Possibilities to amend or cancel contracts during the COVID-19 crisis

In particular, due to aggravating liquidity shortages, many companies are wondering to what extent they are bound by contracts that have become useless or impossible to fulfil and if they could adapt these contracts to the current situation. For example: restaurant owners who can no longer use food that has already been ordered, transport companies who can no longer deliver goods, concert promoters that are not allowed to hold a concert in the rented premises anymore etc.

In the following, a few possibilities for a (unilateral) amendment or termination of contractual relationships shall be discussed:

1. Contract amendment by mutual intent

The parties to a contract may, in principle, jointly amend or cancel it at any time. A joint solution is usually the easiest and quickest way, bearing the least conflict potential. Furthermore, it allows to allocate the economic consequences of the crisis to both parties in a fair manner. As a rule of thumb, a consensual solution is always preferable. In order to prevent disputes arising out of the contract amendment, it is highly recommended to amend the contract in writing.

2. Judicial contract adjustment – Clausula rebus sic stantibus

It is well recognised in Swiss doctrine and practice, that contracts can be adjusted subsequently by a court, if, due to a change in circumstances, the fulfilment of the contract can no longer be reasonably expected from at least one party. This is generally the case if the balance between performance and consideration is seriously disturbed. In the words of the Federal Supreme Court, a contract is to be amended or terminated, if subsequent and unforeseen circumstances result in an obvious disproportion between performance and consideration that would make one party’s insistence on its claim seem abusive (BGE 97 II 398).

In such cases, a judge shall adjust the contractual relationship to the current, changed circumstances if requested. Adjustments can be made with regard to the value of the contractual obligations or with regard to their content. In extreme cases, a contract may even be terminated. The following conditions have to be fulfilled for a judicial contract adjustment:

• A change of circumstances after the conclusion of the contract,
• which could not have been reasonably foreseen in the normal course of events and which
• has resulted in a serious disturbance of the contractual relationship.

Given the fact that hardly anyone will seriously argue that the crisis or its effects were foreseeable, a judicial adjustment of a contract may seem as a suitable way to amend contracts affected by the crisis. However, a case-by-case assessment is necessary as various legal problems may arise.

Especially with regard to continuing obligations it is unclear how long the crisis has to last and how severe economic restrictions have to be in order to constitute a disturbance to the fulfilment of the contract that would allow a judge to adjust it. Furthermore, a judicial adjustment of a contract requires a request of a party, i.e. the filing of a corresponding claim. However, for procedural reasons such a claim could hardly be treated within a reasonable period to adapt a contract at short notice. Nonetheless, the judicial adjustment of contracts may be useful in the future to amend contracts which are continuously affected by long-term effects or the aftermath of the corona crisis.

In any event, it has to be noted that a contract adjustment based on a legal claim and court proceedings will unlikely be beneficial for future business relationship between the parties.

3. Right to terminate a contract on serious grounds

According to the Federal Tribunal a party has the right to terminate a continuing obligation on serious grounds (cf. e.g. BGE 138 III 304). A contracting party may terminate a continuing obligation if the fulfilment of its obligations cannot be reasonably expected anymore for economic or personal reasons (cf. BGE 128 III 428). Specifically, the contracting party cannot be reasonably expected to await the end date of a fixed-term contractual relationship or the expiry of the notice period of an indefinite contract (BGer 4A_148/2011 E. 4.3.1). Unless otherwise provided by law, termination without notice is possible (vgl. BGE 138 III 304).

However, the right to terminate a contract on serious grounds is of limited help in the present crisis. Taking into account the unknown duration of the crisis and that we will hopefully return to normal economic conditions in the near future, it has to be evaluated individually, whether it is unbearable for one party to wait until the end-date or the expiry of the notice period for the contract to be terminated. Moreover, it is safe to assume that most parties of a continuing obligation are interested in its validity after the crisis. If the right to terminate a contract on serious ground is exercised, the contractual relationship between the parties ends completely. Consequently, a new contract would have to be to be negotiated after the crisis. It is questionable whether the counterparty would be interested in this, as the economic consequences of the crisis were shifted to it through the termination.

