Force Majeure - under German, French and US law

The COVID-19 pandemic has an impact on our lives and all areas of the economy. When deciding whether contracts must be fulfilled or adapted in light of the pandemic, the first thing said is the term "force majeure". In this article we would like to present the understanding and legal consequences of force majeure in German, French and US-American law.

1. German law

1.1 Legal regulations

In German law no statutory provision exists that allows the refusal to perform, the termination or the adjustment of contractual relationships because of force majeure. This term is only occasionally found in legal regulations that cover completely different matters, e.g. in section 206 of the German Civil Code (suspension of the statute of limitations in cases of force majeure), section 701, paragraph 3 of the German Civil Code (no liability of the innkeeper in cases of force majeure) or section 7, paragraph 2 of the German Road Traffic Act (no liability of the vehicle owner in cases of force majeure).

1.2 Contractual agreements

Contracts and general terms and conditions, on the other hand, often contain "force majeure" clauses, usually providing for the right to refuse performance, dissolve or amend the contract. What is understood by "force majeure" in these cases has - in the absence of a legal definition - been developed by the courts: it defines

"an external event, caused from outside by elementary natural forces or by actions of third parties, which is unforeseeable according to human insight and experience, cannot be prevented or rendered harmless by economically acceptable means, even by the utmost care reasonably to be expected in the circumstances, and which is not acceptable to the operating company due to its frequency."

This definition typically covers wars and natural disasters, but also epidemics and diseases such as the SARS virus or Cholera. The current COVID-19 pandemic should also be considered a case of force majeure.

It is unrestrictedly permissible and widespread to specify the concept of force majeure in general terms and conditions clauses by explicitly listing certain cases of application such as storms or civil wars. Furthermore it is possible to extend the term beyond the typical cases as long as it concerns unforeseeable and involuntary situations, e.g. unforeseeable operational disruptions or unforeseeable shortages of raw materials.

What (legal) consequences should apply in the event of force majeure is in turn not regulated by law. Contractually and in general terms and conditions, rights to refuse performance, the right to terminate or adjust the contract or the exclusion of liability in the absence of intent are often agreed upon. Individually, such consequences can be stipulated up to the limit of immorality and violation of the law. In general terms and conditions, however, such provisions are only effective if they do not eliminate the requirement of fault. A general terms and conditions clause which provides for claims for damages in the event of force majeure is therefore ineffective, even if the other contracting party is not at fault.

1.3 Comparable regulations

If there is no contractual regulation on "force majeure", the legal regulations remain in force. These are essentially section 275 of the German Civil Code (impossibility of performance) and section 313 of the German Civil Code (interference with the basis of the transaction).

Usually, in the case of force majeure, performance is deemed to be impossible: The seller is not able to deliver a certain product at the agreed time. This can be based on both objective and subjective impossibility. Objective impossibility is given if the delivery of the respective product has become impossible for everyone, i.e. for all suppliers, because e.g. necessary preliminary products are no longer available due to trade restrictions. Subjective impossibility is considered when the delivery of the product is impossible for only one supplier, e.g. because his company has been quarantined. According to section 275 of the German Civil Code, the supplier is excluded from his obligation to perform in both cases. In these cases,  the obligation to perform in return, typically the obligation to pay the agreed remuneration, is eliminated as well. The buyer is not entitled to claim damages because the seller is not at fault.

A so called temporary impossibility is given, if the supplier can only deliver the product at a later date. In this case, the described exemptions from the obligations to perform and pay only apply for the period during which performance was impossible. As soon as the obstacle has been removed, performance can be demanded again. However, the customer shall not be entitled to claim damages for delay in performance.

An equalization of the temporary with the permanent impossibility and its legal consequences is required if the customer cannot reasonably be expected to adhere to the contract until the obstacle is removed. This will typically be the case in the trade of goods, as the buyers have to change their plans at short notice and cannot wait for a performance in the future. In Germany, the institution of disruption of or the interference with the basis of the transaction (section 313 of the German Civil Code) is most comparable to the force majeure provisions of other legal systems: If the circumstances which have become the basis of the contract have changed so seriously after the conclusion of the contract that one party cannot reasonably be expected to adhere to the contract, this party may demand either the dissolution of the contract or its adaptation to the changed circumstances. The prerequisites for this are likely to exist in many cases at present. The COVID-19 pandemic has changed the general economic and social conditions in an unprecedented way. A disruption of the basis of the transaction is therefore conceivable.

