The official declaration of an epidemic in Poland, as well as the rapidly growing number of people infected with the COVID-19 has significantly hindered the implementation of contractual obligations. Can events related to COVID-19 however be seen as force majeure events and consequently is liability excluded for a failure to perform or for improper performance of contractual obligations? Answers to this, as well as other questions related to the impact of coronavirus on business relations can be found in this Q&A.
How can the COVID-19 epidemic be classified under a contract, is it a force majeure event excluding the contractor's fault for a failure to perform or improper performance of the contract?
A widespread outbreak of an epidemic is classified as an extraordinary event that cannot be foreseen. It is also often interpreted as a force majeure event. However, in order to clearly determine whether a failure to perform or improper performance of a contract is an event that relieves an entity from liability for the non-performance or for improper performance of a contract, the given contractual provisions must be analysed each time, especially with regard to the presence of a "force majeure clause" or "hardship clause". It also needs to be proved that the pandemic must have a direct impact on the performance of individual contractual obligations, so that the epidemic can be effectively invoked as the reason for exclusion of liability.
What should be done if there is a force majeure clause in the contract?
If a force majeure clause is included in the contract, then it must be verified whether the failure to perform a specific obligation was directly caused by events caused by the coronavirus epidemic. If so, it must also be verified whether all the conditions stipulated by the contract and necessary to invoke force majeure have been fulfilled.
How can I protect myself or my company against the consequences of coronavirus in the absence of a force majeure clause in the contract?
If the contract does not contain a force majeure clause or a "hardship clause", then the general principles of liability must be invoked. In such situation, Article 3571 of the Civil Code may apply in particular (rebus sic stantibus clause - extraordinary change of circumstances) and Articles 471 and 495 of the Civil Code (impossibility to make a performance or a reciprocal performance for reasons not attributable to any of the parties).
Since when does the state of force majeure exist and when will it supposedly come to an end? Does the existence of an official epidemic in Poland determine the period in which the force majeure can be referred to in the context of exemption from liability for a failure to perform or untimely performance of a contract?
In each case, on the basis of the nature and specificity of a given contract, it is necessary to assess the moment when such events (extraordinary, unpredictable and not falling within the limits of the counterparty's contractual risk) caused by the coronavirus epidemic, which thwarted the possibility of performing the contract according to its original assumptions, actually took place.
In view of a party's effective reference to force majeure events, is that party exempt from liability for the performance of the contract?
As a matter of principle, an official pandemic does not constitute a universal basis for exemption from liability for failure to fully perform the contract, or for improper performance in part. It is necessary in each case to link the consequences of a pandemic to the impossibility or particular impediment to make a specific performance on the basis of a particular contract. Extraordinary and unforeseeable circumstances may affect the ability to perform particular contractual obligations in a different way.
What actions should be taken by the contractor in connection with the epidemic in order to protect its interests to the fullest extent possible in the future?
The contractor's obligations should be analysed each time on the basis of specific contractual provisions. However, the following steps should first be considered:
- notifying the other party to the contract of the possibility of occurrence of force majeure events preventing the performance of the contract;
- indicating which contractual obligations are or may be affected by the situation;
- implementing all available preventive and remedial measures;
- contacting the other party in order to discuss further procedures for the implementation of the contract in the existing situation and after its termination;
- gathering full documentary evidence confirming the impossibility to perform the contract, as it is the contractor affected by force majeure who bears the burden of proof that it was unable to perform a specific obligation.
How should the contractual risk arising from a situation caused by the epidemic be managed?
The most important issues related to contractual risk management in the face of an epidemic are as follows: (i) identification of the status and business priority of the project, (ii) identification of the status of project execution and the potential impact of the epidemic on the contractual obligations performed so far, assessing the contractual regulations regarding the occurrence of the force majeure clause and their relation to the remaining provisions of the contract as well as to the regulation of the code, (iii) preparation of a strategy for further actions, (iv) implementation of the strategy by way of application of remedies, if acting as a contractor, or by making proactive contact with the contractor, obtaining its opinion and taking actions to jointly minimise risks and losses.
If the non-performance or improper performance of the contract is caused by a failure to perform the subcontracts of third parties due to the coronavirus epidemic, can the contractor refer to a force majeure event to justify the failure to perform or improper performance of the contract?
The contractor remains responsible for the actions and omissions of the related parties (i.e. any other entities through which the obligations are fulfilled - employees, co-workers, subcontractors, experts, etc.) as for its own actions. As a rule, the risk of a failure to perform an obligation by an entity appointed to perform the contract remains the risk of the party which appointed this entity. Only in a situation whereby it is impossible to find a substitute entity on the market or where the costs of such substitution are excessively high in relation to the initially assumed costs, does this risk go beyond the level that may entitle the party to obtain legal protection.
Please feel free to contact our DWF Poland lawyers directly in order to obtain an opinion on a specific case, a recommendation or legal advice.
*Please note that this study is for illustrative purposes and should not be construed as advice, opinion or legal recommendation. Due to the complexity of contractual relations, resulting from both factual differences and contract differences, provision of legal advice, opinion or recommendation for a particular case requires a detailed analysis of its specific circumstances, including the provisions of the contract and the applicable law.