Since the Coronavirus (“COVID-19”) was first reported in Wuhan, China in December last year, countries around the world have sought to impose travel bans, quarantine citizens and isolate the infected in an attempt to stop the spread of the new virus. The outbreak has developed into a global threat and on 30 January 2020, the World Health Organization declared that the outbreak constituted a public health emergency of international concern.
In view of the current situation and the spread of COVID-19, the Federal Council has categorized the situation in Switzerland as special in terms of the Epidemics Act. In such a special situation, the Federal Council has the authority to take decisions on matters that would normally be under the authority of the cantons. On 28 February 2020, the Federal Council decided to ban all large-scale events involving more than 1,000 people. Depending on how the situation in Switzerland further develops, the federal and cantonal authorities may issue further directives to limit the spread of COVID-19. Such measures by the authorities as well as absences of employees due to COVID-19 could lead to problems regarding the performance of contracts.
This alert discusses the possible consequences of COVID-19 for contractual obligations and employment relationships from the perspective of Swiss law and what clients have to consider in the current situation.
How does COVID-19 affect contractual obligations?
In order to assess the possible consequences of COVID-19 for contractual obligations, the parties first have to analyze their specific contracts and the law applicable to them. The contracts often include a choice of law clause. The following analysis focuses on contracts under Swiss law.
Under Swiss law, in the absence of mandatory legal provisions, the parties are free to determine their rights and obligations under the contract. Therefore, contracts may include specific provisions that deal with the non-performance or delay of performance due to events like the current spread of COVID-19 (e.g., force majeure clauses).
Contracts including Force Majeure Clauses
The term “force majeure” is not defined in Swiss statutory law. However, the concept of force majeure (“FM”) is recognized in the Swiss legal doctrine and case law and is frequently used in international commercial contracts. FM clauses provide remedies to the parties when the contract becomes impossible, difficult or onerous to perform due to events outside the affected party’s control. FM clauses typically excuse non-performance by a party of its contractual obligations where such non-performance is caused by a defined FM event.
Determining whether an event is a FM event normally depends on the formulation of the clause and the hypothetical will of the parties. Most FM regimes are “open” or inclusive in the sense that the event does not need to be specifically listed as a FM event. Many contractual FM provisions will include a list of examples of FM events. Generally it will be easier to bring a FM claim if the event is listed. The parties may have specifically included “epidemic” or “pandemic” as listed FM events or those events may be subsumed within more general terms such as “disease” or “illness”. Similarly, emergency measures to address or contain an outbreak may be listed or covered under general terms such as “government action”, “government order”, “national or regional emergency” or “quarantine”.
Contracts without Force Majeure Clauses
In the event that the parties have not agreed on a clause dealing with impossibility or delay of performance due to force majeure, the discretionary provisions of Swiss law apply. The available remedies under Swiss law vary depending on whether the performance of the contract is either (i) permanently or (ii) temporarily impossible.
(i) Permanent impossibility – available remedies
The question of whether the performance of the contract is permanently or temporarily impossible must be analyzed on a case-by-case basis. In most cases, the performance of the contract will only be temporarily impossible due to COVID-19. The spread of COVID-19, particularly in supply contracts, will normally only result in a delay of the performance. However, if the parties agreed to a fixed date for performance, there is a likelihood that performance is permanently impossible. Please note that the performance of monetary obligations is, according to Swiss law, never impossible.
Whether damages have to be paid by the non-performing party depends on the question whether the party was at fault. If the party is regarded as at fault for the permanently impossible non-performance, it has to pay damages for non-performance. If the performance has become permanently impossible due to circumstances beyond the non-performing party’s control generally no damages have to be paid. In this case, the claim of the counterparty is deemed extinguished but the non-performing party also loses its claim for compensation. Please note that this only reflects the general regulation in Swiss contract law. Depending on the contract, the allocation of the risk due to impossibility of the performance may differ. Therefore, the contract has to be assessed in detail on a case-by-case basis.
The non-performing party is generally not at fault if for instance subsequent import restrictions apply that were not foreseeable at the time the contract was formed. In a situation, such as the current one due to the COVID-19, there are – depending on the specific situation – arguments that the non-performing party is not at fault. In particular, this could be the case if the non-performing party is unable to perform due to governmental restrictions.
(ii) Temporary impossibility – available remedies
If, depending on the specific circumstances, the COVID-19 outbreak has to be qualified as causing temporary impossibility, the available remedies differ. Swiss law stipulates that if one party may not perform, the counterparty may in its discretion: (i) continue to insist on performance and claim for damages due to the delay; (ii) waive performance and claim damages for non-performance; or (iii) terminate the agreement.
However, as a general principle, the non-performing party has to pay damages only in the event that it cannot prove that it is not at fault. The question whether the non-performing party is at fault has to be assessed according to the principles outlaid above under (i).
Causation: In order for the above-mentioned consequences to apply, there must be a causal link between the event causing the impossibility (e.g. the FM event as defined in the contract) and the affected party’s failure to perform. This means that the affected party must establish that the FM event has caused the non-performance. The FM event does not have to be the direct cause of the non-performance. However, if there are too many steps between the FM event and the non-performance it will be difficult for the affected party to satisfy causation.
