The Effects of SARS-CoV-2 (Coronavirus) on Supply Relationships and their Conse-quences under the Law of Obligations, especially for Start-ups
The effects of the coronavirus on national and international supply relationships are already being noticeable. Due to the numerous measures that are being taken worldwide against the spread of the coronavirus, the supply of important raw materials and goods has often come to a standstill. Important production facilities are currently closed due to the corona pandemic; production is temporarily stopped. A - timely - delivery of goods and raw materials is no longer guaranteed due to border closures and other precautionary measures. There are numerous problems with deliveries. Further developments are difficult to anticipate. In this article we give a brief overview of the legal aspects of the effects of the coronavirus on supply relationships as well as some recommendations for start-ups.
1. Initial situation
Depending on the industry and business model, the almost tsunami-like crisis has affected large, renowned companies as well as start-ups but the latter have to overcome particularly great challenges in many respects. As regards to supply relations, the main problems are that
- due to the often thin financial cover, even brief supply shortages can threaten the existence of a company,
- the other contracting party often has the stronger market power,
- there are no long-term trusted supply relationships,
- often only rudimentary written agreements exist.
In the case of impediments to performance, the contractual provisions (these take precedence) and the statutory law on defective performance under German civil law - insofar as this is relevant - must be taken into account.
2. Priority of contractual provisions - clauses on "Force majeure /"Höhere Gewalt"
Contracts often contain specific provisions on the exchange of services and the consequences of defective performance, for example in the form of contractual penalties. General terms and conditions in particular often contain so-called "force majeure" clauses. According to such clauses, the parties are not responsible for any failures in performance due to "force majeure". Some of these clauses also provide that the parties can withdraw from the contract or (at least temporarily) be released from their obligation to perform in the event of "force majeure".
According to case law, "force majeure" is defined as an "external event, externally caused by elementary forces of nature or by the actions of third parties which is unforeseeable according to human insight and experience, cannot be prevented or rendered harmless by economically acceptable means, even by the utmost care reasonably expected in the circumstances, and cannot be accepted as such by the operating company due to its frequency". "Force majeure" is thus marked by the following characteristics: Unpredictability, inevitability and exceptional nature.
These characteristics can be present, for instance, if a contractual partner is affected by an official closure or does not receive the necessary raw materials/goods itself due to border closures etc.
However, it is also conceivable that the contractual partner itself is responsible for the closure of its business or delivery shortages or could have avoided these by taking appropriate precautions.
When invoking "force majeure", it should therefore always be reviewed whether this objection is also justified, for example by requesting appropriate evidence and information.
3. Statutory law on defective performance
If, however, contractual provisions on the law on defective performance, such as "force majeure" clauses, are missing or are only very succinctly worded and/or ineffective, the statutory law on defective performance shall apply.
In this context the principle applies that contracts must be observed ("pacta sunt servanda") which means that, as a rule, the right to postpone or refuse performance does not arise from mere complications in performance. An obligor must in principle take responsibility for his ability to perform and to make every effort in good faith to ensure that performance is made.
If the obligor is unable to render performance due to extraordinary circumstances, these cases are to be judged by law according to the legal institutions of impossibility (section 275 German Civil Code (BGB)) or the discontinuation of the basis of the transaction (section 313 BGB).
In the case of temporary impossibility and thus delay of performance, the obligor is released from his primary obligation to perform for the duration of the impediment in accordance with section 275 BGB; any action for performance would be dismissed as "currently unfounded" during the release from performance in accordance with section 275 BGB. Impossibility in this context may mean that performance is impossible for anyone (objectively) or only for the obligor (subjectively). Furthermore, a right to refuse performance can also exist for the obligor if the effort to be made by it and the creditor's interest in performance are disproportionate (section 275 (2) BGB).
Assuming that a vaccine is developed and the spread of the virus is contained as soon as possible, the quarantine and the closure of the business are to be regarded as temporary impediments which will not permanently exclude deliveries in the future, but will lead to a temporary impossibility.
In the event of price increases or other impediments to performance, on the other hand, it is necessary to consider on a case-by-case basis whether these lead to a freedom to perform.
