Coronavirus and its impact on ongoing B2B contracts
Coronavirus and its impact on ongoing B2B contracts
The COVID-19 virus will most certainly lead to delays, suspensions, cancellations or renegotiations of ongoing contracts.
1. How is “force majeure” or “external cause” defined?
Articles 1147-1148 Belgian Civil Code stipulate that no compensation is due in the event of non-performance or delay in the performance of obligations, due to force majeure, external cause (‘Fait du Prince’) or fortuitous event.
What is force majeure or external cause is often defined in a contract. Some contracts even expressly exclude force majeure as excuse for a non-performance.
1.1. Mandatory closing is an ‘external cause’
What is clear is that mandatory closures or cancellations of activities are cases of ’external cause’/‘Fait du Prince’.
1.2. Other COVID-19 related issues not automatically’ force majeure’
What is less clear is whether non-execution or cancellation due to general difficulties (e.g. not finding sufficient employees, a(n) (expected) decrease of turnover, clientele, visitors) are cases of force majeure.
Lacking contractual guidance, the Belgian High Court has described force majeure as unforeseeable events that make it absolutely impossible (or at least ‘reasonably” impossible) to perform an obligation. If all others under the same circumstances are (reasonably) unable to perform as well, this can be considered force majeure. If performance is still possible ‘at a later stage’ e.g. once the pandemic has ended, there is also no case of force majeure, but no damages are due for the delay if the delay is caused by a temporary force majeure.
While a pandemic might be considered ‘unforeseeable’ this will certainly not be the case for contracts concluded after the first reports of the virus.
2. Consequences of force majeure or external cause
The question is raised which of both contracting parties ultimately bears the risk of the force majeure situation.
For one-way contracts: the obligation can be cancelled/suspended.
For mutual (reciprocal) agreements the risk ultimately lays with the debtor, since no payment is due by the other party in case the obligations of the debtor are cancelled for force majeure. This has been confirmed in article 5.102-105 of the new Belgian Civil Code (Book 5 “Obligations”).
For deliveries, the final outcome will depend on when the risks and ownership are transferred. If the ownership and risks have been transferred before the existence of a Force Majeure, payment is still due. If the transfer of ownership and risk is foreseen after the case of Force Majeure, the transfer of ownership is no longer possible due to force majeure and payment is not due. Unless a contract provides otherwise, the transfer of ownership occurs upon conclusion of the contract (not necessarily upon delivery) so that in general, force majeure is the problem of the buyer.
3. Is COVID-19 a reason to adapt the contractual terms and conditions?
In the absence of a contractual clause to this effect, the terms and conditions of a contract cannot be adapted in case unforeseeable circumstances make it harder to perform a contractual obligation. Belgian law (as opposed e.g. French law) does not recognize ‘hardship’ as a reason to alter contractual obligations.
Contracts can however reserve a right to adapt obligations in case of altered circumstances making their execution more difficult. Typical clauses to that effect are:
- “Hardship” clauses allow for adaptations of the contract in case unforeseen circumstances render its execution excessively onerous, independent of the will of the parties.
- “MAC” (“Material Adverse Change”) and “MAE” (“Material Adverse Effect”) clauses describe a material and adverse change of business, financial results or activities of the company, which leads to the termination or modification of the contract.
4. What about my contracts?
- Lease agreements: Rent must be paid. COVID-19 measures are not a valid reason to obtain rent reductions, even if this would temporarily restrict the rent enjoyment of the premises (e.g. in case of a temporarily closing). The situation could be different if the access to the premises becomes impossible due to, e.g. a necessary ‘deep clean’ of the premises. In that case, the tenant might be able to claim a reduced enjoyment of the leased premises and therefore a rent reduction (cf. art. 1722 Civil Code). In France there seems to be a growing consensus to qualify COVID-19 as a ‘change of circumstances which was unforeseeable at the time of conclusion of the contract and that renders performance excessively onerous ’ and thus allow for a renegotiation of the rent as per article 1195 French Civil Code.
- Service agreements: Services that cannot be provided due to COVID-19 (reasonably and definitively impossible), do not have to be paid.
- Deliveries: Deliveries can be suspended in case of reasonable impossibility to deliver. If the ownership has been transferred (without contractual provision stating otherwise, this is upon conclusion of the contract), the goods have to be paid , even if they are blocked in their country of origin and perish due to a situation of force majeure. Minimum purchase obligations continue to apply, even if the company of the purchaser is temporarily closed.
- Distribution contracts: Products must be delivered and paid, royalties, commissions or other contributions remain due, even if the distributor’s company is temporarily closed. Minimal turnover obligations can be temporarily suspended. In practice, however, many distributors will rely on reasonable assistance from their supplier/franchisor. Services of the supplier that can no longer be provided, do not have to be paid.
The contractual provisions of these contracts may off course vary and a case per case assessment is thus necessary.
Would you like to know more?
The Racine team is at your disposal to answer your specific questions.