Covid-19: Impact on commercial contracts – Poland
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No. 593/2008 on the law applicable to contractual obligations (“Rome I”). Rome I confirms the principle that business parties can freely choose the governing law, even if the law chosen has no connections to the contract, but also imposes some limitations on that freedom.
Special regulations apply to domestic contracts, where all parties are based in Poland, in which case the courts will always apply the mandatory provisions of Polish law. Likewise, in intra-EU business relationships, the courts will apply mandatory EU provisions. Additional limitations are also imposed on consumer, insurance and employment contracts.
In the absence of a choice-of-law clause, Rome I provides default rules which aim at designating the law which bears the “closest connection” to the contract at issue.
Are there any statutory provisions relating to force majeure?
The term “force majeure” is not defined in Polish statutory law. The term is used, however, in numerous statutes, typically as an exception releasing a party from its contractual obligations due to an extraneous event that is not attributable to the respective party.
Exoneration of liability
Under Article 471 of the Polish Civil Code, a party must compensate for the damage resulting from non-performance or improper performance of its contractual obligations, unless it is due to circumstances for which that party is not liable. Such circumstances include force majeure, which may result in relieving the defaulting party from its liability for the resulting damage.
In the absence of a statutory definition, Polish courts developed the following criteria: force majeure is
- an external event, which is
- unforeseeable (or has a very low probability of occurrence in the given circumstances) and
- impossible to prevent (even with utmost care, i.e. the current level of knowledge and technology making it impossible to overcome its effects).
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. The burden of proof rests with the party invoking force majeure.
The analysis of Polish courts focuses on the consequences of the force majeure event, which may include natural disasters (e.g. epidemics) and the subsequent orders and regulations imposed by sanitary and other governmental authorities, rather than the actual event.
It remains to be seen how the novel coronavirus will be considered by Polish courts. The assessment will be made on a case-by-case basis, depending on the specific circumstances of each case and taking into account the terms and conditions of a given contract.
In this context, the new bill on special arrangements for the prevention, counteracting and combating of Covid-19, other infectious diseases and crisis situations caused by them of 2 March 2020 and the decree by the Polish Minister of Health declaring the state of epidemic emergency nationwide of 13 March 2020 (the “Covid-19 Law”) may become relevant. The Covid-19 Law bans certain kinds of business activities (such as trade in textiles or operation of restaurants or clubs) and vested the central and local governments with special powers (such as the Prime Minister’s right to issue direct instructions to any private or public entity and the Minister of Health’s right to set maximum prices for certain medicinal products, devices and foodstuffs for special nutritional purposes). The Covid-19 Law also provides for exoneration of liability in transport: airport operators, railway station operators, air carriers, rail or road carriers shall not be liable for any damage caused as a result of legitimate actions by public authorities to counter Covid-19, in particular, the lack of transport capacity.
Interruption of limitation periods
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 the given type for the duration of the obstacle.
Other statutes in which the term “force majeure” is used directly relate to the exoneration of liability of businesses set in motion by natural forces (steam, gas, electricity, liquid fuels, etc.) or in transport law. Some contracts may also be governed by the 1980 United Nations Convention on Contracts for the International Sale of Goods (“CISG”), which expressly addresses force majeure (see our separate CISG chapter).
How are force majeure clauses in commercial contracts applied and interpreted in practice?
Force majeure 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. We are not aware of any cases in which Polish courts have denied enforcement of force majeure clauses as such.
Under the general principles of contract interpretation, 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. The parties are free to, for instance, (i) choose a wider or narrower definition of what constitutes force majeure, (ii) decide to include a list of events which will be considered as force majeure, or (iii) agree on the effects of force majeure, e.g. by introducing a duty to renegotiate or an early termination right. Where force majeure triggers a specific contractual mechanism, the application of such clause 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 and purpose of the force majeure clause in question.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
A force majeure event may also lead to an adaptation of the contract or an expiry of the contractual obligation under general principles of civil law including hardship. Further information on the concept of hardship may be found in our cross-border guide on hardship, which also includes a Polish chapter.
Moreover, according Article 475 of the Polish Civil Code, if performance becomes impossible due to circumstances for which the debtor is not liable, the obligation expires. With regard to the provision of services and goods, the impossibility may occur both in case of a factual impossibility and in case of a legal impossibility. However, Article 475 of the Polish Civil Code does not apply to a situation in which performance is technically still possible but would require expenses and efforts grossly disproportionate to the interests of the other party.
Finally, under Article 495 of the Polish Civil Code, if one of the reciprocal obligations 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 consideration. If the consideration was already received, the respective 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 consideration. However, the other party may even rescind the contract in certain situations.
We are not aware of any judgements directly applying these provisions to viral outbreaks. However, court decisions dealing with, for example, the prerequisites for hardship indicate that the provisions on an extraordinary change of circumstances may cover events related to epidemics (e.g. judgement of the Supreme Court of 8 March 2018, II CSK 303/17).
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Mitigation of losses
Whilst in Poland there is no statutory obligation for an aggrieved party to mitigate and prevent damages, Polish courts commonly recognise this principle and parties are expected to take reasonable steps to mitigate any losses resulting from improper performance or non-performance of their obligations. Moreover, 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 the mitigation of the losses.
Notification and cooperation
In general, parties should carefully review contracts. In particular, they should be mindful of any notification obligations, stipulated in a contract, that might be relevant in the case of a viral outbreak.
Approaching business partners with honest and transparent information regarding the situation resulting from Covid-19 may, potentially, also be beneficial to both the general business relationship and potential litigation resulting from a breach of contract. If the other party is notified sufficiently in advance about the potential problems regarding performance of obligations, it may have enough time to react to that anticipated breach and have a 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 and circumstances, as in some circumstances unnecessary disclosures may be detrimental to the actively cooperating party.