CATALYST // PRESSURE POINTS:
SUPPLY CHAIN DIFFICULTIES
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Rarely have events accelerated so rapidly or so radically as they have in the course of the Covid-19 pandemic. Governments have taken exceptional measures to protect citizens and suppress the spread of coronavirus disease. In tandem, fiscal support schemes of historic proportions have been introduced to preserve skills and stave off business failure. But despite these measures, the economic situation for many businesses remains uncertain, with continuing disruption to the supply chain in a number of sectors. There are several options open to companies to address supply chain difficulties.
The consequences of the pandemic and the associated public health measures aimed at slowing the transmission and spread of the disease have posed serious threats to the supply and demand sides of many businesses. Purchasers have sought alternative supplies or suppliers where supply could not be maintained; where demand has been high, suppliers may have find their products being copied, diverted to other markets, or even counterfeited. Supplier liquidity issues have led to breaks in supply chains in some instances. Effects have included reductions in capacity and output, supply chain failures, drop-offs in demand, and deferrals and defaults affecting payments. Where these effects have reduced as a result in a relaxation of restrictions, there remains the potential for further disruption if there is a so-called “second wave” of infections, with resulting re-imposition of restrictions, in any particular country or region. Each of the means of managing supply chain difficulties outlined below (maintaining the links in the supply chain; competition law issues; product-related issues; suspension and termination of contracts) can be explored in greater detail in these pages. In each area, we suggest practical steps to consider immediately and further ahead. We would expect various combinations of these options to be adopted by many companies. In every instance, directors must take particular care to discharge their legal duties to the company, its shareholders, creditors and other stakeholders. As the Covid-19 pandemic continues to create or exacerbate supply chain challenges, businesses should also be mindful of adverse human rights impacts and environmental, social and governance (ESG) risks when making decisions regarding the management of their supply chains. Many businesses have made public commitments to upholding human rights and ESG principles. Decisions made during the crisis will likely come to be judged by these standards in due course and problems throughout the supply chain may be imputed onto the business itself. We explore these aspects as well within the sections below.
Summary
We explore each of these means of managing liquidity in greater detail and suggest steps that companies should consider in the short term and in the months ahead. We would expect various combinations of these options to be adopted by companies facing a cash crunch. In every instance, directors must take particular care to discharge their legal duties to the company and its shareholders and creditors. Click a above box to read more.
POLLING DATA AREA
Maintaining the links
Competition issues
Product issues
Workers and consumers are being impacted by confinement and self-isolation rules across the globe, leading to disruption in supply and demand. Supplier or customer liquidity may also become a concern, with many businesses struggling with the sudden and significant contraction in liquidity which has occurred, worldwide, in the past weeks and months. Once the importance of suppliers in the supply chain has been assessed, there are a number of ways in which the position of suppliers can be bolstered, from reducing payment terms to actual financial assistance. In some jurisdictions there may be emergency changes to insolvency law that may assist.
Competition authorities across the world have given robust responses to seemingly rocketing prices of products experiencing high demand due to the crisis and a number of investigations are ongoing. In a number of jurisdictions competition rules have been relaxed, allowing coordination where necessary to ensure the supply of critical goods and services, but competition authorities will ensure that this approach is not used as a cover for non-essential coordination that may cause harm to consumers or the wider economy.
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In situations where demand outstrips supply or a supply chain fails, product replacements or alternatives may be supplied instead. Imports may be triggered from alternative jurisdictions where products are more freely available or cheaper (but which were never designated for the relevant market), counterfeit products may emerge, or customers may be misled by advertising. At the same time innovation and collaboration, either internally or with third parties – even competitors – may develop to generate new products now needed in the crisis or to replace pre-existing but now unobtainable ones.
Contract suspension and termination
Businesses may find themselves unable to meet their contractual obligations to suppliers or customers, or may find that others in their supply chain are unable or unwilling to perform. Key questions will include whether they, or their counterparties, can rely on contractual provisions to suspend their obligations or terminate the contract, and whether the contract may be brought to an end either automatically or by one party becoming entitled to terminate for breach.
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April 2020
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Companies should review all discretionary spending and cut it out where possible. Some costs, such as travel and hospitality, will reduce by virtue of the restrictions put in place by governments around the world but companies should review all expenditure to identify where cost savings can be achieved both in the short term, while work patterns are disrupted, and looking ahead as normality resumes.
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The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
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The most immediate action a business facing a collapse in revenues can take is to reduce its costs and expenditure.
Immediate Steps
Looking further ahead
Audit your supply chain and identify key and priority suppliers – understand their Covid-19 contingency plans Consider how you can support any key suppliers/customers who present in distress If you need to secure additional supplies of key materials/components, consider storage and logistics issues
Monitor government support schemes and any proposed emergency changes to existing rules aimed at alleviating impact of current crisis on companies
This situation is almost unique in the regulatory and political support which has been made available to struggling businesses. While the support packages may not be complete, and the hurdles faced by almost all sectors should not be underestimated, the recognition of some of the issues and attempts to address them will hopefully be helpful in many cases. In these times of uncertainty, with a rapidly changing situation, various government support measures being announced quickly to address both liquidity and trading issues, and the course of the next few months far from clear, businesses face many competing, complex demands on their time:
Addressing supplier or customer financial distress
Workers are being impacted by confinement and self-isolation rules across the globe, leading to disruption in supply. Unless businesses or manufacturers have been designated essential, or “key workers”, by relevant national or local authorities, large parts of the workforce are being expected to work from home, which may not be practical for all steps in a company’s supply chain. For the latest on measures in place across Europe, see here. Businesses with complex supply chains that require workers to operate in close proximity are particularly vulnerable to disruption. In addition, labour practices in relation to health and safety and access to paid sick leave have a fundamental impact on public health. These issues used to be viewed through a reputational and regulatory lens. In the context of Covid-19, they have become critical to the continuity of business operations. We are already seeing calls from the investor community for better corporate understanding of human rights and ESG vulnerabilities across the entire supply chain, including in lower tiers. Given the operational impact of these issues in the current circumstances, this may well form part of investor assessments of supply chain practices and business continuity going forward. Businesses should review their supply chains to identify where COVID-19 could place additional stresses on ESG performance and regulatory compliance (e.g. maintaining compliance with modern slavery and anti-corruption requirements). Companies with operations in countries with poor human rights records, for instance, should consider putting in place various measures to protect their own supply chains from inadvertent participation in abusive business practices. Specifically, they should consider measures such as auditing supplier practices and material sourcing practices, implementing a responsible supply chain policy, addressing any unique rights concerns posed by their specific areas of operation, and exercising heightened precautions in areas where human rights violations are common. Companies will be looking to technological solutions where possible, or sourcing essential products and components perhaps from new suppliers with fewer personnel restrictions because of their local rules. Businesses are unlikely to have the time or capacity to carry out the level of due diligence that would normally be undertaken in relation to new suppliers. Such businesses may find themselves exposed to increased ESG and human rights risks - from bribery and corruption, to modern slavery and health and safety breaches. Even where rapidly on-boarding new suppliers, businesses should ensure they review the provider’s ESG practices and incorporate ESG requirements into supplier contracts and/or codes of conduct to the extent possible. Clearly, the initial and ongoing due diligence that is ordinarily required of businesses pursuant to the United Nations Guiding Principles for Business and Human Rights and relevant national legislation will be difficult to undertake in the current context. Businesses should consider ways of adapting such processes to ensure that they can still be implemented within the constraints created by national lockdown measures.
Workforce challenges
In addition to challenges with workforces being forced to work in new/different locations in certain industries and sectors, securing transport, particularly air transport in light of the challenges currently faced by aviation suppliers, may add to supply chain disruption and uncertainty. Any relaxations regulations around transport may ease the pressure in some sectors. Warehousing and other storage spaces are also coming under pressure in some areas as companies seek to increase stocks of certain key components and supplies. The combination of this and large scale working from home means that companies are being creative about existing space organisation and use (subject to any relevant local planning or lease restrictions).
Logistics challenges
Cutting costs
Government support packages
Debt finance
CAPITAL CALLS
Insurance
ASSET DISPOSALS
In a poll of listeners to our recent UK webinar on supply chain difficulties, 55% of respondents said they are already experiencing supplier distress, either failure to supply or suppliers already going out of business.
Last updated 18 June 2020
Immediate steps
LOOKING FURTHER AHEAD
taking care of their staff and responding to official guidance to ensure their well-being; running the day-to-day operations of the business and fighting any fires which arise; dealing with commercial counterparties and possibly financial creditors if there is a financial covenant breach or other default under financing documents; and stabilising the business for the future, maintaining liquidity to withstand disruption and ensuring that output can be maintained in both the short and longer term.
Generally, the earlier signs of financial distress in suppliers and customers can be identified, the more options will be available to resolve issues and ensure supply chain continuity. One of the significant difficulties is obtaining accurate, timely information about the position of the relevant supplier’s or customer’s business. Good quality contacts will be key to this, though they may not be aware of all issues and nuances. Early signs of financial distress can include: aggressive cash management; attempts to reopen commercial terms; and a particularly aggressive approach to contractual terms or litigation. There may also be new personnel involved, and new approval processes internally at the supplier or customer which may indicate deeper problems. Some of these commercial warning signs can also have consequences for other contractual arrangements, such as the supplier’s own financing arrangements. For example, a supplier commencing negotiations with creditors as a result of financial difficulties will need to be mindful of insolvency events of default in finance documents and key commercial contracts, and the actual non-performance of supply contracts could also cross-default other arrangements. There may be nuances around the announcements or disclosures made publicly by suppliers which reflect this. These consequences, and the general contraction in available liquidity in many businesses, will compound the problem unless addressed quickly. Developing a robust contingency plan will be an important first step; this will be critical to understanding what to do should the worst happen and the supplier fail. It will also inform how far the purchaser – or supplier – may be prepared to go to reach a commercial compromise and help the supplier – or customer – to avoid a failure. Once that is done, there are a number of options available to purchasers:
In some cases, purchasers may be prepared to contractually agree to pay their suppliers more quickly to directly assist the supplier’s cash flow and also their access to receivables financing arrangements. Occasionally, purchasers may be prepared to go even further and provide direct funds to the supplier, by way of taking an equity stake in that company. Where certain assets are being purchased, the purchaser may also provide debt funding to the seller of that asset. There are a number of options available to suppliers themselves to maintain their liquidity: obtaining the support of existing financial creditors or alternative debt funding; or seeking an equity injection or asset sale or a broader M&A solution. For more information on approaches to managing liquidity, see Managing Liquidity. There are established restructuring tools that can assist in developing creative solutions to address a problem. In some jurisdictions, emergency changes to insolvency law may be enacted to seek to stabilise supply chains. There may be a responsive trade credit or credit risk insurance policy at some point in the supply chain. If there is, it is essential that the terms are complied with – frequent slippages occur due to matters such as late notification or renegotiation of supply terms without insurer consent.
Given the unprecedented way in which Covid-19 is affecting the whole market and the level of regulatory and governmental intervention in business, we may see creative combinations of these methods being used to support supply chains over the next few months.
Competition law issues
Beware excessive pricing and unfair terms Consider whether any cooperation arrangements could benefit from any competition law relaxations Exercise caution around public statements in relation to possible price rises or product shortages
Monitor any proposed emergency changes to existing regimes aimed at alleviating impact of current crisis
Many competition regulators are taking pragmatic steps to seek to assist businesses and preserve supply chains during the Covid-19 pandemic.
Relaxation of competition rules
Despite a targeted relaxation of some of the rules, competition authorities will come down hard on any businesses that try to exploit the Covid-19 crisis as a “cover” for non-essential collusion.
But strict enforcement where necessary to protect consumers/markets
Several countries have pre-existing measures that prevent the abuse of relationships of economic dependence (eg Austria, Belgium, Germany, France and Japan). The scope for such abuse could, in theory, be heightened in a more uncertain and difficult economic environment. Thus companies with others dependant on them must not exploit this advantage, eg by raising their prices or reducing their supply.
Abuse of economic dependence
Intro text area
State aid is essentially financial assistance given by a government to certain companies or other organisations on a selective basis. The aid can be in the form of direct subsidy such as cash grants or subsidised borrowing rates, or forgoing revenue such as tax credits or deferrals. Many jurisdictions have regimes designed to restrict, or regulate, state aid in all forms, including the European Union. Absent specific relaxations, these regimes must be borne in mind in relation to any assistance from governments to suppliers/customers.
State aid issues
United Kingdom
Germany
Spain
Belgium
Netherlands
Russia
Asia
South Africa
US
Australia
France
EU
Italy
Click through for more country-specific overviews of the relevant competition relaxations and rules.
Regional insights
China
Hong Kong
Indonesia
Companies should review the headroom under their existing debt facilities and any weaknesses in the capital structure. Whether or not facing an immediate liquidity crisis, they should consider whether to draw down on existing facilities and whether they may need increased committed borrowing facilities.
