Founded in Paris in 1920, Gide is a leading international law firm with 12 offices spread throughout the world.
Gide is physically present in six regions of the world, with 11 offices, enabling it to act on cases globally.
24 March 2020
Ever since the COVID-19 epidemic spread from China to affect almost every country around the world, we are reminded daily in the news of its far-reaching economic impact and the paralysis of certain sectors of global economy. It has caused not only an unprecedented health crisis, but is also having a serious impact on contractual relations of all kinds.
One question that we lawyers keep being asked is whether it is possible to stop or suspend the performance of a contract, or even terminate it completely, due to the negative impact of the virus. There are two relevant instruments in Polish law that can help answer this: force majeure and hardship.
Although force majeure (siła wyższa) is not defined in the Civil Code, it is understood as an event or circumstance that is:
(i) external;
(ii) impossible (or almost impossible) to predict;
(iii) has unpreventable effects.
Epidemics, together with other natural disasters, wars, or strikes, were qualified by the Supreme Court as a significant obstacle in performing contractual obligations, so the COVID-19 epidemic meets all the criteria to be termed an event of force majeure
In the context of contractual relations, a force majeure event is one that could not have been predicted when concluding the contract, but which directly hinders or prevents a party from performing its contractual provisions.
The unpredictability requirement is particularly important in the context of contracts being concluded now, as the COVID-19 epidemic is already present, and therefore cannot be considered unpredictable by the parties. Consequently, if parties fail to specifically include the existing COVID-19 epidemic in the definition of a force majeure event now (even though it is occurring before the contract is executed), then they might find it difficult to invoke the force majeure event at the later stage, to exonerate themselves from default, even if caused by the COVID-19 epidemic being an external cause.
It is worth noting that the framework of the parties’ liability for failing to perform or improperly performing an obligation is set out in Article 471 et seq. of the Civil Code, pursuant to which, "a debtor is obliged to redress the damage resulting from failing to perform or improperly performing an obligation, unless the failure to perform or the improper performance results from the circumstances not attributable to the debtor." A failure to perform or an improper performance of an obligation does not involve a debtor’s liability if it was through no fault of a party acting with due care.
A party directly affected by force majeure is released from liability for damage from failing to duly perform (or to perform at all) its contractual obligations. The event of force majeure also results in a kind of temporary suspension of the contractual performance, which resumes under the previous conditions once the event of force majeure is over.
Successfully invoking force majeure depends on whether it has a significant impact on the possibility of performing a given obligation. Just because an event of force majeure has occurred does not necessarily mean that the performance is not possible. The parties may disagree about the extent to which the event prevents the party from carrying out its obligations. It is up to the party claiming force majeure to prove its impact on the performance, and subsequently the extent to which it is unable to perform as a direct result.
This is well illustrated by obligations to make a due payment. While the effects of force majeure on in-kind obligations are easier to prove, the situation is more complex where payment obligations are concerned. Such obligations are to actually carry out a payment, so if an event, like the current COVID-19 epidemic, leaves a company temporarily without the financial liquidity to make a due payment, but it is still technically possible for payments to be made, then a failure to pay will not be considered as caused by an event of force majeure.
Unless the contractual provisions expressly allow for the possibility to withhold or waive payment in the event of force majeure, liability for non-payment due to a lack of funds will not be excluded due to force majeure. In this case, the party remains fully liable to make due payments.
In the cases where parties have mutual obligations, one to perform a non-monetary performance and the other to make a payment, the performance of the non-monetary obligation may be hindered by force majeure, and may even become impossible (known as a non-faulty posterior impossibility to perform) even after the force majeure has ceased. This may, in turn, justify the other party refraining from performing its mutual obligation to pay until, as a result of the force majeure event subsiding, the non-performing party makes its non-monetary performance, or may result in the other party being released from the obligation to pay for the part of the non-monetary performance that has become impossible.
The parties might attempt to contractually modify their liability for improper performance, to limit or even exclude the possibility to invoke force majeure as a premise excluding liability. In order to assess the effects of a force majeure event such as the COVID-19 epidemic, it is always essential to review the contract entered into in terms of the existence of clauses potentially modifying the liability of the parties, and/or contractually amending the concept of force majeure.
