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.
Michael S. Fischman, Partner Phillips Nizer LLP
In many states, such as New York, a covenant of good faith and fair dealing is implied in every contract and prevents the trademark owner from (ab)using the right of sole discretion in a manner that would deny the manufacturer the benefits of the contract. An example of the interplay of the covenant of good faith and “sole discretion” rights can be found in a 2017 case involving a dispute between Elie Tahari Ltd. (“Tahari”) and one of its licensees, Parigi Group Ltd. (“Parigi”). As reported in public filings, Tahari and Parigi were parties to a license agreement by which Parigi was to produce and sell a line of children’s clothing under the ELIE TAHARI trademark, commencing with the spring/summer 2015 season. Pursuant to the detailed procedures of the license agreement, Tahari gave Parigi its approval, in writing, for styles that it accepted for the first collection and those styles were placed into production.
Thereafter, during a visit to the Parigi showroom, the head of Tahari and its chief designer, Elie Tahari, announced that he was revoking Tahari’s approval of each and every style that was previously approved by the Tahari personnel. Tahari, the company, claimed that it had the right to force Parigi to pull the entire collection from the showroom (just as it was to be offered for sale to retailers) under a provision of the license agreement that allowed it to “revoke its approval of Licensed Products in the event that Licensor [Tahari] determines, in its sole discretion, that any such prior approved item has become outdated or the durability or design of such prior approved item no longer meets the highest standards of style, appearance, distinctiveness and quality as to conform to the standards and specifications established by Licensor” (emphasis suppled).
The parties each claimed that the other breached the license agreement. Parigi refused to produce further products under the Tahari license and risk losing its investment in yet another collection. Tahari claimed that Parigi was obligated to continue under the license agreement, design new product and pay the minimum royalties regardless of whether Tahari would approve it unconditionally or not. Tahari ultimately commenced an action against Parigi alleging that licensee’s repudiation of the agreement constituted a material breach and that it was owed $1,000,000 for royalty payments and guarantees. Parigi filed its own claim alleging that Tahari materially breached the agreement and its duty of good faith and fair dealing.
The panel of three arbitrators hearing the dispute concluded that, notwithstanding the broad approval rights of Tahari under the contract, including Tahari’s right in its “sole discretion” to revoke prior approval of product, “the Agreement’s fundamental purpose was entirely frustrated by Tahari’s conduct, and therefore … Parigi was entitled to terminate based on Tahari’s material breach of the Agreement.” The panel concluded that Tahari could not collect minimum royalties because it had prevented Parigi from making any sales against which royalties could be earned. In other words, Tahari had breached the covenant of good faith and fair dealing that is implicit in every contract.
The covenant of good faith and fair dealing “encompasses any promises which a reasonable person … would be justified in understanding was included in the parties’ agreement.”  A party breaches its duty of good faith and fair dealing when it “acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.” Tahari breached the implied covenant of good faith and fair dealing by revoking its explicit approval of each and every product in an entire seasonal collection, all of which products it had approved months earlier.
Although an extreme case in the suddenness and timing of Tahari’s announcement of its decision to revoke its earlier approval and in the consequences of doing so, the Tahari-Parigi dispute underscores the importance of considering the impact of “sole discretion” decisions. There is nothing really “sole” about a contract with another party.
 See In The Matter Of The Arbitration Of Certain Controversies Between Parigi Group Ltd. v. Elie Tahari, Ltd. (656041/2017). Parigi was represented in the matter by Alan Behr and Michael Fischman of Phillips Nizer LLP.
 ARB Upstate Commc’ns LLC v. R.J. Reuter, L.L.C., 93 A.D.3d 929, 934 (3d Dep’t 2012) (internal quotation marks omitted) (citation omitted).
 Id. (citation omitted). See also, Jaffe v. Paramount Commc’ns, 222 A.D.2d 17, 22-23 (1st Dep’t 1996) (“[the] covenant of good faith and fair dealing … is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.”); Legend Autorama, Ltd. v. Audi of Am., Inc., 100 A.D.3d 714, 716 (2d Dep’t 2012) (“The covenant embraces a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’”)(quoting, Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995)); Richbell Info. Servs. v. Jupiter Partners, 309 A.D.2d 288, 302 (1st Dep’t 2003)(even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party’s right to the benefit under the agreement).
