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  • Liability for contracting obligations and coronavirus

Liability for contracting obligations and coronavirus

Krzysztof Lebiest, Senior Manager in Audit Department |

25 March 2020

The spreading COVID-19 infectious disease caused by the SARS-CoV-2 virus known as coronavirus causes numerous problems in terms of contractual relations, affects entrepreneurs and their business relationships. The applicable provisions of the Civil Code provide for mechanisms to avoid contractual liability in connection with the non-performance or the improper performance of the contract due to force majeure in the form of a coronavirus epidemic.

Coronavirus as an example of force majeure

The concept of "force majeure" is not defined in the Civil Code. It is assumed in case law and legal writing that force majeure is an external, unpredictable and impossible to prevent event. Undoubtedly, the coronavirus epidemic meets all these criteria. However, to release from contractual liability for non-performance or improper performance of a contractual obligation it is necessary to demonstrate a cause and effect relationship between the state of force majeure and the inability to perform the obligation. Therefore, the entrepreneur must demonstrate the actual impact of the epidemic on his inability to perform the contract by providing relevant evidence for this. In addition, the entrepreneur must remember that, to the extent possible, due diligence should be exercised when trying to perform the contract despite the prevailing epidemic of coronavirus e.g. if other methods of performance of the obligation are allowed, then in order to avoid the negative effects of force majeure, the entrepreneur should use them, if this allows limiting losses. It should be noted that force majeure will not occur where the contract defines the concept of force majeure and this definition does not include epidemics. Force majeure should be distinguished from economic risk related to the conducted business activity, when the party to the contract is an entrepreneur. Economic risk is an immanent feature that accompanies almost every activity performed by entrepreneurs. This means that the contract can still be performed, but it loses economic sense to one of the parties. 

Impact of force majeure on contractual liability

In accordance with art. 471 of the Civil Code, the debtor shall be obliged to redress the damage arising from non-performance or from improper performance of an obligation, unless the non-performance or the improper performance are an outcome of circumstances which the debtor shall not be liable for. This means that if the debtor is not at fault, he will not be liable for damages. Force majeure is an independent circumstance that excludes liability for damages. The occurrence of force majeure excluding the liability of the contractual party means, as a rule, no penalties, no compensation. The above applies to obligations based on the principle of fault (the vast majority of obligations). It should be noted that also in the event of granting a guarantee or in the event of liability based on risk, the entrepreneur may be released from liability in the event of force majeure. If the parties want to extend the liability of the debtor, then in accordance with art. 473 § 1 of the Civil Code, they must indicate in the contract for what other circumstances the debtor is liable. In this case, force majeure must be clearly indicated (judgment of the Supreme Court of October 6, 2010, ref. no. II CSK 180/10, judgment of the Court of Appeal in Szczecin of September 14, 2017, ref. no. I ACa 309/17).

What to do if an epidemic affects the performance of the contract.

What actions can or should be taken in the event of an impact of a coronavirus epidemic on the performance of contractual obligations depends on whether the contract contains force majeure regulations or not. Large or long-term contracts usually have regulations regarding the rights and obligations of the parties in the event of force majeure (e.g. the obligation to immediately notify the other party of the circumstances and the threat of performance of the contract, the obligation to meet the parties and determine how to proceed, renouncement from the contract, etc.). These types of regulations are acceptable and bind the parties. If there are no contractual regulations, the possible actions of the parties depend on the type of obligations and the effects of the epidemic on the obligations.

Consequential inability of performance

The furthest-reaching effect of force majeure is expressed in the inability to perform the service. Based on art. 475 § 1 of the Civil Code, if performance has become impossible due to the circumstances which the debtor is not liable for, the obligation shall expire. In mutual obligations pursuant to art. 495 §1 of the Civil Code, If one of the reciprocal performances has become impossible due to the circumstances which neither of the parties is liable for, the party who was to render the performance may not demand reciprocal performance, and in the case it had already received it, it shall be obliged to return it according to the provisions on the unjust enrichment. If the performance of one of the parties has become only partially impossible, such a party shall lose the right to receive an adequate part of the reciprocal performance. However, the other party may renounce the contract if partial performance would not have significance for it.

An action to amend or terminate a contract

The emergence of an epidemic carries a significant risk of changing the purchasing power of money, the availability of raw materials, or an increase in their prices. the performance of an obligation would entail excessive difficulties or would threaten one of the parties with a glaring loss. In the event of extraordinary circumstances beyond the control of circumstances, the relationship will change. In the event of disagreement over any amendment to the contract, it will be necessary to consider bringing an action pursuant to art. 357 of the Civil Code with reference to the rebus sic stantibus clause - an extraordinary change of circumstances. On this basis, the court may indicate a different way of performing the contract or even decide to terminate it. In the absence of a reservation in the contract contractual right of renouncement, the Civil Code in art. 4921 stipulates that if the party obliged to render performance declares that he will not perform, the other party may renounce the contract without setting an additional time limit, also before the time limit specified for the performance arrives. The creditor may exercise the right to renounce from the contract regardless of the state of delay or default of the debtor. In the event of renouncement from the contract, it is worth taking into account the issues of advance or down payment. If the non-performance of the contract was due to circumstances for which neither party is responsible, the parties will, as a rule, have to pay the above benefits.

Changes in law

The general principles of contractual liability are and may be further regulated in the near future in relation to specific contracts. An example of recent changes is the so-called special act on specific solutions related to the control of COVID-19 virus. According to its wording, carriers are not liable for damage caused in connection with the justified actions of public authorities aimed at counteracting COVID-19, in particular for the inability to transport.

Conclusion of new contracts

When concluding the contract, it should be borne in mind that the coronavirus epidemic is no longer a force majeure because it already happened. If the protracted coronavirus-related situation may affect the performance of the negotiated agreement, then constructing the provisions of the agreement it should be included in their regulation regarding the rights and obligations of the parties when the situation is prolonged (such as the possibility of renouncement and settlement of this title, price adjustment). If the protracted coronavirus-related situation is to affect the performance of potential contracts, then such contracts should clearly indicate this and regulate the rights and obligations of the parties giving the possibility of renouncement, termination by notice and changes in the terms of the contract. In accordance with art. 387 §1 Civil Code conclusion of contracts in a situation of prevailing coronavirus pandemic may be associated with the risk of their nullity. A contract for an impossible performance shall be invalid, and the existing force majeure, which is a virus threat in many branches of the economy, makes performance of one party impossible to fulfill at the time the contract is concluded. This is called initial inability of performance. When new contracts are concluded, it is recommended that the provisions should include a force majeure clause that precisely defines cases of force majeure. This solution will certainly minimize the risk of litigation in the future. 

In case of doubts related to negotiating the content of contracts including the introduction of mechanisms securing the party's interest in the event of protracted coronavirus epidemic or analysis of already concluded contracts in terms of the possibility of exemption from contractual liability due to the situation, our specialists in the law office are at your disposal.