Luther memo: Legal effects of the coronavirus on IT companies

Just as humans can develop different symptoms in response to a corona infection, so different areas of an IT company can be affected by the effects of the virus. This applies both within the company (e.g. illness of the workforce) and with regard to external factors (illness of suppliers, bottlenecks in the target or supply market, etc.).

It is therefore worth identifying those aspects and business areas that can typically be affected by such an epidemic. This is the only way to devise a plan for a prevention and de-escalation strategy.

The following impact areas are typically conceivable:

• effects on the own (German/European) company;
• effects on own subsidiaries or branch offices, etc. in China;
• effects on third parties (e.g. suppliers in China), which indirectly affect the own company.

First and foremost, direct (individual) illnesses in the own workforce are conceivable. For example, in the case of globally operating IT service providers, where employees have become infected during a secondment to a client in China (especially Wuhan). If such a scenario is likely to occur in your company, the following prevention and de-escalation mechanisms should be put in place in particular:

• internal (within the company) and external (to local and health authorities) reporting procedures;
• qualified replacement personnel (e.g. if certain quality requirements for deployed personnel have been agreed in the context of agile development);
• HR measures to provide care for the affected employees (compensation arrangements with regard to bonuses, possible additional support for the affected employees and, if necessary, their relatives), and above all a reaction to possible quarantine requirements imposed.

Depending on the company's own degree of risk, a possible "worst case" must also be considered: What should be done if entire sections of the workforce are affected (e.g. raging infection rates in the development department)?

In general, the measures already mentioned above should be taken. There must also be contingency plans to compensate for production and service bottlenecks. Legally, there must be an overview of the existing contractual obligations that are threatened with non-performance, poor performance or late performance. The following in particular are to be examined:

• deadlines to which company performance is subject (in particular maintenance levels and response times agreed in SLA);
• knowledge of any contractual penalties;
• evaluation of potential "tear lines" (interference with the basis of transaction (Störung der Geschäftsgrundlage), Force Majeure, termination for cause).

This can be achieved only through effective contract management.

First of all, the company has to think about how to react to illnesses in its own workforce and how to keep track of its own obligations, including where the effects are felt in overseas branches (see previous paragraph).

In addition, specific features of the Chinese legislation may come into play here. It is essential that the German/European headquarters also maintain an overview of the legal situation in the affected Chinese areas where the company has its own sites. In China, dozens of national and provincial, governmental and statutory rules and regulations have been enacted within a very short period of time since the discovery of the coronavirus, and observance of these is mandatory. Luther's "China Desk", which specialises in the East Asian market, has produced a compilation of the most important laws, decrees and ordinances for you, which you will find here. These regulations range from the statutory extension of public holidays and the payment of "quarantine money" to state subsidies for severely affected businesses in exceptional cases.

Only legal and local expert advice can provide clarity about the rules and regulations that apply to your company.

It is also necessary to analyse the indirect risks to the own company that are posed by effects on third parties such as suppliers, cooperation and sales partners. Even though considerations regarding the consequences of illness among their workforce (other than the risk of infection of one’s own workforce) play only a minor role here, contract management is still of crucial importance here as well - just as it is for effects on your own company. The above-mentioned considerations regarding the contractual consequences of loss of production and personnel shortfalls, non-fulfilment of SLAs, payment of any contractual penalties, etc. are of equal importance here, just from another perspective. Namely from the perspective of the own company as a creditor.

In addition, if possible, there should be knowledge and an overview of alternative service providers or suppliers, the costs of which can possibly be "recovered" through the claim for damages instead of the (full/partial) performance.

In the case of service contracts (e.g. a contract for coding customized software, EVB-IT system contracts, etc.), the possibilities for in-house or substitute performance should be evaluated. If this is feasible for the company, it may, under certain circumstances, in the event of corona-related service failures on the part of the contractual partner, carry out the coding, hardware production or other services owed (or have them carried out by third parties) and demand compensation from the contractual partner for the effects caused.

It is common to all of the above comments on the legal considerations that the question of the applicable law (in particular German versus Chinese) must always be clarified first. A corresponding passage is regularly to be found in the final provisions of a contract or in the general terms and conditions of business or purchase.

In the absence of such a clause on the choice of law, the legally complicated but also differentiated international private law applies.

Hand in hand with this question, one should at the same time examine the place of jurisdiction in the event of a dispute - or whether an arbitration clause is maybe available. Knowledge of this matter will have a practical effect on the realistic prospects of enforcement. The most generous judgment is of little use to the company if the practical (compulsory) enforcement on site is in effect futile.

 Owing to its considerable importance in the event of epidemics, an excursus to the so-called "force majeure" is given at this point. This type of clause, which is used as standard in international IT contracts (mainly server, hosting and similar contracts), is hardly ever noticed and is rarely used. However, just such an exceptional case of use may be the presence of an epidemic.

As a general rule: the event (in China: “change in objective circumstances") must (i) have occurred after the conclusion of the contract (ii) but before the contractual performance date (delivery, completion date) and (iii) still persist. The contract itself must therefore have been concluded before the occurrence of force majeure, otherwise the event was not "unforeseeable". Whether and for how long the liable contractual partner can then really invoke force majeure or "impossibility" (or change of objective circumstances) without becoming liable to pay damages depends on further circumstances, e.g. whether it is a custom-made product or simple commercial good for which replacement can also be obtained elsewhere. Especially in the case of software, even custom-made software, the theoretically endless basic resources (know-how, programming language, etc.) make it much more difficult to argue for the existence of impossibility than in the case of physical products. Moreover, the "exemption from liability" only refers to the obligation to pay damages or a contractual penalty; the obligation to fulfil the primary debt, e.g. delivery of goods, does not automatically cease to apply. Whether the liable party is entitled to demand an adjustment of the contract by citing the principles of interference with the basis of transaction (Störung der Geschäftsgrundlage) also depends on the specific circumstances of the case.

The need for protective measures on the part of companies whose employees or operations are directly or indirectly affected by the virus is as individual as the course of disease in a patient infected with corona.

An effective strategy can only be worked out if the distribution channels and contracts are known. In this regard, company management should work in close collaboration with the legal departments and - if necessary, in view of complicated global issues - with external consultants.

Please refer to our information page to find out more about the legal implications of the coronavirus.

We hope that all readers will be spared the virus.