Force Majeure in Contract Law

Coronavirus, COVID-19, Contract law

The economic effects of the coronavirus (COVID-19) are becoming increasingly evident: the consequences of ordered business closures and the ban on events, loss of customers and suppliers, price increases and delays with suppliers, loss of manpower or consequences of home office in the areas of labour law, insurance, confidentiality and IT security raise many legal questions. Although the virus primarily affects human health, the economic consequences of COVID-19 are also serious.

In practice, the main question is how contractual defaults caused by the coronavirus are to be legally assessed. The unexpected extent of the coronavirus makes one think primarily of the occurrence of force majeure or the principle of clausula rebus sic stantibus.

I. Legal regulation of force majeure in Swiss law

The Swiss Code of Obligations does not explicitly regulate force majeure, but this principle is nevertheless recognised in case law and is subsumed under Art. 119 CO. If performance has become impossible due to circumstances beyond the debtor's control, Swiss law considers the claim to be made impossible under Art. 119 CO. The debtor is no longer required to make payment. In the case of bilateral contracts, any consideration already provided is reversed. In the case of continuing obligations, any payments already made to the other party are not affected by a reversal. In this case, the reversal concerns the services currently to be rendered under the contract and/or services rendered unilaterally. In addition, the question arises as to what happens if the impossibility of performance ceases in the future, i.e. if the performance becomes possible again.

In principle, a Party may invoke force majeure if the following three conditions are met:

a) Art. 119 CO speaks of "circumstances not attributable to the obligor". This includes coincidence and force majeure. First of all, an event must be present which qualifies as force majeure. The term force majeure includes natural events such as floods and earthquakes as well as war, terrorism and strikes. What these events or situations have in common is that they were not foreseeable when the contract was concluded and the occurrence of the event was unavoidable. The question of whether a global health risk such as epidemics and pandemics can also be considered a force majeure event has not yet been conclusively clarified. This is particularly the case in combination with an official order or ban.

We recommend that the following constellations be observed and clarified in detail in each individual case:

  • If, based on the outbreak of coronavirus, an official order comes into force after the conclusion of a contract, which makes performance impossible with regards to a specific contract, the application of Art. 119 CO must be examined.
  • If the impossibility of performance is not based on an official order, but performance is no longer possible due to the circumstances attempted by the coronavirus, Art. 119 CO may also apply.
  • If the performance is still possible in principle, but if it no longer makes sense from an economic perspective of the parties, it must be analysed on the basis of the concrete circumstances whether a case of Art. 119 CO could still exist or whether the parties insist on full performance of the contract or can claim the positive interest in the contract. In the latter case, a solution may possibly be found by means of the principle of clausula rebus sic stantibus (see below).

b) Under Art. 119 CO, an impossibility attributable to force majeure only leads to the extinction of contractual obligations if the force majeure event is in an adequate causal relationship with the impossibility or the default: The force majeure event must therefore make the concrete contractual performance in dispute impossible.

This is never the case, for example, with pure cash payments/payments. It is precisely for this reason that the Federal Council issued a ban on debt enforcements on 18 March 2020, for example. In the case of other services, a distinction must be made as to whether it is actually impossible to provide the service or whether the circumstances merely lead to a delay. If the latter is the case, Art. 119 CO is not applicable and the statutory rules on delay are decisive. In assessing the adequate causality, a temporal element must also be taken into account. If the force majeure situation persists, it may be expected that the parties to the contract will have to adapt to the new situation. If it is possible to adapt the organisation of the service provision, there is no longer an adequate causality between the force majeure situation and the impossibility of the service provision.

c) Finally, Art. 119 CO only concerns the individual claim. Accordingly, the claim for performance and, if applicable, the claim for consideration expire, but not the obligation as such (BSK OR, Art. 119, Wolfgang Wiegand).

The question of the application of Art. 119 OR can therefore not be answered in an abstract way. A case-by-case assessment taking into account the concrete circumstances is necessary.

II. Contractual force majeure arrangements

Within the framework of the contractual freedom applicable under Swiss private law, the legal scope of application of force majeure can be contractually extended or even restricted by the parties involved. Such clauses chosen by the contracting parties generally take precedence over the subsidiary legal regulation in Art. 119 CO. Many contracts and general terms and conditions contain a force majeure clause, according to which, for example, pandemics, official restrictions or other unexpected occurrences are to be qualified as force majeure - or are not to be qualified at all.

Contractual force majeure clauses usually also contain provisions on the legal consequences (termination, liability for damages or grace periods) of late performance or non-performance due to the event that has occurred, given a causal link.

The meaning and content of such clauses shall be determined by interpreting the relevant contractual clauses in the context of the entire contractual relationship.

Clausula rebus sic stantibus

The unexpected extent of the coronavirus makes one think of the principle of clausula rebus sic stantibus in addition to force majeure.

The principle "clausula rebus sic stantibus", developed in Roman law, states that the judge can deviate from the principle pacta sunt servanda (contracts must be observed) in the presence of special circumstances and adapt a contract at the judge's discretion. This legal institution is always applicable when cumulatively

  • the circumstances have changed fundamentally since the contract was concluded,
  • the changes cause a serious equivalence disruption in the service programme,
  • the changes were neither foreseeable nor avoidable, and
  • there is no contradictory party behaviour.

These cumulative requirements are of particular importance in the case of long-term contracts/permanent contracts.

