Legal Aspects of Coronavirus in Switzerland II – Force Majeure

The coronavirus is spreading world-wide and has arrived in Europe and North America. As a result, the consequences of the coronavirus no longer affect only international companies with production sites in China or which depend on deliveries from China. Nationally operating companies of all kinds are also facing consequences in the form of total or partial suspensions or delays in deliveries or cancellations or bans on events.

In the following, we will show whether the coronavirus can legally be classified as “Force Majeure” and explain the consequences for affected companies.

1.     Is the coronavirus a “Force Majeure” event

The term “Force Majeure” or “Act of God” is used to describe an unforeseeable and unusual event that cannot be prevented by economically reasonable means (including by due care expected under the circumstances) and which, in view of the particular situation and due to the rarity of such an event, is not to be expected. At present, one can assume that the coronavirus pandemic is to be classified as a Force Majeure event. However, a case-by-case assessment is always necessary.

2.     Force Majeure clauses in contracts

International purchase, supply or service contracts often contain Force Majeure clauses. These usually release the party affected by the Force Majeure event (both the party obliged to perform and the party receiving the performance) from its obligation to fulfil the contract at least for a certain period without entitling the opposite party to claim damages or to terminate the contract. Depending on the industry, the contractual relationship and the circumstances at the time of the conclusion of the contract, the hurdles for the application of the respective Force Majeure clause are set at different levels. It should also be noted that the opposite party may demand reasonable measures and efforts from the affected party to maintain the ability to fulfil the contract despite the effects of the coronavirus and the associated official measures.

Force Majeure clauses in insurance contracts are also frequently encountered. In these contracts, the Force Majeure clauses should be aligned with the contractual obligations of the policyholders vis-à-vis their customers or suppliers, as otherwise there is a high financial risk for the insurance company.

3.     Absence of Force Majeure clauses

In the absence of a Force Majeure clause, the general provisions of the applicable law applies to the contract. In order to find a solution that is as economically appropriate as possible, we strongly recommend that the applicable options for action are carefully examined.

3.1     Legal consequences under Swiss law

Swiss law provides in Art. 119 of the Swiss Code of Obligations (CO) that the affected party is released from its obligation to perform in the event of an impediment that is not attributable to the affected party, which has arisen after the conclusion of the contract. In our opinion, this requirement is generally fulfilled in the case of the coronavirus pandemic. In this case, the opposite party can only reclaim from the released party contributions that the released party has already received from the opposite party (e.g. prepayments). In addition, the opposite party can also demand compensation from the released party for services received from a third party due to the impediment (e.g. payments from an insurance company).

If performance of the contract is possible but becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract, on condition that the change of circumstances occurred after the time of conclusion of the contract and the possibility of a change of circumstances, was not one which could reasonably have been taken into account at the time of conclusion of the contract and therefore, the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear (principle of clausula rebus sic stantibus). In connection with the corona virus, for example, increased disinfection or safety measures as well as higher costs for the procurement of components or for stricter hygiene controls, can increase the costs for a supplier to such an extent that performance of the contract at the agreed conditions would be excessively onerous. If these changed circumstances lead to a considerable disturbance of the contractual balance, the contract must be adapted to these changed circumstances. If the contracting parties cannot agree on an adjustment of the contract, such an amendment could also be ordered by a court.

3.2     Legal consequences under international and foreign law

On condition that the parties have not agreed on a specific applicable law, an applicable law must be assessed. If foreign law is applicable on a contract (result of the assessment or according to an agreement between the parties), the options for action and the legal consequences associated with these options are to be evaluated according to this foreign law. If international conventions are applicable, these must also be examined with regard to regulations on the non-performance without fault. The United Nations Convention on Contracts for the International Sales of Goods of 11 April 1980 (CISG), for example, provides in Art. 79 for a possibility of exemption from liability (and thus e.g. suspension of delivery obligations) in the event of Force Majeure, comparable to the Swiss Code of Obligations.

4.     Recommendations

In order to limit losses due to coronavirus or similar cases, it is advisable to agree on well-defined Force Majeure clauses. If the effects of the coronavirus affect your company or if it is foreseeable that the coronavirus will have an impact on your company, it is worth examining any claims and countermeasures. Depending on the applicable law, different claims may exist and different measures may be appropriate.

In addition, it is advisable to give notice to the opposite party of the threat of disruptions to performance due to Force Majeure as early as possible and in a verifiable manner, in order to enable the opposite party to prepare itself for the impediment to performance and to act appropriately to mitigate the damage.

The attorneys of Bihrer Attorneys at Law Ltd. are at your disposal for a proactive consultation, for an analysis of the legal situation or for the enforcement of claims.

Contract, Coronavirus, Force Majeure