Is COVID-19 (coronavirus) a case of force majeure?
The coronavirus is not only tragic for the people affected, it is now also having a noticeable impact on the economy. The Swiss company ABB has announced that production in China will be suspended for at least one week. Many electronics manufacturers are already struggling with supply bottlenecks, as manufacturing is often done in whole or in part in China. Legally, this means that supply contracts cannot be fulfilled according to contract. In this case, the question arises whether the corona virus can be used as a legal justification for a delay or non-delivery and whether a debtor could invoke a case of force majeure.
Force Majeure
The various legal systems and doctrine do not define the term force majeure uniformly. In international contractual relationships and English-influenced areas of law, the term "force majeure" is often used to describe force majeure. In general, events of "force majeure" are described as incidents that are beyond the control of a party and cannot be averted even with the utmost diligence. The event must be outside the operational sphere of the company; for example, the fire of a plant would not fall under force majeure, as this is an operational risk. The same applies to the insolvency of a supplier, which is also an entrepreneurial risk and must be taken into account accordingly. Furthermore, the event must occur unexpectedly, because a party could have prepared for a foreseeable event accordingly.
Force majeure events are generally considered to be; natural events (floods, earthquakes, typhoons, etc.), wars, revolutions, terrorism as well as strikes.
Of course, the prevention of contractual performance must be causally connected to the event.
Legal regulation
The term force majeure is repeatedly referred to in Swiss law, but the law does not provide a definition. It is therefore generally accepted that a debtor may invoke force majeure. A distinction must be made between impossibility and temporary impossibility.
Insofar as the debtor's performance has become impossible due to circumstances for which he is not responsible, the claim is deemed to have lapsed (Art. 119 CO). Unless it is an expiry date transaction, a pandemic will only delay the delivery, but not make it impossible. The debtor would be in default here, which could lead to claims for damages. In commercial transactions, however, a specific or determinable delivery date is usually agreed. In case of default, it is then automatically presumed that the creditor waives the delivery and claims damages for non-performance. Since a case of force majeure is not automatically checked, it is important that the creditor is notified accordingly.
From the creditor's point of view, it is important to note that the debtor is no longer liable for an impossible or untimely delivery if the risk has already passed to the creditor. Unless special circumstances or agreements justify an exception, in the case of a contract of sale the benefit and risk of the object pass to the creditor upon conclusion of the contract (Art. 185 CO). In practice, the transfer will often result from the Incoterms, which provide for different times of the transfer of risk. If the goods are stuck somewhere in the logistics chain, the risk could already lie with the creditor. In international contractual relationships, it must also be examined whether the CISG applies. As a result, the CISG provides for a similar solution, which is why it will not be discussed in detail here.
COVID-19 as force majeure
Unfortunately, no generally valid statement can be made on this. Especially in cases where the production or supply chain was interrupted due to official measures, a case of force majeure is likely to exist. The coronavirus in itself will probably not be sufficient in many cases to invoke force majeure. Unless the relevant contract lists "pandemic" as an example and causality is given. If the debtor (or a subsidiary) is located in one of the restricted or inaccessible areas in China, this will probably constitute a case of force majeure, as the performance of the contract is prevented by official measures.
Ultimately, it will depend on the wording of the contract and its interpretation whether a case of force majeure exists or not.
Contractual regulation of "force majeure
Many contracts contain a force majeure clause. This clause is usually perceived as a standard clause and is therefore often given little attention. It is only a standard clause at first glance, as the parties to the contract are basically free in their drafting. Therefore, very different clauses can be found in contracts. First of all, a distinction must be made between conclusively formulated clauses and openly formulated clauses. In the case of conclusively formulated clauses, the scope of application for force majeure has already been defined accordingly by the parties. Thus, if there is no reference to pandemics or other events affecting health, it can be assumed that the parties do not consider this to be a case of force majeure.
In most contracts, the wording is open-ended and usually contains a list of examples such as war, natural disasters, etc. The wording is also open-ended. Open-ended wording is indicated by phrases such as "in particular", "by way of example" or if the list refers to other unforeseeable events. In the best case, the term pandemic can already be found among the exemplary lists. However, since the examples are usually very general, there is still considerable room for interpretation when interpreting such a clause.
In addition, such a clause often contains a regulation concerning the consequences and possibilities of action. Thus, the existence of force majeure can be linked to different rights. The following possibilities should be considered:
"In future, all contracts will probably contain tailor-made force majeure clauses."
Suspension (from what?)
Right of termination
Granting of extensions
Exemption from liability for damages
Before invoking force majeure, it is therefore always necessary to first examine the relevant contractual clause more closely. The existence of a "force majeure" clause alone is not sufficient to justify a delay in delivery or non-delivery due to the COVID 19 pandemic.
For the specific reversal of contracts, see here.
Display of a delay
An aggravating factor may be that performance is not yet owed at the present time, but it is already foreseeable that the contractually agreed deadline can no longer be met. For example, the branch has temporarily stopped its production, which raises the possibility that the final product cannot be completed on time. Invoking force majeure at a later point in time can quickly lead to discussions and proving the causal connection is not always easy afterwards. In addition, the other party will often argue that there was enough time to find an alternative solution.
The duty to inform as early as possible about the probability of an impossibility of performance already arises from good faith. Many contracts also contain a clause requiring immediate notification of a foreseeable delay in delivery. In some cases, the risk of a contractual penalty can be prevented or at least reduced by an early and well-founded notification.
As a company, you should therefore already check today whether there could be delays because, for example, suppliers are in arrears. If there is a possibility of a delay, a notification to the customer and a warning to the supplier should be examined and the incident should also be documented accordingly so that evidence is available in the event of a dispute.
Insurances / Guarantees
A claim due to force majeure is often not covered by insurance. It depends on the individual clause. Export insurances may offer coverage for typical events of force majeure as part of the insurance of political risks. Here, too, it depends on the exact wording of the corresponding clause. Therefore, one should not blindly trust in one's insurance. In the case of health-related insured events, an official warning from a state authority or the WHO is often required for insurance coverage.
The same applies to guarantees, such as bank guarantees, which may also contain clauses excluding force majeure events or causing a standstill.
This article was written by RA Yves Gogniat.
If you need assistance in reviewing a contract or clarifying a delay in delivery, we look forward to hearing from you. Our partners Hans Kuhn and Balthasar Wicki will be pleased to be at your disposal as direct contacts.