Newsflash: Corona-Virus Quick Check

(Last update: 18  March)

In Germany, cases of the novel coronavirus have now been detected in 10 of the 16 federal states. Numerous companies are restricting or even suspending international business travel. Several events have been cancelled or postponed. At a machine manufacturer in southern Germany, because one of its employees is infected with the SARS-CoV-2 virus, all of the subsidiaries have now also been closed until Wednesday. In our Newsflash we have compiled the most important questions and answers for companies dealing with the spread of the virus.

Directory

1. Rights and obligations of employers

2. Effects in the supply chain

3. Corporate acquisitions and reorganisations 

1. Rights and obligations of employers

1.1 Are employees obliged to inform their employer that they are infected with corona-virus or can employers ask on their own initiative whether an employee has contracted a contagious disease?
If an employee has become infected with coronavirus or has been put into quarantine (e.g. ordered by the authorities) due to a concrete suspicion of infection because he has the corresponding symptoms, he is definitely obliged under the ancillary obligations of his employment contract to inform his employer that he is suffering from a contagious disease or that there is a concrete suspicion that he has contracted such disease, so that the employer is able to take measures to protect the rest of the workforce. It is questionable whether this notification obligation also applies in case of the possible infection of close acquaintances (e.g. because they have recently visited in a risk area), and this can probably only be assumed in exceptional cases.

However, employers cannot order their employees to undergo an examination to determine whether they have been infected with the virus, even if they have recently returned from a risk area. In this case, employers are only free to temporarily release the employee concerned from his work, with pay, in order to protect the rest of the workforce.

1.2 Can employers unilaterally order home office work?
To begin with this depends on whether the work owed is actually capable of being conducted from a home office (employees on an assembly line, for example, will not be able to perform their work from a home office) and whether contractual or business regulations on home offices exist at the company/business. If an employer is entitled to order its employees to work from a home office pursuant to their employment contracts or on the basis of an effective shop agreement, and the employees concerned have the necessary equipment, then the employer can order work from the home office. If none of the above-mentioned legal bases exists, however, the employer cannot order this on the basis of its right of direction, except for in a genuine exceptional or emergency situation. This is not expected at present.

Alternatively, employers can conclude a shop agreement with the works council at short notice on temporary home office work for certain groups of employees.

However, employees may not stay away from work for preventive reasons, unless the employee himself has a contractual right to also be able to carry out his work from home. A further exception is also conceivable if an employee has to stay at home in order to look after his own children, e.g. because schools or kindergartens have closed due to the virus. This could constitute a personal hindrance to performance according to § 616 German Civil Code [Bürgerliches Gesetzbuch, BGB].


1.3 Can bans on vacation be imposed due to the absence of other employees or can short-time work be ordered?
If staff shortages lead to disruptions in the business operations and the employer could suffer considerable damages as a result, the employer is entitled under § 7 (1) German Federal Vacation Entitlement Act [Bundesurlaubsgesetz, BUrlG] to impose a ban on vacation.

If an employer cannot maintain the business under the given circumstances, it may even be entitled or - if the business is located in a closed-off area - obliged to actually close it. An order to use up any overtime or even take compulsory vacation is also conceivable. However, as the bearer of the business risk, the employer also remains obliged to pay remuneration even in the event that the business is officially ordered to close.

If the introduction of short-time work and a corresponding reduction in pay is possible on the basis of employment contracts, collective agreements or the operational legal basis, short-time work can also be ordered if the requirements are met at the company. In the opinion of the German Federal Ministry of Labor and Social Affairs [Bundesministerium für Arbeit und Soziales, BMAS], quarantine orders or official business closures regularly constitute a work stoppage that has been caused by official measures and thus is an unavoidable event, which means that the prerequisites for receiving short-time working compensation could also be met.

2. Impact on the supply chain

2.1 Does exemption from liability apply in the event of hindrances to performance?
Whether or not suppliers bear the liability for hindrances to performance caused by corona-virus depends largely on whether a case of force majeure exists. Following the case law on travel law, according to which, for example, epidemics in the country of destination can justify a withdrawal from the travel contract, especially in case of relevant declarations by the WHO and the Federal Foreign Office, there is some evidence to suggest that coronavirus can also constitute a hindrance to performance that exempts from liability.

