dr Christian Andrelang, LL.M.
Specialist lawyer for international business law
Specialist lawyer for commercial and corporate law
The Covid19 pandemic is causing significant disruptions in the supply chain. Border closures and temporary company closures, especially in China and now throughout Europe, have already led to bottlenecks in the supply of goods and individual parts for many companies.
Is this an event of “force majeure” that entitles us to refuse delivery or even to completely exempt us from the obligation to deliver? What does a company have to do to remain able to deliver? How does a company protect itself against the abuse of “force majeure”? Under what conditions must compensation be paid? In principle, delivery obligations arising from framework agreements or orders must always be adhered to. In the event of non-delivery, there are claims for damages if the supplier is at fault.
What is force majeure?
According to case law, force majeure is any event external to the company, brought about externally by elementary forces of nature or through the actions of third parties, which is unforeseeable according to human knowledge and experience, and which cannot be prevented by economically reasonable means, even by the utmost care that can reasonably be expected given the circumstances can be rendered harmless and cannot be accepted by the business owner because of its frequency.” Therefore, force majeure requires the unforeseeability of an event that is beyond the control of the contracting parties and which makes it impossible, even if only temporarily, for at least one contracting party to perform its performance. The Covid19 pandemic is certainly beyond the control of companies. However, every company must address the point at which the pandemic was no longer unpredictable. This will no longer be the case for contracts concluded at the end of February/beginning of March 2020, or by March 13, 2020 at the latest.
Force majeure in the supply chain
Whether the Corona crisis is a so-called “force majeure” event and eliminates culpability also depends on the contractual provisions. First, every company should check its contracts or the delivery conditions within the supply chain. Framework agreements or general terms and conditions often contain provisions on “force majeure” – also known as “force majeure” in international traffic.
If the contract or delivery conditions contain such a clause, they first specify which events can constitute “force majeure”. Sometimes epidemics or official measures are explicitly mentioned. If such designations are missing, the clause must be interpreted. Such clauses usually also determine what legal consequences arise for the obligations within the supply chain in the event of an epidemic. Thereafter, neither party is obliged to provide their contractual services for a certain period of time. After this period has expired and the “force majeure” continues, the contractual obligations cease to apply entirely.
fault of the company
However, such a clause is not a “free pass”. The force majeure event must be the cause of a party within the supply chain being unable to perform. If the Covid19 crisis or official orders are not responsible for the fact that a company cannot deliver, it will not be exempt from its delivery obligation. If a company does not stock up on individual parts in a timely manner or secure themselves through replacement suppliers and there are enough parts available, i.e. not affected by official orders, the company itself is to blame. The Corona crisis does not eliminate culpability and therefore the obligation to deliver in the supply chain.
The Corona crisis, the Covid19 pandemic itself or an official company closure do not automatically lead to the impossibility of a service. A service is only impossible if no alternative sources of supply or replacement goods, possibly with additional costs, are available. Impeding performance is not sufficient for impossibility or force majeure, especially if the contracting party that cannot perform is negligent, i.e. at fault.
Supply chain: Impossible according to the law
If a company determines that the contract or other delivery conditions do not contain a “force majeure” clause, the legal situation is determined according to the statutory regulations. This depends on the applicable law. The first thing to check in the contract is which law is applicable. If this is German law, it must be clarified whether the corona pandemic no longer causes liability for the non-delivery. In this respect, what was said above applies.
However, it is also crucial to take into account how important the service or delivery is for the buying company. This can result in increased performance and delivery obligations on the part of suppliers, which at the same time raises the hurdles for impossibility or “force majeure”.
In some cases, efforts are also being made to eliminate the basis for the transaction: If the parties had the same understanding that the contract must not be influenced by the corona pandemic, the contract must be adapted to the current circumstances and performance periods and dates postponed. However, this will only apply to recently concluded contracts. In any case, it is important to examine the contract and its provisions on a case-by-case basis.
Supply chain: Protection through self-supply reservation
If a company is not supplied, it is often unable to fulfill its obligations, for example to retailers. Force majeure clauses may also be included in contracts between manufacturers and retailers, such as distribution agreements. Then what was said above applies accordingly. The manufacturers' sales and delivery conditions often also contain a so-called “self-delivery reservation”. This means that the manufacturer's delivery obligation is subject to the condition that he himself is supplied with the product or the necessary individual parts. If such a “reserve of self-delivery” is effectively agreed, the manufacturer does not have to deliver and does not violate any obligations in the event of non-delivery. Here too, the contractual regulations must be checked on a case-by-case basis.
Protection against abuse in the supply chain
Companies can protect themselves against improper reliance on the “force majeure” clause. First of all, the supplier should point out the urgency of the delivery and also ask for an explanation of the reason for no delivery. The mere objection “Corona crisis” is no excuse. The supplier must explain exactly the reasons for which he cannot deliver, what connection there is with official orders and what efforts he has made to keep himself able to deliver. The supplier can also be expected to purchase supplies from other sources at more expensive prices. If there are indications that the ability to deliver was avoidable, the company should reserve the right to claim damages. After all, it also has to fulfill its own delivery obligations.
Special case of rental agreement
The official order in the German federal states that only shops that sell basic supplies are allowed to open does not relieve the rest of the trade from the obligation to pay rent for commercial premises or leasing installments for vehicles or machines. The situation is somewhat different with commercial leases. The purpose of the rental, i.e. the use of the rooms, is usually specifically defined there. If an official order now prohibits this use, the tenant may be in a case of temporary impossibility. This would relieve the tenant of the obligation to pay rent.
For these reasons, the Corona crisis is not an important reason that would justify extraordinary termination with immediate effect. However, ordinary termination of a contract within the agreed notice period remains possible and can be important in reducing damage.