Trade: the coronavirus as a force majeure case

Darius O. Schindler is professor of commercial and business law and legal advisor at the Baden-Württemberg Cooperative State University (DHBW) in Karlsruhe, Germany. In 2003-2019 he worked as an independent lawyer and as a corporate and commercial solicitor. He is the Director of the Center for international trade and export control (C|iT|EX).

Professor Schindler, the impact of the coronavirus crisis is extensive. The pandemic also affects existing supply relationships. What do contractual parties need to consider at present?
Schindler: The coronavirus pandemic has a major impact on supply and commercial relationships. A blanket statement concerning the impact on individual contractual relationships is not possible. These supply contracts first and foremost depend on the laws and regulations to which they are subject. Different regulations apply in individual legal systems.

What does this imply for individual cases?
Schindler: The German Civil Code always applies for all shipments within Germany. By contrast, several legal factors need to be considered for international shipments, also within Europe. Contracts may be subject to German law or to the laws of other countries, depending on where the contracting parties are based, or to the UN Convention on Contracts for the International Sale of Goods. The decisive factor are the regulations in the choice-of-law clause. In other cases, international regulations stipulate which laws apply.

What do suppliers need to reckon with?
Schindler: The effects of such a crisis are not normally explicitly regulated in the contracts. Since we are confronted with an exceptional situation, effects cannot possibly be predicted or controlled in advance. Contracts, however, commonly include a "force majeure" clause to provide mechanisms of response in such situations. Force majeure commonly designates a situation that cannot be predicted when contracts are agreed and that cannot be avoided even if the usual diligence is observed in international trade. The coronavirus pandemic most certainly qualifies as a force majeure case.

What does the force majeure clause stipulate?
Schindler: Most importantly, it should be noted that suppliers need to invoke this clause. Sellers intending to seek protection from such a clause must immediately inform their co-contractors. With regard to the legal effects of force majeure it is important to distinguish between German and international law, depending on which applies. International contracts frequently stipulate that in an event of force majeure delivery times are either to be extended appropriately or that the parties are obliged to renegotiate contracts in accordance with the new situation. Often, however, the effects of force majeure are not sufficiently regulated. In such cases, the individual legal systems may not only require the adaptation of contracts by means of negotiation but may also call for a suspension of liabilities or, in special cases, even the cancellation of contracts.

How can suppliers prepare for such an event?
Schindler: If suppliers invoke force majeure they are required to provide evidence. Suppliers may in fact have to disclose their supply chains to prove that they are unable to deliver on time because of the coronavirus crisis.

Are suppliers obliged to procure replacements if the crisis causes considerable delays or if shipments have to be cancelled?
Schindler: This is a difficult issue. Problem is that such crisis situations lead to price increases that suppliers cannot easily pass on to their customers due to the fixed prices in the contracts. Legally, this issue is a "procurement obligation". Suppliers have an indeterminate obligation since they do not supply specific individual items. This means that they are obliged to supply items that are only characterised by common features, such as a type or a variety, and that are thereby distinguished from items of other kinds. This indeterminate obligation constitutes a procurement obligation. If I am, for instance, required to deliver a certain quantity of apples, I may have to procure these from a different supplier if my own supplier is unable to deliver because of the coronavirus crisis. The matter is, however, different if a producer sells his own agricultural products. In this case, the producer only owes a delivery from his own stock, which he has generated himself. If such a producer is unable to deliver because of the crisis, he is not obliged to procure a replacement.

How can suppliers prepare for such a situation?
Schindler: This is where two fields interact. For one, it is important for suppliers to structure their own supply relationships through individual contracts. These must be orientated towards the possible risks relating to the suppliers' products and distribution channels. Particular attention must be paid to contracts, especially to cross-border contracts - even for shipments within the European Union. The second field relates to actuarial cover. Loss-of-profits or all-risk insurances can protect businesses from sales shortfalls in the event of temporary closures, which may be associated with such a crisis. Such insurance covers may include unearned fixed costs or lost profits.

What are your final recommendations for managing directors?
Schindler: As an emergency measure, I recommend reviewing the specific effects of the crisis on your own supply relationships as quickly as possible. In the event of risks, the co-contractors must be informed immediately to avoid extensive legal disputes. This is also important for self-protection since managing directors are held privately liable if their own company incurs damage due to the failure to take appropriate measures. The legal term for this is the diligence of a prudent businessman.