Examine supply chain continuity Identify potential product gaps Heighten awareness of infringements and misleading advertising in the market
Consider collaborations to ensure continued production of essential products and generation of innovations required to combat the crisis
Where supply chains fail and it is not possible to source replacement supplies from third parties, purchasers may consider reverse engineering products themselves or supply by providers who have themselves reverse engineered replacement products. An increase in demand for certain products, where there is a lack of supply through official sources, may create more opportunity for unscrupulous vendors to supply counterfeits or replacement products (eg mis-supply or being misled) or distributors assigned to other jurisdictions may start supplying into markets outside their territory (called “parallel imports” or “grey goods”). Where the products or components are covered by intellectual property rights these may be able to be enforced to stop such practices.
Accessing resources / supplies / components
Customs seizures are available to intercept goods at borders. Infringement actions can be brought. Takedown procedures can be employed through online platforms to remove webpages offering counterfeit and infringing goods, as well as judicial measures to shut down websites. Misleading advertising and unfair competition law and regulation will also play a part. For more on this, see COVID Counterfeits.
Counterfeiting, misleading advertising, parallel imports
Approaching supply chain challenges in a collaborative manner may well generate opportunities of course. Collaboration is happening apace across the engineering and medical sectors to meet the demands of the virus crisis on the healthcare system. Collaborations generally require specific consideration in order to establish the ownership of the outcomes including resulting intellectual property and data. Although in the current situation this may not be high on everybody’s list, setting up a basic agreement to ensure no future uncertainties or disputes will still be worthwhile. For more on this, see Innovation and Collaboration hub and client report and the COVID-19 publications there. In a poll of listeners to our recent UK webinar on supply chain difficulties, 40% said they are already considering new collaborations or innovations as a result of the COVID-19 pandemic. Any such collaboration should also be considered under competition rules. To the extent that it is taking place in order to achieve essential supplies or provision of healthcare services in light of the COVID-19 pandemic, the collaboration may benefit from any relaxation in competition rules (see the competition law section here).
Innovation and collaboration
There are a number of issues to consider around the nature and origin of products when supply chains are under severe stress:
UAE
Click through for more country-specific overviews of the relevant product rules.
The need for significant volumes of essential goods within a short timeframe increases the risk of labour rights violations, health and safety breaches, modern slavery and other adverse human rights impacts. For instance, purchasing practices that call for short-term workers, large orders within short deadlines and acceleratedtight production deadlines rates can increase the risk of modern slavery. Businesses should also be mindful of the wider “value chain” – which involves a broad set of stakeholders, including customers and clients - when analysing human rights risks in accordance with the United Nations Guiding Principles on Business and Human Rights. Their focus must be, not only on how to avoid causing adverse impacts on human rights, but also on how their decisions could contribute or lead to adverse impacts on human rights further down the value chain (e.g. clients or customers) and how to prevent and mitigate such situations.” For more on this see here.
Human rights and ESG issues
contract suspension and termination
Companies may choose to look to their shareholders for additional funding.
Identify any agreements where performance is or may be affected Identify relevant force majeure clauses and comply with any notification and/or mitigation requirements Consider any other relief that may be available under the contract or at common law Ensure appropriate records are kept to support your position if a dispute arises
Continue to review the situation and identify any performance issues Maintain comprehensive and contemporaneous records including the effect on the business and steps taken to mitigate
Counterparties may be seeking to delay or avoid performance (or escape liability for non-performance) of their contractual obligations, or even terminate contracts, either because COVID-19 has legitimately prevented them from performing their obligations, or because they are seeking to extricate themselves from what in the new global circumstances is a bad, or worse, deal. Parties in these circumstances may wish to explore the following avenues for relief:
“Force majeure” provisions
Many commercial contracts will contain force majeure clauses, which will typically suspend the parties’ contractual obligations where performance is prevented (or hindered or delayed) as a result of some event outside the parties’ reasonable control. Such a clause may also give one or both parties a right to terminate the contract if the force majeure event continues for a specified period of time. In some jurisdictions, there may be a statutory entitlement to invoke force majeure independent of any contractual provision. In a poll of listeners to our recent UK webinar on supply chain difficulties, 86% of respondents said they were actively reviewing their contracts for force majeure clauses. The analysis of force majeure events and clauses may need to be reconsidered should the impacts of COVID-19 broaden, or a so-called “second wave” of movement restrictions and public health measures be required in any particular country or region. For more on this see Force majeure considerations in a potential "second wave" of COVID-19.
Automatic discharge of the contract
A number of legal systems provide for a contract to come to an end, immediately and automatically, if performance has been dramatically affected by circumstances outside the parties’ control – so, for example, if performance has become impossible or illegal or been rendered radically different from the obligations the parties thought they were taking on at the time of entering into the contract.
Where a contract has become uneconomic or undesirable, a party may wish to limit its losses by terminating the contract. Parties will need to consider:
Termination of the contract
What are the express termination provisions under the contract? There may for example be a right for one or both parties to terminate on notice and without cause. Or there may be specific termination rights that are triggered in the circumstances that have arisen (putting aside force majeure provisions, which are considered above). Is there a right to terminate under the general law governing the contract? Depending on the legal system in question, such a right may arise, for example, if the counterparty has committed a serious breach of contract or has clearly demonstrated an intention not to perform the contract in some essential respect.
COVID-19 may give rise to attempts by counterparties to invoke other contractual provisions, for example:
Change of law clauses – some contracts may contain a separate clause entitling either party to terminate or renegotiate the contract where a change in relevant provisions under the applicable law makes it impossible or impracticable for a party to perform its contractual obligations (rather than including this under a force majeure clause). Price adjustment clauses – parties may seek to adjust all or part of the contract price for a commodity due to increased costs as a result of COVID-19, eg due to increased supply chain strain. Limitation or exclusion clauses – parties may increasingly seek to rely on limitation or exclusion clauses to limit or exclude liability for non-performance, particularly if there is no force majeure clause or it cannot be invoked.
Other contractual provisions
UK
Click through for more country-specific overviews of the available avenues for relief, or have a look at our new publication COVID-19: Force majeure: A global perspective which provides a high-level overview, set out in table format, of the approach taken to force majeure clauses in: Australia; China; France; England & Wales; Germany; Hong Kong; Indonesia; Italy; Japan; Russia; Saudi Arabia; South Africa; Spain; Thailand; and United States (California, New York & Texas).
Companies should be mindful of the impact their decisions can have along their supply chains. For instance, triggering force majeure clauses, suspending purchasing orders, and similar decisions can result in the suspension of revenues for workers (including vulnerable individuals) and unemployment amongst migrant workers who are unable to return home. These situations can lead workers and their families into extreme poverty and are often compounded by a lack of health insurance coverage/inability to access healthcare. Boards should consider the reputational consequences of their decisions, particularly where they have made public commitments to international standards (e.g. to the UN Sustainable Development Goals, the UN Global Compact or, for investors, the UN Principles for Responsible Investment), prior to the crisis, as they will likely be held accountable (if not, in some instances liable) for decisions made. Given the increased visibility and perceived importance of sustainable business practices in the face of the pandemic, decisions made during the crisis will likely come to be judged against these principles and standards once the crisis has subsided. There is a global trend towards litigation (including class actions) resulting from companies' involvement in adverse human rights impacts. Supply chain responsibility is increasingly a matter of compliance, with legislative initiatives such as the UK and Australian Modern Slavery Acts, the California Transparency in Supply Chains Act and the French duty of vigilance law.
ESG and human rights impacts
On 8 April 2020 the EU Commission published a “Temporary framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak” (Temporary Framework). The Commission recognises the exceptional challenges faced by some businesses as a result of the COVID-19 pandemic, which may require cooperation in order to overcome and mitigate some of the impact of the crisis and to continue to ensure the supply of essential products or services. The Temporary Framework focuses in particular on medicines and medical equipment relevant for testing and treating patients or otherwise mitigating the impact of COVID-19, but equally applies to businesses in other sectors that are cooperating in order to ensure the supply of scarce products. It sets out the key criteria the Commission will take into account when assessing such cooperation and establishes a procedure for the provision of guidance for specific conduct by way of an ad hoc comfort letter. For more information see here. The Temporary Framework is in addition to the European Competition Network’s joint statement on the application of competition law during the COVID crisis, indicating that the Commission (and the competition authorities of the Member States) will not intervene in necessary and temporary cooperation between businesses aimed at ensuring the supply and fair distribution of essential products and services, and the Commission’s dedicated mailbox that can be used to seek informal guidance on specific initiatives.
Whereas the Commission supports pro-competitive cooperation aimed at addressing COVID-19 related challenges, it has also made it clear that it “will not tolerate conduct by undertakings that opportunistically seek to exploit the crisis as a cover for anti-competitive conduct” and will continue to actively monitor market developments in order to identify practices in breach of the competition rules. The Commission encourages businesses and citizens to continue reporting any breach of the competition rules, through the usual tools.
To remain eligible for the scheme, employers must ensure “eligible employees” receive at least AUD$1,500 per fortnight, and must provide monthly updates to the Australian Taxation Office (ATO) identifying their “eligible employees”. More details on the JobKeeper payments are available here.
EU state aid law will apply to many of the forms of assistance offered by European Union Member State governments, including the UK during the current Brexit transition period. Where a measure involves state aid, it cannot in principle be implemented unless it is notified by the Member State concerned and approved by the European Commission. Breach of this “standstill” period could result in the company receiving support being required to repay the aid with interest and can be enforced by the Commission or by complainants in the national courts. The EU Commission has indicated that it will take a flexible approach to the state aid rules during the current crisis, and has adopted a Temporary Framework setting out the types of liquidity support measures and other COVID-19 related measures it will be able to approve rapidly. An amendment to the Temporary Framework allows further liquidity support measures (tax/social security contribution deferrals), additional wage subsidies to protect employment and measures designed to accelerate the R&D, testing and production of products necessary to fight COVID-19. Read more here. Nonetheless, in light of the possible consequences for beneficiaries if the state aid rules are breached, advice on state aid law compliance should be sought when considering any government assistance.
State aid rules
COMPETITON ISSUES: EU
Last updated 28 April 2020
COMPETITON ISSUES: UK
In the UK, the CMA has established a Covid-19 taskforce which will, among other things, scrutinise market developments to identify harmful sales and pricing practices as they emerge. This includes businesses seeking to exploit the situation through excessive pricing or making misleading claims about their products. The CMA has written an open letter to the pharmaceutical and food and drink industries, warning them not to capitalise on the pandemic.
In the UK the Competition and Markets Authority (CMA) has adopted guidance on the application of the UK competition rules to certain cooperation agreements. The Government also adopted Competition Act Exclusion Orders for certain types of agreements (but two of these exclusion orders have now expired):
Guidance on the approach to exemption criteria during the Covid-19 crisis: In order to avoid competition law putting the brakes on cooperation between businesses that may be necessary to ensure the security of essential supplies, the UK CMA adopted guidance on the application of competition rules to cooperation arrangements aimed at ensuring the supply and fair distribution of essential products and services, indicating they will not intervene in necessary and temporary cooperation between businesses. UK Government adopts Competition Act Exclusion Orders: On 28 March 2020 three orders excluding certain types of agreements from the prohibition on anti-competitive agreements under the Competition Act 1998 came into force. A further exclusion order was adopted in May 2020. The exclusion orders relate to the groceries sector (but note this exclusion order was revoked as of 8 October 2020), the provision of healthcare services, certain ferry services and the dairy sector(the dairy sector exclusion order expired on 1 August 2020) . The exclusion orders are very specific and expressly list the types of agreement that are exempt from the prohibition on anti-competitive agreements. Information sharing relating to costs or prices, or to future business planning (and therefore not related to the current crisis) is not exempt under any of the orders. Agreements that are intended to benefit from the exclusion orders must be notified to the Secretary of State, who will keep and publish a register of agreements.
COMPETITON ISSUES: FRANCE
In France, following investigations regarding pricing practices of hand sanitisers and disposable masks, the Government issued a decree setting up maximum wholesale and retail price for these products on the basis of Article L.410-2 of the Commercial Code to avoid any price abuse.
As of mid-October 2020, the French Competition Authority has not adopted any specific guidance on cooperation between businesses during the COVID-19 pandemic.
COMPETITON ISSUES: GERMANY
The FCO also made it clear it would continue to enforce antitrust rules with regard to the abuse of a dominant position. The FCO is currently investigating Amazon’s behaviour during the COVID-19 pandemic as there have been several complaints from retailers that Amazon had acted as price controller and blocked them from Amazon’s market place because of allegedly inflated prices. Amazon has responded to an initial request for information which is currently being evaluated by the FCO.
