Crisis Resilience of European Contract Law and the Covid-19 Pandemic: A Functional and Comparative Approach

The sanctity of contracts, a guiding principle of contract law in civil law systems, requires that all contracting parties be expected to meet their contractual obligations, thereby ensuring efficacy and efficiency of private ordering. In extraordinary circumstances, however, legal systems provide for mechanisms that may excuse contractual performance or lead to adaption or termination of contractual obligations. Since the coronavirus pandemic, these mechanisms have clearly gained traction.

In two recent articles, published as EUI Working Papers LAW 2021/07 and LAW 2021/08 and forthcoming in the European Review of Private Law, I draw on five important civil law jurisdictions (Germany, Austria, Switzerland, France, Italy) and elaborate on excuses of contractual performance and remedies for breach of contract and on adaption or termination of contractual obligations. In these articles, I aim to address the fundamental questions as to whether these excuses and remedies and institutions on adaption or termination still serve their purpose in times of pandemic, and whether and to what extent a uniform breach of contract action or a codification of such institutions is needed in European Contract Law. From a methodological perspective, I use a functional and comparative approach to unpack and analyse these timeless questions from a contemporary perspective.

The legal institution of subsequent impossibility generally applies to a situation where contractual performance becomes permanently impossible. In such a situation, contract law excuses performance and counter-performance, at least if no party is responsible for the impediment, and provides for remedies such as damages, if a party is responsible for the impossibility. Switzerland and France are exceptions in this respect, not excusing parties from their duties, if they are at fault. In addition, impossibility is defined very broadly in Austria, for instance.

The legal institution of delay of debtor is applicable to situations where contractual performance is only temporarily impossible due to a default of the debtor, typically the seller of a product or provider of a service. In general, no prevention but only a suspension of contractual performance may result from such situations. Damages are in some cases owed regardless of debtor's fault, in other cases only if the debtor is at fault. In addition, creditors have various remedies at their disposal, which indeed vary from one jurisdiction to another.

The legal institution of delay of creditor is also applicable to situations where contractual performance is only temporarily impossible, but in this case the impossibility of performance is due to a default of the creditor, typically the buyer of a product or purchaser of a service. Under certain conditions, the debtor may excuse contractual performance while the creditor remains bound by the contract. As a delay of creditor does not lead to a breach of contract, but to specific negative consequences, creditors are generally not liable for damages.

Overall, with regard to default of performance under a contract, I conclude that there is no need for unification in European Contract Law. I argue that the distinction between permanent and temporary default of performance is convincing as it allows different situations to be treated differently, paired with appropriate incentives. Consequently, remedies of delay rather than those of subsequent impossibility should be claimed during the coronavirus pandemic.

Moreover, it is generally accepted that a change in circumstances, which renders contractual performance impossible, either temporarily or permanently, may release a party from its obligations to perform under a contract. Each jurisdiction evaluates it differently, however, whether economic disadvantages or mere impracticability also have an effect on releasing the party from its contractual obligations. Germany and France have such institutions already codified in their civil codes. Austria, Switzerland and Italy have not, but similar institutions are widely recognized there.

The extraordinary termination of permanent contracts for cause is firmly established in the German-speaking jurisdictions. This institution was codified in Germany, while legal doctrine and case law in Austria and Switzerland generally recognize it without being codified there. Termination for cause leads to the dissolution of a permanent contract for the future, whereas performance already rendered is not affected by such termination. The relevant institutions in France and Italy only lead to similar results in some cases, but often not.

Overall, with regard to modifications of a contract, I conclude that there is a need for codification in European Contract Law, both at the national and at the supranational level. In the spirit of providing economic efficiency and legal certainty, I suggest and support three reform proposals. First, Member States should codify institutions on adaption or termination, if not already done. Second, the relationship between different instruments should be elevated to the acquis communautaire, starting with renegotiations between the parties, continuing with the adaption of the contract and ending with its termination. Third, the acquis should further provide for a rather narrow interpretation of termination for cause.

From a doctrinal perspective, my articles deal with the alpha (unification) and the omega (codification) in European Contract Law. In case of default of performance, the rules on subsequent impossibility are to be applied restrictively, at least insofar as the legislator does not provide for separate legal consequences for permanent and temporary impossibility. When adapting or terminating contracts, the order of individual legal consequences is to be reconsidered in terms of subsidiarity. Embracing these guiding principles should contribute to making European Contract Law more crisis resilient.

Valentin Jentsch is a Post-Doctoral Research Associate at the University of Zurich.