COVID-19: Key considerations for commercial contracts in Poland
The rapid spread of Coronavirus disease (COVID-19) is a major public health challenge that is affecting businesses and individuals globally.
We are discovering from our clients that the growing and evolving global nature of the outbreak and the disruptions it causes, both in the short and longer terms, is forcing them to look to force majeure and hardship clauses in their commercial contracts.
To assist businesses and their legal teams, this alert highlights some of the main legal issues that companies based in Poland should be thinking about in light of the current environment, as well as some practical tips to be considered.
Step 1 - Force Majeure
Step 1 – Force Majeure
Identify if there is a force majeure clause in your contract. If so, go to STEP 2. If not, proceed from STEP 3. Determine the scope of your force majeure clause and any applicable exclusions.
1. The term “force majeure” is not defined in Polish statutory law, but such clauses are common in international contracts, including contracts governed by Polish law. In domestic relations, contract adaptation clauses triggered by force majeure events are used more often than force majeure clauses entirely exonerating the contracting party from its liability.
2. Parties are free to
- choose a broader or narrower definition of what constitutes force majeure;
- decide to include a list of events which will be considered as force majeure, and
- a corresponding list of exclusions which do not trigger a force majeure clause; or
- agree on the effects/consequences of the force majeure for their contractual relationship, e.g. by introducing a duty to renegotiate the contract or a right to early termination with a dedicated compensation mechanism.
3. Where force majeure triggers a specific contractual mechanism, application of such clauses shall be determined on a case-by-case basis. The question of whether an epidemic or a global pandemic will qualify as force majeure mainly depends on the wording of the force majeure clause in question. Polish courts will seek to determine the intention of the parties at the time of drafting the force majeure clause and interpret its wording accordingly.
4. Additionally, the mere occurrence of force majeure does not automatically relieve the defaulting party from liability – it is necessary to demonstrate a causal link between the event of force majeure and the inability to meet the contractual obligations.
Step 2 - Additional Obligations
Step 2 – Additional Obligations
Consider additional obligations that may be relevant prior to triggering a force majeure clause or relying on a statutory, extraordinary change of circumstances.
1. Consider your notification obligations under the contract.
- In general, parties should review contracts carefully. In particular, parties should be mindful of any notification obligation stipulated in a contract that might be relevant in the case of a viral outbreak.
2. Consider if you are obligated under the contract or the law to mitigate losses.
- Whilst in Poland there is no statutory obligation for an aggrieved party to mitigate and prevent damage, Polish courts commonly recognise this principle. Therefore, a party is expected to take reasonable steps to mitigate any losses resulting from the improper performance or non-performance of its obligations.
- Pursuant to Articles 354 and 355 of the Polish Civil Code, both contracting parties should take into account the legitimate interests of the counterparty and should not undertake actions that would complicate, impede or hinder the performance of the contractual obligation. These obligations, may in some circumstances also include a pro-active approach to mitigate losses.
- Parties can also include a duty to mitigate losses by including a contractual clause to that effect or by reference to a law or body of rules which imposes such duty (e.g. the 1980 United Nations Convention on Contracts for the International Sale of Goods).
3. Consider if cooperation with the counterparty to mitigate losses is appropriate in the circumstances.
- Approaching business partners with honest and transparent information regarding the situation resulting from COVID-19 may potentially be beneficial both to the general business relationships and potential litigation resulting from a breach of contract. If the other party is notified sufficiently in advance about potential problems regarding fulfilment of obligations, it may have enough time to react to that anticipated breach and a have chance to avoid or at least mitigate its losses. Evidence of that transparent approach may also prove useful when a dispute goes to court to prove that the other party was aware of the situation and could have tried to mitigate its losses.
- These recommendations are however subject to the specific contractual provisions, as in some circumstances, unnecessary disclosures may be detrimental to the actively cooperating party.
Step 3 - Hardship
Step 3 – Hardship
Consider if the occurrence qualifies under the statutory protection of extraordinary change in circumstances.
1. A force majeure event may lead to an adaptation of the contract or the expiry of the contractual obligation under general principles of civil law including hardship (extraordinary change in circumstances) and the impossibility to perform the contract as a result of circumstances for which the defaulting party is not liable. Court decisions indicate that an “extraordinary change in circumstances” can cover events related to epidemics.
2. The concept of hardship is regulated in Article 357 of the Polish Civil Code, the so-called rebus sic stantibus clause, (the “hardship clause”), which provides that “[i]f, due to an extraordinary change in circumstances, a performance entails excessive difficulties or exposes one of the parties to a serious loss which the parties did not foresee when executing 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 value of the performance or even decide that the contract be dissolved. When dissolving the contract, the court may, as needed, decide how accounts will be settled between the parties, being guided by the principles set forth in the preceding sentence.
