On 16 March 2020, the Swiss Federal Council issued Ordinance 2 on measures to combat the coronavirus (COVID-19 Ordinance 2), whereby, among other things, publicly accessible facilities such as shops and markets were closed. Now at the latest, the coronavirus and its effects have also hit Switzerland with full force. In addition to the large number of SMEs with roots in Switzerland, distribution networks with regularly internationally structured supply chains have been particularly affected. Against this backdrop, we would like to provide a brief outline of what we consider the most important steps to be taken in particular by the parties to distribution agreements in order to prevent or mitigate damages.
1. Contract review prevents damages – screening and prioritisation
In our view, it is crucial to conduct a systematic and professional contract screening as quickly as possible. The aim is to identify the contractual relationships that are most affected by the coronavirus and the associated governmental measures. In particular, the following questions should be assessed:
- to what extent is oneself no longer able to meet contractual performance obligations; and/or
- to what extent are the contractual partners or third parties no longer able to fulfil their respective performance obligations.
Examples include delivery stops or delays or the (temporary) uselessness of long-term obligations associated with the distribution system such as, for instance, rental or storage contracts.
Wherever possible, the expected claims or damages should be quantified in the process. Based thereon, a prioritisation of the contractual relationships to be addressed can be made in a second step.
Under Swiss law, distribution agreements are not regulated by statutory law and are therefore considered so-called „innominate agreements“ (Innominatverträge). This is why the text of the individual agreement is especially important with regard to the allocation of the respective rights and obligations of the parties thereto. Hence, before the general legal regulations, it is primarily the text of the respective contract that should be consulted. In principle, the contract text offers the most legal certainty. In our view, the following questions should be at the centre of a contract screening:
- Which law is applicable to the distribution agreement?
- Are there contractual rights and (information) obligations regarding the procedure to be followed in the event of delivery failures or delivery bottlenecks and delays?
- Does the distribution agreement contain a force majeure clause and what is the wording of such clause, if any?
- How are the rights of termination set forth and how are the consequences of termination regulated?
In the current situation, it seems noteworthy that distribution agreements under Swiss law can be terminated without notice at any time for good cause due to their nature as continuing obligations. This also applies even if the text of the agreement does not regulate anything in this respect. Furthermore, according to the case law of the Swiss Federal Supreme Court, the right to terminate continuing obligations for good cause is mandatory, i.e. it cannot be completely waived or limited by an agreement to the contrary.
In our opinion, depending on the specific circumstances, it cannot be ruled out that the coronavirus and its effects could qualify as a good cause entitling to immediate termination without notice. In some instances, high costs may be avoided thanks to the immediate termination without notice. Depending on the specific merits of the individual case, it is also conceivable that the coronavirus and its effects could be qualified as an unforeseeable, significant change in circumstances (so-called clausula rebus sic stantibus), which exempts from the fundamental obligation to provide the agreed performances (contrary to the principle of pacta sunt servanda), potentially even temporarily. However, due to the lack of relevant case law, there is a high degree of legal uncertainty with regard to these issues which is why a case-by-case assessment is warranted. The same applies in principle to the question of whether the coronavirus qualifies as a case of force majeure.
2. Act quickly and diligently – mitigate damages and secure evidence
In a second step, after the contracts have been reviewed, the resulting measures must be taken as quickly and diligently as possible. Due to the generally applicable duty to mitigate damages, all parties should exercise their rights as mildly as possible under the given circumstances and do everything possible to avoid or mitigate damages. In principle, the measures to be taken should therefore be those which, taken as a whole (for all parties concerned), minimise any possible damages if possible.
It is also particularly important to document the measures taken accordingly and to secure evidence. The following documentation measures seem advisable:
- Letters are to be sent by registered mail and tracked with the consignment number. Proof of delivery must be retained.
- Responses and all relevant authority measures as well as their concrete effects on the own company must be documented in the best possible way.
We would also recommend that the events and measures taken be recorded in chronological order in overview form. With appropriate documentation in place, one is well equipped to support one’s own point of view and interests, should a dispute arise afterwards. At best, a possible dispute can thereby be avoided partly or entirely.
3. Identify and use insurance services and public support programs
In addition to contract screening, any claims potentially arising from existing insurance policies should be examined and registered as well as documented accordingly. This way, a claim can at least be passed on if it cannot be avoided.
In addition, various countries have launched sometimes large scale support programs. Irrespective of whether this involves the possibility of reduced working hours, loans or administrative relief, companies should identify these programs in good time and, if being eligible, take advantage of such program in order to mitigate the impact of the coronavirus.
4. The coronavirus will come to an end eventually | together against the coronavirus
As a closing remark, it seems important to us to point out that, according to the relevant expert opinions, the coronavirus will also come to an end eventually, despite all its fierce consequences. In our opinion, not only out of solidarity, but also from a longer-term perspective, it may be advisable in the current situation to show some goodwill towards contractual and distribution partners and to support each other as far as possible and legally admissible.
Contractual partners who jointly defy the coronavirus may well emerge from the crisis stronger than ever. Given the situation caused by the coronavirus that is unusual, unexpected and drastic for all of us, it can therefore be worthwhile to contact your distribution partners as early as possible in order to jointly seek the best and most agreeable solution for all parties concerned (without acknowledging any legal obligation).
In this context, however, it is particularly important to note that competition and antitrust laws continue to apply. Even if, in view of the current situation, certain forms of cooperation could be considered more permissible, this cannot be assumed lightly. In this respect, too, the individual analysis of each case with a corresponding risk assessment is usually required.
After the coronavirus, there will also be an opportunity to apply the lessons learned from the crisis and to restructure the distribution network and related supply chains accordingly. Usually, this involves the comprehensive amendment and reorientation of existing contracts.