Performance of contractual obligations in Poland during the Coronavirus pandemic.

If and how does the spreading Coronavirus pandemic affect contractual obligations in Poland? Pacta sunt servanda (Latin for ‘agreements must be kept’) is one of the guiding principles of contract law also in Poland. On 11 March 2020. the International Health Organization (WHO) announced that the Coronavirus epidemic SARS-CoV-2 (causing COVID-19 illness) has become a […]

If and how does the spreading Coronavirus pandemic affect contractual obligations in Poland?

Pacta sunt servanda (Latin for ‘agreements must be kept’) is one of the guiding principles of contract law also in Poland. On 11 March 2020. the International Health Organization (WHO) announced that the Coronavirus epidemic SARS-CoV-2 (causing COVID-19 illness) has become a pandemic, i.e. an epidemic on a global scale. Apart from actually catching the disease, the consequences of the spread of Coronavirus include border blockades, factory closures, transport stoppages, cancellations of events or closures of educational and public administration institutions. In view of the above, the basic question arises – if and how does the spreading pandemic affect contractual obligations in Poland?

IS CORONAVIRUS PANDEMIC A FORCE MAJEURE?

Force majeure (Polish: siła wyższa, Latin: vis maior, English: Act of God), despite its presence in many Polish legal acts, has not been defined by statutory law. Both in the Polish case law and doctrine
it is commonly accepted that force majeure is an event, that is: (i) external; (ii) impossible (or almost impossible) to be predicted; and (iii) which effects cannot be prevented. The exteriority of the event can be characterized by its occurrence outside the structure of the parties to the contract, the unpredictability of the event by its extraordinary nature and urgency, whereas  the impossibility of preventing its effects by its magnitude (the parties are incapable of repelling the imminent danger). Force majeure is  usually perceived as (i) disastrous phenomena caused by natural forces (e.g. floods, earthquakes, forest fires, epidemics), (ii) social or political incidents on a large scale (e.g. wars, general strikes), or (iii) acts of public authority (e.g. blockades of borders and ports).

It is a common practice, especially in business contracts, for the parties to include ‘force majeure clauses’. A standard force majeure clause usually consists of two elements: the first part contains
a provision excluding the parties’ liability for the effects of force majeure, while the second part enumerates – in a casuistic way – what force majeure is in particular. Often, the parties contain more elaborate clauses, which contain provisions on the obligation to inform the counterparty about impediments to the performance of the obligation due to force majeure, rights to change the performance date or remuneration, and even rights to terminate or withdraw from the contract. It is therefore essential, in the first place, to check whether such a clause is also included in the contracts that bind us.

Answering the question whether a Coronavirus pandemic is a force majeure seems simple when the parties to the contract have made a casuistic enumeration which actually includes ‘epidemic’
or ‘pandemic’. In other cases, the assessment of the legal nature of the Coronavirus pandemic will require a thorough analysis of the force majeure clause and the legal system under which the agreement was concluded. Without prejudging at this stage what kind of assessment the Polish courts could make in the future, one can presume cautiously, in the light of the available doctrine and jurisprudence, that qualifying Coronavirus pandemic as force majeure may seem plausible. However, caution in making such an assessment at this stage is advisable. Looking at the present situation formally, according to the provisions of the Ordinance of the Polish Minister of Health of 13 March 2020 on declaring a state of epidemic hazard on the territory of the Republic of Poland (Polish: Rozporządzenie Ministra Zdrowia
z dnia 13 marca 2020 r. w sprawie ogłoszenia na obszarze Rzeczypospolitej Polskiej stanu zagrożenia epidemicznego)
, today, in Poland, formally we are dealing with a state of epidemic hazard, not an actual epidemic.

It should be stressed however, that an obligor who wishes to exclude his liability for non-performance or inadequate performance of an obligation pursuant to a force majeure clause will still have to prove, particularly in the case of legal proceedings, that force majeure event had a real impact on his inability to fulfil his obligation. Obligees should not blindly and automatically accept statements from their obligors about performance difficulties due to the Coronavirus pandemic. Precaution dictates that obligors should be obliged to precisely demonstrate and prove the impact of force majeure on their ability to fulfil contractual obligations – as the present situation may be abused by unreliable contractors.