Michael S. Fischman, Phillips Nizer Partner
Whether it be the impact on supply chains, office disruption from government shut-down orders or lost business from the temporary closing of retail stores to help limit the spread of the coronavirus (COVID-19) outbreak, licensing relationships are likely to be tested like never before. It is therefore important for both brand licensors and licensees to have clarity about the effect of legal provisions of their agreements and about the legal rights and protections that may be implicated by the global pandemic.
Although the breach of a license agreement may create both legal and reputational risks for a licensee, of immediate concern to many licensees today is whether they can continue to pay the minimum guaranteed royalties due under their contracts. The purpose of such a provision, after all, is to lock in a baseline level of royalty revenue over the duration of an agreement. With decreasing retail sales, licensors will likely come to rely more and more on these forms of “guaranteed” payments. A licensee, knowing that its licensor could well be hard-pressed to replace its license in the current business climate, may choose to use this moment of mutual business distress to seek relief from its minimum guarantee. After all, the licensee might assume, the licensor will recognize the impact of coronavirus on the licensee’s business and will want to retain the contractual relationship for when business conditions improve.
That may be an accurate assessment by the licensee, but it does not come without risk. For example, depending on the wording and context, communications with the licensor before any payment is due could trigger an anticipatory breach of the contract. An anticipatory breach involves “a wrongful repudiation of the contract by one party before the time for performance,” entitling “the nonrepudiating party to immediately claim damages for a total breach.” Under this doctrine, “[t]he nonrepudiating party need not … tender performance nor prove its ability to perform the contract in the future,” but rather, “the doctrine relieves the nonrepudiating party of its obligation of future performance and entitles that party to recover the present value of its damages from the repudiating party’s breach of the total contract.” (Id.) What that means in practice is that there could be serious unanticipated consequences of what might have been intended to be no more than an innocent expression of financial difficulty by a licensee, but which instead is determined to be a declaration of its inability or refusal to make payment of an imminent minimum guaranteed royalty or other amount due under its license. Specifically, the licensee may find itself defending a lawsuit for anticipatory breach of contract.
Before making that call or sending that email, therefore, carefully review with counsel your license agreement and the facts specific to your business issues. To be considered, for example, is the question of whether the license contains a force majeure clause – a provision that excuses non-performance due to circumstances that are beyond the control of the parties. Typically, force majeure clauses under New York law (and those of other states) apply to events such as fires, floods, wars and acts of God. The determination of whether COVID-19 applies to a specific license agreement will depend heavily on the language of the contract. What is often considered “boilerplate” and not subject to any substantive negotiations, the force majeure clause might be able to be used to avoid or suspend minimum guaranteed royalty and other payment obligations. A caution: those clauses are narrowly construed by courts, meaning that: “only events specifically listed will excuse a party’s performance.”
Depending on the circumstances, government decrees arising from the coronavirus outbreak — such as prohibitions against public gatherings, shelter in place orders and border closures of facilities – may give rise to a valid claim of impossibility or impracticability. The doctrine of impracticability may provide relief when such unexpected superseding events occur (and where the nonoccurrence of which was a basic assumption on which the contract was made) and make it unreasonable or commercially senseless to require performance in light of such events. The doctrine of impossibility of performance may also excuse temporary non-performance in exceptional circumstances where a party is able to show that performance was rendered objectively impossible for any similarly situated party. These legal doctrines may have particular relevance during times when governmental measures render performance temporarily impossible.
As news of additional outbreaks and new transmission paths continue, responsive measures to COVID-19 are likely to escalate further (albeit at different times and in different degrees globally), creating broader and more severe economic ramifications. Licensees may be able to use the doctrines of force majeure, impossibility, or impracticability to protect themselves from liability for non-performance. However, whether those doctrines apply in specific circumstances is a question that will depend on fact-specific analyses. In short, regardless of how close a relationship you have developed with your licensor, it is wise to be prepared before seeking relief from the express terms of your license agreement.
