The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Poland

How are Force Majeure and Hardship defined in Poland?

It is essential to underline that many contracts contain Force Majeure and Hardship clauses. They usually contain definitions as well as the due course of action in such a case. In particular, the parties may extend or limit the catalogue of cases of Force Majeure and Hardship, may shape the liability of the debtor as less restrictive or more restrictive than it is provided by the Polish law.

Therefore, the below regime is applicable only in case if the contract does not contain a Force Majeure and Hardship clause, whether it be tailor made or a boilerplate one.

The below characteristics applies to the domestic contracts (where both parties are domiciled in Poland) and to those international contracts which are governed by the Polish law.

It also needs to be exposed that to many contracts of international of sale of goods where one of the parties is domiciled in Poland the Convention on the International Sale of Goods (1980 Vienna Convention) shall be applicable.

Polish civil Code does not provide for a definition of Force Majeure. It has been developed by the jurisprudence. Force majeure is defined as an event which:

  • is external with regard to the parties to a contract – the event was not caused by any of the parties
  • is unforeseeable – the parties could not have foreseen the event of Force Majeure at the moment of conclusion of the contract
  • is unavoidable – beyond control of the parties
  • causes impossibility of performance

Some examples of  events of Force Majeure are:

  • natural disasters (floods, fires, explosions)
  • an epidemic,
  • acts of authority (embargo, regulations or directions, seizure of works, requisition, nationalization, curfew restrictions, import and export prohibitions)
  • military conflicts, civil riots, insurrections, rebellions, uprisings,
  • strikes, lockouts

The Coronavirus epidemic may therefore constitute an event of Force Majeure.

An event of Force Majeure renders the fulfillment of a contractual obligation totally or partly impossible. In case delivery is still possible but commercially impracticable or causes extraordinary expenses for the party –  such a situation cannot be identified as an event of Force Majeure but an event of Hardship.

A Hardship is a situation where:

  • due to an extraordinary event,
  • which the parties could not have foreseen at the moment of conclusion of the contract,
  • the performance by a party encounters excessive difficulties or exposes this party to a glaring loss

In other words the contracting party theoretically still might deliver its performance because the delivery is not impossible (like in case of Force Majeure); however, expecting that such a party performs its obligation would be deemed unfair and unjust from the point of view of equity.

Examples of Force Majeure

A supplier cannot deliver the goods because the place of delivery is situated in a region closed by public authorities for quarantine and the trucks cannot enter.

A supplier cannot deliver the goods because the public administration of the country where the delivery is to take place has issued a temporary import prohibition.

A supplier cannot produce goods because of the lack of raw materials on the market or import restrictions.

Examples of Hardship

The supplier encounters economic difficulties due to the fact that certain raw materials or semi-finished products have become scarce or their prices have increased.

Such a supplier can still perform its obligation although the performance would trigger a substantial additional effort and expense.

It is important to remember that the protection of Force Majeure and Hardship mechanisms will only apply if the contract had been signed before the Coronavirus epidemic outbreak. The contractors who had signed the agreement before the epidemic of coronavirus may get protection against the other party claims. However if an entity concludes an agreement at present, when the general public is well aware of the virus and its impact on the economy – such an entity will not be protected unless the contract contains the Force Majeure and Hardship clauses which specifically regulate the consequences of the epidemic and its ramifications.

What are the Consequences of Force Majeure and Hardship under Polish Law?

In case of a failure to perform due to impediment which constitutes an event of Force Majeure a party to an agreement is relieved from the liability for the non-performance. The other party cannot claim damages from the defaulting party and is released from its reciprocal obligation to  perform its obligation. The most obvious example is when the supplier does not deliver the goods, and the buyer is not obliged to pay the price. If an advance payment was paid, it needs to be reimbursed to the buyer.

Under Polish law the contract does not cease to be binding automatically because of the event of Force Majeure and it is up to the interested party to declare  terminatation.

It is also important that the parties act in good faith and undertake all reasonable steps to mitigate the damage deriving from the event of Force Majeure. For example, by seeking another supplier in order to substitute the goods which cannot be delivered as a result of the epidemic or acts of public administration.

In case of Hardship , the party affected by the event is entitled to initiate court proceedings and demand that the court either modifies or terminates the agreement. The court should weight the interests of all parties and apply the rules of equity. The court may impose different prices, delivery terms, payment terms, and introduce any other alterations in order to adapt the contract to the new situation. In some cases the court will put an end to the contract. Taking into account that usually the court proceedings are long lasting it is essential to demand from the very beginning that the court decides on injunction relief.

How to prove that a Coronavirus can be considered as a Force Majeure event?

A party which did not perform its obligation needs to prove before the court the existence of the event of Force Majeure or Hardship. Any possible proof is allowed, however the certificates issued by public administration, chambers of commerce or other independent and reliable bodies will constitute an important evidence. Among others, the announcements of World Health Organization shall be helpful to prove the event of Force Majeure or an event of Hardship.

The party which wishes to shield itself from the liability for the non-performance needs also to demonstrate before the court a causal link between the epidemic and the non-performance. In other words such a party will have to demonstrate that the cause for which it did not perform was a result of the epidemic which could not have been foreseen. In some situations, where the link between the epidemic and the non-performance is distant, it may be difficult to prove the event of Force Majeure. The general disturbance that probably will take place in the global economy will not be deemed a Force Majeure in all situations.

What to do in case of notice of a COVID-19 Force-Majeure event in Poland?

In case of any difficulty in performance of a contract a party thereto is obliged to act with due diligence and undertake all reasonable steps in order to mitigate the adverse results of the extraordinary situation. It is therefore recommended to:

  • Inform timely the other party of the difficulties encountered, their nature and anticipated consequences,
  • Seek alternative solutions: other suppliers, providers, replacement goods, logistics, routes etc.
  • Undertake all reasonable steps to mitigate the damage,
  • Analyze the agreements and check if they can be terminated by either party and on which grounds
  • Analyze the agreements and establish how they regulate the events of Force Majeure and Hardship. This will allow to select the clients who should be served first (in case if the resources are scarce) and thus reduce future liability.
  • Initiate the negotiations in good faith with the other party aimed at modification of the contract,
  • Apply to relevant authority or non-governmental organization (e.g. chamber of commerce) for a certificate confirming the facts invoked as force majeure or hardship,
  • Gather all necessary proofs that may be necessary at a further stage (documents, photos, witnesses’ testimonies)
  • Carefully draft any future agreement in order to get protection against the future expansion of the epidemic and other extraordinary events
  • Verify the insurance policies and make sure that the insurance company is duly notified about the problem with the prescribed time
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