THE IMPACT OF THE CORONAVIRUS PANDEMIC ON COTRACTS WITHOUT A FORCE MAJEURE CLAUSE

What if the contract binding us does not have a force majeure clause? The Polish Civil Code (as opposed to for example the French one – art. 1218 of the French Civil Code) does not provide a general right
to suspend or terminate a contract due to force majeure. The question arises, therefore, what about contracts that do not contain a force majeure clause and their performance have been directly impeded by the Coronavirus pandemic? Do the general rules apply in such a situation and will the obligor be liable for any damages to his obligee?

Polish contract law, as a general rule, justifies the liability for non-performance or improper performance of contracts on the principle of culpability/fault (Articles 471 and 472 of the Polish Civil Code). It should be noted that unless the parties agree otherwise, the obligor is also obliged to exercise due diligence at all times – the standard of which is higher for professional parties to the contract (Article 355 of the Civil Code). In other words, a professional entity may be legally required to do more. Pursuant to Article 471 of the Polish Civil Code, the obligor is obliged to remedy damage resulting from the non-performance or improper performance of an obligation, unless the non-performance or improper performance
is a consequence of circumstances for which the obligor is not responsible (unless the parties agree otherwise – Article 473 of the Polish Civil Code).

It is therefore irrelevant, in regard to possible future disputes, whether or not we qualify the Coronavirus pandemic as force majeure. From the obligor’s perspective, it will be crucial to prove that he/she did not perform the contract as a result of the consequences of the Coronavirus pandemic, for which he/she was not responsible, and that at the same time due diligence was observed. On the other hand, the obligee will have to prove that he/she suffered damage as a direct result of the non-performance or improper performance of the contract by the obligor. If we already anticipate that the Coronavirus pandemic will affect our contract performance, it is worthwhile to bear the above factors in mind and to start gathering relevant evidence now – just in case.

Slightly different rules apply when assessing the obligor’s liability for payment of contractual penalties. Contractual penalties are usually stipulated for late performance, however they can be also stipulated for any other contractual obligation of a non-financial nature (Articles 483 and 484 of the Polish Civil Code). In such cases the obligees do not, as a general rule, have to prove the damage suffered. According to the Polish Supreme Court (case: II CSK 180/10 of 6 October 2010) the obligor’s liability
for contractual penalties, conditioned regardless of the reason for non-performance of an obligation, should be clearly and precisely stipulated in the contract, as there are no grounds for understanding its broaden general liability. In other words, if the parties have included contractual penalties and have not clearly indicated that the obligor will be liable for the non-performance of the obligation regardless of the reason, then the obligor will be able to discharge his liability – for example, if he/she demonstrates that the delay was caused by the consequences of the Coronavirus pandemic – i.e. circumstances beyond his/her control.

When analyzing the rights of contractual parties, one should keep in mind the provisions of Articles 475 § 1 and 495 § 1 of the Polish Civil Code. Pursuant to Article 475 § 1 of the Polish Civil Code, if the performance has become impossible due to circumstances for which the obligor is not responsible, the obligation expires. Whereas, article 495 § 1 of the Polish Civil Code provides that
if one of the reciprocal performances becomes impossible due to circumstances for which neither party is responsible, the party which was to make the performance cannot demand the reciprocal performance, and, if it had already received it, it is obliged to return it according to the provisions on unjust enrichment. However, It is worth emphasizing that the inability to perform must be permanent, which will depend on the context and circumstances of a given situation.

Finally, when reviewing the provisions of contracts, attention should be paid to those obligations that do not have a fixed date for performance. This category of obligations is governed by Article 455 of the Polish Civil Code. According to its provisions, if the deadline for performance is not specified, the obligation should be performed immediately after the call. The key issue from the perspective of the current situation is to determine the meaning of the term “immediately”, which in our opinion should mean now a longer period of time, than in normal (i.e. non-epidemic) conditions.

CONTRACT AMENDMENT

When the circumstances and the nature of relationships between the parties allow it, counterparties may seek to voluntary amend the contracts and their obligations taking into consideration the consequences of the Coronavirus pandemic. They may do so by renegotiating the contractual terms, signing a waiver of claims or even terminating the contracts.

