Corona: Cancellations And Shortfalls

The Corona-epidemy raises a lot of challenges for our society – including a number of legal issues. With our Corona-Series articles we would like to randomly highlight selected issues related to operational, transactional, and regulatory matters.

Given the circumstances, many questions currently focus on the legal consequences if contracts are no longer or can no longer be carried out due to the Corona-virus epidemic. Buzzwords such as “force majeure” are often used in this context. Following, we would like to provide a brief introduction in the concepts of the so-called legal impossibility, frustration of contract, and force majeure in connection with the cancellation of (scientific) events due to the Corona crisis. The cancellation of an event may affect a number of legal relationships: landlord-organizer-exhibitor-stand builder-participant-hotels-transport company. Canceling events often means that expenses incurred by , e.g., exhibitors or participants turn useless and that those affected suffer economic damage.

Following we concentrate on the cancellation of events from an epidemiological point of view and differentiate between two situations: (i) the self-motivated cancellation of events and (ii) the cancellation due to governmental orders.

In General

Organizers that cancel events, want to free themselves from their contractual obligations in order to avoid unnecessary cost. On the other hand, canceled events cause damage by third parties that have made expenses towards the canceled event and that now turn useless. If no contractual arrangements have been made for this scenario, two statutory rules are applicable under German law.

Section 275 German Civil Code – Impossibility

Pursuant to Section 275 German Civil Code (“BGB”), a party has no claim for performance toward the other party, insofar as specific performance it is impossible for the debtor. If A promises a performance to B that is impossible for A to perform, A does not have to deliver this performance to B. However, this does not mean that B cannot make A liable for damages. It depends on who (e. g. whether A) is responsible for the impossibility.

Section 313 BGB – Frustration of Contract

There are cases where the parties to a contract explicitly or implicitly assume that certain or general circumstances will allow the contract to be carried out. Section 313 BGB provides that in the event of a serious change in such circumstances, the party affected by such change may request an adjustment of the contract, provided, however, that the affected party cannot be expected to adhere to the contract as is. If an adjustment of the contract is not possible or not reasonable, the contract may be terminated. Examples would be an exceptionally sudden, strong and general shortage of the availability of certain products, whereby the courts regularly place very high demands on Section 313 BGB. Although not entirely correct, for the lack of an exactly mirroring mechanism under common law, following we would like to refer to this principle as a “frustration of contract” or a “frustration of the purpose of a contract.”

However, it should be noted that claims from § 313 BGB are primarily aimed at the adjustment of the contract (i.e. a change in performance). The affected party is only allowed to withdraw from the contract in exceptional cases. And even in this case, case law usually requires the withdrawing party to reimburse the other party for its useless expenses.

Force Majeure?

There is no general legal principle in German law that allows parties to release themselves from their contractual obligations due to “force majeure”. Direct claims based on force majeure only exist under travel law, the United Nations Convention on Contracts for the International Sale of Goods or if specifically provided for in the agreement (also in form of general terms and conditions). If an organizer has not provided for specific contractual provisions on force majeure, (e.g., an organizer has specifically agreed on rights in case of a force majeure with the landlord of the event location, exhibitors or participants), the concept of force majeure does not apply in the context of the cancellation of events for epidemiological reasons.

Procedure

If you are affected by the cancellation of a (scientific) event, you should first check whether the contract contains provisions on force majeure. The SARS epidemic in 2003, e.g. was classified by German courts as force majeure. If there are no provisions in the contract, the principles of impossibility (§ 275 BGB) of a frustration of contract (§ 313 BGB) may apply.

Self-motivated Cancellations

By “self-motivated cancellations” we mean cancellations of events that are not based on governmental orders. In times of the Corona-epidemic, these cancellations can be motivated by various reasons: (i) due to a self-motivated limitation of infection risks, (ii) due to cancellations of presenters and panelists, or due to cancellations of a large number of participants.

No Impossibility

If an organizer cancels an event within his or her own discretion, the principle of impossibility pursuant to Section 275 BGB – that would release an organizer from his or her contractual obligations – would not be applicable. A cancellation of presenters, panelists, or participants is an inherent risk of an organizer that he/she has to take responsibility for.

Frustration of Contract

If the principle of impossibility does not apply, there may be a possibility to lodge a claim for frustration of contract according to. § 313 BGB. First of all, the implementation of the planned event must have become the purpose of the contract in question (e.g., lease agreement with the landlord of the location, contracts between the organizer and exhibitors or participants). Pursuant to Section 313 BGB that would be the case if the implementation of the event was made the specific purpose in the agreement or if it was recognizable to the other party, and if both parties corresponding business expectation in connection with the contract in question would be frustrated in a fashion that insisting on the implementation of the contract would be unreasonable in light of the change of circumstances. As a second requirement, these circumstances must have changed significantly after the contract was concluded in such a fashion that the contract would either not have been concluded at all or that the parties would have concluded a different contract had the parties foreseen the change in circumstances. Ultimately, adherence to the unchanged contract must be unreasonable for the party concerned. The above concept suggests that a court will decide on the requirements pursuant to Section 313 BGB on a case-by-case basis. Nevertheless, we would dare an attempt to identify some starting points for the analysis of the rights and obligations in connection with the canceling of a conference in epidemiologically difficult situations.

