Business Shutdowns - The State Must Pay

              Michael Falter examines how hotels and restaurants are entitled to compensation during the coronavirus crisis. 

              Date: 30/03/2020

              The authorities must compensate private companies which have been shut down by official order due to the corona pandemic. For German attorney-at-law Michael Falter, Managing Partner Germany with global legal business DWF, there is no doubt about it. After all, "the compensation provisions of the German Infection Protection Act specifically provide for this." Examples mentioned by Falter are fitness studios as well as hotels, restaurants, hairdressers and beauty salons, which are suffering tremendous losses as a result of ordered shutdowns in reaction to the coronavirus pandemic.

              The legality of the measures taken by the authorities is by no means in dispute. "However, whether they do warrant a claim for compensation depends on whether they serve to prevent or control communicable diseases."

              Falter clarifies that the authorities are authorized by Section 16 of the German Infection Protection Act (IfSG) to take preventive action. This covers all measures necessary to prevent new infections in the event of a suspected risk. Salient literature expressly mentions banning assemblies and gatherings as an example of such measures in the event of an impending pandemic. Therefore, German law clearly places orders issued to this end in the infection prophylaxis category.

              Conversely, measures to control transmissible diseases are based on Sec. 28 IfSG. These anti-epidemic measures pursue the goal of detecting, treating and eliminating cases of such diseases and minimizing the risks of infection. "Disease control thus always starts with the individual cases. German police law classifies individuals who are sick or suspected of being sick, dropouts and individuals suspected of being contagious as disruptors of disease control."

              Falter goes on to say that by contrast, non-disruptors are businesses that do not pose a direct risk of infection. Measures affecting these companies thus always find their basis in Sec.16 IfSG, as they are always of preventive nature. According to Falter, this distinction between disruptors and non-disruptors is paramount in determining whether compensation claims are warranted. Accordingly, the provisions of Sec. 56 IfSG govern the claims of disruptors. In the current situation, these primarily include individuals who, on suspicion of illness, have been quarantined without actually being sick. They are thus entitled to full compensation for the first six weeks of lost earnings, with the compensatory payment equaling their sick pay thereafter. Accordingly, self-employed individuals are also entitled to compensation for lost earnings. All claims must be made within three months.

              The situation is different when it comes to preventive measures. They are based Secs. 16 and 17 IfSG and relate to non-disruptors of disease control. "The legislator only intends for this group of people to receive compensation," says Falter. This means that infection prophylaxis measures justify compensation—in accordance with Sec. 65 IfSG. Infection control measures, however, do not. This is because the first scenario relates to non-disruptors whereas the second one only applies to disruptors.

              The amount of compensation claimed is determined in accordance with the principles of general tort law: The aggrieved party must be put in the position they would have been in without the order. The three-month time limit does not apply in this case. The claims must be flied against the state in which the order was issued.

              By way of example, Falter cites the general decree of the City of Cologne, dated March 16, 2020, according to which all fitness studios had to be closed. This was done "to prevent the further spread of the SARS-CoV-2 viral infection." He further states that if no cases of illness are detected in the fitness studio in question, the measure must be classified as one to prevent infection. The obligation of the members of the fitness studio to pay membership fees has thus been eliminated. Consequently, the operator is entitled to compensation from the state of North Rhine-Westphalia pursuant to Sec.65 IfSG.

              Falter concludes, "Many of the measures ordered by the authorities to prevent the further spread of SARS-CoV-2 viral infections are preventive and can thus only be substantiated by Sec.16 IfSG. Consequently, even if they prove to be lawful, they warrant compensation pursuant to Sec. 65 IfSG". He goes on to say that the provision of Sec. 65 IfSG has barely been relevant thus far and that there is no case law on this matter. "However, in the coming months, it is likely to become of considerable importance with a view to rectifying the consequences of the corona crisis."

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