative sources of supply or transport routes). Since the debtor is faced with the burden of proof for the existence of an interference with the basis of the transaction, the corresponding measures should be documented.
Moreover, taking (reasonable) measures to avoid a breach of contract is also important in cases where the effects of the COVID-19 pandemic already lead to an impossibility to perform pursuant to section 275 BGB. This enables the debtor to rebut the legal presumption that he is responsible for the impossibility to perform, thus preventing any claims for damages by his creditors.
The aforementioned explanations show that even in the absence of contractual agreements, there are certain provisions in statutory law that can be used to counteract the economic distortions in the area of contract law associated with the COVID-19 pandemic. However, the concrete possibilities always depend on the relevant type of contract and the individual contractual situation. For example, statutory law provides for special regulations for certain types of contracts in the event of impossibility to perform or of interference with the basis of the transaction.

III. Refusal of acceptance

While the above explanations deal with the right to refuse performance, let us take a brief look at the right to refuse acceptance. This could lead to the idea that goods or services (including rental services) no longer need to be accepted because of the pandemic. This right may only be given in very special cases, for example if the intended use was explicitly mentioned in the contract and this use is no longer possible because the contracting party no longer allows for it (example: hairdresser in a hotel if the hotel has to close.) As already mentioned, the right to refuse acceptance may only exist in exceptional cases. As a rule, the risk of using a contractual service is assigned solely to the recipient of the service.

IV. Contract design for the future

For the design of future contractual relations, care should be taken, especially in supply contracts, to include force majeure clauses listing epidemic and pandemic events as exemplary cases of force majeure.
The importance of MAC clauses is likely to increase in the field of transaction law. While such clauses are common in the Anglo-American legal system, they have so far been applied very hesitantly in German legal practice. However, the extent to which MAC clauses can be included in company purchase agreements also depends to a large extent on one’s own negotiating position. As a concession to the seller, for example, the agreement of a break-up fee in the event that the purchaser makes use of the MAC clause is conceivable. MAC clauses could be based on how long “the economy will stand still”, the extent of the sales or profit slump that has occurred in the meantime, or whether the company is/will not be facing insolvency in the meantime. Further cases are conceivable. It may also be the case that the legal consequence is not a withdrawal but only an adjustment of the purchase price.
However, “ordinary” force majeure and MAC clauses, as well as reservations of self-delivery, protect at best against developments that were unforeseeable at the time of the conclusion of the contract. But what applies to contracts concluded in the middle of the current crisis situation? For such agreements, an attempt should be made to mitigate or modify the criterion of unpredictability in such clauses. It is conceivable, for example, not to declare the unforeseeability of the event itself, but rather its unpredictable duration and its unforeseeable effects as the relevant point of reference. When drafting such clauses in concrete terms, however, the limits of the contract under the law of obligations, in particular the law on general terms and conditions, must always be kept in mind.