In our example in the relationship between organizer and the landlord of the event location, an organization or implementation of a scientific conference most likely would have become the purpose of a contract (absent an explicit contractual provision) if the implementation of the event was decisive for the parties’ pricing model, e. g. if the organizer and the management of the event location (e.g. conference hotel) calculate prices and costs on the basis of the number of participants.

All or the vast majority of presenters or panelists canceling their participation in a conference due to the outbreak of an epidemic situation may qualify as a serious change in the circumstances and purpose of the contract. There should be little doubt that the parties would have entered into another contract had they been aware of this possibility. However, answering the question whether it would be reasonable for an organizer to adhere to its contractual obligations in such a case requires a decision on a case-by-case basis. As a general rule, suffering from a disadvantage in connection with the implementation of a contract is not unreasonable, if such disadvantage (e. g., loss or default) creates a risk that the law would typically allocate to the the suffering party. For example, the law allocates the procurement risk to the party of a contract that is obligated to surrender a specific good, the risk of devaluation to a creditor of a cash benefit, and the risk of the usability of a leased good to the tenant. Thus, in general, an organizer that rents an event location would have to pay the rent (in the absence of corresponding individual contractual agreements) despite the event being canceled. Section 313 BGB, however, allows to arrive at a more appropriate balancing of interests.

In a case from the 1950s, the court found impossibility in a case where a theater show was canceled due to the absence of the ill lead actress. These days we would correctly apply the concept of Section 313 BGB: If all presenters cancel their participation in a scientific congress speakers due to a pandemic situation, it may be unreasonable for the organizer to adhere to its contracts with landlords, exhibitors or participants. In such a case, the organizer should be able to request an adjustment of its contract, e.g., with the landlord pursuant to Section 313 BGB. Depending on the circumstances of the individual case, such adjustment may allow the termination of a contract against the reimbursement of the other party (landlord) for its useless expenses by the organizer. Although an organizer might not be in the position to terminate a relevant contract without any further payment obligation, a limitation of its liability to the reimbursement of the landlord’s useless expenses may – depending on actual expenditures already made by landlord – significantly limit an organizer’s damage exposure.

Cancellations Due to Governmental Orders

The legal situation in the event of cancellations due to governmental orders as a means of epidemiological infection protection is somewhat more forward.

If the implementation of an event is directly or indirectly prohibited due to governmental orders for infection protection, such implementation has turned “impossible” in the legal sense pursuant to Section 275 BGB. The organizer cannot and must not carry out the planned event. Neither the organizer nor exhibitors or participants are responsible for such an official ban. (Of course, that would be different if, for example, the organizer had caused a health hazard.)

In such a case, an organizer would be released from its performance towards exhibitors, participants, and panelists. However, the organizer would also forfeit its right to receive consideration (e.g., exhibition fees or participation fees). For example, the organizer would not have to provide an exhibitor with an exhibition space; however, the organizer would also forfeit its right to receive payment of an exhibitor fee. Pursuant to Section 275 BGB this relief of obligations usually does not come for free: If a performance of a contract has become impossible for one party, the other party can be entitled to damages. However, in our case neither party would be responsible for an governmental order prohibiting the event at issue. Therefore, damage payments should not be applicable in case of the cancellation of an event due to governmental order for reasons of epidemiological infection protection.

In its relationship with the landlord of an event location, the organizer should be able to invoke rights under the concept of a frustration of contract pursuant to Section 313 BGB. The rules of impossibility pursuant to Section 275 BGB should not apply, since the prohibition to carry out an event would neither bar from nor prohibit an organizer to renting the venue itself. However, an governmental ban to carry out an event for reasons of epidemiological protection against infection most likely would present such a major change in the circumstances that were expected by landlord and organizer when contracting that would turn adherence to the contract unreasonable. Provided that the rental contract for the event location does not provide any specific provisions for non-performance in cases of force majeure, organizer should be able to terminate the contract at issue against reimbursement of the landlord for its useless expenses.

Necessity to Exercise Your Rights

It is important to remember that the law requires a concerned party to explicitly claims its rights under Section 275 or Section 313 BGB towards the other party. Courts will not automatically adjust performance obligations pursuant to Section 313 BGB in a litigation unless the concerned party has explicitly claimed its rights towards the other party prior to litigation.