Abuse of a dominant position
The German Competition Law (ARC) was amended for a limited period. For merger control notifications made between 1 March 2020 and 31 May 2020, extended decision deadlines applied. During this period, the decision period of the Federal Cartel Office (FCO) for phase I proceedings was extended from 1 to 2 months and for phase II proceedings from 4 to 6 months. These amendments have not been extended. In addition, the obligation to pay interest on antitrust fines is suspended until June 30, 2021 if payment facilities (e.g. deferral) have been granted for fines. Further specific changes in law have not been made so far, ie the general framework has not been amended. However, the Federal Minister of Economics, Peter Altmaier, has brought up the possibility of easing regulations due to the current situation and promised to encourage authorities to go easy on retail companies so that they could cooperate more easily. Right from the beginning of the COVID-19 pandemic the FCO has publicly supported a flexible application of the relevant antitrust provisions, including more leeway for cooperation between competitors. Andreas Mundt, the president of the FCO, explained that the current competition rules allow extensive cooperation between companies, if there are “good reasons” for such cooperation. By way of example, the FCO has cooperated with the German Association for the Automotive Industry (VDA) to assess proposed measures to address the challenges caused by the COVID-19 pandemic. Ultimately, the FCO decided – within the scope of its discretion – to refrain from investigating the measures under competition law in more detail. The VDA’s measures had essentially two components:
Germany has set up a very broad state-support package for companies in response to the COVID-19crisis. The European Commission has approved a number of aid schemes notified by Germany under the discretionary exception in article 107 III (b) TFEU. The most relevant schemes in Germany are summarised here.
Publishing information on the re-opening times of automotive manufacturers and suppliers, including a best practice guide to avoid misallocation at a time when capacity is scarce Publishing a best practice guide explaining ways to avoid misallocation of resources and to enable a speedy restructuring process for companies which are undergoing an economic crisis during the COVID-19 pandemic; the main aspect of this part of the program is to set up stakeholder groups where information shall be exchanged for a limited period of time.
German law prevents the abuse of relations of economic dependence. Therefore, companies on which others are dependent may not exploit this position, e.g. by raising their prices, tying contracts to the purchase of further goods or services or making further supplies dependent on the granting of unjustified advantages (e.g. more favourable prices or discounts). Even in times of crisis, such a company must in principle supply all customers on equal terms and must not exclude individual customers. This means if the company cannot satisfy the entire demand, it must select the companies to be supplied according to appropriate and uniform standards.
Abuse of a economic dependence
COMPETITON ISSUES: ITALY
The European Commission approved the following Italian aid schemes in the context of COVID-19 outbreak: (i) Euro 50 million scheme to support production and supply of medical equipment, (ii) two State guarantee schemes, (iii) Euro 9 billion “umbrella” scheme to support Italian economy, (iv) three schemes – for an overall amount of Euro 6.2 billion – to support small businesses and self-employed affected by coronavirus outbreak, and (v) Euro 199.45 million scheme to support Alitalia to compensate the losses incurred due to the coronavirus outbreak. State aid is essentially financial assistance given by a government to certain companies or other organisations on a selective basis. The aid can be in the form of direct subsidy such as cash grants or subsidised borrowing rates, or forgoing revenue such as tax credits or deferrals. Where a measure involves State aid, it cannot in principle be implemented unless it is notified by the Member State concerned and approved by the European Commission. Breach of this “standstill” period could result in the company receiving support being required to repay the aid with interest and can be enforced by the Commission or by complainants in the national courts. The EU Commission has indicated that it will take a flexible approach to the State aid rules during the current crisis, and has adopted a Temporary Framework setting out the types of liquidity support measures and other COVID-19 related measures it will be able to approve rapidly. Nonetheless, in light of the possible consequences for beneficiaries if the State aid rules are breached, advice on State aid law compliance should be sought when considering any Government assistance.
Italian law prevents the abuse of relationships of economic dependence. The scope for such abuse could, in theory, be heightened in a more uncertain and difficult economic environment. Thus companies with others dependant on them must not exploit this advantage, e.g. by raising their prices or reducing their supply.
The Italian authority (Autorità Garante della Concorrenza e del Mercato – “ICA”) has issued specific guidance on its approach to competition law exemption criteria during the COVID-19 pandemic, as well as a number of interpretative notes on procedural issues:
The ICA has opened various proceedings for alleged infringements of consumer protection law. In particular, the ICA is currently investigating pricing and misleading practices for certain COVID-19 related products such as hand sanitisers, disposable masks, tests, drugs and crowdfunding websites. Additionally, the ICA is investigating misleading practices vis-à-vis several companies and airlines for flight cancellations and reimbursements during the COVID-19 outbreak.
The ICA has taken a strict approach to protect consumers
Guidance on the approach to exemption criteria during the COVID-19 crisis: the ICA adopted guidance on the application of competition rules to cooperation arrangements aimed at ensuring the supply of essential products and services, for instance in the health, pharmaceutical or food sectors, indicating that it will not intervene in any necessary and temporary cooperation agreements. In addition, unlike under its standard approach, the ICA can reply to requests for ex ante clearance (under Italian competition law) for a specific cooperation arrangement, by way of a comfort letter. Suspension of payment deadlines: in light of the suspension of deadlines for proceedings before public authorities (set out under Article 103 of Law Decree 17 March 2020, No. 18), the ICA has clarified that all deadlines for imposing penalties and deadlines for payment are suspended. Suspension of proceedings: all deadlines for proceedings are suspended until 16 May 2020. However, no suspension is envisaged in relation to interim measures and terms to comply with orders and remedies.
The European Commission approved the following Italian aid schemes in the context of COVID-19 outbreak: (i) Euro 50 million scheme to support production and supply of medical equipment and (ii) two State guarantee schemes. State aid is essentially financial assistance given by a government to certain companies or other organisations on a selective basis. The aid can be in the form of direct subsidy such as cash grants or subsidised borrowing rates, or forgoing revenue such as tax credits or deferrals. Where a measure involves State aid, it cannot in principle be implemented unless it is notified by the Member State concerned and approved by the European Commission. Breach of this “standstill” period could result in the company receiving support being required to repay the aid with interest and can be enforced by the Commission or by complainants in the national courts. The EU Commission has indicated that it will take a flexible approach to the State aid rules during the current crisis, and has adopted a Temporary Framework setting out the types of liquidity support measures and other COVID-19 related measures it will be able to approve rapidly. Nonetheless, in light of the possible consequences for beneficiaries if the State aid rules are breached, advice on State aid law compliance should be sought when considering any Government assistance.
COMPETITON ISSUES: SPAIN
In Spain, the CNMC has opened several investigations into a number of financial institutions, related to the terms and conditions imposed to grant state-backed loans, as well as into funeral companies in connection with the prices they charge for their services.
Creation of a whistleblowing/enquiries tool for competition law matters in Spain: On 31 March 2020, the Spanish National Competition and Markets Commission (CNMC) launched an online hotline for operators to report anti-competitive practices or to make enquiries in matters of competition law related to measures or practices adopted as a result of the health crisis caused by the COVID-19 outbreak. As such, operators can use the enquiries platform to ask the CNMC whether their cooperation arrangements are compatible with the competition rules. The CNMC has produced no specific guidelines in relation to cooperation agreements but has informally stated that the cooperation agreements that may be entered into between competitors as a result of the health crisis should fulfil the following requirements to be considered compatible with competition rules: (i) these agreements should be necessary and proportionate to face the current situation; (ii) they should be temporary and open to third parties; (iii) they must include mechanisms to prevent exchanges of commercially sensitive information; and (iv) these agreements should include an obligation to document all the contacts maintained by the parties and to inform the CNMC about those contacts. The CNMC has received more than 500 inquiries/complaints, mainly related to the financial sector and the prices of health/food products, and has provided informal advice on the compatibility with competition rules of cooperation agreements entered into between competitors in the insurance, banking, hospital and sanitary sectors. For more information see here see here.
COMPETITON ISSUES: AUSTRALIA
Despite the ACCC’s fast-tracking of the assessment of requests for interim authorisation, the ACCC has stated that a competitive economy will be vital to Australia’s future and so any changes to the competitive landscape now are to be temporary. The ACCC has noted it will be focused on addressing any conduct by businesses which seek to exploit the crisis to enhance their commercial position or engage in conduct which harms consumers.
To facilitate necessary cooperation between businesses which may be necessary to ensure security of essential supplies, the Australian Competition and Consumer Commission (ACCC) has been granting interim authorisations and dedicated significant staff to assess these applications swiftly. Where an authorisation is granted conduct, which may have otherwise contravened Australian competition law, will receive competition law immunity. The ACCC has granted interim authorisations to allow cooperation as between competitors in relation to the supply of essential products in energy, fuel medical equipment, hospitals and healthcare, pharmaceutical products and telecommunications. The ACCC has also authorised cooperation in relation to the supply of consumer and business relief through debt relief packages and modification of loan facilities.
COMPETITON ISSUES: RUSSIA
The Russian Government has also taken measures to support businesses mostly affected by the COVID-19 outbreak, however, there have been no major changes from the competition law perspective to state aid rules. The measures include, among others, introduction of moratorium on filing bankruptcy applications against certain types of debtors in the emergency situation, granting direct or indirect financial support (e.g. in the latter case by financing banks which offer debtor friendly loans) and subsidies to certain negatively affected sectors and enterprises.
In the midst of the pandemic in Russia the FAS reported that all of its regional offices had established dedicated teams to monitor prices for various groups of goods on a daily basis. In addition, the FAS set up a whistleblowing hotline in relation to the availability of and prices for, consumer goods. The FAS is keen to review the pricing all along the supply chain. It has also been quick in taking action where any public announcements may adversely affect existing supply chains (eg in relation to forecasted price increases for goods in high demand, including in the food, pharma and other sectors). Given the pandemic outbreak, the FAS considers such actions as attempts at coordination that may lead to price fixing or resale price maintenance. The FAS has already warned a few associations against such announcements noting that they could be viewed as a sign of price fixing. The regulator has also detected a growth of collusion practices in the pharmaceutical market and has prioritised this in its compliance review plan. In the pharma sector, the FAS also plays an important role in monitoring pricing practices for certain medicines used in the treatment of COVID-19. It is very likely that the FAS will take similar approaches during what many are calling a ‘second wave’ of COVID-19.
But strict enforcement where necessary to protect consumers and markets
Suspension and cancellation of inspections in Russia: In March 2020, the Russian antitrust regulator (Federal Antimonopoly Service, or FAS) announced the temporary suspension of inspections, except for unscheduled antitrust inspections in the sectors relating to public health, public procurement and defence. The Russian Government has further limited the right of controlling bodies (including the FAS) to conduct extraordinary inspections to specific situations (eg if specifically prescribed by the Government, or where public health and safety is at risk).
COMPETITON ISSUES: SOUTH AFRICA
South African competition authorities keeping a close eye on exploitative prices: In South Africa, the minister responsible for the competition and consumer protection regulators has published a regulation dealing with: (i) excessive prices by a dominant firm; (ii) unconscionable, unfair, unreasonable and unjust prices; and (iii) the equitable distribution and maintenance of stock of essential goods and services (which include basic food and consumer items, emergency products and services, medical and hygiene supplies and emergency clean-up products and services). The regulation sets a lower threshold for excessive or unfair prices during the pandemic, with the effect that where a material price increase in relation to certain goods or services either: (i) does not correspond to, or is not equivalent to, the increase in the cost of providing that good or service; or (ii) increases the net margin or mark-up on that good or service above its average margin or mark-up in the three month period prior to 1 March 2020, the price may be unlawful. According to the regulation, the existence of either of these factors is relevant and critical in determining whether the price in question is excessive or unfair and, indeed, their existence alone indicates prima facie that the price is excessive or unfair. COVID-19 focused competition regulation in South Africa: The South African competition authorities have issued notices that their primary focus during the pandemic will be to allocate resources to cases related to the COVID-19 pandemic. Cases related to COVID-19 will be subject to an expedited process. The Competition Commission of South Africa has also encouraged retailers and suppliers of essential goods and services to proactively engage with it in respect of price increases that may be implemented during this period, so as to promote transparency and avoid suspicions of non-compliance. The Competition Commission of South Africa has successfully concluded several settlement agreements with firms, and prosecuted other firms, who allegedly engaged in excessive pricing, despite the fact that some of these firms would not ordinarily satisfy the qualitative and quantitative thresholds for dominance under the South African Competition Act. The threshold of dominance appears to have been adjusted to account for “temporary market power” held by market participants during the state of national disaster as a result of inter alia (i) the narrowing of the geographic market for products due to the restriction of consumer movement, (ii) the ability of firms to raise prices independently of competitors and customers; and (iii) the absence of corresponding cost justifications for price increases.
South African Government issues various block exemptions: The South African Government has published a number of competition law exemption notices that allow for coordination in various sectors during the state of national disaster, with the input and supervision of the Government, in order to facilitate and promote a coordinated response to the COVID-19 pandemic and to mitigate and manage its effects on certain industries. In particular, exemptions have been issued in the healthcare, banking, retail property and hotel sectors. In all instances the Government must be involved in approving the cooperation within the relevant industries to ensure that specifically listed outcomes relevant to each industry and aimed at addressing the impact of the COVID-19 pandemic are achieved.
PRODUCT ISSUES: EU
On 20 March 2020, the Consumer Protection (CPC) authorities of EU Member States issued a CPC common position aimed at stopping scams and tackling unfair business practice on online platforms in the context of COVID-19. The CPC authorities also asked the cooperation of the major online platforms to cooperate in order to remove fraudulent and misleading practice on their platform. The ICA sent a request of information to the main online seller platforms with reference to the way of advertising and marketing specific products as hand sanitizers and disposable face masks.