This is not automatically the case, however: an exemption from liability only occurs if the supplier has taken all reasonable measures to avert or mitigate the hindrance to performance. For example, if there are hindrances which prevent delivery by sea, the supplier must check whether he can have his consignment delivered to his customer on time by air. He may also have to incur high costs for this purpose. Which measures are reasonable need to be considered in the individual case.

2.2 What are the supplier's obligations to cooperate?
Suppliers have to observe their duties to notify customers. In this case, suppliers are advised to first check their supply contract for force majeure clauses containing special notification obligations. These often contain hard notification obligations of usually 14 days after gaining knowledge of the occurrence of a hindrance to performance. Furthermore, due to general obligations to mitigate damages, suppliers must notify their contractual partners of the supply disruption as soon as it becomes foreseeable.

Caution is also required, however. For example, supply contracts often provide for a right of termination on the part of the customer if the supplier invokes force majeure. It may therefore be necessary to weigh up the possibility of exemption from liability in case of force majeure against the consequences of termination.

2.3 What happens if it comes to a dispute?
To ensure that both suppliers and customers are prepared for any disputes over the exemption from liability or damage claims, we strongly recommend careful documentation. The supplier bears the burden of proof for the exemption from liability due to force majeure. It definitely should document when the hindrance to performance arose and which circumstances concretely led to it. In addition, the supplier must be able to prove that it has taken all reasonable measures to avoid the situation and that it has complied with its notification duties in a timely manner. The customer, on the other hand, needs to document the damage it has suffered and its connection with the hindrance to performance. 
 

3. Corporate acquisitions and reorganisations

3.1 Do rescission clauses, for example in company purchase agreements, now take effect?
More and more frequently, company purchase agreements contain provisions pursuant to which the buyer is entitled to rescind the purchase agreement in the event of a significant change in the key business figures of the target company between the signing and the closing of the purchase agreement (so-called material adverse change clauses, in short MAC clauses). These are particularly common in US contracts. Whether the current coronavirus epidemic constitutes a material adverse change in the company's key figures that entitles the company to rescind the agreement depends largely on the wording of the respective clause and can only be assessed in the individual case. Moreover, it is hard to find any precedents for guid-ance in this respect. If a purchase agreement does not contain a MAC clause, it will certainly be almost impossible to construe a reason to rescind on grounds of the existence of the coronavirus epidemic. The situation is similar after the closing of the purchase agreement. Here as well, a rescission of the purchase agreement is contractually excluded in most cases.

However, if the purchase agreement has not yet been concluded, there are options for action. It is advisable to include the subject explicitly in the MAC clause. During contract negotiations, particular attention needs to be paid to ensuring that a MAC clause also covers circumstances that do not yet affect the target company at the time of closing, but will doubtlessly do so after closing. An example of this could be the discontinuation of production by the supplier of the target entity due to illness, which has no effect on the target entity at the time of the closing because it has sufficient stocks of the supplier’s material, but which will affect it immediately after the closing due to the depletion of these stocks. Conceivable scenarios should then be formulated as concretely as possible in the MAC clause.

3.2 What about companies threatened by insolvency?
For companies threatened by insolvency, nothing initially changes at all in terms of the obligation to file for insolvency: they must ensure that neither insolvency (§ 17 German Insolvency Code [Insolvenzordnung, InsO]) nor over-indebtedness (§ 19 InsO) exists. If this can no longer be guaranteed, the respective members of the executive bodies must immediately file for insolvency (§ 15a InsO). As the massive disruptions in the supply chain due to the coronavirus crisis - especially for companies in the automotive sector – are leading to distortions that have a direct negative impact on the liquidity forecast of the companies concerned, more and more voices are calling for a temporary suspension of the obligation to file for insolvency under § 15a InsO - as previously happened with respect to flood damages. It remains to be seen whether these voices will also be heard by the responsible authorities in politics. Until such time, companies threatened by insolvency should not only check or have their solvency checked, but should also check whether their prospects of survival are (still) positive.

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