Category: English

English Law Contracts and COVID-19

Northampton, 1st June 2020

At some point companies will be required to consider whether they, or a party with whom they have contracted, can suspend or terminate a business contract as a consequence of the disruption caused by COVID-19.

Government restrictions, unsettled markets and labour issues continue to create obstacles to doing business, in some cases making adherence to contractual obligations impossible. For those agreements between international parties governed by English law, determining whether an agreement can be suspended or terminated is not necessarily straightforward because no general relief or allowance for COVID-19 exists. Each case depends on the specific terms of the contract and the exact circumstances in which the parties find themselves.

Here are some of the key issues that parties to contracts governed by English law should consider:

1. Force Majeure – does the contract include a force majeure provision that deals with the specific circumstances?
2. Mitigation – has the affected party mitigated its loss?
3. Frustration – has there been frustration of the contract?

What is Force Majeure?

A force majeure clause (if included within the contract) commonly sets out the rights and remedies of one or both the parties if an extreme event occurs which is outside their control.

A contract must specifically provide for force majeure as there is no common law principle for force majeure in England.

As each contract is drafted differently, it is important to review the specific wording on a case by case basis.  Depending on the wording of the clause, a party may be able to rely on the clause to justify delay, suspension or even termination of the contract without any liability.

Does COVID-19 Constitute a Force Majeure Event?

Whether COVID-19 constitutes a force majeure event will depend upon the definition of “force majeure” in the contract as well as the specific circumstances.

Wording that includes “pandemic” or “health crisis” may support COVID-19 being considered a force majeure event.  Any mandatory restrictions imposed by the Government may be considered a force majeure event if the definition includes wording such as “acts of government” and “regulatory measures”. On the other hand, reference to an ‘Act of God’ is unlikely to include COVID-19 as this usually refers natural disasters such as floods and earthquakes.

Unless the contract specifically states otherwise, force majeure generally won’t apply if the event was ongoing or in the contemplation of the parties when the contract was entered into.  The point at which COVID-19 was “in the contemplation of the parties” is open for interpretation.

It will be for the party seeking to enforce the force majeure clause to prove that the force majeure event has occurred to the extent that performance is significantly delayed or altered.

Mitigation

Where a force majeure event has been established, it is still necessary for the disadvantaged party to show that it has mitigated the effects of the force majeure event, regardless of whether this is specifically provided for in the contract.  The purpose of the force majeure clause is to provide relief for the inability to perform obligations under the contract, not to terminate or suspend the contract where the contract becomes more onerous for the other party.

Frustration

Separate and different to force majeure, frustration does not need to be provided for in the contract, it is a common law right.  A contract may be frustrated if an event occurs, through no fault of either party, which makes performance of the contract impossible or fundamentally different.  A contract will not be frustrated if the contract just becomes more difficult or expensive for one party to perform. In practice frustration is rarely established as it is difficult to prove that a contract was impossible to perform. However, frustration may be increasingly relied upon, given the current economic conditions, as a means of delaying or confusing matters.

Where a contract is frustrated, that contract is terminated and the parties will be discharged from their future obligations. If the contract is long-term in nature then the implications of termination should be considered before claiming that the contract is frustrated. Importantly, frustration won’t discharge the parties from previous obligations that accrued.

A potential example of frustration would be where a location is shut down as a consequence of government restrictions in connection with COVID-19 and this stops a time critical event, which is the subject of the contract, being held.  In such circumstances it might be reasonable to argue that the parties could not perform the contract.

Conclusion

Whether force majeure applies will depend on the individual contract and the circumstances in which the parties find themselves.  It is important that contracting parties seek legal advice on the specific terms of their contract.  If a party wrongly refuses to perform its contractual obligations or incorrectly terminates the contract, then the other side may take advantage of this and seek damages for breach or wrongful termination.

Rather than invoking a force majeure, businesses may wish to discuss options with the other party to reach an amicable solution.  It is possible that both parties are in a similar position e.g. if the contract is for the supply of goods, the other party may no longer require the goods. Maintaining good business relationships during the current pandemic may yield benefits when some form of normality eventually returns.

Author: Craig Harrison, Attorney at law

Tollers LLP

A possible suspension of commercial and professional rents during the state of crisis

Luxembourg, 1st June 2020

Government measures taken in order to fight COVID-19 have forced many businesses to either reduce or entirely stop their activities. As these businesses now face serious cash flow problems, more and more voices are calling for a suspension of contractual obligations in commercial and professional leases.

Lessors remain free to terminate the lease on the ground of non-payment of rent (Art. 1762-11, Luxembourg Civil Code). However, evictions are suspended until the end of the state of crisis (Art. 5 (1), amended Grand-Ducal Regulation of 25 March 2020).

Thus, a Bill No. 7551 on rent suspension for commercial and professional leases during the state of crisis and amending the Law of 4 December 1967 on income tax has been submitted to the Chamber of Deputies on 6 April 2020.

The key points of this bill, which has not yet been adopted, are:

• The suspension of the obligation to pay rent and the suspension of the lessor’s right to terminate a lease for non-payment of rent during the state of crisis;
• The lessee’s obligation to pay rent arrears until 30 June 2021;
• An incentive fiscal mechanism allowing the lessor, who reduces or waives rent during the state of crisis, to fiscally deduct the financial concessions which are being assimilated to expenses (amount limited to EUR 10.000).

There is also a public petition N° 1581 launched on 8 May 2020, with already over 580 signatures, advocating for an adaption of commercial rents according to turnover in case of extraordinary events such as the COVID-19 crisis and the possibility for the lessor to claim compensation from the government for the lost rent.

In our opinion, the lessee’s obligation to pay rent is already suspended.

