Lena Fleischmann is a German law student and a Referendarin at Phillips Nizer LLP.
COVID-19, first detected in Wuhan, China, in December 2019, was, within just a few months, declared by both the WHO and CDC to be a global pandemic. Due to the closely interlinked supply-chain relationships of the global economy, the contractual obligations and expectations of German companies are directly affected, even in areas where the worst health effects of the disease have thankfully not occurred. Factory, warehouse and retail store closings, quarantine and social distancing measures, bottlenecks in the supply of materials and components, transport delays and failures—supply chains get out of joint, sales collapse, entire industries practically come to a standstill. Because the fashion business, due to its dependence on sell-through of seasonal consumer merchandise, depends more than most businesses on the timely delivery of product, it has been especially challenged. When doing business in Germany, it is all the more important to know your own rights and obligations in service and supply relationships and to develop a proactive strategy best to protect your company’s interests.
So-called force majeure clauses are often found in most international fashion-business contracts, and Germany is no exception. As companies doing business in the United States have typically experienced domestically in the application of the laws of the various states, there is no definition of force majeure in German law. In general terms, however, a force majeure event is an exceptional, unforeseeable (as to a specific event) circumstance that is beyond the control of the parties and that, at least temporarily, renders fulfillment of the specific contractual provisions impossible or impracticable. The clause effectively forgives performance failures during the period in which the obstacle stands in the way—as long as reasonable notice is given of an intention to claim force majeure. (Some versions of a force majeure clause limit how long such a period might be.) More specifically, according to the case law of German courts (which is instructive although not holding the power of binding precedent under German law), force majeure is an event that comes from outside the control of the parties, that has no operational connection to their respective performance and that, even with the utmost care, could not reasonably have been anticipated.
Once a court concludes that an event of force majeure has taken place, the rules of impossibility according to § 275 BGB (the German civil code) and the loss of the business basis according to § 313 BGB become applicable. Force majeure clauses often contain wording requiring the claimed obstacle to performance to be removed, if possible, with “reasonable economic effort.” As a rule, the court will seek to balance the potential for damage on either side in arriving at a decision. The burden of proof rests with the party claiming force majeure. To prevent potential claims by others who might in some way be affected in the supply chain, by lending practices or otherwise, making those third parties aware of the difficulties at an early stage is important—as is the need to take reasonably necessary precautionary measures to mitigate losses.
If a performance is impossible or unreasonable under the circumstances, depending on the party exercising a force majeure clause, a performance obligation will be excused or refusal to acceptant performance will be permitted. It is possible that, if later circumstances warrant it, a contract can be adjusted to take the force majeure event into account; in other cases, the contract can be terminated. Indeed, if performance has become impossible or unreasonable, withdrawal from the contract might be permitted. This means that deliverables (such as cash or goods) received in advance of the intended performance would have to be returned.
Whether delays in delivery or failures to deliver merchandise due to COVID-19 in a specific instance can be considered to have resulted from force majeure will depend on the contractual terms and the context in which the claim of force majeure arose. If epidemics, pandemics, diseases or quarantine measures are explicitly mentioned in the contractual clause as forms of recognized force majeure, the spread of the new coronavirus would quite likely be deemed such a circumstance. However, if the term force majeure is mentioned along with examples such as natural disasters, strikes, wars or terrorist conflicts (but not medical crises), the term force majeure would be interpreted in the light of the totality of the agreement and the surrounding circumstances (such as, as we have seen, a general halt of most garment retailing). Although no court decision has yet come down for a COVID-19 case, older judicial interpretations relating to the SARS virus epidemic in 2003 and a cholera outbreak can be referenced for guidance.
In short, existing interpretation of German law, and the legal method by which interpretation is made suggest that COVID-19 could be seen as force majeure in Germany in cases involving the fashion and accessories businesses. We will likely soon know whether and under what circumstances German courts will so rule.
§ 275 BGB applies if a performance has either become impossible or possible but unreasonable. As a result, there is no obligation to perform.
§ 313 BGB applies if the circumstances the contract was based on have changed and the parties can no longer be expected to adhere to the contract. As a result, the contract can either be adjusted or, if that is not feasible, terminated.