1.4 Significance for the COVID-19 pandemic

In order to legally assess the effects of the COVID-19 pandemic on supply contracts, the contractual provisions of the respective supply contract must first be examined to see whether a (valid) force majeure clause has been agreed upon. If such a clause exists, the COVID-19 pandemic is likely to be covered by it. The legal consequences of the clause will then apply. It should be noted, however, that the COVID-19 pandemic can only be considered an unforeseeable force majeure event for contracts that were concluded before it became known - about until the beginning of March 2020.

In the case of newer contracts and those that do not contain a force majeure clause, it must be examined whether a case of subjective or objective impossibility exists, as is the case, for example, with plant closures or trade embargoes. If there is no such case, the principles concerning the interference with the basis of the transaction will apply. These also require an unforeseeable event, which is why a disruption can only be present in contracts concluded before the beginning of March 2020. If a disruption of the basis of the transaction is affirmed, the supply contract can either be adjusted, i.e. in particular the delivery period can be changed. Only if an adjustment is not reasonable for the supplier or customer, the contract can be terminated by withdrawal or cancellation.

Contact person for German law: Simone Jäger

2. French law

2.1 Legal regulations

In contrast to the German Civil Code, the French Civil Code contains a definition of force majeure in Art. 1218 of the French Civil Code that applies for contract law. According to this definition, force majeure shall exist if

“an event beyond the debtor's control, which could not reasonably have been foreseen at the time of conclusion of the contract and the effects of which could not have been avoided by reasonable measures, prevents the debtor from performing his contractual obligation.”

French law not only defines the concept of force majeure, but also specifies the legal consequences in case of force majeure in Art. 1218 para. 2 of the French Civil Code as follows:

“If the debtor is only temporarily prevented from performing his obligation by force majeure, his obligation to perform is temporarily suspended, unless the delay caused thereby justifies the cancellation of the contract.”

If the debtor is permanently prevented from performing its obligation by force majeure, the contract is cancelled by law and the parties are no longer required to perform their respective contractual obligations.

For supply agreements, this means that the seller no longer has to deliver the ordered goods and the buyer does not have to pay the purchase price if, for example, the seller cannot procure the goods from his supplier in China because the Chinese supplier cannot produce the ordered goods and therefore cannot deliver them due to the COVID-19 pandemic.

For contracts that entered into force after October 1, 2016 (i.e., after the reform of French contract law), Art. 1195 of the French Civil Code provides for the following: If a change in the circumstances underlying the contract, which could not be foreseen when the contract was concluded, results in the fulfilment of the contractual obligations becoming excessively costly for one party, the party who did not willingly assume this economic risk may request that the contract shall be renegotiated by the parties. If renegotiation of the terms of the contract does not succeed, the parties may agree to terminate the contract at the time and under the terms which they mutually agree upon. If the parties cannot reach an agreement, they may refer the matter to a court. If no agreement is reached within a reasonable period of time, the court may, at the request of either party, amend the contract or declare that it is terminated on the date and under the conditions determined by the court.

Art. 1195 of the French Civil Code thus provides for an adjustment of contracts comparable to Sec. 313 of the German Civil Code in the event of a lapse or substantial change of the basis of the contract. However, the French Civil Code seems to go beyond the German regulation of interference with the basis of the transaction. It is remarkable that its wording already mentions the cost factor and the economic risk distribution. According to the principles of interference with the basis of the transaction applicable under German law, the inefficiency of a transaction is not sufficient as a reason for an adjustment of the contract. Generally the entrepreneur has to bear a considerable entrepreneurial risk. Only in exceptional cases, if the allocation of risks to the parties is so unreasonably unbalanced due to an event of force majeure with the result that one party can no longer be expected to adhere to the conditions of the contract originally agreed by the parties, an adjustment of the contract according to section 313 of the German Civil Code comes into consideration. This provision is to be applied restrictively.

For contracts concluded before October 1, 2016, the provision of Art. 1195 of the French Civil Code introduced by the reform of French contract law in 2016 does not apply. The right to adjust or renegotiate the terms of the contract only exists if the contract contains a provision that expressly provides for an adjustment of the contract (so-called clause d'imprévision / hardship clause). Otherwise, an adjustment of the contract is only possible by mutual agreement. In this case, there is no unilateral right of a contracting party to amend the contract pursuant to Art. 1195 of the French Civil Code.

