Coronavirus - Recommendations for Mitigating and Preventing Legal Risks

Newspapers are full of news about the growing epidemic of a new infectious coronavirus disease. But what are the legal difficulties that may arise to legal entities from the new disease and, indirectly, from measures to prevent a coronavirus epidemic?

The outbreak of the new virus and the preventive measures which the state authorities have taken thus far (restrictions on the movement of persons, closure of establishments, quarantines, etc.) tend to fulfill the definition of extraordinary unforeseeable and insurmountable obstacles under Section 2913 (2) of the Civil Code. The existence of such obstacle relieves a party that is unable to fulfill its obligations due the obstacle from the duty to pay damages, but (unless otherwise agreed) not from the duty to pay any agreed contractual penalty (e.g. for a delay in delivery). Sometimes, contracts have a different regulation on these issues (the so-called Force Majeure clause), which contains a more precise definition of what is to be considered an event of Force Majeure, as well as its possible implications for the legal relationship between parties, such as the parties’ right to terminate or withdraw from a contract if Force Majeure events last for a specific period of time. However, all the circumstances of each individual case must always be considered, in particular how the event of Force Majeure actually prevents a party from fulfilling its specific contractual obligation. In any case, it is recommended to proceed according to Force Majeure contractual clauses and, if there is no Force Majeure clause in the relevant contract, according to the provisions of Section 2913(2) of the Civil Code.

Attention should also be paid to contracts concluded after the public has become aware of the coronavirus epidemic outbreak. For such contracts it may no longer apply that the epidemic consequences constitute an unforeseeable obstacle. It will therefore be appropriate in contracts to negotiate, for example, a clause that this epidemic is considered a Force Majeure event for the duration of the contract, or that the Force Majeure event means a substantial deterioration the situation due to the epidemic compared with the situation when the contract was concluded, etc.

In the context of M&A transactions, so-called MAC or MAE clauses are often negotiated. The MAC/MAE clauses deal with material adverse changes and material adverse events arising after the conclusion of a contract but before the full settlement of the transaction; for example, they allow the buyer to withdraw from an SPA or other transaction documentation in the event of such material change or event. A MAC/MAE clause may also be part of the seller’s warranty to the buyer. In this case, a precise definition for “material adverse change/event” is crucial. It is always required to proceed exactly according to the wording of this clause. If not the question as to whether or not a material adverse change/event actually occurred in a particular case could result in a dispute between the parties.

The information contained in this brochure does not constitute legal advice. PRK Partners and individuals involved in the preparation of this brochure are not responsible for the consequences of actions taken based on the information contained herein, which may not be accurate or comprehensive to a particular situation.You can also send any questions to our designated email address