3. Parties are free to contractually exclude or modify its use or adopt a model hardship clause (e.g. based on the UNIDROIT Principles or the ICC’s model hardship clauses).
4. The statutory hardship clause will be triggered where the following requirements are met:
- an extraordinary change in circumstances unforeseen by the parties occurs, which
- renders the performance of the contract excessively onerous or exposes one of the parties to a serious loss.
- Under Polish civil law, a causal link between the exceptional change in circumstances and the excessive difficulty or a serious loss must also be proven.
5. Unforeseen change in circumstances: The prevailing view is that an extraordinary change in circumstances unforeseen by the parties at the time of the conclusion of the agreement should be assessed based on an objective test, aside from whether the parties are to exercise due care in foreseeing such consequences.
6. An extraordinary change in circumstances may consist of the disappearance of the conditions that initially existed, the emergence of new ones or an alteration of the circumstances, which the parties did not foresee at the time of formation of the contract. Typical examples include sudden and unexpected increases in prices (e.g. construction materials or labour costs) or drastic changes in the economy. However, the risk of bankruptcy of a business partner is considered a common contractual risk in Poland. Likewise, circumstances concerning the personal life of a party (e.g. illness or death of a close family member) do not fall under the scope of protection under a hardship clause.
7. Contract performance excessively onerous or threat of serious loss by one of the parties: The change in circumstances should lead to a significant contractual imbalance bringing into question the economic benefits of the contract and undermining the contractual objectives set by the parties themselves.
8. Hardship clauses are often invoked by parties for whom the performance of a contract becomes excessively onerous due to personal or financial difficulties. Such personal difficulties could include a natural disaster in the aftermath of which the performance of the contract by the debtor could endanger their life or health. Alternatively, the same natural disaster could result in excessive expenditures and costs which were not considered by the parties at time of the conclusion of the contract, and thus cause a substantial loss to the performing party.
9. Whether the performance of an obligation subject to an extraordinary change of circumstances would entail a serious loss by one of the parties is assessed by the courts on a case-by-case basis. However, such serious loss does not need to undermine the financial condition of that party or constitute a threat of bankruptcy.
10. Causal link between an extraordinary change in circumstances and the damage: The relationship between an extraordinary change in relations and complications in the performance of the obligation (excessive difficulty or threat of recurrent loss) should have the characteristics of an objective causal link.
11. Court’s discretion to change or terminate the contract: The operation of the hardship clause vests the court with the authority to (i) designate the manner in which the obligation must be performed, (ii) set the value of the performance of such obligation or even (iii) decide that the contract be dissolved. In making the assessment, the court must take into account the “principles of social coexistence” (pl: zasady współżycia społecznego) and the interests of the respective parties.
12. Contract modification/alteration: The court’s decision may either change the manner of performance of the contract (place or time of performance, performance of the obligation in instalments, where appropriate, etc. ) or change the contract price. Thus, when assessing such cases, courts adapt the new manner of the performance of the obligation such that the modified performance corresponds to the contract’s economic purpose initially set by the parties.
13. Contract termination: The court’s authority to terminate a contract based on the operation of a hardship clause is limited to exceptional cases, where contract modification was impossible or impracticable. The court is to favour contract adaptation (where appropriate) over contract termination even if one or both parties has asked for its termination. When dissolving the contract, the court also may, as needed and guided by the aforementioned principles of social coexistence and the parties’ respective interests, decide how accounts will be settled between the parties.
14. Importantly, reliance on the hardship clause does not entitle the aggrieved party to request specific performance of the contract. The occurrence of unforeseeable, extraordinary circumstances empowers the court only to amend the legal relationship between the parties such that their agreement remains in force, or terminate the contract in exceptional situations where no adaptation can ensure adequate performance of the contract.
15. The court is not bound by either party’s request and retains discretion as to whether to modify or terminate the agreement considering the principles of social coexistence and the respective interests of the parties. The court is authorised to alter or terminate a contract, but it cannot create a new obligation between the parties.
16. Burden of proof: The burden of proof is on the requesting party, which nonetheless does not have to establish that the parties had previously attempted to modify the obligation in question contractually. The hardship clause cannot be relied upon as a defence to a claim for performance.
17. Statute of limitation: A party’s right to have their legal relationship redefined under a hardship clause is not subject to the statute of limitations as such. However, the court can only modify or terminate a relationship that exists. Therefore, if the contract was fully performed or the obligation has already expired1 , the underlying legal relationship can no longer be adapted or terminated.