In practice, high demands are placed on these prerequisites. However, certain scenarios are conceivable in which the consequences of COVID-19 propagation on certain contractual relationships fulfill exactly these requirements. Here too, however, a final assessment can only be made on the basis of the specific circumstances and the wording of the contract in question.

III. No state compensation

Even if a contractual service can no longer be provided due to official orders, the Federal Government has made it clear on several occasions that the Federal Government will not cover any resulting losses.

However, the state is attempting to cushion the consequences indirectly, in particular through the ban on debt enforcement measures until at least 19 April 2020 (taking into account the statutory debt enforcement holidays), short-time working compensation and other economic aid programmes. Despite the ban on debt enforcement measures, it is still possible to put debtors in default: The main consequence of this is that the risk of damage or loss of goods (e.g. theft) is transferred to the defaulting debtor and, in the case of financial claims, default interest is charged (Art. 102 CO).

 

Conclusion

1. Contracts are to be observed in principle (principle pacta sunt servanda).

2. Under the given circumstances, however, it is possible that individual contractual services or entire contractual relationships may expire in application of Art. 119 CO (force majeure).

3. If there are no force majeure circumstances, it must be examined whether in this extraordinary situation certain contractual relationships can be adapted to the changed circumstances by applying the "clausula rebus sic stantibus".

4. No debt enforcement measures may be initiated until 19 April 2020: Whether and to what extent delayed payments will receive special treatment cannot be foreseen at the moment, for the time being the ordinary rules apply. In any case, it is advisable to nevertheless put debtors in default by sending reminders on overdue invoices in order to obtain the advantages of Art. 102 CO (defaut interest, etc.).

Whether a party can specifically invoke force majeure or whether contractual agreements can be adapted or renegotiated in application of the clausula rebus sic stantibus to the new circumstances cannot be answered generally even in the current situation of a pandemic. The individual contractual relationships and the effects of the pandemic on the performance obligations of the parties must be analysed.

We are happy to assist you in drafting and enforcing solutions with regard to contractual relationships that contain force majeure clauses or that can no longer be fulfilled or lose their economic sense due to the outbreak of the coronavirus.

March 2020 | Authors: Raphael Brunner, Prof. Andreas Furrer, Peter Kuhn, Karl Fässler, Luca Hitz, Michelle Wiki

Your team

Contact

In need of legal, tax or compliance advice? We look forward to contacting you.

Services

From the magazine

Work and childcare

Since 16 March 2020, all schools and kindergartens in Switzerland have been closed. Hundreds of thousands of children have to stay at home. But who pays the wages of the employees if they have to look after their children at home? In our FAQ we try to give you an overview of the most frequent questions.

Insurance coverage of epidemics and pandemics

The explosive spread of the corona virus and the resulting official restrictions on business life have led to large and potentially existential financial losses for companies and the self-employed. It is advisable to check whether there is insurance cover for the damages suffered.

Tax Relief

In order to cushion the economic impacts of the spread of the coronavirus, the Federal Council decided, among other things, to provide liquidity aid in tax matters.

Corona and Cross Border Trade

The MME Cross Border Trade Team evaluates the challenges that international trade now faces.

Entry Restrictions

On March 18, 2020 the Federal Council further extended Ordinance 2 on measures to combat coronavirus (COVID-19 Ordinance 2). Based on Article 7 of the Epidemics Act, which provides that in the event of an extraordinary situation, the Federal Council may order necessary measures for the entire country, the entry restrictions were extended.

Home Office

By minimising social contacts through the adoption of appropriate measures, the authorities are currently trying to slow down the spread of Covid-19. This also has deep effects on professional life. The instruction to work from home ("home office") is an effective means to achieve this, however there are challenges to overcome.

Liquidity shortage

As a result of the Swiss federal governmental measures against the coronavirus, many companies in Switzerland find themselves in a liquidity shortage. The Swiss debt enforcement and bankruptcy law contains provisions which protect the debtor’s interest. This gives the debtor time to eliminaLte the liquidity shortage.

Current Pandemic and Official Orders

The economic impact of coronavirus is immense for Swiss companies and their employees. We are happy to provide advice and assistance on legal and tax issues relating to the current pandemic and the orders of the authorities.

Coronavirus & Swiss GAAP accounting

The macroeconomic effects of the coronavirus also have consequences for accounting according to the Swiss Code of Obligations. In the opinion of EXPERTsuisse, however, this is an event that does not have to be accounted for in the financial statements as of December 31, 2019.

Short-time work in times of the Coronavirus

The rapid spread of the novel coronavirus is already having a strong impact on the profitability of numerous companies, especially in the tourism and event industry. From an employer perspective, measures to ensure the continuity of the company should be considered.

Coronavirus & Employment Law

The coronavirus is spreading rapidly. Except in China, human infection has been confirmed in almost 30 countries. This also poses great challenges and raises questions for employers and employees.

All magazine reports

Publications

  • Prof. Dr. Andreas Furrer,

    Dr. Andreas Glarner,

    Thomas Linder,

    Dr. Luka Müller

    Die Rechtswirkung algorithmisch abgewickelter DLT-Transaktionen

    PDF

  • Prof. Dr. Andreas Furrer,

    Dr. Andreas Glarner,

    Thomas Linder,

    Dr. Luka Müller,

    Andreas Rudolf,

    Dr. Dominik Vock

    MME Stellungnahme zur Konsultation der Arbeitsgruppe Blockchain | ICO des Eidg. Finanzdepartements (SIF)

    PDF

All publications