Takedown procedures
PRODUCT ISSUES: UK
IP rights will not generally be able to be used to prevent imports into the UK of goods put on the market in the EU with the consent of the owner of the IP rights in them, as IP rights cannot be used to prevent the free movement of those goods within the EU. The UK is still regarded as a member of the EU for legal purposes until the end of the Brexit transition period (currently set at 31 December 2020), so this will continue until then, at least. According to the Withdrawal Agreement, goods which were deemed to have their associated IP rights exhausted prior to the end of transition will continue to have those rights exhausted throughout the EU (including the UK) post-transition, but goods newly put on the market in the UK after that date will not. However, the UK government has provided in the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 that goods put on the market in the EEA post-transition, with the IP owner's consent, will be treated by the UK as having their IP rights exhausted and so UK IP rights would not be able to be used to prevent importation of such goods into the UK. Post-transition however, goods first put on the market in the UK will not be regarded as having had their rights exhausted in the EEA and thus holders of EEA IP rights will be able to use these to prevent importation into EEA states. For more on this see our IP & Brexit guide within the firm's Legal Guide to Brexit here. However, IP rights can be used to prevent parallel importation from outside the EU (or in some cases where goods are pharmaceuticals and have been damaged or altered by repackaging even if coming from within the EU). Much will depend on whether the UK courts decide to apply international exhaustion or not in any cases brought. Where goods can be stopped, application can be made to Customs & Excise to seize the goods as they enter the UK. EU Regulation No 608/2013 gives patentees an avenue to ask border authorities to inspect and seize possibly counterfeit and pirated goods upon importation into the Member State. Under this regulation, an application can be made to each customs authority to request them to seize goods that are suspected of infringing an intellectual property right. Such application should provide the authority with sufficient information in which to identify possibly infringing goods, including detailed descriptions and photographs of the goods and any likely packaging or labelling. If possibly infringing goods are seized by customs, the authority is to provide the applicant with information about the goods, including photographs of goods and the names and addresses of the consignee and the holder of the goods, and their origin, provenance and destination. In some instances, it will be possible to request that a sample of the goods be analysed. The applicant can request destruction of the goods if they consider that the goods are indeed infringing their rights, and/or the applicant can commence legal proceedings for infringement.
Parallel imports, the exhaustion of IP rights and customs seizures
The UK provides protection against counterfeits via the enforcement of intellectual property rights (patents, trade marks, designs etc), including obtaining information on infringers via Norwich Pharmacal applications, and against misleading advertising through the tort of passing-off and also the use of the misleading advertising regulations (principally the Business Protection from Misleading Marketing Regulations and the Consumer Protection from Unfair Trading Regulations). Passing-off requires there to have been a misrepresentation made by the defending party that goods or services are those of the party bringing the claim, which must have goodwill in its business (in particular the name that is being misappropriated) and there must be actual or likely damage to that goodwill. For more on all of these options, see our article COVID Counterfeits here.
Counterfeits and misleading advertising
The take-down procedures for online platforms apply globally. It is also possible to apply to the domain name registrars and social media sites to request withdrawal of a domain or account which is promoting infringing or fake products. The UK government itself did this recently in relation to bogus COVID-19 products – see our report here. The UK courts will also get involved where they consider it appropriate. and more detail in the on-line sales section here.
In relation to fake or unlicensed medicines entering the market, the Falsified Medicine Directive (the FMD)) may be of assistance (Directive 2011/62/EU which amended Directive 2001/83/EC on the community code relating to medicinal products for human use in order to prevent the entry of falsified medicinal products into the legal supply chain). A falsified medicine is defined by the European Medicines Agency (EMA) as a “fake medicine that passes itself off as a real, authorised medicine”. The FMD contains provisions requiring Member States to impose penalties for acts involving falsified medicinal products however sold. The UK implemented the FMD via the Human Medicines Regulations 2012 (as amended) which make it a criminal offence to import, manufacture or distribute active substances unless they are registered with the relevant licensing authority and meet stringent regulations elsewhere in the legislation. Therefore, although not a direct remedy for a rights holder, these provisions offer reassurance to pharmaceutical manufacturers as the Regulations provide barriers to, and sanctions against, those involved in activities relating to falsified medicines if they attempt to introduce falsified medicines into the pharmacy supply chain.
Falsified medicines
PRODUCT ISSUES: ITALY
IP rights holders could of course bring main actions and preliminary proceedings to protect their intellectual property rights (patent, trade marks, design and copyright) against counterfeiters' infringement, unfair competition conduct and misleading advertising before Italian Courts. However, it might be difficult to obtain a decision in short term because all legal proceedings (hearings and procedural deadlines) have been suspended in Italy - apart from very urgent cases - due to the COVID-19 pandemic (currently until 11 May 2020). The disruption to supply chains and the difficulty of meeting the demand for certain essential products may induce companies to use “new technology” such as 3D printers to create products or replacement parts without requesting the IP right owner’s consent, with the likelihood of infringement ensuing. For example an Italian start-up company reverse engineered the structure of a valve for ventilator and used the 3D printer to print the product - protected by a valid patent - risking being sued for patent infringement. On the other hand, however, it might be relevant that the product was not reproduced for commercial gain; the use of a patent has to be commercial or have a commercial purpose for there to be infringement. The Italian Advertising Self-Regulation Institute (Istituto Autodisciplina Pubblicitaria) has issued various decisions banning advertising claims in relation to a number of products (e.g. hand sanitizers and herbal teas) on the basis of misleading advertising, determining that the goods were incorrectly advertised as having beneficial effects in strengthening immune systems with an obvious link to the alleged prevention of COVID-19 infections. The Italian Competition Authority ("ICA") (Autorità Garante della Concorrenza e del Mercato) has instigated a number of proceedings (also requesting websites are blocked) against various products such as facial masks and diagnostic tests which are advertised with misleading claims relating to their alleged effectiveness in preventing or treating the COVID-19 disease, or presenting technical features which are false or deceptive. In order to prevent requests by non-Italian purchasers of certificates confirming that Italian products are virus free, the Italian Government has provided that the request of a virus free certificate to purchase Italian food products is an unlawful unfair commercial practice (Legislative Decree no. 9 of 2 March 2020).
The EU Directive was implemented in Italy through Legislative Decree no. 17 of 19 February 2014 (which amended the EU Human Medicines Code). Said Decree sets out criminal penalties for (i) anyone who manufactures, sells, distributes, imports or exports or conducts brokering activities of falsified medicinal products; and (ii) the company's owner or legal representative who started to manufacture, sell, distribute, import or export active substances without being duly registered with the Italian Medicines Agency (AIFA). The Decree has also set out pecuniary penalties for other unlawful conducts such as the non-compliance with specific principles and guidelines for the good manufacturing of medicinal products established by the Directive and elsewhere in the legislation.
French Law provides various tools to enforce IP rights against infringing products (trademark, design patent, patent, copyright). More particularly, the right holder can initiate an infringement seizure procedure which allows any person entitled to exercise the infringement action to proceed with the seizure of allegedly infringing goods and related documents. It is authorized by an order issued by a judge upon an ex parte request. This procedure is a very efficient way to obtain evidence against counterfeiters. With regards to misleading advertising, the French consumer code provides a strong protection against any false representation. In the light of the COVID-19 crisis, the French government created a specific website where consumers can report suspicious advertising, i.e. fake disinfectant, hand sanitizer, scams.
The French customs administration remains active regarding seizure proceedings with customs officer's seizing counterfeits through traditional customs proceedings or through the "flying customs" investigating the supermarket chains to identify and seize imported infringing goods.
Customs seizure
Due to the COVID-19 crisis and the closure of all movie theatres, the delay between the release of a movie and its DVD/Blu-Ray commercialization has been eased (article 17 of law No. 2020-290 of 23 March 2020), as the president of the NCC (National Centre for Cinematography) will be able to shorten this delay.
Exemption for the film industry
PRODUCT ISSUES: FRANCE
PRODUCT ISSUES: UAE
A number of laws have been put in place in the UAE to combat and penalize counterfeit products and misleading advertising. These include the UAE Commercial Transactions Law, Anti-Commercial Fraud Law, Consumer Protection Law, and Trademark Law. Federal Law No.(18) of 1993 regarding commercial transactions ("Commercial Transactions Law") defines the selling, displaying, and possessing of any counterfeit goods as an act of commercial fraud. The Commercial Transactions Law states that a trader may not resort to fraud and cheating when marketing his goods, and that a trader is not to spread or publish false information that are prejudicial to the interests of a competitor. This law provides, in relation to advertisements, that a trader may not make public, information that is inconsistent with the true description of the goods in question. Under this Commercial Transactions Law, anyone who commits a commercial fraud is potential liable to facing imprisonment up to two years and/or a fine between AED 50,000 and AED 250,000. Federal Law No.(37) of 1992 concerning trademarks ("Trademark Law") defines a trademark as "anything having a distinctive form such as names, words, signatures, letters, figures, drawings, logos, titles, hallmarks, seals, pictures, engravings, advertisements, packs or any other mark or group of marks if used or intended to be used either to distinguish goods, products or services whatever their source or to indicate that the goods or products belong to the trade mark's owner due to its manufacturing, selection or trading or to indicate the rendering of a service". The penalties for counterfeiting are imprisonment up to one year or a fine of not less than AED 5,000. Federal Law No. (24) of 2006 concerning Consumer Protection ("Consumer Protection law") – defines a consumer as "any person obtaining a commodity or service for or without a price to satisfy his own or another person’s needs". The law obliges the supplier to return or replace any goods if it were to have defects which are discovered, subject to it being in accordance with the law. In relation to advertising, the Consumer Protection Law states that traders should not "display, present, promote or advertise any adulterated, bad or misleading commodities or services that may harm the consumer’s interest or health on ordinary use". Federal Law No. (19) of 2016 regarding anti-commercial fraud ("Anti-Commercial Fraud Law") defines counterfeit goods as "goods which bear, without permission, a trademark which is identical or similar to a legally registered trademark ". The Anti-Commercial Fraud Law provides that the maximum penalty for involvement in counterfeiting pharmaceutical and food products is AED 1 million and for other products it is AED 250,000, with the possibility of penalties being doubled in cases of repeat violations.
PRODUCT ISSUES: SOUTH AFRICA
While the Trade Marks Act No. 194 of 1993 (“Trade Marks Act”) permits parallel importation, because of the risks posed by parallel imports to consumers the Consumer Protection Act No. 68 of 2008 (“Consumer Protection Act”) and its Regulations impose additional conditions on the marketing of so-called “grey market goods”. The Consumer Protection Act indicates that persons marketing such goods must apply a conspicuous notice to the relevant items in a place that the consumer is likely to see. The vendor is obliged to expressly draw the attention of consumers to the notice and explain the contents thereof in plain language. The notice must indicate that, if the item bears a trade mark, it has been imported without the approval or licence of the trade mark holder and that no guarantee or warranty in respect of such goods will be honoured or fulfilled by any official or licensed importer of such goods. To the extent that the goods do not qualify as parallel imports, relief may then possibly be pursued under the Trade Marks Act for trade mark infringement, or under the Counterfeit Goods Act as has been discussed above.
Protection against counterfeit goods is provided in South African law by both the Counterfeit Goods Act No. 37 of 1997 (“Counterfeit Goods Act”) and the enforcement of intellectual property rights. The Counterfeit Goods Act includes a general prohibition against dealing in counterfeits and, should anyone engage in this prohibited conduct or fail to take all reasonable steps to avoid dealing with counterfeit goods, they will be found guilty of an offence. In the case of a first conviction, the penalty for such an offence is a fine of no more than ZAR5000,00 per article involved in the act of dealing in counterfeit goods and/or imprisonment for a period of no more than three years. For any subsequent conviction, a fine may be imposed of no more than ZAR10 000,00 per article and/or imprisonment for a period of no more than five years. Any person with an interest in protected goods and who suspects a contravention of the aforementioned prohibition may lay a complaint with a police official, the Commissioner for Customs and Excise or any member of the customs authorities. Where the suspected counterfeit goods are being imported into South Africa, application may be made to the Commissioner for Customs and Excise to seize and detain all such goods. In addition to these remedies, the owner of an intellectual property right who is aware of, or has reasonable grounds to believe that, an act of dealing in counterfeit goods has taken place may apply to court for an order directing that any counterfeit goods as well as documents which are relevant to the infringement of the intellectual property right be seized and attached. Additional protection against misleading consumers in relation to the provenance of goods is available through the common law prohibition of passing-off, which protects businesses against misrepresentations in which one business trades on the goodwill and reputation of another business by deceiving the public and passing their business or merchandise off as that of another. This is supplemented by the Advertising Regulatory Board’s Code of Advertising Practice (“Code”) which provides generally that (i) advertisements should not contain any statement or visual presentation which is likely to mislead consumers and (ii) that advertisers may not make unsubstantiated claims. More specifically, it is prescribed that, without prior written permission, advertisements may not take advantage of the advertising goodwill relating to the trade name or symbol of the product or service of another business, or from the advertising goodwill relating to another party’s advertising campaign.
