In this article we explain the concept of force majeure under Polish law, discuss whether the current pandemic may be deemed an example thereof, and present crucial points you should pay attention to when negotiating a contract in the time of COVID-19.
Although Polish law is familiar with the concept of force majeure and the term may be found in many Polish legal acts, it has never been given a statutory definition. Nevertheless, based on an established line of judicial decisions, force majeure may be described as an extraordinary event external to the parties, which could not have been predicted and whose consequences could not have been averted.
Given this definition, a pandemic, as an extraordinary and external circumstance which could not have been foreseen and averted, clearly can be classified as a force majeure event. In Poland, the prime minister declared a state of epidemic on 20 March 2020.
However, the declaration of a state of epidemic and the further spread of COVID-19 does not automatically release a party from the obligation to duly perform its contractual obligations. Only a careful analysis of the impact of the pandemic on the contract can determine whether it is possible to establish a cause and effect relationship between the outbreak and the inability to perform the contractual obligations.
Force majeure clauses usually consist of two elements: (i) the definition of the force majeure event, together with an open or closed catalogue of events which will be treated as force majeure, and (ii) the determination of the legal consequences of such an event. Accordingly, the introduction of the force majeure clause in the contract usually leads to modification of the statutory fault-based liability for non-performance or improper performance of the contractual obligations either by extension of the parties' liability by adopting risk-based liability or limitation of the parties' liability by indicating events which are not the fault of a party or the parties.
The assessment of whether the declaration of a state of epidemic constitutes a force majeure event will always be preceded by a verification of the contract and possible force majeure clause. If the contract contains a well drafted force majeure clause it should also provide an answer to the above question. Otherwise, the party must seek an alternative solution under the statutory legal provisions.
Consequences of non-performance of contractual obligations due to force majeure
Under Article 471 of the Polish Civil Code, the 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.
Based on the above provision, it can be stated with certainty that force majeure, understood as an extraordinary and external event that could not have been predicted and whose consequences could not have been averted, is one of the circumstances for which the debtor is not liable.
Consequently, the assessment of whether a cause and effect relationship between the outbreak of COVID-19 and the failure to perform the obligation is present will be crucial for determining the debtor's liability. The burden of proof is on the party that did not perform or improperly performed a contractual obligation.
Impossibility of performance
Under Article 475 of the Polish Civil Code, if performance becomes impossible due to circumstances for which the debtor is not liable, the obligation expires.
Impossibility of performance under the above provision occurs if:
- the obligation had already been incurred and then became impossible to perform by the debtor but also by any other person under the relevant circumstances;
- the impossibility is of a factual or legal nature;
- the impossibility is of a lasting nature (except for continuing obligations where temporary impossibility is treated as partial impossibility of performance).
The impossibility of performance as described above results in the expiration of an obligation with effect from the moment that the performance became impossible to perform.
The assessment of whether the impossibility of performance caused by the current state of epidemic is objective and of a lasting nature will always be made on a case-by-case basis depending on the nature of the obligation and the content of the contract.
In the case of a mutually binding contract, if only one of the mutual performances becomes impossible, Article 495 of the Civil Code applies. If one of the mutual performances becomes impossible due to circumstances for which neither party is liable, the performing party cannot demand mutual performance from the other party. If, however, it had already received it, it is obliged to return it according to the provisions on unjust enrichment. If the performance of one of the parties becomes only partially impossible, that party loses the right to a proportional part of the mutual performance. However, the other party may rescind the contract if partial performance is meaningless to it due to the nature of the obligation or due to the purpose of the contract intended by that party and known to the party whose performance has become partially impossible.
The general principles of liability for damages may be modified by the specific legal provisions, including the provisions being currently introduced in connection with the COVID-19 pandemic.