Mitigation and Notification: Under Swiss law, the parties are obliged to meet their contractual obligations (“pacta sunt servanda”). If a FM event renders this impossible, they are required to mitigate damages. This may require that the affected party must notify the counterparty of the FM event promptly or in a timely manner. Such duty may also include acceptance of alternative means of delivery if reasonable (e.g., video conference instead of personal meeting). If the responsible party does not take such mitigation measures, it may become liable for losses suffered by both parties due to such omission.
Burden of proof: It is generally on the party referring to the FM event to prove the occurrence of an FM event. Accordingly, it is important to collect respective evidence. Some governments, such as the Chinese government, have issued “Force Majeure” certificates to companies in relation to the outbreak of COVID-19. However, such certificates will not be binding on Swiss courts either as to the existence of the relevant FM event or the effect of the event on the affected party’s non-performance.
As the situation develops and the impact of the outbreak of COVID-19 remains uncertain, we recommend taking the following steps at this stage:
- Review your contracts to consider whether you can rely on a FM clause or some other provisions.
- Check whether the FM clause stipulates the prescribed form and time limitations for giving notice of a FM event after it occurs, and if so, ensure that timely notice is given in the prescribed form.
- Where non-performance of a contract has occurred, make a record of the event in as much detail as possible, including the timing of the occurrence, the parties involved and any facilities impacted by the event.
- Consider whether there are alternative ways of performing the contractual obligations (e.g. sourcing another supplier).
- Consider whether there are ways to mitigate the effects of the present situation.
- Review potential insurance coverage and check whether your policies provide the right types and levels of coverage for crisis situations and are responsive to any changes in the business; •
- Monitor the announcement of any new governmental or regulatory policies in response to the outbreak of COVID-19, which may lead to changes in the applicable law, the options for relief and the assessment of compensation.
How does COVID-19 affect employers?
As of now, the Swiss authorities have not ordered companies to take specific measures related to their employees. However, based on a general obligation to protect the employees’ personal rights, employers must take all necessary measures to protect the employees’ health that are appropriate (e.g. instructions to wash hands, allow home office or remote work solutions). In any event, such measures must remain proportionate and have to consider the employee’s personal rights. For instance, instructions which could affect the employees’ private lives must be considered very carefully.
Payment of salary
If an employee cannot work due to circumstances that fall within the employer’s business risk, the employer must continue to pay the salary. The State Secretariat for Economic Affairs (SECO) takes the (non-binding) view that COVID-19 represents a business risk and that salary must be paid even if the employees cannot work due to a business closure based on the orders from public authorities. Under specific conditions, employers are entitled to apply for compensation for reduced work hours.
If an employee is quarantined and cannot work remotely, the employer’s obligation to pay the employee’s salary during a quarantine period depends on whether or not the employee is responsible for his/her incapacity to work. If the employee is placed in quarantine by either Swiss or foreign authorities or by the employer’s request, the employer will generally have to pay the salary during a limited period of time. As the case may be, the employee or the employer will be entitled to insurance benefits depending on the insurance coverage. Salary payment is not required, however, if employees decide not to come to work on their own initiative without being sick or having to care for sick family members.
If an employee refuses to follow reasonable instructions by the employer regarding the outbreak of COVID-19, this may be considered a breach of the employment contract.
As the situation develops and the impact of the outbreak of COVID-19 remains uncertain, we recommend taking the following steps at this stage:
- Appoint a coordinator: The coordinator, or a group of cross-functional coordinators, should be responsible for tracking the latest developments, reviewing guidance from any governmental agencies and who can be a point of contact for concerned employees.
- Understand employer obligations in each affected jurisdiction (which will change): Review applicable government health alerts and requirements for reporting. Remember that the balance between privacy and public health is achieved differently in different countries. For instance, primarily due to data privacy laws, employers in most of the EU and in Switzerland generally may not notify health authorities that an employee has been infected.
- Address business travel concerns head on: Companies whose business involves travel by its workforce into areas where the virus is particularly active should immediately try to establish customer contact or business contact through other means, e.g. teleconference, webinar, or videoconference. Businesses with employees who are working overseas or who are traveling should track travel and health restrictions to allow the company to move quickly in response to concerns these employees may have. Limit business travels as much as possible.
- Maintaining operations in the face of a pandemic: Take measures to reduce the risk of a potential transmission of COVID-19. The Federal Office of Public Health (FOPH) recommends that companies prepare a pandemic plan. The FOPH has published an informative handbook in this respect, directed at small and medium enterprises. Depending on the evolution of the COVID-19 situation, such a plan may become mandatory.
- Identify the key positions and functions essential to sustain business continuity: Develop plans to enable these functions and personnel to continue working, possibly through remote operations. Identify and, if necessary, cross-train back-up personnel to ensure critical functions are not compromised. Consider physically separating key position holders.
- Identify contact information for key suppliers, utilities, and local and national governments: Keep this “list” available and updated so that the company can both advise them of steps it is taking to mitigate the effects of a pandemic, as well as make requests for assistance, if necessary.
Given that the full impact of the coronavirus is likely to evolve over several months and there is substantial potential for the outbreak to spread into new regions, this issue will become increasingly important over time.
If you would like to discuss any of the issues raised in this alert please contact us. Further news, regional law perspectives and other information can be viewed at Baker McKenzie’s Coronavirus Resource Center.