The Electronic Communications and Transactions Act, 2002 provides for take-down of content. Where counterfeit and infringing goods are being promoted online, any person can provide a written notice to the service provider of the site on which the content is published, requesting the content to be taken down. The complaint is required to include specific information, in particular, the material or activity that is claimed to be the subject of unlawful activity must be identified. Where a take-down notice is sent to an internet service provider, the voluntary association to which most established internet service providers in South Africa belong, has published a procedure and guide and has an online portal through which take-down notices may be lodged. If facts are misrepresented by the complainant, the complainant is liable for damages for wrongful take-down, however a service provider is not liable for wrongful take-down in response to a notification.
In addition to remedies potentially available under the common law of passing-off or the Counterfeit Goods Act, South Africa’s Medicines and Related Substances Act No. 101 of 1965 (“Medicines and Related Substances Act”) prohibits the sale of any unregistered medicines where a declaration has prescribed that the medicine must be registered. This is accompanied by several provisions regulating the marketing of medicines. For example, the publication or distribution of false or misleading advertisements concerning medicines and other medical devices is prohibited by the Medicines and Related Substances Act. Indeed, it is recognised as an offence to make any false or misleading statement in connection with any medicine, scheduled substance, medical device or IVD in the course of the sale thereof, the penalty for which is a fine or imprisonment for a period not exceeding ten years. The South African Code of Marketing Practice for Health Products also provides generally that companies shall not be involved in promotional schemes which are hazardous to consumers or which could bring the medical industry into disrepute. All information, claims or comparisons must be capable of substantiation and any exaggerated or misleading claims should be avoided.
PRODUCT ISSUES: AUSTRALIA
Parallel imports and exhaustion of IP rights: Generally speaking, Australian law allows copyright, trade mark, registered design and patent owners to control the importation of articles subject to their IP rights. However, there are restrictions on the ability of intellectual property owners to use such rights with defences available in each of the designs, trade mark and copyright legislation that facilitate parallel imports. The broadest of these defences is in the trade marks legislation, which was subject to recent amendment in response to a 2016 Productivity Commission Report. The result being that it is difficult to use trade mark rights to prevent parallel importation. In respect of patented goods, while there is no specific defence in the legislation, the Australian Federal Court recently confirmed that the sale of patented goods automatically provides an implied licence and unless expressly restricted at the time of sale, the implied licence carries with it the right to use, import, sell or hire the goods. This means that in the absence of a restriction, importation rights will be exhausted after the first sale and there will be no infringement by genuine goods. However, Australian courts have not gone so far as to say that Australia has a doctrine of exhaustion, such as the U.S. It is of note that any substantive modifications to the goods will extinguish the implied licence and allow a patentee to bring infringement proceedings against the importer. Aside from IP rights, where a genuine product is imported as a parallel import, the ACL may provide protection for IP owners against such conduct if the goods being imported are of a different quality or standard to those supplied through legitimate channels in Australia. Customs seizures: Under Australian trade mark and copyright legislation, trade mark or copyright owners may be able to lodge a Notice of Objection with Australian Customs. This allows the Australian Border Force (ABF) to seize products imported into Australia which it believes infringe the IP owner’s rights. Once a shipment is seized by Customs, the importer and the trade mark or copyright owner will be notified. The importer then has a limited period of time to make a claim for the release of the seized goods. If the importer makes a claim for release of the goods, the IP owner will have a limited period of time to commence legal action or consent to the release of the goods before the ABF must release the goods to the importer. Practically speaking, the ABF may seize both counterfeit goods and parallel imports but more regularly seizes counterfeit goods.
In a similar manner to the UK, Australia provides protection against counterfeits via the enforcement of intellectual property rights (patents, trade marks, copyright, designs), including interlocutory injunctions and similar orders which may be used to prevent a party from continuing to infringe pending the outcome of a trial. Interim orders are also available to allow a party to inspect infringing goods or restrain a party from dealing with the infringing goods or removing them from Australia. Australia also protects against misleading and deceptive conduct, including misleading advertising, through the Australian Consumer Law (ACL) which is contained in Schedule 2 of the Competition and Consumer Act 2010, or through the common law tort of passing-off. On 27 March 2020, the Australian Competition & Consumer Commission (ACCC) issued a press release advising that it would re-focus its 2020 priorities to those that have the most relevance to competition and consumer issues arising from the impact of Covid-19. This includes enhancing the ACCC’s efforts to address any behaviour by businesses which seek to exploit the crisis either to unduly enhance their commercial position or harm consumers. The press release details the establishment of a Covid-19 Taskforce and its focus on Covid-19 scams. The ACCC has also created a “Covid-19 (coronavirus) information for business” section on its website, which, among other things, warns that suppliers and retailers must not make misleading claims for price increases. It also specifically advises that businesses need to take genuine and reasonable steps to correct any country of origin claims that become incorrect due to changes in their manufacturing process or supply chain. The ACCC notes that such measures may be in the form of corrective stickers on packaging or corrective point of sale materials. In Australia, the Therapeutic Goods Administration (TGA) regulates the advertising of therapeutic goods under the Therapeutic Goods Act (Cth) 1989 (TG Act) and Therapeutic Goods Advertising Code (No.2)(Code). In response to the Covid-19 pandemic, the TGA has warned that it will take action in relation to advertisers who take advantage of the current situation by advertising self-testing kits or products that claim to prevent or cure Covid-19. The statements seek to remind advertisers that the TG Act and Code provide a range of substantive criminal and civil penalties for illegal advertising of therapeutic goods. This warning has been followed by enforcement action by the TGA and specifically, in response to false or misleading advertising of products in relation to Covid-19, the TGA has issued over 37 infringement notices and $300,000 in penalties.
As mentioned, the takedown procedures for online platforms apply globally and it is possible to directly contact Australian or global domain name registrars, online retailers (such as eBay) and social media websites to request withdrawal of a domain name or account which is making misleading or false representations, using an infringing trade mark or promoting infringing or fake products. Separately, under Australian law, if a copyright owner, their exclusive licensee or an agent of the owner or licensee, reasonably believes that there is infringing material on a service provider’s (ISPs) system or network, they can issue a notice of claimed infringement in relation to the copyright material to the ISP. Under the Copyright Regulations (Cth) 2017, the ISP is required to expeditiously remove, or disable access to, the copyright material specified in the notice and residing on its systems. The ISP must also issue a copy of the notice to the user who posted the material and after three months the user may serve a counter-notice on the ISP. If a counter-notice is served, the owner/licensee or agent must seek a court order to restrain the activity and prevent the material from being reinstated. In light of the Covid-19 pandemic, the Australian Signals Directorate has engaged telecommunications firms to block and take down websites identified as malicious as a result of their involvement in Covid-19 related scams, online frauds and phishing campaigns. The ASD's Australian Cyber Security Centre is also working with Google and Microsoft to flag websites as malicious to ensure that users are warned about such sites before visiting them. The Cyber Security Centre’s 20 April update advises that it is working closely with industry, government and law enforcement partners, including the ACCC, Services Australia, Australian Federal Police and Australian Criminal Intelligence Commission, to share information and disrupt Covid-19 scams.
In Australia, therapeutic goods, including medicines, must meet particular standards and be registered (entered on the Australian Register of Therapeutic Goods or "ARTG") before they can be legally imported, supplied in, or exported from, Australia (unless they are subject to an exemption). To support efforts in managing the Covid-19 pandemic, the TGA is performing expedited assessments of Covid-19 tests. Exemptions have also been enacted to:
permit the importation, manufacture and supply of Covid-19 tests that have not undergone TGA assessment to accredited pathology laboratories; and exclude specified therapeutic goods from the registration and listing requirements under the TG Act on certain conditions, namely, that the therapy is dealt with in relation to a contract with the Australian Government and for the purposes of the Covid-19 pandemic.
The TGA classifies imitation goods which are packaged to look like genuine items as counterfeit medicines or medical devices. Under the TG Act, products will be counterfeit if they are falsely labelled, packaged or advertised, or otherwise contain an undeclared ingredient or substance. Due to the safety risks posed, counterfeit medicines which are imported will usually be immediately seized by the ABF and destroyed. Criminal and civil penalty provisions apply for the importation, manufacture and supply of counterfeit therapeutic goods in Australia. The TGA monitors reports, compliance activities and laboratory testing of pharmaceuticals in Australia for potential counterfeit medicines. The TGA also monitors PPE that meet the definition of a ‘medical device’ and are therefore registered on the ARTG, this includes face masks. In response to concerns that have been raised about the quality and effectiveness of face masks currently being supplied in Australia, the TGA is conducting a post-market review of registered products. Although not a direct remedy for a rights holder, the TGA’s regulation and continuous monitoring by the ABF provides reassurance to therapeutic good manufacturers and suppliers that Australia has barriers to, and sanctions against, the import and supply of counterfeit medicines. In addition, a new study conducted in April by Australian National University and commissioned by the Australian Institute of Criminology, analysed 20 darknet markets to identify the scale of online underground sales of Covid-19 related products including PPE, vaccines, ventilators, anti-viral medicines and test kits. It’s reported that the results of this study will help inform the Australian Government's response to people trying to profit from the sale of medical supplies during a pandemic.
Last updated 4 June 2020
In Russia, the Russian antitrust regulator (Federal Antimonopoly Service, or FAS) has been advocating the legalisation of parallel imports (especially in the pharma and automotive sectors) which may currently be restricted by owners of proprietary products. The FAS believes that this measure could help combat price discrimination in the Russian market with respect to certain products in high demand.
Parallel imports
PRODUCT ISSUES: RUSSIA
Force majeure is principally a contractual concept. In general, there is no statutory entitlement to claim force majeure, and no standard or accepted definition of what constitutes force majeure. Consequently, the relief provided by a force majeure clause is dependent on the precise language used in the relevant agreement. A typical force majeure clause will excuse one or more parties from performing their contractual obligations if they are prevented (or, depending on the scope of the force majeure clause, if they are hindered or delayed) from doing so by an event or circumstances outside their control. In considering whether a force majeure clause can be invoked there are a number of points to consider:
"Force majeure" provisions
Particular points to consider include:
If seeking to rely on an express termination provision, any contractual requirements, such as notice provisions, should be strictly observed. Parties should also remember that, where a contract is terminated under an express contractual right, there will generally be no entitlement to “loss of bargain” damages for future non-performance. (Note that measures in the Corporate Insolvency and Governance Act 2020, referred to above, may restrict a supplier’s ability to rely on contractual termination provisions in some circumstances: see Governance: Corporate Insolvency and Governance Bill: Impact on supply chains and their customers (UK) here). A right to terminate at common law will arise, most commonly, if the counterparty is in repudiatory breach of contract (ie if the breach deprives the innocent party of substantially the whole benefit of the contract) or has clearly demonstrated an intention not to perform the contract in some essential respect. Where a force majeure clause has been triggered, the question of whether the counterparty can still terminate at common law will depend on the construction of the clause.
A contract may also be “frustrated” – ended at law – if, as a result of the Covid-19 crisis, further performance of the contract has become impossible or illegal or the relevant obligations would be radically different from those contemplated at the time of contracting. A party hoping to rely on frustration to avoid further performance of the contract should remember:
contract suspension and termination: UK
Do the events or circumstances fall within the definition of a force majeure event under the contract? So, for example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there sweep-up wording to cover other events beyond the reasonable control of the parties? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if that is the case. A change in economic or market circumstances which makes the contract less profitable or performance more onerous has not generally been regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically. Where the contract is governed by English law, the Law Reform (Frustrated Contracts) Act 1943 provides that parties can recover sums paid under the contract before it was discharged, subject to an allowance for expenses incurred by the other party at the court’s discretion.
Last updated 8 July 2020
The Cabinet Office of the UK Government has published non-statutory guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency. The guidance does not have the force of law but the Government strongly encourages all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy.
Responsible contract behaviour
Click here to access our quick reference tool to help assess the availability of force majeure relief under English law, either in respect of a party's own contractual obligations or those of its counterparty, as a result of the Covid-19 pandemic or related circumstances.
The Corporate Insolvency and Governance Act 2020 is likely significantly to impact many supplies of goods and services to companies that are or may be in financial distress, and indeed could affect the balance of rights in all supply chains. For an analysis of the impact on supply chains see Governance: Corporate Insolvency and Governance Bill: Impact on supply chains and their customers (UK) here.
Insolvency reforms
contract suspension and termination: FRANCE
Parties to a contract governed by French law and entered into after 1 October 2016 may seek to rely on the doctrine of hardship (imprévision) codified at article 1195 of the French Civil Code to try to renegotiate their contract when an unforeseeable change of circumstances makes performance excessively burdensome for a party that had not agreed to assume such a risk. If the parties cannot reach an agreement on renegotiation of the contract, either party may apply to the courts for the contract to be amended or terminated. However, parties can also exclude article 1195 of the Civil Code, or make adjustments to the conditions under which it applies, especially as concerns renegotiation or recourse to the courts. For more on COVID-19 and hardship under French law see here.
