COVID-19: Who is liable for non-performance of existing agreements - and what about new agreements?

With one Danish case of COVID-19 infection, a potential coronavirus epidemic is drawing nearer. This past week has brought news of a rapid spread to multiple countries.

COVID-19 has already had serious financial consequences for many businesses across industries and has shook up stock markets all over the world.

Legally, as well, COVID-19 and its derived effects are also creating a host of problems that most businesses would be wise to consider in their day-to-day activities, not least in relation to agreements that risk being affected by the outbreak. 

As reported in business news on a daily basis now, Danish companies are finding that Chinese and other sub-suppliers are unable to perform under delivery agreements already concluded. As a result, Danish businesses may find themselves unable to perform under the agreements they have made with their customers. And if the customers do not receive the deliveries ordered, they in turn cannot meet their obligations to their own customers. 

Many companies are already losing considerable turnover, which will presumably reduce their earnings and profits, as a result of COVID-19. For listed companies, changes to previously announced expectations may require the immediate release of a company announcement to that effect.

Companies that cannot perform under the agreements with their customers will be at risk of receiving substantial claims for compensation. This goes for ongoing trade relations as well as for one-off transactions. Examples of the latter include cancellations of trade fairs, exhibitions, conferences, events, etc., which are already a reality in countries close to Denmark and for Danish companies. 

Who must “pick up the tab” for cancelling or for non-delivery of goods in the form of paying damages to the injured party depends, under Danish law, on the agreement between the parties. If the agreement is silent on the issue, as will presumably frequently be the case, Danish law still offers a possibility of exemption from liability, under a general ‘force majeure’ principle.

Meaning of force majeure

“Force majeure” means events that are (i) unforeseeable and (ii) beyond the parties’ control, which make them (iii) an impediment to performance of an agreement. For an event to be deemed a force majeure event, it must, in other words, be extraordinary and unforeseeable, like e.g. war, import bans and natural disasters.  Force majeure generally exempts the breaching party from liability. 

Force majeure in contracts

Many existing agreements include a separate force majeure clause. In these situations, it will depend on the specific wording of the clause if COVID-19 is covered and thus constitute a force majeure event. If the events that may be characterised as force majeure are listed exhaustively in the clause without any mention of epidemics, pandemics or other global health crises, then the outbreak of COVID-19 cannot, obviously, be relied on as a defence.

If epidemics, pandemics or other global health crises are specifically listed in a force majeure clause, such events can of course be invoked, but there is still a risk of incurring liability. The party seeking to rely on the force majeure event must also prove that it is impossible to perform the agreement, and that the non-performance is due to that particular force majeure event. 

Non-contractual force majeure 

If, however, the specific events that may be characterised as force majeure are not listed exhaustively in the clause, or if the agreement does not include a force majeure clause, then it will have to be decided on a case-by-case basis whether the outbreak of a disease can be deemed a force majeure event. For this purpose, it must be determined if performance of the agreement is impossible,  having regard to announcements and restrictions from the authorities or international organisations, including e.g. the Danish Ministry of Foreign Affairs, the Danish Health Authority, Statens Seruminstitut or the WHO. 

Generally, Danish case law has applied a strict approach when interpreting force majeure clauses, making it difficult to succeed in a force majeure claim. Thus, a party seeking to rely on force majeure will have to prove that it is impossible to perform the agreement, and that the impossibility of performance is due to the force majeure event.

Integrate COVID-19 into existing and future agreements 

For a party to rely on force majeure, the force majeure event must, as noted above, be unforeseeable. The rapid spreading of the virus over the last weeks means that “unforeseeability” can no longer be invoked in relation to agreements that are entered into now. Kromann Reumert therefore recommends contracting parties to take delivery problems, cancellations, etc. caused by COVID-19 or other epidemics into account from now on. If COVID-19 is an impediment to performance, liability for damages should be avoided through risk hedging clauses. Only in this way can businesses exclude or limit their future liability for non-performance of the agreement.

What to do now?

As in most other situations, exercise of “due care” is advisable. At Kromann Reumert, we have a team that has already advised on a number of contractual issues relating to COVID-19. We are ready to assist at short notice in reviewing your agreements and providing individual advice.