18. Notably, where the debtor decides to perform the obligation after the contract adaptation/termination request was filed with the court despite a significant loss incurred and only to protect its interests (e.g. avoid excessive contractual penalties), such request remains actionable and may be considered by the court.
19. Further information on the concept of hardship may be found in our cross-border guide on hardship, which also includes a Poland chapter.
Step 4 - Consider other available statutory protections
Step 4 – Consider other available statutory protections
1. Exoneration of liability.
- Under Article 471 of the Polish Civil Code, a contracting party must compensate the damage resulting from the non-performance or improper performance of its contractual obligations unless it is due to circumstances for which that contracting party is not liable. Such circumstances include the occurrence of force majeure, which may result in relieving the defaulting party from its liability and the resulting damage.
- Polish courts have therefore developed elements typically present in the case of force majeure, which include:
an external event, which is
unforeseeable (or with a very low probability of occurrence in the given circumstances), and
impossible to prevent (even with the utmost care, i.e. where the current level of knowledge and technology makes it impossible to overcome its effects).
- The occurrence of force majeure may therefore include natural disasters (e.g. epidemics) and the resulting orders and regulations imposed by sanitary and other governmental authorities. It is plausible that in justified circumstances, Polish courts will consider the exoneration of a contractual party from liability as a consequence of force majeure, understood as an unforeseen event related to the global spread of COVID-19. Courts will, however, assess each clause on a case-by-case basis depending on the specific circumstances of each case, in light of the terms and conditions of the contract under review.
2. Impossibility of performance as a result of circumstances for which the defaulting party is not liable.
- Under Article 475 of the Polish Civil Code, if a performance becomes impossible due to circumstances for which the debtor is not liable, the obligation expires. The impossibility, with regard to both providing services and goods, may occur both in the case of a factual impossibility and in the case of a legal impossibility.
- This provision does not apply to a situation in which performance is technically still possible but would require expenses and efforts which are grossly disproportionate to the interests of the other party.
3. Non-culpable impossibility in case of mutual agreement.
- Under Article 495 of the Polish Civil Code, if one of the reciprocal performances becomes impossible to perform due to circumstances for which neither party is liable, the party responsible for the performance of such obligation cannot demand the reciprocal performance. If it was already received, the party is obliged to return it. If the performance of one of the parties becomes only partially impossible, that party loses the right to the appropriate part of the reciprocal performance. However, the other party may even rescind the contract in certain situations.
4. Interruption of limitation period
- Article 121(4) of the Polish Civil Code provides that a limitation period does not start and, if started, is suspended for any claims if, due to force majeure, the entitled person cannot bring them before a court or another authority established to hear cases of a given type – for the duration of the obstacle.
Step 5 - Check if any of the consideration from step 3 apply
Step 5 – Check if any of the consideration from step 3 apply
Consider if any of the additional contractual or other obligations in relation to notification, mitigation of loss or cooperation with your counterparty are applicable in your case and proceed accordingly.
Step 6 - Future Contracts
Step 6 – Future Contracts
Consider clauses that should be included in future contracts to ensure that you are protected against the unforeseen consequences of COVID-19 over the long-term.
1. Preservation of rights: Take extra care in drafting the scope of a force majeure or a material adverse change (“MAC”) clause so that no variation or waiver is agreed or offered without being clear as to the intended scope and legal consequences. In particular, depending on your contractual position, do consider whether you need strong protections against your counterparty’s potential failure to perform, or to the contrary, flexibility in the performance of the contract in the case of unforeseen circumstances, including force majeure.
2. Specific events or exclusions: When considering the scope of a force majeure or a MAC clause, take additional care in deciding which specific events should or should not trigger its operation.
3. Mitigation of losses: Consider whether a contractual obligation to mitigate losses is appropriate in your commercial setting and if so, what the scope of such obligation for you and your counterparty should be.
4. Notice requirements: Make sure that your contract clearly provides for notice requirements, including situations in which delay in giving notice may be excused. For contracts which require physical delivery of the notice, be conscious of any travel and other restrictions that may apply locally and the impact of a practical fallout from the virus (offices being closed etc.).
5. Insurance contracts: Disputes might arise as to whether an insurance policy covers losses suffered during the COVID-19 outbreak, such as by reason of border controls or transport disruption. Some insurance policies exclude losses caused directly or indirectly by an epidemic, but a careful analysis is required to check whether and when an exclusionary clause is indeed triggered.