Hardship and contractual renegotiation under French law
Article 1218 of the French Civil Code specifically provides a statutory regime for force majeure in contracts governed by French law, even where the contract does not contain a force majeure provision. Article 1218 provides that a party can invoke force majeure to excuse its failure to perform its contractual obligations if: (i) the event was beyond the control of the non-performing party; (ii) the event was not reasonably foreseeable at the time of entering into the contract; and (iii) the non-performing party could not have avoided the effects of the alleged force majeure event with appropriate measures and is therefore unable to perform its contractual obligations. The statutory regime is not mandatory, however, and parties can opt out of it completely or vary it by including force majeure clauses in their contracts, in which case there are a number of points to consider, including:
Do the circumstances fall within the definition of a force majeure event under the contract? So, for example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there sweep-up wording to cover other events beyond the reasonable control of the parties? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if that is the case. A change in economic or market circumstances which makes the contract less profitable or performance more onerous has not generally been regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
For more on COVID-19 and force majeure under French law, see here and here.
Last updated 25 June 2020
contract suspension and termination: GERMANY
If the contract does not contain any provision on force majeure applicable for the effects of Covid-19, the statutory provisions apply. In any case, the concrete contractual obligations as well as the extent and reasons of the effects of Covid-19 on these obligations need to be examined in detail. In particular, the following statutory provisions are to be considered: Release from the obligation to perform due to objective impossibility, s.275 (1) German Civil Code The contractual obligation to perform is released if the performance of the service is impossible. In this case, the obligation of the contractual partner to provide the counter-performance is also released. However, the legal system sets high demands on these requirements. In principle, each party bears the risk of the usability of the service. For example, an impossibility of performance cannot already be assumed in the case of illness of all employees, as long as the fulfilment of the contractual obligation is possible through the engagement of third parties. The effects of Covid-19 could lead to the release of the obligation to perform in the case of absolute fixed-date transactions. Right to refuse performance due to economic impossibility, s.275(2),(3) German Civil Code It will often be the case that, although it would be objectively possible to perform a service, the effort required to do so would be immense. Therefore, the debtor has a right to refuse performance if such performance: (i) requires expenditure which is grossly disproportionate to the creditor's interest in performance; or, (ii) after weighing the obstacle to performance against the creditor's interest in performance, is not reasonable. However, such a right to refuse performance can only be considered in the case of obstacles to performance which could only be removed with considerable, unreasonable effort. In this case, the debtor's expenditure (eg costs, labour input, etc) must be weighed against the customer's interest in performance (asset value of the performance, substance and use interests) as well as any share of fault. It will be difficult to justify such a right to refuse performance based on the effects of Covid-19. If the debtor is released from its obligation to perform due to objective or economic impossibility, the creditor's claims for damages have to be examined (see below). Right to terminate the contract for a compelling reason The right of termination for a compelling reason can be based on contract or law. Therefore, it is primarily to be examined whether compelling reasons for termination are explicitly mentioned in the contract and whether one of these reasons could cover the effects of Covid-19. A termination for a compelling reason based on the law (eg sections 314, 626, 648a German Civil Code) exists if, taking into account all circumstances of the individual case and weighing the interests of both parties, the continuation of the contractual relationship until its scheduled end or until the notice period has expired is not reasonable. This is a question of the individual case. Right to adapt or terminate the contract in case of interference with the basis of the transaction, s.313 German Civil Code One party has the right to adapt or, if an adaptation is impossible or unreasonable, to terminate the contract if there is an interference with the basis of the transaction. The law provides for the following requirements: (i) circumstances which became the basis of the contract have significantly changed since the contract was entered into; (ii) the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change; and (iii) adherence to the unchanged contract would be unreasonable for one party, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk. Whether a circumstance which leads to an impediment to performance (such as the effects of Covid-19) concerns a question of the basis of the transaction must always be assessed on a case-by-case basis on the interpretation of the contract. Exemption from the obligation to pay damages or contractual penalties The extent to which the contractor can be accused of fault depends largely on the circumstances of the individual case. In principle, the effects of Covid-19 can lead to the fact that the debtor is not liable for the non-performance or the delay in performance. In particular, the debtor is not responsible for the non-performance/delay if it was unforeseeable and unavoidable. It therefore depends on whether the debtor knew or should have known at the time of conclusion of the contract that it would not be able to fulfil his obligation to perform (on time) due to the ongoing COVID-19 pandemic. It must also be examined whether the non-performance or the delay could not have been avoided by reasonable measures. The debtor must prove that it has taken all reasonable steps to prevent the event of non-performance or delay. If the non-performance/delay is not attributable, there is in principle also no obligation to pay damages or contractual penalties.
Statutory provisions
German law recognizes force majeure generally only if it is explicitly addressed under a contract. Although there are statutory provisions that mention the concept of force majeure (eg in s.7(2) Road Traffic Act, s.206 German Civil Code), a generally applicable definition and clearly defined legal consequences for contracts are not provided. If the contract contains a force majeure clause, it should be carefully examined whether the clause has been effectively included in the contract (especially under the law for general terms and conditions). If a clause is effectively included, the parties will have to assess whether the effects of Covid-19 can be seen as force majeure. A lot of force majeure clauses explicitly name pandemics as a case of force majeure. If pandemics are not explicitly mentioned in the clause, the interpretation must be based on the relevant principles of the "force majeure" case law. Force majeure is predominantly understood as an exceptional, external, non-culpable and unpredictable event that cannot be avoided even by extreme care. Whether the effects of Covid-19 can be considered force majeure according to the clause depends on the time the contract was concluded, the legal framework during that period, and the information available to the parties at that time. It can often be assumed that the effects of Covid-19 constitute a force majeure event. If, however, contracts are concluded although one party could have already known that it will not be able to fulfil his contractual obligations properly due to the Covid-19 pandemic, no force majeure can be assumed for him. Force majeure clauses usually make provisions on the following points:
Force majeure
Last updated 29 July 2020
definition of force majeure; release from the obligation to perform for the duration of the disruption; right to terminate the contract; duty to mitigate damages; and exclusion of claims for damages.
Since the Covid-19 pandemic has been ongoing for some time, force majeure clauses in newly concluded contracts will probably not cover the effects of Covid-19. Therefore, parties must be advised to include specific contractual clauses on the effects of Covid-19 in newly concluded contracts.
contract suspension and termination: ITALY
Where a contract has become uneconomic or it impossible to perform it, a party may wish to limit its losses by terminating the contract. First, the parties should verify whether there are specific termination provisions under the contract. There may be, for example, a right for one or both parties to terminate or withdraw (recesso) on notice and without cause. Or there may be specific termination rights that are triggered in the circumstances that have arisen (eg conditions subsequent or termination for prolonged force majeure events). Any contractual requirements, such as notice period provisions, should be strictly observed. In addition, possible compensation provisions must be carefully examined to assess the direct economic impact of termination/withdrawal. In addition to specific termination terms under the relevant contract, a party may be entitled to terminate or withdraw under certain statutory Italian law provisions or principles, to the extent that they have not been waived by the parties:
Under article 1256 of the Italian Civil Code, a contractual obligation is terminated due to supervening impossibility not attributable to the relevant party (applying the test under article 1218 of the Italian Civil Code, outlined above). If the supervening impossibility is temporary, the obligation will terminate at the point in time when the party required to perform can no longer be deemed liable or the counterparty can no longer be deemed to have an interest in the performance. Under article 1464 of the Italian Civil Code, if the supervening impossibility regards only a portion of the contractual obligations, the counterparty is entitled to withdraw from the contract if it does not have any interest in the partial performance. Pursuant to article 1467 of the Italian Civil Code, if under a contract providing for obligations to be executed over a period of time, the obligations of a party become excessively burdensome due to extraordinary and unforeseeable events, such party may apply to the relevant court to terminate the contract. However, the other party may propose to amend the agreement in order to avoid the termination. The termination remedy does not apply if the increased burden falls within the typical economic risk regarding the contract. In accordance with the assumption principle (presupposizione) developed by case precedents, a party may withdraw from a contract if a matter of fact or law, which was known by all contractual parties to be the reason for that party to enter into the contract, no longer exists due to unforeseeable events.
Termination / discharge of the contract
Usually contracts include detailed “force majeure” provisions, providing that upon occurrence of events which are outside the invoking party’s control and impede proper performance of its obligations, if certain tests are met the invoking party will be excused. Usually, these tests require inter alia, to check if:
the relevant event is included amongst the force majeure events; the relevant event was unforeseeable and unavoidable using the appropriate standard of diligence; and the invoking party informed the other party in the agreed timeframe.
excusing failure to perform; extending time for performance (subject to each party’s obligation to bear its own costs incurred due to occurrence of force majeure); relieving the non-affected party from the obligation to pay the consideration strictly related to the obligations that are not performed due to force majeure; and prompt resumption of the relevant obligations upon end of the force majeure events.
Depending on the text of the relevant clause, effects of force majeure usually include:
If no specific force majeure clauses are provided for in the contract, a party may still try to invoke “supervening impossibility” under article 1218 of the Italian Civil Code. According to this provision, a party can avoid liability for failure to fulfil an obligation if it can demonstrate that:
it is impossible for that party to perform its obligations; the impossibility is due to causes not attributable to the party invoking force majeure; and the impossibility is “absolute” and “objective” (ie a “subjective” impossibility may not excuse the non-performing party).
According to case precedents, orders of public authorities or new governmental regulation (so called factum principis) can, at least in theory, be legitimate circumstances of supervening impossibility. In addition, pursuant to article 1256 of the Italian Civil Code, if the supervening impossibility is temporary, the relevant party is excused for late performance.
COVID-19 may have an impact on other provisions in an Italian law governed contract:
Change in law clauses – contracts may include provisions allowing a party to request amendments to the agreed commercial terms if a change in law occurs and providing the right of such party to withdraw (recesso) from the contract if an agreement is not reached. Price adjustment clauses –parties may be entitled to an increase of the contract price. Under Italian law a party to certain types of contract may be entitled to a price adjustment regardless of an express provision being included in the contract (eg under articles 1660, 1661 and 1664 of the Italian Civil Code in relation to works contracts and service agreements) unless such right is contractually waived. Suspension right clauses: a party may be entitled to suspend performance of its obligations if the other party is not performing its obligations. This right is also provided by article 1460 of the Italian Civil Code.
contract suspension and termination: SPAIN
If a force majeure event takes place, the parties to a contract cannot be held liable for failure to fulfil obligations that become impossible to comply with (ie not just any obligation) as a result of the exceptional or extraordinary event. This does not entail automatic termination of the contract. The non-defaulting party would not be entitled to claim damages or request termination of the contract.
Under article 1105 of the Spanish Civil Code, force majeure is defined as: “Apart from the cases expressly mentioned in the law, and those cases in which the obligation so declares, no one shall be responsible for those events which could not have been foreseen, or which, if foreseen, were inevitable.“ Parties can also contractually seek to define force majeure more narrowly. Broadly, an event or circumstance should qualify as a force majeure event if it is extraordinary, caused by external forces, not foreseen and it would not have been possible to foresee nor avoid it even applying the greatest diligence. The Spanish Supreme Court has ruled that, as well as the event being unforeseeable, the event must have been inevitable or unstoppable. In general terms, it could be argued that force majeure will apply where fulfilment or performance of an obligation has become impossible, either on material or legal grounds directly linked to the COVID-19 health crisis. The following must be taken into account:
the contractual provisions (if any) governing special situations leading to a force majeure event and the consequences of that event; the circumstances in each case; the means available to the party which is required to perform; and its ability to react to the unforeseen event.
contract suspension and termination: AUSTRALIA
If seeking to rely on an express termination provision, any contractual requirements, such as notice provisions, should be strictly observed. Parties should also remember that, where a contract is terminated under an express contractual right, there will generally be no entitlement to “loss of bargain” damages for future non-performance. A right to terminate at common law will arise, most commonly, if the counterparty is in repudiatory breach of contract (ie if the breach deprives the innocent party of substantially the whole benefit of the contract) or has clearly demonstrated an intention not to perform the contract in some essential respect. Where a force majeure clause has been triggered, the question of whether the counterparty can still terminate at common law will depend on the construction of the clause.
A contract may also be “frustrated” – ended at law – if, as a result of the COVID-19 crisis, further performance of the contract has become impossible or illegal or the relevant obligations would be radically different from those contemplated at the time of contracting. A party hoping to rely on frustration to avoid further performance of the contract should remember:
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically. Where the contract is governed by the laws of New South Wales, South Australia or Victoria, the Frustrated Contracts Act 1978 (NSW), Frustrated Contracts Act 1988 (SA) or Australian Consumer Law and Fair Trading Act 2012 (VIC) respectively may apply and govern the financial consequences of frustration.
contract suspension and termination: SOUTH AFRICA
As stated above, usually force majeure clauses provide for the election to cancel the contract should the force majeure event persist. Common law relief can be found in the doctrine of supervening impossibility of performance. This common law remedy requires that the performance of certain obligations is rendered objectively impossible due to either an act of God (vis maior) or accident (casus fortuitous). Performance under a contract is suspended during any temporary period of impossibility, or alternatively is entirely extinguished in circumstances of objective impossibility of performance:
Partial impossibility of performance under common law does not extinguish the obligation but, if the counterparty cannot be reasonably expected to accept partial performance, it is entitled to terminate the obligation. Insofar as performance is extinguished, performance of the counter-party’s corresponding obligations is also extinguished. Any prior performance can be claimed back through the mechanism of unjustified enrichment. The contract, however, will not automatically be terminated. Usually, no claim for damages will exist if the party seeking the relief is not responsible for the cause of the impossibility.