- American List Corp. v U.S. News and World Report, Inc., 75 N.Y.2d 38, 44 (1989).
- Force Majeure Clauses and COVID-19 – Can Force Majeure Clauses Excuse Performance Under New York or Delaware Law in a Pandemic? The National Law Review (March 13, 2020).
- See Bush v. Protravel International, Inc., 746 N.Y.S.2d 790 (Civ. Ct., Richmond County 2002) (holding that performance of a travel contract has been rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown); see also Kolodin v. Valenti, 979 N.Y.S.2d 587, 589 (1st Dep’t 2014) (management and recording contract between two parties was rendered objectively impossible by subsequent court order precluding all contact between them).
Candace R, Arrington, Phillips Nizer Associate
Aspirations of heroism are not typically the motivation behind entering the fashion business as they would be, for example, for people training to be fire fighters and other first responders. When trouble does come, however, it often does so from unexpected quarters and with unanticipated consequences, such as the world now faces with COVID-19.
We know that we were unprepared, without supplies of such basics as protective masks and gowns. News stories have appeared about how garment makers have hurriedly retooled to make those desperately needed items and how fragrance manufacturers are using their equipment and workers to produce hand sanitizer.
To the extent that any of the items made in such hurriedly retooled factories have to meet the requirements of applicable safety regulations, counsel should be brought in to help facilitate compliance. That is all about immediate need. The follow-up question is whether, should any of the essential items so produced by factories not previously employed in their manufacture suffer from defects such that the health of users or others is compromised, to what extent might the maker be liable?
State Good Samaritan laws typically protect people who act reasonably when helping others in immediate peril (such as accident victims and overdosing drug users) but who might cause unintentional harm. It is probably not realistic to expect such a law to be accepted as a defense in a lawsuit claiming negligent manufacture. It is reasonable to expect that a court and a jury would be very sympathetic to the manufacturer, but sympathy can only go so far.
First, as always, manufacturers should check with their insurers to see to what extent they might already be covered or can be covered to protect against liability resulting from such claims. Next, a simple, albeit ad hoc, solution for fashion companies that want to participate is to offer their new goods coupled with a short-form release, explaining the situation and stating clearly that the purchaser accepts those goods at its sole risk. For several reasons, that is not foolproof as to the purchaser, and legal questions could also arise if the purchaser passes on the item or injuries are suffered by third parties during use, but it would still be worth doing. But we are in a time in which perfect is no longer a viable option. Regardless, as always in these situations, counsel should be consulted for drafting the release and on how to use it. Most attorneys are working remotely these days, but the American bar remains able and willing to serve.
Alan Behr, Phillips Nizer Partner and Fashion Practice Chair
Fashion is about nothing if not what comes next, and we are already being questioned at the firm about what are the best options for when this terrible scourge at last subsides and we can go to work without fear for the health of ourselves, friends, coworkers and families. In other words, what will we do when normalcy returns, and will things ever be normal, at least in the way we once saw it, again?
The first point to note is that COVID-19 will likely accelerate the trend, moving along an ascending line throughout the century, of the replacement of tangible experience with digital access. The world went to remote working and learning because it could. We have to remember that, a generation ago, those options were not all but universally available to those who could benefit from them. Online buying now being nearly the only way to get what you need, we expect that the trend toward shopping online will only continue. And because online buying is dominated by a handful of retailers–starting with Amazon–the pressure to limit their market dominance or even to break them up will also likely grow.
Another trend, one that is less-often written about but also significant, is that electronics have helped bring down the cost of made-to-measure and other forms of garment customization. You can (as I have) pick a fabric online, inform your shirt maker and have it delivered from, depending on price point and style, Britain, Italy or China at what has increasingly become a smaller marginal cost over off-the rack. We can expect that trend to continue as well.