2.2 Contractual agreements

However, the definition given by law is not mandatory; as it is not part of the ordre public. The parties to the contract may, deviating from the provisions of the French Civil Code, define cases of force majeure by mutual agreement and determine the consequences of force majeure, i.e. whether the contract should be cancelled, end prematurely on a specific date, be merely temporarily suspended or continue to apply with modified terms. The handling in cases of force majeure that is individually appropriate for the respective contractual relationship can and should be regulated in the contract.

2.3 Relevance for the COVID-19 pandemic

If, as a result of the COVID-19 pandemic, a company is unable to comply with its obligations under a contract concluded, it is always worth examining the contract to see whether there are any possibilities of withdrawing from the contract or the conditions agreed upon or adapting them. In this case, it is very important to know what the parties have agreed upon individually, which obligations are affected by force majeure, at what point in time and in what initial situation the contract has been concluded.

In any event, for contracts concluded from the beginning of March 2020 onwards, it will be difficult to argue that the economic consequences of the COVID-19 pandemic were not known and could not have been anticipated. The risks were obvious from March 16, 2020 at the latest, the date on which initial restrictions were imposed in France by decree. Already at the end of February 2020, on February 28, 2020, the French Minister of Economy and Finance Bruno Le Maire had recognized a case of force majeure for public procurement.

Corona is increasingly being cited as a reason for not having to provide services as contractually agreed or to terminate contracts prematurely. In these cases, it is always worth taking a closer look and question whether there is a case of force majeure at all.

Contact for French law: Birgit Münchbach

3. US American law

3.1 Legal regulations

In contrast to Germany, the US do not have a unified civil law. Instead, each federal state has a great deal of legal independence, which goes far beyond the autonomy of the German federal states. In order to reduce legal fragmentation, the draft of a uniform nationwide commercial law, the Uniform Commercial Code ("UCC"), was drawn up already in the 1940s. The UCC lays down certain principles of commercial law which are supplemented by the laws of the different federal states. After several revisions over the years, the UCC has been adopted almost unchanged in nearly all US states. Only Louisiana has not brought larger parts of the UCC into force. The reason for this is that the law of Louisiana is not based on Anglo-American case law, but on the French Code Civil - a relic of former French colonial rule.

According to UCC section 2-615 paragraph a), delays in delivery or non-delivery do not constitute a breach of contract if the underlying cause is an event whose non-occurrence was a basic assumption of the contract between supplier and customer:

“Delay in delivery or non-delivery in whole or in part by a seller (...) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made (...).”

(UCC section 2-615 paragraph a); "Commercial Impracticability")

In this respect, the UCC is similar to the legal consequences of refusal to perform in the event of impossibility (“Unmöglichkeit”) under German law. In contrast to German law, however, US law explicitly mentions delays in delivery or non-delivery, only. Furthermore, it does not rely on the German concept of "impossibility" of performance in terms of a prerequisite for applicability, but only mentions the occurrence of an unforeseeable event that prevents performance. This also includes, for example, disproportionate cost increases with regard to the provision of services.

If such an unforeseen event occurs, the contract can neither be terminated nor adjusted; instead, the customer has (merely) no claims for damages against the supplier.

In the event of only partial impairment of the ability to supply (for example, in the event of a supply shortage caused by raw material scarcities), the supplier must allocate its existing resources according to "fair and reasonable" criteria (UCC section 2-615 paragraph b). Surprisingly, the supplier does not have to distribute the existing goods exclusively to customers who have already placed a binding order at the time of occurrence of the force majeure event. Instead, the supplier may also (i) cover his own requirements necessary for further production and (ii) deliver goods to those customers who usually order from him even if no binding orders of such customers exist at the time of occurrence of the supply restrictions. While the first mentioned exception makes sense for the purpose of maintaining production capacity, the second exception is rather unusual: Under German law, the principles of contract compliance and delivery reliability would oblige suppliers to allocate their existing goods exclusively to customers whose orders were already placed and accepted by the supplier (i.e. to customers with existing individual contracts). An allocation of goods to third parties, that have not placed any orders at all, would rather not be permitted unless such third party is a system-relevant company (e.g. a supplier of medical technology or food). As a result, US law appears to be susceptible to legal misconduct at this point, as for example a supplier could reduce deliveries to smaller companies in favor of larger and financially rewarding companies, even if the smaller companies have placed their orders long before the impairment of the supplier’s ability to supply and the larger companies start ordering after the supply shortage occurred. The current global competition in the procurement of respiratory masks shows that such “supply battles” can quickly become reality.

