COVID-19 and its impact on the commercial sector

Force majeure, exhibitor and organiser rights vis-à-vis cancelled live events and government intervention during the crisis.

The COVID-19 pandemic and restrictions imposed by governments in Europe and around the world have created a host of challenges for commercial activity. International businesses are faced with supply-chain issues and the cancellation of commercial events and trade shows, which has been devastating for this sector.

But despite these challenges, governments in EU and around the world have announced aid and interventions to assist business, and many of these programmes directly assist the commercial sector. Furthermore, companies involved in commercial activity can adopt strategies to help mitigate the current crisis: mainly, by fully understanding the implications of force majeure – events occurring beyond a company's control that makes fulfilment of an agreement impossible – in your jurisdiction and contracts.

This article explores issues such as supply chain challenges, your rights as an exhibitor or organiser of trade shows or consumer events impacted by the crisis, and a rundown on what governments are doing to assist businesses and employees with a focus on Italy, Germany and the UK.

Supply chain challenges: Italian perspective

COVID-19 has created profound interruptions in international supply chains, particularly in Italy, the first European nation to fall victim to the virus. Because of the pandemic and government actions to stop the virus's spread many companies unable to operate have been exploring the legal principle of force majeure.

But according to Vincenzo Giangiacomo, a lawyer with CMS Rome, Italian law traditionally does not specifically recognise force majeure. As a result, many Italian businesses struggling to operate amid the government-imposed response to the crisis (e.g. quarantines, business closures, restrictions on movement) found themselves in a commercial and legal quandary.

In response, in late February the Italian government issued Decree 18/2020, which identified state measures to stop the spread of the virus as an exemption from liability for failure to fulfil contractual obligations and for any penalties for non-performance. This decree applies to domestic Italian contracts and was not intended for international agreements given the fact that it would be difficult to apply this blanket exemption to companies from other nations with their own definitions of force majeure.

But Giangiacomo states that for companies – in Italy and anywhere – seeking a force majeure exemption, one of the most important issues is "burden of proof". A company must be able to prove that the force majeure event was an impediment to performance. But what is the metric by which a company needs to prove that non-performance was caused by a specific event and that overcoming this event was impossible?

The answer sometimes exists in contracts, which often contain clauses requiring that force majeure be officially certified by a third party.The Italian government has mandated the Italian Chambers of Commerce to issue such certificates

Although the Chinese government introduced a similar third-party certification system that has proven successful, the legal impact of the Italian certification is still not clear (i.e. how Italian and foreign courts will view these certificates.)

In terms of the practical impact of the crisis on the Italian supply chain, the Italian government has expanded the lockdown until 13 April. Until that time, all business activity, except for essential enterprises (e.g. food production, distribution and retail, medical supply sales, etc.), are restricted. In Italy, non-exempted businesses may still be allowed to operate provided that they notify their local government authority that they are operating for exempted business, listing what activities they will be conducting in that area during the lockdown and for which client. The authority will then verify this report and may close the companies if their declarations are found false or incomplete.

The Italian experience is different from other countries in Europe such as Germany, which is not operating under a general lockdown. But this freedom to operate is not necessarily good news for many businesses. In the absence of an official lockdown, German suppliers who are unable to fulfil their contractual obligations due to the crisis are now faced with the prospect of proving force majeure in each individual instance.

Supply chain challenges: German perspective

One of the challenges a German company in this situation faces is meeting the burden of proof required to invoke force majeure. It is not enough for a supplier to state that it cannot fulfil a contact due to COVID-19, reports Dirk Loycke, Partner and Global Co-Head of the CMS Commercial Law Group. Companies in this predicament must be thorough. They must investigate every available and reasonable means of fulfilment and if performance is still impossible, they must report to their customer that they have tried and exhausted every reasonable economic means to prevent force majeure and meet the terms of their contracts.

This effort includes investigating whether components for production can be obtained from other sub-suppliers, even at a higher price. Under German law, price increases during a given period, such as a pandemic, is often the supplier's problem, and it is generally not a reason for non-fulfilment.

Another challenge that has arisen in Germany: suppliers possess an inventory of goods, but not enough to fulfil all orders. What is a supplier and customer supposed to do in this situation? There is no easy solution, explains Loycke. Under German law, it is not advisable to choose one customer over another (i.e. to fulfil the order of a preferred customer and declare force majeure to everyone else) if all orders are comparable and the supplier received them around the same time. Generally, the best recourse is to deliver an equal share of one supply to all customers. Even if each delivery is short, this strategy should prove fair play was exercised, allows the company to justifiably claim force majeure and will possibly help it escape liability for damages.