The obligor could demand compensation for delayed performance if the requirements of default within the meaning of section 286 BGB are fulfilled. According to this provision, default exists if the obligor fails to perform in response to a reminder after the due date or - as a rule in the economy - at a contractually agreed time, the performance can generally still be made up for and has not been failed to be made due to a circumstance for which the debtor is not responsible (section 286 (4) BGB). The obligor bears the burden of proof for the latter. If, for instance, official orders that were not foreseeable at the time of the conclusion of the contract have led to the obligor not being able to render performance on time, he shall not be liable for default. In this case, the creditor only has the option of withdrawing from the contract after a reminder and setting a grace period. However, in most cases this will not make much sense if the supplier product cannot be easily replaced on the market.
It becomes difficult to work with situations in which there is a lack of binding official measures and the company only implements recommendations for health care thus making the provision of services impossible. However, in the current exceptional situation, in which the responsibility of each individual is being called upon, it is to be expected that in a subsequent assessment courts will not impose liability disadvantages on a company that follows clear official recommendations.
The legislator only provides for a discontinuation of the basis of the business transaction in exceptional cases, and according to section 313 BGB it is possible, if circumstances have changed after the conclusion of the contract which the parties have expressly made the basis of their business and the parties would not have concluded the contract or would not have concluded it with this content had they been aware of the changed circumstances. Legal consequence of the discontinuation of the basis of the transaction is an adjustment of the contract to the changed circumstances or - if this is not reasonable for at least one contractual partner - a cancellation of the contract. In each such case, it is a matter of sensitive subsequent disturbance of the interest in equivalence between performance and consideration. In other words, it must be reviewed here whether the corona pandemic or associated protective measures have changed circumstances which were expressly the basis of the supply relationship in such a lasting manner that an adjustment or cancellation of the contract is imperative. Such a case could arise, for instance, if the buyer recognizably purchases the product for the seller exclusively for a certain use which is now no longer permitted, at least for a longer period of time, due to an official order. In contrast, the mere change in consumer behaviour as a result of the corona pandemic and its economic consequences should not justify the discontinuation of the basis of the transaction. Similarly, short-term business closures which can also occur for other reasons and are part of the general business risk, do not generally justify an adjustment or cancellation of the contract. Price increases as a result of the corona pandemic (construction companies report significant price increases for raw materials, such as steel) only justify the discontinuation of the business basis in the absolute exceptional case.
4. Conclusion for start-ups
In the event of defective performance, the contractual provisions, in particular the existence of so-called "force majeure" clauses, are decisive. In most cases, "force majeure" clauses will probably justify defective performance attributable to the corona epidemic.
However, even in the absence of contractual provisions to this effect, the statutory law on defective performance provides for mechanisms which can be used to resolve supply problems.
In conclusion, though, it should be noted that contractual partners who have to put up with the mere delays in deliveries caused by protective measures against corona often have to accept this. The reasons for their own delivery obligations and any delays in delivery must be carefully documented.
The legal situation outlined above, which applies without restriction in the absence of contractual provisions, can of course be modified and supplemented by the parties. The reference to "force majeure", which is frequently mentioned in connection with measures to contain the coronavirus and which can lead to a temporary suspension of contractual obligations for the parties, is not a formulation of the German law of obligations, for instance, but rather the typical "force majeure" clause which is found in many contracts but whose application to corona-related impediments to performance must be carefully examined in each individual case (cf. Coronavirus: Consequences in contractual relationships). A "force majeure" provision is also to be found in the UN Convention on Contracts for the International Sale of Goods which may also be applied in an international supply relationship as a component of German law, unless it has been expressly excluded (Art. 79 CISG).
For a start-up, the objection of "force majeure" raised by the contracting party or by itself is a double-edged sword as the suspension of contractual obligations leads to a standstill in the business relationship which usually quickly becomes a threat to the existence of a start-up. With regard to the duties of the management, in particular the duty to monitor solvency and the resulting liability risk, please read here.
Since waiting for the conclusion of new supply contracts is often not an option, particularly for companies in the start-up phase, and new business relationships must therefore be established despite uncertain future forecasts, special attention should be paid here to ensuring that the uncertain situation is expressly taken into account by means of flexible regulations (e.g. shorter terms, variability in purchase quantities, price adjustment clauses, etc.). The problem with new contracts currently being concluded is that the corona pandemic and its performance-impairing potential are already known in principle so that a loss of the basis of the business or "force majeure" can hardly be considered an objection, even if the effects of the coronavirus on the supply relationship increase in the future. Under no circumstances should a start-up in the current situation make explicit performance guarantees. All in all, it is important to operate on sight.
Dr André Depping
Rechtsanwalt, Mediator, M.L.E.
Dr Florian Weichselgärtner
Rechtsanwalt, Wirtschaftsmediator (CVM)