Newsflashes

Is your contract affected by the coronavirus outbreak?

04.03.2020

Since its first detection in China in December 2019, the novel coronavirus COVID-19 has been spreading around the globe and declared a public health emergency by the World Health Organisation. In addition to the impact on human health and life, it has had significant repercussions for businesses worldwide, whether it be due to disruptions in supply chains, suspensions of production and manufacturing, quarantine measures, travel and import restrictions, or cancellations of fairs and events.

The impact of the coronavirus outbreak has been palpable in business sectors that rely on global supply chains and cross-border transactions. As a result of the epidemic and government measures taken in response in various jurisdictions, more and more companies are facing delay or inability to perform their contractual obligations, or performance of such obligations has become increasingly burdensome, financially or otherwise.

From a legal perspective, the question arises whether COVID-19 may suspend or excuse parties from performance of their contractual obligations.

  • The answer will first depend on the provisions of the contract, in particular whether it contains a force majeure or hardship clause and how such clauses are drafted.
  • The answer will also depend of the governing law of the contract. Each legal system has a different approach to force majeure and hardship. The governing law will determine how a force majeure clause or a hardship clause will be interpreted and the extent to which parties can be excused from performing under a contract in the absence of such a contractual provision.

The concept of force majeure under Swiss law

Although the concept of force majeure is recognised by Swiss courts, a general force majeure defence as such does not exist under Swiss law. Legal concepts that are most akin and that are relied on when arguing force majeure under Swiss law are impossibility of performance (Article 119 of the Swiss Code of Obligations) and a change of circumstances in the sense of hardship or "economic impossibility" (clausula rebus sic stantibus).

Generally speaking, a circumstance qualifies as force majeure only if it objectively prevents a party from performing its obligations. According to the case law of the Swiss Supreme Court, a force majeure event is defined as an extraordinary external event related to elemental forces or actions of third parties which are unexpected and unforeseeable, and which cannot be prevented by applying due care. If alternative means of performance are available, although more financially burdensome, the failure to perform will not be excused.

A force majeure event may lead to the termination of the contract or the suspension of the performance of contractual obligations until the event ceases to constitute an impediment of performance.

Contractual force majeure provisions

In line with the principle of freedom of contract, the parties are free to define in their agreement the events which shall be considered events of force majeure, and to determine the consequences thereof.

A typical force majeure clause sets forth certain requirements that must be established to constitute a force majeure event and often provides a list of examples of force majeure events. Depending on the wording of the provision, the list may be exhaustive or non-exhaustive. Some provisions expressly mention epidemics.

Some provisions set forth additional requirements, such as a duty to mitigate damages or an obligation to give notice to the counterparty, some also including a requirement for a confirmation of a force majeure event by a local chamber of commerce, or alike. In some contracts, failure to issue a notice within the prescribed period will result in the loss of relief and the barring of a defense under the force majeure provisions.

Hardship or economic impossibility

When a change in the economic circumstances surrounding a contract is so radical as to substantially alter the equilibrium of the contract, in such a way that performance would become excessively burdensome for one party, the Swiss Supreme Court considers that such change of circumstances may be a ground for modification or even termination of the agreement. This doctrine, also known as "clausula rebus sic stantibus", is based on the general principles of fairness and good faith under Swiss law.

Contracts may contain hardship clauses setting forth the circumstances that will trigger the provision and defining the consequences of such event, in particular whether or not the parties have an obligation to renegotiate the contract.

Conclusion

Whether the outbreak of COVID-19 or government measures taken in response fall within the scope of a given force majeure clause or hardship clause, or otherwise constitute an excuse for non-performance under the governing law, requires a careful legal analysis and individual case-by-case assessment for each contract. Depending on the wording of the applicable contractual provision, a party seeking to rely on force majeure or hardship may need to comply with specific conditions in order to be suspended or excused from performing its contractual obligations.

More generally, whether or not affected by COVID-19, companies are well-advised to review the terms of their contracts, or negotiate future contracts, to more adequately address the potential impact of epidemics or other unexpected events that may affect the parties' ability to perform their contractual obligations.

 

Subscribe to our Updates

*Required fields

Monthly selected key topics from our practice areas and sectors, plus Newsflashes on current events.
Monthly email with the latest updates on and summaries of the Swiss Federal Supreme Court's case law in arbitration matters.
A regular look (1 – 2 per year) from a unique M&A perspective on legal changes, economic developments and societal trends in Switzerland.
Regular insights on Swiss and international trends and legal developments in the construction industry.
Concise analyses of key trends in the fast moving world of corporate governance for the boards of Swiss companies.