Those are conveniences that benefit retail customers, but retailers and, to put a human face on it, the people who work for retailers, will have different lives. It is a different kind of employment from helping a customer who comes into your shop to buy her wedding dress to working at the computer five states away that takes the order and verifies with the warehouse that the piece is in stock and ready for shipment. There are ample satisfactions offered by the latter job, but they are not quite the same as seeing the bride leave the shop in the dress that you helped assure will be right for her.
For retailers, integrating their online and their physical presence will likely grow only more challenging–because customers will expect a seamless experience. That means a commitment of financial and human resources immediately following a sustained moment of financial terror. It is that part of it that we expect to focus on with our clients: helping them adjust by helping rework their existing agreements to fit the new, more complex and layered intake and distribution system that has gone by the name of “omni-channel” and may now simply be called business as usual. Real estate attorneys will be needed to help with that, along with attorneys able to assist with new sourcing and distribution relationships, trademark attorneys will need to make the necessary filings to protect marks for a broader range of services given in connection with sales and purchases and, as often happens after a downturn, litigators will be needed to help work through the disputes that arise whenever markets decline.
It may seem premature now, but it is never too early to plan and, while you are discussing with your attorney how to renegotiate the lease and work out a deal with the unions following layoffs, to consider what to do when, as they will, things again go right for the world
Alan Behr, Phillips Nizer LLP Partner and Fashion Practice Chair
There have been unique challenges for retailing since not long after Amazon.com first went live, but a worldwide disruption of supply chains and temporary but extended closures at points of sale is outside of all prior international experience. True, there had been speculation about such things one day happening, but it was almost always voiced in the context of war or terrorism, not disease. So no one should be surprised that contingency plans were not made to handle massive disruptions due to a microscopic, life-threatening menace. Similarly, no one with whom a retailer might now seek to renegotiate an existing agreement or otherwise alter a working relationship can claim not to understand the retailer’s problems or to insist that he or she knew better.
True, all consumer-facing businesses have similar challenges, but fashion and accessories retailing is unique in one key respect. If you own a restaurant and are forced to shut or to confine yourself to takeout and deliveries, the inventory you will lose will be, in the main, whatever was stocked for a few days at most. Fashion retailing, on the other hand, is a seasonal business, and if the store is forced—by order or by conscience—to shut for any length of time, imprisoned within it are this season’s goods—things that have to be sold or otherwise cleared out before the next season begins. The retailer may have a plan that indicates at each point along the way when each item will be discounted and by how much, but none of that is particularly useful with the doors shut. And if capital is an issue, as it is for many of us, if you cannot sell what you bought for spring/summer, it could be hard, if not impossible, to pay for what is scheduled to come in starting in late summer for fall/winter. And the incoming merchandise that, if you can pay for it and sell it in the ordinary course, will help get you out of this hole—as long as disrupted supply chains (notably from China and Italy) do not force you to tear up those plans as well. Of course, there is the no-less-critical problem about idle staff, particularly what to do about salespeople who live largely or wholly off commissions.
Modifying Shakespeare’s famous remark in a more pro-social way: in times like this, the first thing we do is call the lawyers. That is because a unified plan, formed around potential legal strategies and mindful of legal risks, is the best way to handle any multi-tiered crisis. Those tiers include the need to address, and seek to work out compromises for, vendor contracts, union contracts, employee relations, leases, insurance policies, utilities and maintenance agreements, government relations and public relations. Just as the business solution is not as simple as throwing all your inventory online and hoping for the best, a legal solution is not something that can be tossed out as a quick fix. Speak to counsel now, before the problems become financially daunting, and work out a plan that prioritizes your concerns and examines your potential responses based on best-case and worst-case scenarios. Are employees your first concern? Are they asking what personal time off means in the context of mandatory leave? That is for review with labor counsel now, we would suggest, not later. The landlord wants assurances that the rent will be paid? In fact, even if he or she has not yet asked, if that appears to be a challenge, the question should be discussed in advance with real estate counsel. And so on down the list. If ever there were a time when the ounce of prevention is the worth that pound of cure, we have all reached it now.