4. Impossibility

Currently, various economic activities are subject to restrictions by the authorities. They have thus become impossible from a legal point of view, e.g. running a restaurant. In addition, related business activities have de facto become impossible –for example a wholesaler that cannot supply a closed restaurant. Furthermore, certain contractual obligations are still possible, but have lost their economic value completely. There are two provisions regarding the impossibility of performance in the general part of the Swiss Code of Obligations:

According to Art. 119 CO an obligation is deemed extinguished where its performance is made impossible by circumstances not attributable to the obligor. The obligor thus released is liable for the consideration already received and loses his counter-claim to the extent it has not yet been satisfied. According to Art. 97 CO no compensation for resulting damages is owed if the obligor was not at fault. According to the Federal Court it is irrelevant whether the impossibility is objective (nobody can render performance) or subjective (the obligor cannot render performance). According to doctrine and case law, subjective impossibility includes not only cases in which an obligor is effectively no longer able to perform, but also those in which performance of the contract has become unaffordable for the obligor. However, mere difficulties or inconveniences in the performance of a contract do not constitute an impossibility. Only if the efforts and expenses required for the fulfilment of the contract are in no reasonable proportion to the value of the obligation, will unaffordability be deemed equivalent to impossibility (BSK OR I-WIEGAND, Art. 97 N 14). The Federal Court assumes a case of impossibility if the further performance of a contract can no longer be reasonably expected in good faith (BGE 135 III 212, BGE 82 II 332).

For Art. 119 OR and Art. 97 OR to be applicable, there must be a case of permanent impossibility, not just a temporary one. Permanent impossibility is to be assumed if there does not seem to be a remedy in the foreseeable future. A case of merely temporary impediments to performance constitutes a case of debtor default.

In view of the far-reaching prohibitions currently in force, a plea of impossibility may have good chances of success. However, the exact circumstances must be carefully assessed, in particular whether a case of a permanent impossibility lies at hand. Given the hopefully foreseeable duration of the current crisis, it only seems safe to assume a case of permanent impossibility with regard to fixed-date obligations for the time being. In the case of continuing obligations, it may be argued that certain partial obligations have become impossible during the crisis.

5. Fundamental error concerning future facts

According to Art. 23 CO a party labouring under a fundamental error when entering into a contract is not bound by that contract. An error is considered fundamental, in cases where the error relates to specific facts which the party acting in error considered in good faith to be a necessary basis for the contract. According to the Federal Court an error can also refer to a future event, but only if this event could objectively be considered certain at the time of the conclusion of the contract. A further prerequisite is that the counterparty should have recognized in good faith that the certainty of the occurrence of the future event was a contractual prerequisite for the other party (BGE 118 II 297).

Nobody can reasonably argue that the corona crisis was predictable – at least until a certain point in time, which would probably have to be determined by a court in the event of a dispute. Conversely, it can be argued with good reason that most of the contracting parties were allowed to assume in good faith that there were open borders, freedom of travel and the absence of prohibitions and social distancing. However, it should be noted that with regard to continuing obligations, temporary restrictions and prohibitions may not be sufficient to justify the assumption of a fundamental error. For , an error could be assumed with regard to open borders and entry regulations in the case of airline tickets bought before the crisis.

The error has to be claimed within a one-year period (Art. 31 CO). In principle, the contract will be cancelled retroactively from the time of conclusion of the contract and the contractual relationship must be reversed. In the case of continuous obligations, the contract will be cancelled at the time of the assertion of the error.

6. Conclusion

Despite the enormous impact of the corona crisis, contracts remain valid in principle and the contracting parties remain bound by them. The easiest, quickest and most cost-effective way of terminating or amending a contract is always a mutual agreement between the parties. A mutual agreement is, as a rule of thumb, always preferable.

If it is no longer possible for one of the parties to adhere to the contract and the other party does not offer a hand for an amicable solution, a party may under certain circumstances be released from its contractual obligations by invoking a termination based on serious grounds, impossibility or a fundamental error. Each case must be assessed carefully in this respect. More problematic seems to be the judicial adjustment of contracts with an urgent need for adjustment. However, it could serve as an instrument for the adjustment of contracts that are continuously disturbed by the long-term effects or the aftermath of the corona crisis.