In short, depending on the circumstances of the case and the wording of the contract, it may be possible to invoke force majeure as a result of the COVID-19 epidemic as a reason why and to the extent to which a party is actually unable to perform a contractual obligation. This would allow it to avoid liability for a failure to perform or for breach, and, thus, any contractual penalties, or may prevent the other party from withdrawing from the contract for cause. It would not, however, necessarily result in releasing the party from the obligation to perform after the effects of the force majeure have ceased.
On 2 March 2020, the Polish Sejm adopted the Act on Special Arrangements for Preventing, Counteracting and Combating COVID-19, Other Infectious Diseases and Emergencies (“COVID-19 Act”). This act aims to eradicate sources of infection and to stop the spread of disease. Among other things, it gives the Prime Minister special powers to issue orders to businesses that are enforceable immediately upon the announcement and do not require justification.
The act also states that the provisions of the Construction Law do not apply to the design, construction, reconstruction, overhaul, maintenance and demolition of buildings, including changes in use, in connection with counteracting COVID-19. In addition, certain provisions have been added to the Act on the Prevention and Control of Infections and Infectious Diseases in People defining special zones, such as a zero zone, buffer zone, danger zone and quarantine facility, and giving some government and administrative units the power to establish temporary restrictions on certain areas of business, temporary rationing of certain items, quarantine facilities, temporary restrictions on the use of premises or areas, and evacuation order.
All these new powers may lead to anti-epidemic and preventive measures being imposed on a company, causing subsequent production problems, delays or failures of deliveries, or leading to the non-availability of employees. The performance of contractual obligations may, therefore, be seriously impeded or, in certain situations, even impossible. This impossibility should be regarded as caused by an external factor beyond the scope of business risk. It is therefore reasonable to consider that there is a causal link between an event of force majeure (epidemic) and the occurrence of damage caused by the inability to perform the obligations under the contract. This means that, in the absence of otherwise regulated liability rules in the contract, the defaulting party’s liability for the non-performance of the contract will be precluded.
In addition, the application of the COVID-19 Act may lead to a conflict between the contractual obligations and the need to comply with instructions from administrative bodies. In this case, the legal requirement would have to be complied with first. A party to the contract can claim not to be at fault with its contractual obligations, if it followed the obligations imposed on it that conflicted with its earlier contractual duty to the other party. In the case of a conflict between the contract and statute, the contractual obligation would be waived to the extent that it became contrary to the law.
In accordance with Article 357[1] of the Civil Code, "if, due to an extraordinary change of circumstances, the performance would entail excessive difficulties or exposed one of the parties to a serious loss, which the parties did not foresee when signing the contract, the court may, having considered the parties’ interests, in accordance with the principles of social conduct, designate the manner of performing the obligation, the value of the performance or even decide on terminating the contract.” A company’s lack of liquidity resulting (even indirectly) from the COVID-19 epidemic can be qualified as grounds for modifying the legal relationship between the parties under the hardship clause cited above.
First of all, case law certainly qualifies an epidemic as an event resulting in hardship[2]. Like other force majeure events, it is unusual, uncommon, exceptional and unprecedented. The spreading epidemic of COVID-19 fits this definition. Secondly, companies could not have foreseen or anticipated the appearance of the virus at the time when the contracts were concluded, and the effects of an epidemic are not a standard contractual risk for contracting parties.
Therefore, it can be argued that COVID-19 is a state of affairs that gives rise to hardship, and consequently a party burdened with a financial obligation leading to a serious loss could be released from it, even if temporarily, or the amount of the obligation could be adjusted as appropriate. In extreme cases, it is also possible that a court may rule on the termination of the contract, not only for the future, but also with retroactive effect, e.g. from the date of the hardship occurring, together with an award of certain settlements between the parties.
If the parties to a contract do not agree to amend the contract in the face of the changed circumstances due to the COVID-19 epidemic, a party may go before the court and call on the hardship clause, asking for the content of the contractual obligations to be changed. Such proceedings, often requiring an expert opinion, end with the court determining whether and how to interfere in the contractual relationship. However, if the claimant does not request or receive an injunction, then the parties are bound by their original obligations until the court’s judgement becomes final.
[1] Judgment of the Supreme Court of 9 April 2019, file ref. No. V CSK 59/18.
[2] Judgment of the Court of Appeal in Krakow of 6 December 2016, file ref. No. I ACa 644/16; Judgment of the Court of Appeal in Katowice of 7 December 2018, file ref. No. I ACa 649/18.
>> Click here to read all the legal updates of Gide's multidisciplinary taskforce dedicated.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.