Insofar as force majeure has been regulated by a contract, the courts will be slow to grant relief in terms of the common law (in accordance with the doctrine of supervening impossibility of performance).
Force majeure only applies in accordance with the terms agreed between the parties. Usually, the parties agree on either a closed or open list of instances which would constitute a force majeure event. As a result parties will need to identify whether the definition in their contract is wide enough to include COVID-19. Usually, such clauses provide for the suspension of obligations for a period of time, followed by an election to cancel the contract should the event persist.
contract suspension and termination: RUSSIA
A defaulting party who has breached an obligation due to a force majeure event is not liable to the non-defaulting party for non-performance of its obligations (improper performance) under the relevant contract. However, the force majeure event does not release such party from performance of the obligation itself, if it remains possible to perform once the force majeure circumstances come to an end. However, commercial contracts usually contain provisions allowing for unilateral termination of the contract after a certain period of time has elapsed following the occurrence of the force majeure event, and subject to notification requirements. There are several options available to terminate the contract following a force majeure event (in addition to the parties’ mutual agreement): Termination of the contract at the initiative of the counterparty:
The non-defaulting party has the right to repudiate the contract if, as a result of the delay, it is no longer interested in receiving the benefit under the contract.
A “force majeure” may excuse a defaulting party for non-performance of its obligations under the relevant contract and suspend performance of the obligations for a certain period of time. In order to invoke the benefits of force majeure the defaulting party should consider the following: Do the circumstances fall within the definition of a force majeure event under the contract or the law?
The existence of a causal link between the circumstances which the party in breach claims to constitute a force majeure event and the inability to perform the relevant obligations under the contract is essential to prove the legal grounds for its release from liability under the relevant contract. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. The defaulting party should also act in good faith and take all necessary measures to properly perform its obligations under the contract to the extent possible and to minimise the impact of the force majeure event.
“Force majeure” is defined by unavoidability (it being objectively impossible for any market participant to avoid such a circumstance or its consequences) and extraordinariness (the exceptionality of the event in question, which occurrence is unusual in the relevant circumstances). Neither Russian law nor the Russian courts will give effect to so-called entrepreneurial risks as a force majeure event, including economic and financial crisis, delay or bankruptcy of the counterparty, devaluation of the national currency etc, unless such events and circumstances are otherwise specified in the contract. The fact that the contract becomes uneconomic or undesirable is not sufficient to invoke force majeure. Counterparties may designate in the contract a list of events or circumstances, the occurrence of which could be grounds for releasing each party from liability for breach of the contract (or otherwise change the grounds for liability of the parties). This is regardless of whether such circumstances are considered to be force majeure events by virtue of Russian law (for example, relating to the category of entrepreneurial risks). The fact of force majeure can be confirmed by a relevant certificate issued by the Russian Chamber of Commerce and Industry (for foreign trade transactions) or regional CCIs (for domestic transactions). Other evidence shall also be collected by the defaulting party.
COVID-19 may give rise to attempts by counterparties to amend their contractual provisions. A material change in the circumstances upon which the parties relied when executing the contract is a ground for modifying or rescinding the relevant contract. A change of circumstances is regarded as material when the parties’ circumstances have changed in such a way that the parties would not have entered into the contract at all, or would have entered into it on significantly different terms, had they been able to reasonably foresee the change. Courts usually refuse to classify events that fall into the category of entrepreneurial risk as a material change of the parties’ circumstances. However, it is also possible that measures taken in connection with the spread of COVID-19 could make the fulfilment of contractual obligations so burdensome for the parties that they will be categorised by the courts as a material change of circumstances, such that the parties will be able to rescind or modify the relevant contract. More details on the consequences of COVID-19 for contractual relations under Russian law are available here.
Rescission / modification of contract
Has the relevant event prevented, hindered or delayed performance?
Termination of the contract due to actual impossibility of performance:
The contract may be automatically terminated if, in connection with certain circumstances arising after execution of the contract, there is an actual, objective and permanent impossibility of performance of obligations under the contract. However, it is unlikely that the current COVID-19 situation can serve a ground for termination of a contract due to actual impossibility given that containment and preventative measures are temporary.
A contract may be terminated if state or local authorities adopt legal acts or measures that make it impossible (ie illegal) to perform the obligations. However, it should be noted that, upon repeal of the relevant legal acts, the terminated obligation may be restored if the party that had previously been entitled to receive something under the contract does not repudiate the contract within a reasonable time.
Termination of the contract due to legal impossibility of performance:
contract suspension and termination: UAE
In order to assess whether COVID-19 will constitute a force majeure event under either UAE or DIFC law governed contracts, the starting point should be to check whether there are any express terms in the underlying contract that expressly refer to pandemics (or equivalent wording) or other relevant events in the definition of force majeure. In the absence of any such provisions, both the UAE Civil Code and the DIFC Contract Law contemplate force majeure events. In such instances, it will be for the relevant court or arbitral tribunal to determine whether COVID-19 will constitute a force majeure event. UAE Civil Code The concept of force majeure is well recognised in the UAE and the parties to a commercial contract tend to expressly account for force majeure events. In the absence of an express force majeure provision in a contract, the UAE Civil Code (Federal Law Number 5 of 1985) contains several articles on force majeure which will apply and will provide for cancellation of contractual obligations. The UAE Civil Code provides that if a force majeure event renders performance of a contract impossible, all contractual obligations will cease and the contract will be automatically cancelled. If, however, part performance of the contract remains possible, the contract may only be part cancelled with the remainder of the contract continuing in effect. If a contract is cancelled by virtue of these provisions, the parties are to be restored to their pre-contractual positions. If that is not possible, damages may be awarded. The UAE Civil Code does not provide any definition of what constitutes force majeure, but does however state that a force majeure event will take place if it makes performance of the contract impossible (the contractual obligations becoming more onerous is not sufficient). The party seeking to cancel the contract (in full or in part) will therefore need to establish that performance was impossible as a result of COVID-19.The requirement for parties to act in good faith pervades the UAE Civil Code and therefore parties will also need to consider this obligation when seeking to rely on any force majeure event. DIFC Contract Law Although there is no prescribed definition of a force majeure event in the Dubai International Financial Centre ("DIFC"), the DIFC Contract Law (DIFC Law No.6 of 2004) does recognise force majeure and states in Article 82(1) that: "Except with respect to a mere obligation to pay, non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences." It will therefore be for the party seeking to rely on COVID-19 as a force majeure event to establish that:
its non-performance was due to COVID-19; COVID-19 was not envisaged at the time of conclusion of the contract; and the consequences of COVID-19 could not have been avoided.
In addition, for force majeure to apply, notice must be provided to the other party without undue delay as soon as a party becomes aware of a force majeure event. Article 82(2) of the DIFC Contract Law states that, where the impediment is temporary, the force majeure will only apply for the relevant period in which there is the impediment, and the contractual obligations will continue thereafter. The relevant temporary period of reliance on force majeure will depend on the facts of each case, such as the practicality of carrying out the contractual obligations and how this has been affected by COVID-19, and the purpose of the contract.
contract suspension and termination: CHINA
The statutory consequences vary, depending on whether force majeure prevented the performance of particular contractual obligations or the fulfilment of the object of the contract:
If force majeure prevents a party from performing its contractual obligations, that party may be excused from performance and be exempted from liability for failure of performance partially or wholly, depending on the facts and circumstances. If force majeure renders the object of the contract unable to be fulfilled at all, either party may terminate the contract by giving the other party notice.
The term “force majeure” is defined in both the General Provisions of Civil Law and the Contract Law of the People’s Republic of China. It is “an objective event which is unforeseeable, unavoidable and insurmountable by the parties”. Parties are also free to agree in contract a broader scope of application and relief for similar events, which will generally be given effect to. However, in that case, the contractual provisions will apply, as supplemented by the force majeure provisions at law to the extent relevant, to those events which meet the requirements of “force majeure” under law. In contrast, those other events which do not meet the requirement of “force majeure” under law will be afforded relief and/or entitlement only as agreed between the parties. The onus is on the party seeking to rely on the statutory force majeure entitlement to prove that it applies. As a matter of PRC law, this generally involves establishing that :
the event is "objective", ie it occurred with no fault or intention of any party to the contract involved; the event is unforeseeable; and the event is unavoidable and insurmountable, ie the affected party is unable to avoid the occurrence of the event or its consequences despite having taken reasonable measures. This further requires:
establishing a causal link between such event and contractual performance; establishing that requisite notice has been given; and establishing that the affected party was not already delayed in its performance thereby causing it to be impacted by the event (ie had it not been for that party’s prior delayed performance, the event would not have prevented performance.)
Note however that, if upon receipt of the force majeure notice, the other party fails to take measures to mitigate its losses arising from the non-performance of the affected party, it shall not be entitled to claim the portion of its losses resulting from its failure to mitigate.
contract suspension and termination: HONG KONG
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically.
Intellectual Property (IP) rights, including patents, trademarks, etc, are protected in China. The IP right holders can bring infringement actions against the infringers before a civil court or, in certain cities, a designated IP court. Passing-off or unfair competition is also punishable under the Anti-Unfair Competition Law, which allows the right holders to bring a civil law action against an infringer. In addition, the IP right holders may apply to the Customs authorities to seize goods that infringe their IP rights, provided that a surety is provided to the Customs. The State Administration for Market Regulation (SAMR) is charged with the duties of enforcing the laws against and imposing administrative penalties on counterfeits, misleading advertising and passing-off. IP right holders may file a complaint with the SAMR and request the authority to take enforcement actions against the infringement of IP rights or passing-off. SAMR has recently stepped up its efforts in cracking down on fake COVID-19 products. For counterfeit goods being sold on e-commerce platforms, the platform operators are obligated to remove the infringing goods from the platform upon receiving a notice from the IP right holders.
PRODUCT ISSUES: CHINA
COMPETITON ISSUES: CHINA
SAMR insists that fair competition is essential to maintain stable prices, an adequate supply of materials that are needed for the prevention and control of the epidemic and that are important daily commodities. SAMR is investigating and imposing stricter, heavier and quicker punishments for monopolistic (i.e. anticompetitive) conduct or abuse of dominance which hinders the prevention and control of the epidemic, the resumption of work and industrial production and that harms the interests of consumers. Industries closely related to people's daily livelihoods are also considered important. In this context, SAMR is focusing on investigating anticompetitive agreements which relate to face masks, drugs, medical devices, disinfection supplies and other epidemic prevention and control materials, as well as raw and auxiliary materials and the supply of water, power, gas and other public utilities. It is particularly concerned with coordinated price hikes, production restrictions, market segmentation, joint boycotting and the fixing or restriction of resale prices. In relation to abuse of dominance, it is focusing on conduct involving the setting of unfairly high prices, refusals to deal, tying and the imposition of unreasonable trading conditions and differential treatment. SAMR aims to publicise details of its enforcement action in a timely manner in order to provide guidance to the public.
Exemptions for certain agreements Under China's competition regime, the State Administration for Market Regulation (SAMR), China's competition enforcement authority, may grant exemptions in relation to certain types of cooperation agreements. SAMR has stated that in light of the COVID-19 outbreak, it recognises that certain forms of cooperation agreements may be required to address gaps between supply and demand, including joint R&D agreements relating to drugs and vaccines, testing technologies, medical devices and protective devices. Therefore exemptions will be allowed for arrangements of this nature which are beneficial to technological progress, improvements in efficiency, and the pursuit of public interest and consumer interests, in line with the exemptions provided for in existing regulations. These regulations allow for exemptions for agreements which contribute to:
Improving technologies and developing new products in the fields of drugs and vaccines, testing technologies, medical devices, protective devices, etc.; unifying product specifications and standards or implementing specialised divisions of work for the purpose of improving the quality, reducing the cost and raising the efficiency of epidemic prevention and control materials; realising disaster relief and other social and public interests; and improving the operational efficiency and enhancing the competitiveness of small and medium-sized operators.
Accelerated merger review From 6 February 2020, parties are encouraged to submit merger filings either online or by post, as opposed to in person, and subsequent correspondence such as acceptance notifications, requests for documents, case-handling notifications, and review decisions will occur via email or by fax. Since April 2020, SAMR has also accelerated the merger review process for transactions which are closely related to the prevention and control of the novel coronavirus pandemic and people's daily livelihoods (e.g. pharmaceutical manufacturing, medical equipment manufacturing, food manufacturing, transportation, wholesale and retail, etc.), which are heavily affected by the epidemic (e.g. catering, accommodation, tourism and other industries), and those transaction which are conducted to facilitate the resumption of work and industrial production. In the first half of 2020, SAMR shortened the respective lengths of accepting and closing a merger review case by 20.9 percent and 14.5 percent, compared to 2019.
