When the pandemic affects the ability to fulfil obligations - force majeure, extraordinary change of circumstances

Force Majeure

In business transactions, it is common to include force majeure (vis maior, Act of God) clauses in contracts, according to which if a certain type of phenomenon occurs and prevents one of the parties from fulfilling their obligations, this party shall not bear the consequences of non-performance or improper performance of the contract. Contractual clauses may simply mention "force majeure", they may also contain a definition of this concept, or even indicate specific events (e.g. flood, earthquake) that should be considered as force majeure. Polish law does not define force majeure, but it is commonly accepted that it is an event which: (i) is independent of the parties, (ii) at the time of the conclusion of the contract could not have been foreseen and (iii) the effects of which could not have been prevented by maintaining normal means caution. When asking whether the COVID-19 pandemic is a force majeure event, the answer is not unequivocal, because the current situation has influenced individual enterprises in different ways, some of them have the possibility to apply remedies, some also as professional entities in their fields should have been prepared for it, hence also establishing whether the current pandemic is a force majeure event must be performed on a case-by-case basis, unless the contract clearly indicates that a pandemic is an example of force majeure.

We recommend reviewing active agreements. If there is a risk that you may have difficulties in fulfilling your contractual obligations due to the COVID-19 pandemic, this may help reduce the impact of the prevailing conditions on your enterprise. If, however, your contractors may not fulfill their obligations towards you, reviewing contractual provisions will allow you to predict whether other parties to the contract may be released from liability. Keep in mind that the entity that wants to justify non-performance of its obligations by citing force majeure will have to prove that: (i) the event (here: COVID-19 pandemic) is a force majeure ocurrence, (ii) performance of the obligation has become impossible and (iii) a causal relationship has occurred, i.e. force majeure has resulted in the inability to fulfill the obligation.

In the case of construction works contracts, due to their nature, the force majeure clause  usually provides for justified exceeding of deadlines beyond the deadlines resulting from the schedule, primarily protecting the Contractor against liability for damages towards the Investor. In practice, this means that if the Contractor exceeds the deadlines resulting from the schedule and proves that the reason was the consequences of an event associated with force majeure (e.g. illness of employees as a result of the pandemic), they could avoid liability for damages incurred by the Investor and avoid any obligation to pay contractual penalties. Should the Investor oppose this argument and there was a court dispute, the court on the basis of said provision could conclude that the Contractor is not be liable for the damage suffered by the Investor (of course, provided that other conditions are met, including documentation of the situation). It should be noted that this does not imply a direct possibility of temporarily suspending the performance of the contract at the Investor's request due to force majeure.

No Provisions on Force Majeure

If the contract does not contain provisions allowing the reduction of liability citing force majeure, the Polish Civil Code may be of assistance to the affected party. Article 471 of the Civil Code states: "The debtor shall be obliged to redress the damage arising from non-performance or from improper performance of an obligation, unless the non-performance or the improper performance are an outcome of circumstances which the debtor shall not be liable for." The following article 472 further indicates that the debtor is liable for failure to exercise due diligence. Other regulations may, of course, modify these provisions, however, articles 471 and 472 of the Civil Code constitute the general rule in force in the Polish legal system.

This means, in principle, that if an entrepreneur should fulfill an obligation in accordance with a contract, if he fails to fulfill it and thus causes damage to his creditor, he should redress it. It is the creditor's obligation to prove that the default of the debtor has caused the damage and to demonstrate the amount of the damage. The obligation to redress the damage does not apply if the debtor has acted with due diligence (and it should be remembered that entrepreneurs, i.e. professionals, are expected to be more diligent), and yet he was not able to perform the obligation without his fault. If the creditor claims compensation, then the debtor in order to avoid liability must prove that he was unable to fulfill the obligations through no fault of his own, even though (which he must also prove) he has made every effort to satisfy the obligation.

As a result of the above, even in the absence of force majeure clauses in contracts, if the COVID-19 pandemic causes difficulties in fulfilling obligations, an entrepreneur can theoretically avoid the consequences of such a situation, if he proves that he has shown due diligence and that he was not able to overcome those difficulties.

Rebus sic stantibus

The provisions of the Civil Code do not provide for a direct possibility to withdraw from a contract, terminate it or suspend performance due to force majeure. This effect can possibly be achieved by using the so-called extraordinary change clause (Article 357 (1) of the Civil Code). The aforementioned provision stipulates that when, due to an extraordinary change in relations, the performance of a given party is connected with excessive difficulties or threatens one of the parties incurring gross loss, which the parties did not anticipate at the conclusion of the contract, the court may, after considering the interests of the parties, in accordance with the principles of social coexistence, indicate the manner of performance of the obligation, amount of the benefit or even order the termination of the contract.

The application of the above clause is subject to four conditions. First of all, the source of the obligation must be a contract. Secondly, the change in relations between the parties to the contract is extraordinary. Thirdly, this change results in excessive difficulty in fulfilling the service or threatens one of the parties incurring gross loss, which the parties - when concluding the contract - did not foresee. Fourth, there is a causal relationship between the last two premises. This clause is absolutely unique and usually applies to truly extraordinary circumstances, but in the current situation a pandemic could potentially apply. The key to the legitimacy of its application is to prove the "excessive difficulty or threat of gross loss" that an enterprise would incur if it fulfilled the contract in accordance with its content, and the causal link between the event - e.g. the COVID-19 pandemic, and damage or justified possibility of its occurrence. The burden of proving such circumstances rests with the party who claims this provision.

All the above solutions (both contractual and statutory) should be preceded by negotiations with the other party to the contract, which perhaps for the same reasons would like to achieve a similar effect to yours. Therefore, in the first step, it would be necessary to agree with the other party the possibility of suspending the performance of the subject of the contract (or its modification), and if no agreement is reached in this respect, then seeking a claim to amend the Agreement before the court on the basis of the extraordinary change of circumstances clause.

With all of the above in mind we recommend recording own performance and the performance of business partners and the prevailing conditions, in a way that will in the future allow to prove that particular instances of non-performance or inadequate performance of obligations resulted from the current pandemic.