Covid-19: the outlook from a German legal perspective - Maritime and Transport Law Committee, July 2020

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Jan Dreyer
Arnecke Sibeth Dabelstein, Hamburg
j.dreyer@asd-law.com

Sybille Rexer
Arnecke Sibeth Dabelstein, Hamburg
s.rexer@asd-law.com

On 27 March 2020, the German parliament passed a statute to mitigate the consequences of the Covid-19 pandemic in civil law, insolvency law and criminal proceedings: the Corona-Consequences Mitigation Act ("the Act"). The deadline of September 2020 for the duration of these measures may be extended by simple Regulation until March 2021.

Insolvency law

The obligation to file an insolvency petition, pursuant to Section 15a of the Insolvency Code and Section 42 (2) of the German Civil Code, has been suspended until at least until 30 September 2020, provided the insolvency maturity is based on the consequences of the Covid-19 pandemic.

This represents a significant change to the Insolvency Code. Before Covid-19, breach of the obligation to file for insolvency within three weeks after a company has become insolvent constituted a criminal offence. Thus, companies will be given the time to take appropriate measures, such as restructuring, cutting down of long term non profitable sectors and time to find new financing, or seek state aid. The new law states clearly enough that, if the company was not considered illiquid or over-indebted as of 31 December 2019, it is assumed that the current illiquidity, respectively over-indebtedness, is due to the effects of the Covid-19 pandemic and that there are prospects of eliminating the existing financial crisis.

Insurance law

The insurance-related measures, which the German government introduced, are particularly in respect of the non-payment of insurance premium. Any crisis in the past has shown that the renegotiation of premiums is a first aid measure for many companies, not only in the transportation sector, in order to reduce costs. Whereas the renegotiation of premiums is of course within the scope of usual business, the non-payment of premiums has legal consequences according to German law (Art 37 of the Insurance Contract Law) such as the right to cancel the contract, or to refuse payment of claims. Under the Covid-19 legal measures, insurers are temporarily not permitted to either terminate the insurance contract, or refuse cover, despite non-payment of the insurance premium.

However, the Act only grants micro-enterprises a temporary right to refuse performance with regard to contracts for essential continuing obligations. Continuing obligations are considered essential if they cover services necessary for the adequate continuation of business operations.^[1] Contracts for continuing obligations also include insurance contracts. This applies to insurance contracts concluded before 8 March 2020. The right to refuse performance is initially limited up to 30 June 2020, but can be extended by the government up until 30 September 2020. Larger companies will have to discuss premiums and conditions with their brokers.

Business shutdown insurance policies provide insurance cover, if an insured business is closed down by an official order to prevent the spread of notifiable diseases, within the meaning of the German Infection Protection Act (‘IfSG’). As regards these policies, if the insurance contract contains an exclusive list of diseases, insurers currently often claim that the new Covid-19 is not mentioned by name in the contract and therefore no cover is provided. Insurers should note that they have a better argument if the list contained in the insurance contract can indeed be qualified as exclusive. If the clause only refers to the applicable version of the IfSG at the time, insurers are likely to find it difficult to question the coverage of Covid-19 related restrictions.

Carriers’ liability

Maritime and transportation lawyers have been dealing, since the Covid-19 crisis arose, with issues around force majeure clauses and liability of carriers. One of the first impacts on transport operation has been liability questions around delay or restriction. Under German law, carriers are in principle liable for possible delays in delivery, unless they explicitly pointed out such a risk to the customer at the time of the conclusion of the contract. Since the concept of exclusion of liability because of force majeure does not exist in the German Civil Code, the question arises as to the extent to which the provisions on impossibility of performance and the doctrine of frustration of contract can be applied. In any event, carriers are well advised to include a written clause, excluding liability for damages that may arise in connection with the effects of Covid-19. As transport liability insurance does not regularly cover additional expenses incurred by carriers, or fixed-cost forwarders, in connection with the contractual fulfilment of the order, section 17.1 of the German Freight Forwarders’ Standard Terms and Conditions (ADSp) 2017, allowing for the reimbursement of certain expenses, may also become relevant to the carrier.

State aid

The KfW state bank (‘Development Loan Corporation’) is offering fast loans of up to €800,000 to companies with over 50 employees, with KfW assuming the default risks. The credit conditions for loans for equipment and investments applied for by large companies (more than 250 employees and a turnover of more than €50m) have also been improved. In addition, a state fund for economic stabilisation has been set up. It will provide guarantees and warranties for liabilities of companies incurred after the setup of the fund of up to an amount of €400bn.

Other developments

One of the most spectacular measures taken by the German government include a potential €9bn rescue deal to help German airline Lufthansa survive the pandemic.^[2] Europe's second-largest airline grounded 95 per cent of its fleet due to global border and travel curbs, while its share price dropped to just above its record low of €6.80 in 2003.

The terms of the deal would see the German government receive two seats on the supervisory board, but it would only exercise its full voting rights in exceptional circumstances, such as to protect the firm against a takeover. The expected conditions of the deal also include the waiver of future dividend payments and limits on management pay, all being subject to approval by the European Commission. The deal is under political pressure from the EU, since Lufthansa shall waive slots to low costs carriers such as Ryanair. The Green Party, however, pushes in the direction of sustainability commitments, such as they were imposed to KLM/Air France when seeking state aid.

Outlook from a German perspective

Whereas everybody would wish to have a glimpse into the crystal ball to see where Covid-19 will lead the world economy and also the legal profession, no one knows. Different countries have their own approach and even in Germany, the Federal System leads to widely varying regulations concerning social distancing.

German regulatory and economic measures with regard to Covid-19 seem to be based on a report to the German Government of 3 January 2012 entitled ‘Bericht zur Risikoanalyse im Bevölkerungsschutz’ (Report to Risk Analysis in the Citizen Protection and Disaster Support; Deutscher Bundestag Drucksache 17/ 12051; ‘the Report’) which was commissioned by the German national parliament, the Bundestag.

The Report describes various potential disaster scenarios, their probability of occurrence and their possible effect. Inter alia, the Report depicts a scenario of a highly contagious new SARS-virus spreading as a zoonoses from a South East Asian food market to Germany before the World Health Organization (‘WHO’) is able to give official warnings, let alone declaring it a pandemic. The Report can be read as an apocalyptic outlook with a mortality rate of several million Germans and a huge economic and social impact if no appropriate measures such as a shutdown of public and economic life are taken. Whereas we can say today that effective measures have been undertaken to avoid such a scenario, we have to bear in mind that the Report is giving a forecast of three years until the effects of such a pandemic are under control. It is probable from a German perspective, that as of today, the German Government will continue give consideration to the Report and its interpretation by virologists. Depending on developments, shutdown measures might be implemented again, which will have an economic and social impact, unless a vaccine is produced.

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