Impact of COVID-19 on running IT agreements

19.03.2020

There are currently many uncertainties and questions in connection with the coronavirus and the fulfilment of running IT contracts. Are the contractual partners released from their obligation to perform? Must the software developer also perform in the event of infection or illness and is he still entitled to his agreed remuneration? When can the software development contract be terminated? Do IT service agreements provide for the possibility of relieving a contracting partner by invoking force majeure?

The regulations in German law relevant to IT contracts do not explicitly include the concept of force majeure. In many cases, though, contracts and general terms and conditions contain respective clauses. These clauses must be checked in each individual case for their compliance with the strict German law on general terms and conditions. In addition, an event of force majeure is subject to strict preconditions, such as the unpredictability of the event preventing the user from being able to perform. If this event consists of measures to contain COVID-19 (e.g. quarantine measures), these measures are unlikely to have been unforeseeable, at least for contracts that were still concluded at the end of February/beginning of March 2020.

If no explicit provision was made the question whether the contracting party can relieve herself of the contract obligations due to COVID-19 implied performance difficulties under German law is depending  on the legal question whether performance is deemed to be impossible.

The mere concern about an infection does not generally constitute a case of impossibility which releases the contracting parties from their performance obligations. This could only be different in absolutely exceptional cases if the contractual partner cannot reasonably be expected to perform due to subjective circumstances.

If there is a government order which prevents the execution of the contract (such as travel restrictions or curfews), a case of (at least temporary) impossibility may exist. In this case it is initially temporarily impossible for the contracting party to fulfil its contractual obligations. If a mutually agreed postponement of the agreed period fails, the provision of services may become permanently impossible under certain circumstances. In this case, neither the right to ask for nor the obligation to render the contractual performance shall exist, and the right and obligation to payment of remuneration shall also lapse.

However, if IT service providers and software developers are active by way of a works contract (“Werkvertrag”), e.g. in the context of individual software development, they are obliged to make advance investments through their own performance as well as external support cost. In principle, they can only demand their full remuneration when the complete work (e.g. the programming service or implementation/data migration) has been accepted by the customer. However, there are two exceptions:

(1) In the case of works to be accepted and remunerated in stages, such as the performance phases of a software project, the claim to remuneration for the partial performance already accepted by the contractor shall not lapse even if the project is subsequently terminated.

(2) If further work production becomes unfeasible due to a reason (sphere) inherent in the person or behaviour of the customer, the contractor shall be entitled to the part of the remuneration and reimbursement of any expenses corresponding to the work performed so far. In our opinion, however, a project cancellation due to public order or predominant health risks does not constitute a reason within the software developer's sphere of influence.

The customer may terminate a works contract at any time and without special reason up to the completion of the work. In such a case, the contractor shall retain his entitlement to remuneration for work, but must offset any saved expenses and otherwise achieved merits. If the contract is terminated for an important reason, a claim to remuneration exists only for the work performed up to the termination. On the part of the customer COVID-19 should not be an important reason for termination. Contractors with customer contact such as IT service technicians or trainers and workshop leaders can, however, usually terminate the IT contract for good cause in cases of COVID-19 infections through no fault of their own. The regulations about the so-called "disturbance of the business basis" can lead to a claim for adjustment of the contract (if necessary postponement of the performance periods). If the completion of the work becomes permanently impossible (e.g. because the migration of data has not taken place on the only possible and agreed deadline), a withdrawal from the contract can also be made. In such a case, services already rendered shall be reimbursed or appropriate compensation shall be paid.

Practical advice:

It is important for contractors to examine possible force majeure clauses in their contracts, which may already regulate the consequences. They should be aware of any notification obligations arising from these clauses. It is also important to observe any contractual formal requirements for such notifications (e.g. written form).

Customers may regularly demand reasonable measures from their service providers to maintain their performance capability despite the effects of the coronavirus and the associated official measures.

In any case, possible performance difficulties should be communicated at an early stage in order to give the contractual partner the opportunity to adjust to the performance obstacle, to make precautions and to take damage-reducing measures.

We will be happy to assist you in case of doubt regarding the interpretation of contractual rules and the application of legal regulations.

Status: March 19, 2020

Subject fields