In many US states, the protection of supplier in the event of performance impediments is supplemented by two recognized principles which can be used as a defense against the accusation of breach of contract: "Impossibility of Performance" and "Frustration of Purpose". Applicability of these principles is highly dependent on the individual case and the applicable US state law. In general, "Impossibility of Performance" is applicable in cases where the fulfilment of a contractual obligation is actually impossible (e.g. destruction of an individual item to be delivered or illegality of the performance); however, the US courts tend to rarely assume application of “Impossibility of Performance”. "Frustration of Purpose" refers to cases in which the performance of the contract is possible but has become completely useless for at least one party to the contract.

3.2 Contractual provisions

As under German law, the consequences of the occurrence of a force majeure event under US law primarily depend on whether the parties have considered and stipulated such case in a contractual agreement. The nature and content of such force majeure clauses correspond to the legal situation in Germany, as stated above. In particular, a force majeure clause (whether stipulated in general terms and conditions or in individual contracts) must be examined to determine whether it covers the respective force majeure event. This is the case if the force majeure clause only enumerates examples of force majeure events and generally refers to the fact that the events cannot be influenced. However, if such clause exclusively refers to specific force majeure events which do not include the event in question, the legal consequences are governed by the UCC, unless the principles of "Impossibility of Performance" and "Frustration of Purpose" apply.

3.3 Relevance for the COVID-19 pandemic

Cases in which the Corona pandemic has made it actually impossible to fulfill contractual obligations according to the principle of "Impossibility of Performance" should be the exception. Furthermore, in most cases, the sense and purpose of a contract is not affected by the Corona pandemic in terms of "Frustration of Purpose" either: Even though a customer might have lost its interest in delivery of (industrial) goods e.g. in the event of business discontinuation caused by the Corona crisis, such customer’s business is already destroyed anyway. As a result, such customer will not have any use for claiming for Frustration of Purpose. In addition, sheer difficulties in reselling goods are unlikely to meet the criteria of "Frustration of Purpose", as this principle is not intended to replace the assumption of economic risks by the contracting parties. On the other hand, a loss of interest in performance on the part of a supplier is usually based on the supplier’s inability to supply (in this case the principle of "Impossibility of Performance" applies) or disproportionate expenses (in this case the UCC rule applies).

Therefore, in the vast majority of cases UCC section 2-615 will come into consideration in Corona-related force majeure events. As a prerequisite of application of UCC section 2-615 (as well as the aforementioned principles of "Impossibility of Performance" and "Frustration of Purpose"), it is necessary that the event in question was unpredictable – this prerequisite is the same as under German law. In terms of the Corona pandemic, this means: Contracts concluded prior to the beginning of 2020 are likely to be covered by the legal provisions. In contrast, a contract concluded from March 2020 onwards would have been concluded in full knowledge of the Corona pandemic - with far-reaching consequences for the respective supplier: Unless specific contractual provisions regarding the Corona pandemic have been made, the supplier will not be released from his obligation to deliver in the event of delivery difficulties under US law (as under German law) and may be subject of million-dollar claims for damages. Given the exorbitant legal costs in the US, which are much higher than the costs of proceedings in Germany, many suppliers will not want to accept the risk of a court ruling on such claims - instead, an out-of-court settlement might more often be the preferred solution in such cases. In order to avoid the emergence of such a predicament, detailed contractual agreements should now more than ever be concluded when initiating contracts with US customers. In many (liability) cases, the effort required for drawing up the necessary contracts proves to be an excellent investment.

Contact for US law: Jonas Laudahn

4. Conclusion

A pandemic leading to serious consequences for supply chains is considered a case of force majeure in Germany, as in France and the USA. However, a legal definition of force majeure can only be found in French law.

What applies in cases of force majeure is primarily determined by corresponding contractual regulations. In the absence of contractual clauses on force majeure, there are legal provisions on force majeure in France and the USA - in contrast to Germany. In all three legal systems, the occurrence of absolutely unforeseeable events through no fault of one's own means that a debtor's obligation to perform is at least temporarily suspended without the other party being able to assert claims for damages. The differences lie in the details and therefore require a more in-depth examination.

Certainly, no one who has entered into a contractual relationship from the beginning of March 2020 can invoke force majeure. From that time on, the pandemic was foreseeable in Germany, France and the USA.