Now, assuming that a company can justifiably claim force majeure, what are the practical consequences? First, the supplier who can rely on force majeure would not be subject to claims for damages from its customer based on late deliveries. At some point, one or even both parties may be entitled to terminate the contract or withdraw from it. In many cases, however, the most obvious solution is for one party to reach out to its partner and suggest an amendment to their contract. If the other party is reluctant to agree, German law has a high threshold for forcing renegotiations.

The requirement is that there are "substantial changes in circumstances that are beyond the control of either party," explains Loycke. So it is best if companies can get together and work out a contractual amendment that takes into account the new situation and issues like late deliveries and price increases.

Also, another important supply-chain consideration concerns suppliers who have worries that customers will be unable during a crisis like the current one to pay for products. One legal solution, used during the 2008 crisis, is execution of the "retention of title" principle, which means that a supplier can retain the title of a delivered product until it is fully paid for. This would allow a supplier to get the product back should the customer's business fail. This raises the thorny issue of insolvency. Hence, insolvency proceedings in whatever jurisdiction a company is doing business should be researched vis-à-vis its impact on retention of title. Also, retention of title may be more challenging in cross-border transactions where the applicable law on ownership of a given product changes once the product has crossed an international boundary. To apply retention of title in a foreign transaction, the supplying company must always research how this principle might specifically apply in the customer's jurisdiction.

Supply chain challenges: UK perspective

Like Italy, the UK – although under Common Law – has no statutory provision recognising force majeure, explains John Enser, a Partner with CMS London. Hence, companies must go back to their contracts and determine if they contain any provisions for force majeure. Contracts should be studied in "forensic" detail to see if there is any specific clause that exempts a party from fulfilling an obligation and what the justification is.

Force majeure is not always applicable even in crisis situations like COVID-19, explains Enser. For example, such a provision rarely gives a party justification for not accepting "goods" that it is contractually bound to purchase. An extenuating circumstance could be if the party's factory has been closed as a result of the pandemic or state restrictions. But in this case, the receiver likely would only be able to suspend the receipt of goods (e.g. components for assembling in a factory) and not reject them completely. The final outcome, however, would depend on the exact wording of the contract: how force majeure is defined and what the threshold is for its application. For example, in English case law, a party who claims that a certain force majeure event "prevented" the completion of a contract must meet an extremely high threshold to satisfy the test of "prevented".

In this instance, the courts will want to see proof of either practical or legal impossibility to fulfil a contract. Simply arguing that the event made completion far more difficult or expensive does not meet this threshold.

It is also important to determine what a contract's force majeure clause states regarding payment obligations to be sure that a party is not required to make a payment for goods even though the goods cannot be delivered due to the force majeure event. Unless a payment obligation in a contract is closely tied to the payment of goods, it is possible that the obligation to pay will continue despite the fact the goods never arrived.

Lastly, in English law it is extremely important to follow whatever notice provision exists in a contract's force majeure clause. Following this notice procedure is essential should the matter later go to court. But this practice, admittedly, does place some companies in a difficult situation. Serving notice on non-completion due to force majeure by one party can lead the other party to respond with a notice of termination down the line, even though the party that served the force majeure notice would like the contract to continue.

In English law, if a contract doesn't have a force majeure clause, the Common Law principle of "frustration of contract" could apply in the absence of a broad recognition of force majeure. To apply this principle, a company must meet a high threshold in court for a contract to be deemed frustrated. And if this happens, the contract is considered null and void, which creates a new set of problems for the parties who must rely on other statutes to sort out outstanding issues such as prepayments.

Live events and force majeure

In regard to the cancellation of trade shows and live events, how and when does force majeure apply? According to CMS Germany's Dirk Loycke, the determining factor is timing. The organisers of a trade show that had been scheduled for late March in Milan, Italy can most likely justifiably cite force majeure for its cancellation. But organisers attempting to cancel an event due to take place in September may be standing on shakier ground.

Based on German statutory law, the participant (exhibitor) in a live event such as a trade show which is cancelled by the organiser due to force majeure is not obliged to pay any fees to the organiser. If the exhibitor pre-paid some part of these fees, they should be entitled to claim it back from the organiser. On the other hand, the exhibitor would not have any claims for damages or reimbursement of other expenses due to the cancellation in case of force majeure.

From a German perspective, the wording of the contract is paramount. Some contracts may exempt a party from following through with an event and from having to pay back participants who prepaid if there is a clause in the contract that allows them to cancel without penalty if an impediment occurs "that is not their fault", even if the impediment doesn't rise to the strict definition of a force majeure event.

