Coronavirus pandemic and performance of contractual obligations

Coronavirus pandemic, as a force majeure event affecting contractual obligations of the parties, is a current topic, widely commented on in the media.

This pandemic can undoubtedly be classified as a force majeure event, i.e. beyond control of the parties to the contractual obligations, which they could not foresee but must comply with the restrictions imposed on their functioning by the sanitary, police and state authorities of individual countries. The concept of “force majeure”, despite its widespread use in legal acts and contracts, has not yet been legally defined in law. According to the doctrine, force majeure will be an external event, impossible or almost impossible to predict, the effects of which cannot be prevented – and it can be e.g. extreme, persistent weather conditions such as hurricanes, floods or wide-spread fires (considered a natural disaster), hostilities or riots, general strike as well as current coronavirus pandemic and related functional restrictions or restrictions introduced by relevant government decisions.

However, the effects of force majeure on the performance of contractual obligations are not entirely obvious – especially if any of the affected States such as Poland did not declare, in accordance with the Constitution, one of the possible states of emergency – which in principle is the occurrence of a natural disaster or the occurrence of circumstances of force majeure of another kind, which is undoubtedly the state of epidemic announced by the sanitary authorities.

Basically, we can divide contracts into those in which the parties indicated force majeure as a circumstance excluding their liability for non-performance of obligations or those in which they have not expressly stated such possibility. Therefore, if a contract provides for any principles of liability, including contractual penalties for untimely performance of services or supplies, then a trader which has not fulfilled its obligations due to the outbreak of the coronavirus will be able to seek evasion of such liability due to lack of its fault – due to “external” circumstances beyond its control that caused the delay.

However, if a contract does not contain regulations related to force majeure, it is necessary to invoke the general principles provided for in the Civil Code. In accordance with Article 471 Civil Code (CC), a debtor is obliged to remedy any damage arising from non-performance or improper performance of an obligation unless the non-performance or improper performance is due to circumstances for which the debtor is not liable.

Importantly, the fact of the impact of a pandemic on the performance of contractual obligations or the impossibility of their timely implementation should be able to be demonstrated and documented similarly to a damage. There must be therefore a causal relationship between non-performance of the contract or improper performance of the contract and the state of force majeure. For it is important that non-performance or improper performance of contractual obligations was actually the result of force majeure – a pandemic – and not a failure to apply due diligence or a failure to even start fulfilling the obligations. The burden to prove that non-performance or improper performance of an obligation is a consequence of force majeure, rests with the party which does not perform its obligation and invokes the circumstances of force majeure. Force majeure will not always allow you to withdraw from contractual obligations without documenting the actions taken in order to property perform the contract.

The main effect of inability of one party to perform the service is the lack or limitation of the party’s liability for non-performance or improper performance of the contract as a result of force majeure.

In addition, the parties to the contract are entitled to exercise all contractual rights in the event of non-performance or untimely performance of the contract due to fault attributable to neither party. Such right will primarily be the right to withdraw from the contract reserved in the event of delay by the other party, including as a result of force majeure. When encountering an obstacle in the form of force majeure, the parties to the contract should first read the contract and the rules of conduct set out in it and comply with them – in particular when they alter the general principles of liability provided for in the Civil Code.

If the contract does not regulate the parties’ right to withdraw from it, then the provisions of civil law allow the withdrawal from the contract if the performance of the obligation by one of the parties after the deadline would be irrelevant for the other party due to the nature of the obligation or because of the intended purpose of the contract, known to the party in default. The provisions of civil law also provide that if a party obliged to render a performance declares that it will not render the performance or is unable to render it in a certain way or within a specified period, the other party may withdraw from the contract without setting an additional deadline to perform the contract, including before the deadline specified in the contract for rendering the performance.

A party which has withdrawn from a reciprocal contract is obliged to return to the other party everything that it has received from it under the contract, and the other party is obliged to accept it. In typical circumstances (independent of force majeure), the party which withdraws from the contract may demand not only the return of what it has rendered, but also, in line with general principles, a compensation for damage resulting from default. However, if the default is a consequence of circumstances for which neither party is responsible (such as a coronavirus epidemic), the rules for settlement between the parties are different. There will be no liability for damage resulting from improper performance or non-performance of obligations for reasons attributable to the party, so Article 471 CC will not apply. In addition, the party which was to render a performance and failed to do so as a result of circumstances for which it is not responsible, cannot demand a reciprocal performance, and if it has already received it, it is obliged to return it under the provisions on unjust enrichment.

If the performance of one of the parties has become impossible only partially, that party loses the right to a corresponding part of reciprocal performance. However, the other party may withdraw from the contract if a partial performance would be irrelevant to it because of the nature of the obligation or because of the intended and agreed purpose of the contract. In other words, if partial performance by one of the parties does not make economic sense for the other party, then it may withdraw from the contract in full.

Regardless of the right to withdraw from the contract, pursuant to Article 475 § 1 CC, if the performance has become impossible due to circumstances for which the debtor is not responsible, the obligation expires.

The rights of the contracting party look different when force majeure does not prevent but hinders one of the parties to perform the contract. In such a situation, the interested party has an option to attempt to renegotiate the contract based on the extraordinary change of circumstances under Article 357¹ CC which provides for a possibility to apply to civil court for amendment of the contract between the parties if due to an extraordinary change in circumstances a performance would entail excessive difficulties or expose one of the parties to a serious loss which the parties did not foresee when executing the contract. It is also an argument to enter into negotiations with the contractor without taking legal action. Negotiations may relate to both the method of rendering the performance, its dates, as well as change of remuneration and methods of payment.

On the other hand, if there were no grounds for withdrawing from the contract, the contract did not expire or there were no grounds for invoking the extraordinary change of circumstances, the party refusing to perform the contract only due to the fact of “occurrence” of a coronavirus pandemic, and which not has demonstrated its own damage and causal link between the pandemic and inability to perform its obligations set out in the contract within the deadlines set out in the contract, exposes itself to contractual liability or compensation for non-performance or improper performance of the contract.

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To recapitulate on the above, it should be stated that occurrence of a pandemic as a circumstance of force majeure does not allow to freely resign from the performance of contractual obligations incurred before the occurrence of the pandemic, and this will only be possible if there is a close relationship between the inability to perform the contract and force majeure, and the parties despite showing the utmost diligence in order to minimize the effects of force majeure, were not able to defeat it (e.g. they could not bring employees from abroad despite the contracts signed between them due to protracted closure of borders or a state of emergency in one of the countries which prevented the movement of the population).

In a potential dispute between the parties, it will be important for the party who fails to perform their services to demonstrate that they have taken all possible steps when the first problems with performance of the contract arise, that in the new circumstances of the coronavirus pandemic, the performance of the contract in the manner envisaged therein is possible, and the possible consequences of non-performance of the contract are minimized. The recommended approach in the current situation is to document all correspondence with your contractors, including attempts to negotiate the terms of the contract and confirm, at least by email, conversations with contractors. All this can be used as evidence of due diligence in order to perform the contract despite of force majeure event and showing good faith in the event of a potential dispute.

Author:

Paweł Góra
Attorney-at-law 
TGC Corporate Lawyers

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