COMPETITON ISSUES: HONG KONG
Despite the above recognition that enforcement needs to be responsive to the COVID-19 outbreak, the HKCC has reminded the public that the Ordinance remains in effect during the COVID-19 outbreak. It has stated that it will remain vigilant to protect consumers from anti-competitive conduct by businesses seeking to take advantage of the outbreak or using the outbreak to justify improper collusion or other anti-competitive conduct. Such conduct will be subject to the full force of the law. Further, the HKCC has reminded suppliers not to engage in anti-competitive conduct, including price fixing, bid-rigging and exchange of competitively sensitive information, in the course of providing goods and services to businesses which use the Hong Kong government’s COVID-19-related subsidies for procurement. Companies inviting tenders are also encouraged to include non-collusion clauses in tender documents. It has also warned businesses applying for and receiving subsidies from the Government’s Anti-Epidemic Fund to ensure that they do not contravene the competition rules themselves. For example, such businesses should not allow an application for Government subsidies to be submitted in their names when they know that the application contains quotations that were obtained as a result of supplier collusion.
No changes have been made to the Competition Ordinance, the main piece of legislation governing the competition law regime in Hong Kong. However, the Hong Kong Competition Commission (HKCC), the enforcement authority, has stated that it recognises that, as a result of the COVID-19 outbreak, there could be a need for additional cooperation between businesses in certain industries on a temporary basis, particularly to maintain the supply of essential goods and services to consumers. The HKCC has flagged joint buying, joint production and sales-related joint ventures and exchange of information as conduct that would potentially be relevant to the COVID-19 outbreak. It has also put in place a mechanism for businesses to approach the HKCC on an informal basis in relation to temporary cooperative measures which are genuinely necessitated by the COVID-19 outbreak and in the interests of Hong Kong consumers and society.
In a 24 March 2020 joint statement (available here), the Antitrust Division of the US Department of Justice (the “Antitrust Division”) and the Bureau of Competition of the US Federal Trade Commission (the “FTC”), two bodies responsible for the enforcement of antitrust laws in the United States, released a joint antitrust statement regarding COVID-19 and announced several programs designed to assist firms in the current environment, which include:
Notwithstanding the above, federal and state regulators have made detecting, deterring and punishing wrongdoing in connection with the crisis a key priority. In a 16 March 2020 memorandum, the US Attorney General instructed all United States Attorneys to "prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic." The Antitrust Division reiterated this point in its own 24 March 2020 statement, and several investigations are already underway into alleged instances of price gouging and other anticompetitive conduct.
COMPETITON ISSUES: US
Expedited COVD-19 Related Opinions: The Antitrust Division and FTC are now aiming respond to all COVID-19-related requests for opinions on proposed conduct within seven calendar days of receiving all necessary information, a substantial acceleration to the "several months" that the agencies typically take. Joint Venture Processing: Noting that joint ventures may be necessary for businesses to bring goods to communities in need, expand existing capacity, or develop new products/services, the agencies plan to expeditiously process filings under the National and Cooperative Research and Production Act (the "NCRPA"). Once the agencies process a joint venture's filing under the NCRPA, the joint venture will be eligible to recover attorneys' fees when it prevails in damages actions brought against them under the antitrust laws; the process also potentially limits the amount of damages the joint venture may be liable for to actual, as opposed to treble, damages. Consideration of the Exigent Circumstances: Both agencies will account for exigent circumstances when evaluating actions taken during and on account of the crises, including joint efforts which may be necessary to provide Americans with products or services that might not otherwise be available. As examples, the agencies point to instances where health care facilities may need to work together to aid communities that lack immediate access to health care, personal protective equipment, or medical supplies, and where businesses need temporarily to combine production or distribution of COVID-19-related supplies they may not have traditionally made or distributed.
PRODUCT ISSUES: US
The US Department of Customs and Border Protection (CBP) and US Immigration and Customs Enforcement (ICE) are authorised to exclude, detain, and seize imported goods, including counterfeit and pirated goods, which violate intellectual property rights in the US. Members of the public can inform CBP of potential intellectual property rights violations via the agency’s reporting mechanism called e-Allegations. CBP also maintains an online recordation system which allows IP owners to electronically record their trademarks and copyrights with CBP, allowing CBP to more readily identify or spot counterfeit products. As of 14 April 2020, CBP and ICE’s Homeland Security Investigations (HSI) had seized more than 225 shipments of mislabelled, fraudulent, unauthorised or prohibited COVID-19 test kits, treatment kits, homeopathic remedies, purported anti-viral products and personal protective equipment. For example, on 14 March 2020, CBP intercepted shipments of counterfeit COVID-19 test kits which had arrived at the Los Angeles Airport by mail from the United Kingdom. Similar products have also been intercepted by CBP officers at O’Hare International Airport in Chicago. On 19 March 2020, CBP officers at the El Paso (Texas) Port of Entry also seized a shipment of cleaning supplies after noticing that many of the bottles labelled “bleach” had no safety seals and field-testing indicated that their primary ingredient was only water. On 15 April 2020, HSI announced the launch of Operation Stolen Promise to combat COVID-19 related fraud and other criminal activity. This initiative is designed to enhance collaboration among various federal departments and agencies, including the HIS-led National Intellectual Property Rights Coordination Center, along with business and industry representatives. The US Congress (specifically, the House Committee on Ways and Means and the Senate Committee on Finance) has also requested that the US International Trade Commission (ITC) investigate and prepare a report identifying imported goods related to the response to COVID-19, their source countries, tariff classifications, and applicable rates of duty. The purpose of the investigation, which began 7 April 2020 and is expected to be completed on 30 April 2020, is to increase transparency of the supply chains for critical equipment necessary to address COVID-19.
The US Federal Trade Commission (FTC) and the US Food and Drug Administration (FDA) issued a joint statement (available here) announcing efforts to stop companies from making deceptive or scientifically unsupported claims about their products’ ability to treat COVID-19. Since 6 March 2020, the FTC and FDA have sent “warning letters” to more than 25 companies demanding that they cease claims that their products (including teas, lozenges, dietary supplements, and essential oils) can treat or cure COVID-19. The letters advised the companies to correct violations of federal law or face immediate legal action, which may include a federal court injunction, financial remedies for consumers, or seizure. The FTC and FDA have also advised that they will be monitoring social media, online marketplaces and incoming complaints to ensure that companies suspected of violations do not sell fraudulent products under a different company name or website. On 14 April 2020, the FTC issued 10 additional warning letters to companies, both in the US and abroad, about claims that its products can treat or prevent coronavirus. In the letters, the FTC states that one or more of the efficacy claims made were unsubstantiated because they were not supported by scientific evidence and therefore violate the FTC Act. The FTC has warned other companies considering making similar representations that it has “a magnifying glass on the marketplace to monitor Coronavirus claims” and will be subjecting coronavirus-related advertising claims to exacting scrutiny. All marketing claims should be supported by “sound science,” including the support of well-controlled human clinical studies. Offices of various State Attorneys General have issued similar alerts regarding fraudulent claims related to COVID-19. In New York, for example, Attorney General Letitia James has ordered several individuals and companies to cease and desist selling and marketing test kits and other products claiming to treat COVID-19. In Missouri, the state has sued televangelist Jim Bakker for violating state and federal advertising laws by falsely promising consumers that certain products can treat or cure COVID-19.
The US Digital Millennium Copyright Act (DMCA) limits service provider’s liability for copyright infringement on websites hosted on their systems. Pursuant to the DMCA, online platforms have notice-and-takedown procedures whereby copyright owners and online entities can report counterfeit or infringing material and have it removed, including fraudulent COVID-19 products. On 22 April 2020, the US Department of Justice announced that it had shut down hundreds of internet domains being used to exploit the COVID-19 pandemic to commit fraud and other crimes. In some cases, this included fraudulent sites that purported to be run by or affiliated with legitimate organizations such as the American Red Cross.
contract suspension and termination: US
The impact of COVID-19 pandemic on contracts in the US will depend on the terms of the contract and whether a force majeure clause exists. However, there are several categories of events that are typically included in a force majeure clause that may apply to the COVID-19 pandemic. For example, many contracts provide that government intervention which makes performance impossible is a qualifying force majeure event. A clause that includes this language would presumably be found to cover government orders requiring shelter-in-place or the closure of non-essential businesses (assuming such events render contract performance impossible). If a contract is silent on force majeure, US courts will consider statutory and common law to determine whether to excuse performance. Depending on the jurisdiction, parties seeking to invoke force majeure may be able to rely on the following defenses:
Impossibility. Impossibility excuses performance only where performance has become objectively impossible as a result of a supervening event beyond the control of the parties that causes the destruction of either (i) the subject matter of the contract, or (ii) the means of performance. Impracticability under the UCC. Several states have adopted Article 2 of the Uniform Commercial Code (UCC). Section § 2-615(a) of the UCC provides that a seller is excused from timely delivery or non-delivery in goods (in whole or in part) where the seller’s performance has become impracticable because of either (i) unforeseen circumstances not within the contemplation of the parties at the time of contracting; or (ii) compliance in good faith with an applicable foreign or domestic governmental regulation or order (whether or not it later proves to be invalid). Frustration of Purpose. Frustration of purpose excuses performance where performance is still possible, but an unforeseen event substantially frustrates a party’s principle purpose for entering into the contract. In other words, the purpose for entering the contract has been frustrated by the intervening unforeseeable event, and thus it makes little or no sense to continue performing the contract.
In the US, the applicability of a force majeure clause is contract-specific and clauses are typically interpreted narrowly. US courts will generally consider the following in determining whether a force majeure clause can be invoked:
Do the circumstances fall within the definition of a force majeure event under the contract? For example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there “catch-all” language intended to cover other events beyond the reasonable control of the parties (though such language is construed narrowly)? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if performance is truly impossible (not merely impracticable). A change in economic or market circumstances which makes the contract less profitable, or performance more onerous, is generally not regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied upon? It is common for force majeure clauses to require non-performance to be unforeseeable (which term many US courts construe quite narrowly) and to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause to avoid liability. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
contract suspension and termination: INDONESIA
In order to assess whether COVID-19 constitutes a force majeure event under an Indonesian law governed contract, the starting point should be to check whether there are any express terms in the underlying contract that expressly refer to epidemics, pandemics (or equivalent wording) or other relevant events in the definition of force majeure. In the absence of any such provisions, it will be relevant for the parties to look into the provisions of the Indonesian Civil Code (ICC) in order to assess whether COVID-19 constitutes a force majeure event. Unfortunately, the ICC is not extensively clear about what constitutes a force majeure event. Article 1244 of the ICC, for example, only prescribes a force majeure event as “an unexpected event that cannot be imposed on the debtor” and Article 1245 of the ICC provides broadly that “no damages, costs and interests can be imposed upon a debtor if a debtor was unable [to perform its obligation] as a result of compelling or unintended circumstances”. Therefore under these provisions, it appears to be difficult to argue that COVID-19 or a pandemic does constitute a force majeure event. Having said that, the impact of a force majeure event differs from contract to contract and the question of whether a debtor can be excused entirely from its obligations under the contract will depend on how the relevant clause is drafted. In broad terms, however, the impact of a force majeure event may include:
extending time for performance of the contract; or excusing failure to perform; or rarely allowing suspension or termination of the contract.
Last updated 30 April 2020
In the event where a contract is silent on the impact of a force majeure event, the parties to a contract should once again, and as a general rule, look into the provisions of the ICC as to what obligations a debtor can be exempted from. Depending on the nature of the contract and the sector in which the parties engage in, they may also wish to review more specific regulations such as the construction law to make this assessment. In broad terms, unlike in any other event of default scenarios where the debtor may be required to pay for costs, damages and interest, the ICC exempts debtors to make such payments if the event of default is triggered by a force majeure event. If the contract includes a force majeure clause, the party seeking to rely on the clause must prove it has satisfied the contractual requirements, which generally involves establishing, among other things, that:
the circumstance that has occurred is within the scope of the force majeure clause and outside the party’s control; the circumstance caused the required degree of effect under the clause (prevents, hinders, renders impracticable or other formulation) on performance without any intervening voluntary act, or failure to mitigate; the circumstance is the sole reason for the failure to perform; the force majeure clause provides relief against that effect on performance; and any requisite notice has been given.
As of 24 April 2020, the Indonesian Competition Commission (Komisi Pengawas Persaingan Usaha – KPPU) has not adopted any specific guidance on cooperation between business players or exemption criteria during the COVID-19 pandemic.
COMPETITON ISSUES: INDONESIA
KPPU has been scrutinizing several business sectors for alleged violation of competition law during the pandemic. For example, KPPU is conducting an investigation in an effort to address alleged “tying” practices on COVID-19 rapid test services being offered by several hospitals. KPPU has also warned businesses not to engage in cartel practices or enter into agreements that could directly cause excessive prices and/or supply shortages for products such as masks and other health products, and basic commodities needed by the public during the pandemic. If such activities are found to affect the distribution chain, KPPU has made it clear it will take legal action against the alleged infringers. KPPU also expressly confirmed that, during COVID 19 pandemic, direct appointments in procurement of goods/services by government will not be deemed as a violation of competition law.