But all is not lost for participants in this situation. German law allows many such clauses to be challenged in negotiations and, if necessary, in court. These clauses are usually included in a party's Terms and Conditions, the acceptance of which can vary greatly from country to country. Because Terms and Conditions are often boiler plate provisions in many contracts, an organiser's Terms and Conditions may differ from the Terms and Conditions in an exhibitor's contract, which means in the case of a legal conflict, the two varying sections cancel each other out (i.e. the "knockout rule"), leaving the issue to be resolved by statutory law that is likely to be more sympathetic to an exhibitor who is being denied a refund due to a no-fault clause.

Moreover, Germany, in fact, has extremely restrictive laws governing Terms and Conditions in contracts, which means that many of these clauses – even if they became part of the agreement between the parties – will be invalid and not be enforceable if they put the other party in an unfair and unreasonably disadvantageous position. .

On the other hand, if an exhibitor wants to cancel a contract with an organiser for an event that has been rescheduled for later in the year, it is advisable to look into the details before serving notice. Unless it is highly certain the new date will also be affected by the same force majeure event or it is unreasonable for the exhibitor to accept the new date, a premature attempt at cancelation could weaken the exhibitor's ultimate case.

In the UK, a similar legal situation exists. Whether or not an exhibitor can cancel and receive a refund depends on the wording of the contract. Some organisers draft contracts that place the liability for force majeure events squarely with exhibitors, who must obtain their own insurance or protection. English law also recognises a principle of "reasonableness" that can apply where standard terms of business are used. If an organiser reschedules a live event for later in the year and expects an exhibitor's participation, an English court may determine it unreasonable for the organiser to expect fulfilment under these circumstances.

In English law, a cancelled consumer event, such as a music concert or sporting event, almost always results in ticket holders getting their money back.

Currently, many organisers are attempting to push the boundaries of their contractual obligations by sending notices to exhibitors that an event has been postponed and that their participation is required at the new date. Under English law, such a contractual "moving of the goal posts" will typically not stand, explains CMS London's John Enser. Instead, an organiser is advised to go to its exhibitors and try to renegotiate mutually acceptable terms, such as a new event date.

The implications on long-term contracts, such as sporting contracts governing an entire season, raise another question. In these situations, says Enser, force majeure clauses have gaps. One is the timing of resuming normal activity after a force majeure event. If the regular season for a football league was suspended due to the epidemic, once a lockdown is lifted and some normal activities are allowed, does this mean that the league must resume a full schedule of competitive play or can the teams embark on a safe and gradual resumption of play? Unfortunately, the law has no clear answer for this.

Government interventions

In response to the economic damage created by the epidemic, governments across Europe are intervening and providing aid businesses, employees and consumers. These interventions vary from country to country, but virtually all include three main actions: support for furloughed employees, the distribution of grants or funds to small businesses and financial support for larger businesses.

In the UK, for example, companies can send workers home for up to three months and the government will pay 80% of the salaries up to a cap. A similar system has been created for the self-employed.

In Italy, the government – different from other countries in the EU – have not suspended rental payments during the crisis, but it has created a 60% tax credit for commercial rents for March. No such provision exists for lease of business. In addition, tax contributions have been suspended for small businesses until 31 May, and financial assistance has been provided to both consumers and companies.

In Germany, on 27 March the German government passed legislation – retroactively in effect since 1 March – that suspends payment obligations for consumers and small businesses (less than 10 employees and up to 2 million euros annual turnover) for essential services. In addition, all businesses and consumers may choose to suspend rent payments temporarily without giving the landlord reason for termination of the lease agreement. . Landlords, however, do have the right to calculate interest during this suspension in accordance with statutory law (which is 8.12 % pa for businesses and 4.12 % pa for consumers). In addition, the landlord is still entitled to terminate the lease agreements for other reasons. Hence, it is advisable to renters unable to meet their commitments during this crisis to reach out to their landlords and reach an amicable resolution rather than relying on this law, which can – in the end – prove costly to renters down the road.

Clearly, the effect of the pandemic on the commercial sector from supply chains to the hosting of live events is complex. Companies can find some relief in force majeure legislation, but whether this principle applies depends on the circumstances, the contract between the parties, and whether the legal jurisdiction a company is operating in recognises this principle.

If a company opts to use force majeure as a way to be exempted from contractual obligations, it must be able to prove it and – more importantly – prove that it made every reasonable effort to avoid force majeure.

For more information on applying force majeure in your situation and the challenges that the current crisis poses in the commercial sector, contact your regular CMS advisor or the following CMS experts:

• Aukje Haan, Partner and Global Co-Head of the CMS Commercial Group
• Dirk Loycke, Partner and Global Co-Head of the CMS Commercial Group
• Vincenzo Giangiacomo, Partner, CMS Rome
• John Enser, Partner, CMS London