Art. 1719 3° of the Luxembourg Civil Code provides that the lessor has to ensure the lessee’s quiet possession of the leased premises during the term of the lease.

Whilst lockdown restrictions apply, a lessee could argue that the lessor cannot fulfil the aforementioned duty anymore because the activity agreed by contract at the beginning of the lease can no longer be executed.

The lessee could invoke the exception of non-execution on the basis of Article 1134-2 of the Luxembourg Civil Code which provides that each party can suspend the execution of his obligation if the other party has not executed his own obligation.

However, the lessor could justify his failure to assure the lessee’s peaceful enjoyment of the leased premises by invoking that government action during COVID-19 crisis constitutes a force majeure (an external cause which cannot be attributed to the parties of the lease contract) and that he is therefore exonerated of his contractual liability (Art. 1147 and 1148, Luxembourg Civil Code).

According to Luxembourg case law in case of temporary unforeseen events, the debtor’s obligation is only suspended until the end of the obstacle.

The government action during the state of crises could be considered a temporary unforeseen event.

Thus, the suspension of the lessee’s obligation to pay rent ends as soon as his business can resume the activity.

Author: Anne-Marie Schmit, attorney at law

ETUDE ANNE-MARIE SCHMIT

Overview of the easing of corona-related measures in Austria

Berlin, 5th February 2024

New ruling on the scope of the provision on presumption

After the Federal Court of Justice (BGH) had already dealt with the statutory presumption of fact in Section 133 (1) sentence 2 of the German Insolvency Code InsO in its decisions of 3 March 2022 (IX ZR 78/20) and 23 June 2022 (IX ZR 75/21), it took up this aspect again in a decision of 26 October 2023 (IX ZR 112/22) published only now in January 2024.

This confirms our assessment published at the time, according to which the Federal Court of Justice wishes to give the presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) more significance again. It can be assumed that the successive changes in the chairmanship of the IX. Civil Senate responsible for bankruptcy proceedings in the last three years are responsible for this change in case law to the detriment of creditors affected by avoidance actions.

Knowledge of the intention to disadvantage creditors

According to the provision in section 133 (1) sentence 2 of the German Insolvency Code (InsO), the presumption is that the opposing party is aware of the insolvency debtor’s intention to disadvantage creditors if he knew that the insolvency debtor was insolvent. On the other hand, knowledge of the impending insolvency can only be considered in cases in which the opposing party has not provided any direct consideration for the contested legal act. In this respect, the reform of avoidance law of 5 April 2017 has fortunately slightly improved the legal position of suppliers and service providers.

Following the decision of the Federal Court of Justice of 6 May 2021 (IX ZR 72/20), many creditors had assumed that the scope of statutory presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) is now only limited to exceptional cases.

Although the two decisions of 3 March 2022 and 23 June 2022 had brought a little more legal certainty for those creditors who received payments on the basis of a conclusive restructuring concept, but at the same time already clearly emphasised that the scope of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) should not be restricted.

Key points of the BGH ruling IX ZR 112/22

In the now published decision of 26 October 2023, the Federal Court of Justice is once again giving particular attention to the scope of provision on presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO).

The key points of this decision are clear: if the opposing party is aware of the insolvency of the subsequent insolvency debtor, the factual presumption of fact of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) argues for the contesting insolvency administrator, i.e. they have provided evidence that the opposing party was aware of the debtor’s intention to disadvantage creditors.

For his part, he must now refute the legal presumption and provide full proof that he was not aware of the insolvency debtor’s intention to disadvantage creditors. To this end, he has to demonstrate to the conviction of the court that he can assume that the debtor will be able to fully satisfy his other existing and foreseeable additional creditors in the time available for this purpose. This alone puts huge obstacles in the way for an outside creditor who, from experience, does not know the economic situation of his debtor. However, the Federal Court of Justice has added another obstacle that is unlikely to be overcome: the opposing party may only make this forecast on a sufficiently reliable basis for assessment. So, in other words, he cannot trust vague information from the debtor, and mere hope that the other creditors will also be satisfied is not enough for the Federal Court of Justice. Rather, a sufficiently reliable basis for assessment is required; when this is given, the Federal Court of Justice will then leave it to the courts of lower instances to decide when this is the case.law.

As a result, this means that – once the presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) intervenes in favour of the insolvency administrator – the opposing party will only be able to refute this presumption in exceptional cases, for example if a reliable restructuring concept is available (for its requirements: see the Federal Court of Justice ruling of 3 March 2022 – IX ZR 78/20 and of 23 June 2022, IX ZR 75/21).

Conclusion

The Federal Court of Justice has not yet ruled on whether the assumption laid down in Section 133 (3) sentence 2 of the German Insolvency Code (InsO) in favour of the opposing party intervenes with regard to the opposing party not being aware of the insolvency of the debtor when concluding a payment agreement or granting payment facilitation. The Federal Court of Justice also leaves open the period of time it wants to use as a basis for the complete satisfaction of all creditors with the wording “in the available time”. The legal uncertainty for creditors will thus significantly increase again.

What does this mean for business partners of companies that are experiencing payment difficulties?

They should try to comply with the requirements of Section 133 (3) sentence 2 of the German Insolvency Code (InsO) in order to be able to claim at least this legal presumption of fact in favour of the opposing party.

In general, it is advisable to switch to the so-called cash transactions (Section 142 InsO) to continue the business relationship if a business partner has payment difficulties and to transfer any arrears to a payment agreement. However, this must be designed in a legally secure manner in order to actually be able to make use of the desired granting of privilege in the event of a contestation. Our insolvency law experts will be happy to help you with this.