Rebus sic stantibus clause in view of COVID-19
The outbreak of COVID-19 followed by the declaration of the state of epidemic in Poland may not only be regarded as a force majeure event, but also may be considered as an extraordinary change in circumstances under Article 3571 of the Civil Code (rebus sic stantibus clause). This applies to situations where due to an extraordinary change in circumstances, contractual performance entails excessive difficulties or exposes one of the parties to a serious loss which the parties did not foresee when executing the contract.
Nevertheless, despite certain similarities, the force majeure and rebus sic stantibus clauses are two separate legal institutions. The concept of force majeure relates to the legal consequences of absolute inability to perform an obligation, whereas the rebus sic stantibus clause serves for the adaption of a legal relationship to new circumstances if the performance entails excessive difficulties or exposes one of the parties to a serious loss.
The above provision applies to all contractual obligations and is of a dispositive nature, meaning that the parties may exclude or modify its use in the contract.
According to the rebus sic stantibus clause as regulated under Polish civil law, the following conditions must be met in order to benefit from it:
- extraordinary change in circumstances, i.e. one beyond the normal contractual risk;
- excessive difficulties (on the side of a debtor) or threat of a serious loss (on the side of a debtor or creditor);
- cause and effect relationship between the change in circumstances and difficulties or loss;
- inability to foresee the impact of the change on a legal relationship at the moment the contract was executed.
The fulfilment of all the above requirements entitles each party (with whom the burden of proof lies) to bring an action under Article 3571 of the Civil Code, as a result of which the court may:
- modify the legal relationship by changing the manner of performance (place or time of performance, arranging for payment in instalments, etc.);
- modify the legal relationship by changing the amount of performance;
- terminate the contract (only after concluding that modifying the legal relationship in the manner described above is not possible or contrary to the rules of social conduct).
As a result of the court's decision, the contractual liability will be for non-performance or improper performance of the obligation as modified by the court.
In view of the above, during the pandemic, the rebus sic stantibus clause under the Polish law may appear to be a more flexible legal instrument than reaching for the force majeure clause, since it seeks a solution rather than an exit from the obligation.
Contractual negotiations during the pandemic
Negotiating a contract during the COVID-19 pandemic might be challenging given that the outbreak of COVID-19 has already occurred and a state of epidemic has already been declared in Poland.
In this section we present the key points to pay attention to when drafting or negotiating a contract in the present situation.
Contractual definition of force majeure
For new contracts executed when the COVID-19 pandemic is already a fact, the state of epidemic declared in relation to the disease does not meet the requirement of unpredictability in order to be perceived as a force majeure event. Therefore, the definition of force majeure must be carefully drafted in order to accurately determine the parties' risk in connection with the potential consequences of the pandemic which have already occurred and been officially announced.
Obligations of the parties in connection with force majeure
It is worth noting that even the most accurate definition of force majeure does not sufficiently protect the parties against the consequences thereof. Therefore, it is advisable to consider imposing certain obligations on the party which fails to perform an obligation due to force majeure in terms of exercising due care in undertaking the relevant actions to prevent such an event and minimising its negative consequences.
Notifications in connection with force majeure
When deciding on the scope of obligations related to the occurrence of the force majeure event, it is important to consider making successful reference to the force majeure clause conditional upon prior notification of the other party. The requirements may refer to a certain manner of notification (including the obligation to deliver relevant documents or other evidence) or a certain time limit from the occurrence of the force majeure event. Usually the absence of notification results in the loss of the right to rely on the force majeure clause.
Rights of the parties in connection with force majeure
During the pandemic, parties may be interested in vesting themselves of rights that would allow them to mitigate the potential consequences of the further spread of the disease and the potential limitations resulting therefrom. The parties should carefully consider contractual provisions regulating the termination, withdrawal or break option rights, as well as provisions granting privileged treatment, such as rent reduction or longer time limits to comply with certain obligations.
Requirements regarding insurance policies
In many contracts, one or both parties are obliged to maintain a certain scope of insurance coverage. Taking into account current circumstances and potential exclusions of the insurers liability due to force majeure, it is worth double-checking the general terms of the insurance policy in place before making the relevant undertakings under the contract.