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Companies are facing uncertainty due to the outbreak of the corona virus in China and its global spread. This may be because their own factories in China are at a standstill and contractual agreements with customers are at risk of being violated, or because suppliers are unable to meet their delivery deadlines. Depending on the perspective, the company then faces or would like to claim damages and withdraw from the contract as quickly as possible in order to obtain supplies elsewhere in the market, if this possibility exists. In order to meet these challenges, many legal imponderables must be overcome.

Which law is applicable?
First of all, it must be clarified which law is applicable. Depending on the individual case, German law may be applicable, for cross-border transactions in principle also UN sales law (The United Nations Convention for Contracts on International Sale of Goods [CISG]), for supply chains within China in principle Chinese law or, depending on the choice of law clause, the law of another jurisdiction. A clarification of this question is essential for a claim for damages or its defence and a possible withdrawal and has to be done on the basis of an individual case examination for each individual contract.

Compensation
Under German law, the supplier concerned must in principle have culpably breached a contractual obligation in order to be liable for damages. Due to the applicable reversal of the burden of proof, the supplier must provide so-called exonerative evidence, i.e. prove that he is prevented from delivering on time through no fault of his own. The outbreak of the corona virus as well as the official measures on the Chinese side may constitute an act of force majeure which would not fall within the sphere of the Supplier, unless he has assumed a procurement risk.

In the past, German courts have classified the outbreak of pathogens as force majeure, for example in the case of the outbreak of the SARS virus (AG Augsburg, judgement of November 9, 2004 - 14 C 4608/03) or in the context of a spread of cholera (AG Homburg, judgement of September 2, 1992 - 2 C 1451/92 - 18). However, the declaration of a force majeure event depends strongly on the individual case, in particular on government measures and the respective concrete effects on the operation of the company, and should therefore be carefully examined. If an explicit force majeure clause has become an integral part of the contract, it must be examined whether it modifies the legal consequences of damages. Any evidence regarding the existence of force majeure as well as its causation for the delivery problems must be provided in any case. According to the CISG, a contracting party shall be liable for damages in case of a breach of a contractual obligation, irrespective of fault. This principle is limited by Art. 79 I, III CISG in the case of events which are beyond the control of the contracting party and which were neither foreseeable nor avoidable, i.e. which constitute force majeure. It should be noted that according to Art. 79 IV CISG the other contracting party must be informed of the impediment to performance and the effects on the ability to deliver within a reasonable period of time. Otherwise, the supplier shall be liable for the damage caused by the delay as a result of the omission. With regard to a claim for damages, therefore, a check must be made on a case-by-case basis as to whether the supplier can invoke force majeure and, if necessary, documentation and preservation of evidence should be carried out.

Termination of contract/ withdrawal
Under German law, it must be noted that even a temporary obstacle to performance, in this case the outbreak of the corona virus, in conjunction with the official measures taken by the Chinese authorities, may constitute a so-called impossibility of performance (§ 275 I BGB), which limits the right to demand performance. However, this does not affect the validity of the contract. In the event of mere temporary impossibility of performance, withdrawal from the contract is only possible after setting a reasonable deadline for performance. If, on the other hand, the impossibility is final, the requirement to set a period of grace does not apply. A distinction between temporary and final impossibility is difficult in individual cases and must be made on the basis of the specific circumstances. In this context, it is also important whether production in China has already been resumed or whether it will be interrupted for the foreseeable future. If a separate force majeure clause is included in the contract, it should be examined whether the conditions for withdrawal are modified. It should be noted, however, that the respective effectiveness of force majeure clauses must be checked, if necessary, within the framework of an evaluation of the General Terms and Conditions. According to the CISG, the delivery contract and any other legal remedies remain unaffected by the force majeure event, which is why a rescission of the contract comes into consideration above all (Art. 49 I b) CISG). For this, too, a reasonable period of grace must be set. Thus, the necessity of setting a reasonable period of grace is strongly dependent on whether and how exactly a force majeure event is to be assumed and which law the contract is subject to.

Practical tips
In any case, the respective contractual partner should be contacted at an early stage. In particular, companies with delivery obligations should make every effort to document the force majeure events in their own production in order to be able to provide evidence of any exoneration. For this purpose, it is particularly advisable to apply for a force majeure certificate from Chinese authorities.

Your contact Person:
Laywer, Attorney-at-Law (New York)
Kai Graf v. der Recke LL.M. (Boston)
Tel.: +49 (0)711/22744-41
kr@haver-mailaender.de
www.haver-mailaender.de