The Polish Civil Code also includes a judicial mechanism for appropriate modification of contracts because of changing social and economic relations as a result of extraordinary situations – the so-called rebus sic stantibus clause (Article 357¹ § 1 of the Polish Civil Code). According to its provisions if, due to an extraordinary change in circumstances, a performance entails excessive difficulties or exposes one of the parties to a gross loss, which the parties did not foresee when concluding the contract, the court may, having considered the parties’ interests, in accordance with the principles of community life, designate the manner of performing the obligation, the remuneration for the performance or even decide that the contract shall be dissolved.

There are four conditions for the court to apply the rebus sic stantibus clause: (i) an extraordinary change in circumstances; (ii) excessive difficulty or threat of a gross loss for one of the parties; (iii) a causal link between the change in circumstances and the difficulty or threat of gross loss in performing the obligation; (iv) the parties’ failure to foresee, when concluding the contract, the effects of the change
in circumstances on the performance of obligations.

As a general rule, an extraordinary change in circumstances must concern socio-economic relations which are of universal nature. It must be exceptional, unprecedented in the normal course of events and non-incidental. The prevailing view of the jurisprudence and the doctrine is that an extraordinary change in circumstances must take place after the commitment has been created (conclusion of the contract), but before it expires (performance of the contract). Moreover, it is assumed that the change should take place before the due date of performance. In other words, a change in circumstances occurring after the due date cannot be invoked by a party in default. At the same time, the excessive difficulty of the performance or the risk of a gross loss must result from an extraordinary change in circumstances which the parties could not have foreseen at the time of the conclusion of the contract.

However, the use of the rebus sic stantibus clause entails certain limitations and risks. First of all,
it seems that an action should be brought to the court before the due date of the performance. Also,
it is necessary to demonstrate and prove the existence of all of the abovementioned conditions as being a direct consequence of the Coronavirus pandemic – which will differ from case to case and will ultimately depend on the court’s decision. Additionally, these conditions should be examined as close to the time of the court’s ruling as possible. This means that if, in the course of the court’s proceedings, the situation changes and the performance is no longer excessively difficult or ruinous for the party, the grounds for releasing the party from all or part of its obligations will disappear. Given the lengthiness of the court proceedings in Poland, the impossibility of predicting the development of the Coronavirus pandemic and the fact that some courts are currently suspending their activities, the use of the rebus sic stantibus clause seems to be burdened with many uncertainties.

WHAT ACTIONS SHOULD BE TAKEN?

In the face of the Coronavirus pandemic, the contractual parties, both obligors and obligees, should above all remain calm and take rational action – – although we must admit that it is easier said than done. First of all, the provisions of all contracts should be carefully reviewed and the timely fulfillment
of obligations should be assessed – all in order to evaluate the risks and to prepare protective measures. The counterparties should, as a matter of priority, keep permanent communication with each other and, as far as possible, resolve and prevent conflicts amicably. If this is not possible, it is worth considering agreeing on new rules for governing the contracts, for example by amending the provisions regarding the performance dates.

Under the Polish law, the present situation – caused by the Coronavirus pandemic – is a classic example of the prisoner’s dilemma, i.e. a situation where each party can gain by betraying the other, but both will lose if they both betray each other. In such a situation one can only gain through mutual concessions and cooperation. However, as litigation lawyers, we strongly recommend to start documenting all instances and reasons for the defaults of obligations fulfillment.

It is also advised to keep track of all communication from the Polish official state bodies, such as the Prime Minister, the President, the Minister of Health and the Chief Sanitary Inspector – in order to modify the legal and business position accordingly. In addition, as already publicly announced, the Polish government is preparing protective statutory law acts in order to counteract the adverse effects of the Coronavirus pandemic on socio-economic relations.

Taking legal actions at this point should only be considered when the abovementioned steps fail. However it is important to mention that in the near future not only the courts but also the post offices may restrict their activities or even close down, which may affect the course of the limitation period for claims. Pursuant to Article 121 pt 4 of the Polish Civil Code, the course of the statute of limitations does not start and the started one is suspended with regard to all claims, if due to force majeure the entitled party cannot pursue them before a court or other body appointed to hear cases of a given type – for the duration of the impediment. This means that, in some justified cases, the Coronavirus pandemic may lead to an extended period for the assertion of claims due to the suspension of their limitation period.


Authors:

Ewa Podogrodzka, Advocate, Senior Associate, Maruta Wachta, Dispute Resolution Department

Konrad Zyznar, Advocate’s trainee, Junior Associate, Maruta Wachta, Dispute Resolution Department