Many entrepreneurs, due to the SARS CoV-2 pandemic, have found themselves in a situation in which they are unable to fulfil their commercial contracts, or their contractors are experiencing such difficulties. The state of the epidemic and restrictions on public and economic life imposed by the state authorities cause unprecedented difficulties in this regard.
Therefore, it will be crucial for entrepreneurs to find solutions that will allow them to avoid negative consequences related to the non-performance or improper performance of a commercial contract by themselves or their business partners.
As a general rule, according to the provisions of the Civil Code, a contractual party is obliged to perform the contract properly, otherwise it will be liable for damages. A change in the social and economic situation is generally not an excuse for not fulfilling contractual obligations. However, the regulations provide for the possibility to exclude liability for damages if the party proves that the non-performance or improper performance was caused by circumstances beyond his control.
Liability shall be excluded in particular if the inability to perform the obligation is due to circumstances of force majeure, i.e. an unexpected event which is independent of the will of the contractual party and which could not have been foreseen or prevented.
The outbreak of the COVID-19 pandemic meets the abovementioned conditions and may therefore be regarded as constituting force majeure excluding liability for damages. That will be the case, in particular, in situations in which the contracts concluded cannot be performed due to the COVID-19 pandemic or to the measures taken by the government in order to overcome the pandemic. However, the contract could objectively be performed but the contractor is prevented from performing it by force majeure. In particular, this will be the case whenever, owing to a pandemic, it is not possible to fulfil the agreed obligations, e.g. due to illness or quarantine of employees.
In the above situations, for the contractual party not to be liable for damages it is necessary to prove that the direct cause of non-performance or improper performance of the obligation was force majeure and that the party has exercised due diligence in taking actions aimed at performing the obligation. It shall also be necessary to inform the contractor about the occurrence of the force majeure and the related inability to perform the obligation.
On the same terms and conditions, a contracting party may be released from the obligation to pay the contractual penalty stipulated in the commercial contract.
Another situation in which the contractor will be released from liability for non-performance of an obligation will be the occurrence of a state of so-called “consequential inability to perform”. In the case of mutual agreements, if one of the obligations has become impossible to perform as a result of circumstances for which neither party is responsible, then the party who was to perform the obligation cannot demand the other party to perform it, and if the party has already received payment, it is obliged to return it.
If one of the parties only partially provides the performance, that party loses the right to the corresponding part of the mutual consideration. The other party may withdraw from the agreement if partial performance would have no significance because of the nature of the obligation or the purpose of the contract, which is known to the party who cannot fulfil all obligations.
It is important that as a result of exercising the right of withdrawal, the parties are obliged to return mutual considerations. Therefore, both parties may refrain from reimbursement until the other party has offered to return the compensation received or secures a claim for reimbursement.
If it is not possible to exercise any of the above rights, you can try to invoke an extraordinary change of circumstances, i.e. the so-called rebus sic stantibus clause, which makes it possible to amend or even terminate the contract. However, in order to benefit from this clause, it is necessary to bring an action before a court requesting a change in performance of the contract, the amount of consideration or even the termination of the contract. The conditions for the rebus sic stantibus clause to be applied is the occurrence of an extraordinary change in relations which was not foreseen at the time the contract was concluded and which prevents a party from fulfilling the contract without undue difficulty or significant loss.
A state of epidemic hazard, or a state of epidemic, which has now been introduced in Poland and which has resulted in restrictions on the operation of many entrepreneurs and, consequently, significant price fluctuations or lack of access to goods or services, can be considered an extraordinary change of circumstances.
It is worth mentioning that in order to obtain quick state aid in this respect it is necessary to apply to the court to secure the claim by e.g. withholding the obligation to pay or reducing its amount.
The big disadvantage of the solution presented above is its time-consuming nature. The court proceedings take time and it can often take several or more months before a party receives a favourable judgment. Therefore, it is always worth considering whether the agreement itself does not provide for mechanisms that could be used to change it in the event of extraordinary situations, such as the COVID-19 pandemic.
Entrepreneurs often include in their contracts adaptive clauses automatically changing the terms of the contract (e.g. the amount of the consideration, the deadline for its fulfilment, the required quality) when certain circumstances occur. A commercial contract may also contain renegotiation clauses. Their purpose is to impose an obligation on both parties to enter into negotiations in the event of a change in the circumstances indicated in this clause and an obligation to cooperate in order to adapt the content of the contract to the changed circumstances by, for example, changing the deadlines for performance of the contract or distributing cash considerations into instalments.
If there is no such contractual provision, a party in a situation of force majeure may also always try to enter into negotiations with the other party, relying on the principles of social coexistence and trade loyalty and honesty. The goodwill of cooperation of the parties is also significant, especially if the contractors have been cooperating with each other for a long time and their cooperation is successful. In such a case, it seems that the most reasonable solution for both parties is to reach solutions for the crisis that will enable them to continue working together fruitfully after the crisis has ended.
When analysing contractual anti-crisis solutions, it is also important to consider those contractual provisions which modify the general rules of liability of the parties. It may happen that a given contract extends or limits the liability of one of the parties for particular incidents. Furthermore, it may even be the case that these provisions stipulate that a party is responsible for the performance of an obligation even in case of force majeure. This occurs in the case of so-called warranty liability.
The parties to a commercial contract are therefore entitled to change their liability themselves by extending or limiting the circumstances that lead to their liability for non-performance. It may be the case that the contract contains contractual provisions concerning both the definition of force majeure and additional obligations related to the occurrence of extraordinary circumstances during the execution of a particular contract. Such a clause must be drafted in an unambiguous and precise way so that it is effective. In this case, the contractual provisions will be the basis for the parties’ exclusion of liability for damages.
The contractual provisions determining the definition of force majeure and exemption from liability in the event of non-performance / improper performance of the contract for reasons beyond the control of the parties will also apply when the entrepreneur enters into a contract under a foreign law system.
The special provisions which will modify liability under the Civil Code are also worth remembering. For example, the special Act on combating COVID-19, which has been in force since 8 March 2020. Under this Act, carriers will not be liable for damage caused by the government’s activities combating COVID-19, including the transport restrictions.
According to the draft bill of anti-crisis act, also the lessees of areas in commercial facilities with a sales area over 2000m2 will be released from liability for non-performance or improper performance of the contract, if it was a result of a prohibition or restriction of the lessee’s activity imposed by law, and the lessee did not perform this activity within the period covered by the prohibition or restriction.
Moreover, the anti-crisis bill entitles the Contracting Party to agree with the Contractor amendments to the terms and conditions of the contract concerning the contractual penalty in a situation in which COVID-19 affected the proper performance of the public procurement contract.
In conclusion, the individual provisions of the contract should be analysed in each case in order to find a solution to counteract the negative effects of the coronavirus epidemic, either on their basis or on the basis of code rules.
Director of the Commercial Law and Property Department, Advocate
TGC Corporate Lawyers
TGC Corporate Lawyers
TGC Corporate Lawyers
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