The effect of COVID-19 (Corona virus) on commercial contracts
Due to the sudden outbreak of COVID-19, it will not be possible to implement a large number of commercial contracts as planned, and one recurring question will undoubtedly be who should bear the financial losses resulting from the non-fulfilment of the contracts?
Plesner's Commercial Contracts team stands ready to assist with in-depth assessments of whether it is possible to claim COVID-19 as a force majeure event which voids the breaching party's obligation to fulfil the contract and exempts from damages. We are keeping a close eye on developments and we perform daily reviews of whether new measures may affect the assessment.
Force majeure may either be in accordance with the terms of a contract or common default rules. To analyse your particular situation, the following topics may be pivotal:
If your contract contains force majeure provisions…
… it may alleviate doubt as to when force majeure is present. Even if the contract contains a force majeure provision it is not a given that this may be invoked as a result of COVID-19. The following considerations are important to the overall assessment:
- Does the force majeure provision contain a particular reference to the outbreak of disease, epidemics or public measures? Many force majeure provisions list events to be regarded as force majeure events in the actual contractual relationship. If the force majeure provision lists sudden outbreaks of disease, epidemics, pandemics or the like, this would support the assertion of the force majeure provision. It would, however, still be a requirement that the force majeure event in the actual situation prevents the fulfilment of the contracts or imposes an unreasonable burden on the relevant party under the circumstances.
- Does COVID-19 in actual fact prevent the fulfilment of the contract? It is not enough that the contract has merely been rendered more difficult or costly to fulfil. Force majeure will not be applicable if it is possible to fulfil the contract by e.g. changing supplier or taking extraordinary measures. Assessment must be made on a case-by-case basis and may change from day to day, as and when the government launches new initiatives and measures and takes new precautions to contain contagion.
- Is a sub-supplier's force majeure considered force majeure in your contract? If delivery depends on sub-suppliers, possible force majeure for the sub-supplier does not imply exemption from liability in your contract. If the sub-supplier's force majeure is not included as a force majeure event in your contract with your customer, it should instead be assessed whether the contract can be fulfilled by employing other suppliers.
- Was the hindrance predictable? It is a condition for claiming force majeure that the hindrance was unpredictable at the time of entering into the contract. For contracts entered into after the eruption of COVID-19, it is less likely that force majeure will be relevant. The final outcome of this assessment would, however, depend on the actual case.
If your contract does NOT contain force majeure provisions…
… Danish law still allows for the claiming of force majeure pursuant to e.g. the Danish Sale of Goods Act. The purpose of force majeure clauses is to render the legal position as clear as possible, which is why the legal position without force majeure clauses is uncertain. Furthermore, case law is reluctant to establish force majeure. Any directives and bans by the government may possibly constitute force majeure even in the absence of a force majeure clause in the contractual basis.
When claiming force majeure vis-à-vis your contractual counterparty…
… it is important to observe the relevant provisions in the contractual basis, including giving due notice of the force majeure event as well as mitigating the consequences of the force majeure event.
If your contract does not provide for force majeure, the overall position in Danish law is that the breaching party at a minimum is obliged to inform the non-breaching party immediately of the force majeure event, as well as its nature and expected duration.
Please note that there is a position risk when claiming force majeure. This is due to the fact that the contract will be considered breached if at a later point in time, e. g. under a court case, it becomes evident that there was no force majeure event.
You should therefore consider the above issues carefully before claiming force majeure vis-à-vis your contractual counterparty. It would often be worthwhile - in particular considering the proportions of the COVID-19 outbreak - to initiate a dialogue with your contractual counterparty and that you jointly work towards a practicable and temporary commercial solution to the problem, in order for the commercial relation to continue or to resume subsequently.