Reversal of contract due to force majeure: Example of trade fair organiser
Example case: On 14 April 2020, the large-scale exhibition Spring 2020 (over 1,000 participants) takes place in Zurich. For this purpose, trade fair organiser A has concluded a contract against payment with exhibitor B for the rental of the trade fair space (contract 1). Exhibitor B has also concluded a contract against payment with beverage supplier C for the supply of beverages (contract 2). The large-scale exhibition subsequently has to be cancelled due to Ordinance 2 on the Control of the Coronavirus (COVID-19) of 13 March 2020 issued by the Federal Council . The question now is who can assert which claims from this contractual chain.
Contractual agreements on force majeure
First of all, the individual contracts should be consulted. In many cases, regulations on "special circumstances" or "force majeure" can be found in general terms and conditions or guarantee clauses. If there is a special provision, this provision takes precedence over the general contractual rules of the CO, in particular impossibility without fault according to Art. 119 CO. If no contractual provisions can be found, the general rules of the Code of Obligations apply. For a discussion of whether COVID-19 is a case of force majeure, see this news article.
Absence of contractual agreement on force majeure
If no clause can be found in the contract, a distinction must be made between subsequent permanent or subsequent temporary impossibility. Temporary impossibility is treated according to the rules of default in the sense of Art. 102 ff. CO. Whether it is a question of temporary or permanent impossibility must be decided in each individual case. In principle, the measures ordered on the basis of COVID-19 will be temporary impossibilities. However, in the case of the large-scale exhibition in spring 2020, it will be essential that it can also take place in spring 2020. Subsequent fulfilment would therefore be pointless, as it is an essential part of the contract that the exhibitor can also exhibit at the time in question. This is referred to as an absolute fixed transaction. If, on the other hand, fulfilment could also take place at a later point in time, the default rules according to Art. 102 ff. OR apply(see news article on disposition transactions).
In this example, the permanent subsequent impossibility would therefore have to be examined. A distinction must then be made between impossibility through fault (Art. 97 CO) and impossibility through no fault (Art. 119 CO). In the case of culpable impossibility, the contracting party is liable for damages if there is damage; culpability is presumed, whereby proof of exoneration can be provided.
The rules of impossibility through no fault of the debtor, on the other hand, have the consequence that the debtor is released from his obligation to perform and the claim for consideration expires. The prerequisite for this is that the debtor must not be in any way responsible for the impossibility of performance or whether it is in any way not attributable to his area of risk. The individual areas of risk of the debtors involved must be distinguished from each other. In the case of impossibility through no fault of the debtor according to Art. 119 CO, in the case of bilateral contracts the debtor has to refund the consideration already received and he loses the counterclaim not yet fulfilled. Exhibition organiser A would thus be released from the obligation to perform vis-à-vis exhibitor B, has to refund any payment already received and loses the claim to remuneration. Whether the outbreak of the coronavirus would be considered force majeure has never been dealt with in case law before, but would appear to be adequate due to the unforeseeability of this situation.
"It cannot be ruled out that a court will assess the coronavirus pandemic as a reason for impossibility without fault in accordance with Art. 119 CO."
It must also be noted in detail when the transfer of risk has taken place, for example in the law of sales according to Art. 185 CO, the price risk is already transferred to the buyer when the contract is concluded. This means that the buyer must pay despite the seller's failure to perform through no fault of his own. In the aforementioned case, exhibition organiser A would therefore retain the claim to payment from exhibitor B despite the absence of performance. Agreements in international trade may also play a role here (e.g. Incoterms).
If the fulfilment was not directly prevented by the official prohibition, e.g. the beverage supplier C, who in principle could still provide his service, the so-called continuation of purpose (or also impossibility of achieving the purpose) is to be discussed. Dogmatically, the continuation of the purpose is also to be assigned to the objective impossibility. If the continuation of the purpose is due to force majeure, which is not to be classified in the sphere of risk of the debtor, the debtor is also released from his obligation to perform.
The mutual discharge of debts is subject to a further exception, namely if the debtor receives a substitute performance (e.g. from an insurance company) for his failed performance. The creditor would thus be entitled to the substitute performance (so-called vicarious commodum).
The resulting rescission relationship arising from the subsequent impossibility is of a contractual nature and is subject to the general limitation period pursuant to Art. 127 CO.
This article was written by Rebecca Isenegger, lawyer.
For further information, please contact Balthasar Wicki.