Coronavirus and the implementation of commercial contracts

13/03/20

The performance of many commercial agreements has been or, as a result of a supply chain disruption, may in the future be significantly hindered by COVID-19 disease pandemic caused by SARS-CoV-2 virus.

In these circumstances, the application of standard rules concerning non-performance or improper performance of contractual obligations, including the effectiveness of provisions regarding compensation or contractual penalties for non-performance or delayed performance, may be limited.

Coronavirus will change arrangements between the parties to the contracts

Counterparty may avoid paying compensations

The liability for damage under Polish law is mainly based on fault principle. Consequently, a party to the agreement will not be obliged to compensate damage caused by non-performance or improper performance of such agreement, if the latter results from circumstances for which that party is not responsible. It is assumed that such circumstances may be force majeure, i.e. an occurrence of a sudden, external event which the parties could not foresee at the time of the conclusion of the agreement and effects of which could not be reasonably prevented, including e.g. epidemics or pandemics.

In order to be in a position to potentially benefit from the exclusion of liability for non-performance / improper performance of contractual obligations in such a situation, it is essential to:

  • collect evidence confirming that a specific event caused by force majeure was a direct cause of non-compliance with the provisions of the agreement;
  • demonstrate due diligence in undertaking actions to fulfil contractual obligations, e.g. interruptions in supplies from countries affected by the epidemic should usually not release from liability when the same goods or raw materials could have been ordered from another alternative location.

Having relevant evidence of the occurrence of the above circumstances may be of key importance in discussions on renegotiating the agreement terms, during the mediation process or in the event of a court dispute.

Based on similar principles  the party may be released from the obligation to pay a contractual penalty for e.g. non-performance or delays in the performance of agreement.

However, it should be always taken into account that the agreements concluded with business partners may differently regulate the parties obligations in the event of force majeure, e.g. may impose an obligation to perform additional acts of diligence by the affected party (obligation to notify the contractor in due time about the occurrence of force majeure, taking joint actions aimed at limiting the losses of both parties to the contract, etc.).

In any case, regardless of the provisions of agreement, it is advisable to consider notifying the business partner of the risk of non-performance or improper performance of the agreement as soon as practically possible after identifying such risk. This may facilitate the renegotiation of arrangements with the contractors, as well as allow them to take actions to mitigate their own losses early enough.

Force majeure as defined in the agreement

It may be the case that the parties to the agreement defined what circumstances constitute a case of force majeure. Such provisions (depending on their specific wording) may constitute interpretative guidance as well as extend or limit the qualification of the event as force majeure (e.g. exclude specific events from qualification as an event of force majeure). It is important not to introduce such provisions to the agreement automatically, without any reflection, yet adapt them to the needs of the parties and the subject of the agreement.

The parties to the agreement may also contractually extend their liability to circumstances for which they are usually not responsible, including force majeure events. Such provisions need to be drafted in a clear and precise manner. Otherwise, it may turn out that in a court dispute all ambiguities will be resolved in favor of the debtor.

Change or termination of the agreement by the court

Disruptions of the economy caused by the pandemic may result in significant disproportions in the mutual contractual benefits between the parties to the agreement - beyond the level of standard risk acceptable in commercial relations. Significant price fluctuations or lack of access to raw materials may lead to socially unacceptable situations where performance of agreement results in excessive difficulties or causes a major loss for one of the parties. If the renegotiation of the contractual arrangements is unsuccessful, an action based on an extraordinary change in economic relations principle (rebus sic stantibus) may be considered. When resolving such a case, the court may change the manner in which the agreement is performed or the amount of parties’ benefits or even decide to terminate the agreement.

The specific provisions and special acts

The general principles of liability for damage in agreements may be modified by specific provisions, e.g. regulations aimed at consumer protection, rules applicable to tourist services, or the special act that entered into force in Poland on March 8, 2020 regarding, among others, extraordinary solutions preventing COVID-19 disease. For example, in accordance with the latter regulation, passenger carriers will not be liable for damage caused by the actions of authorities aimed at counteracting COVID-19, including, in particular, transportation restrictions.

Agreements governed by foreign law

The principles described above generally apply to agreements subject to Polish law. If a particular agreement is governed by a foreign law, the party affected by the consequences of COVID-19 pandemic is not, however, in a lost position.

Firstly, in a majority of cases, agreements, regardless of the law governing them, includes regulations of force majeure and / or release from liability in the event of non-performance / improper performance of the agreement for reasons beyond the control of the parties. Additionally, numerous jurisdictions recognize the concept of force majeure and regulate its consequences.

Hence, in case of an agreement governed by a foreign law and from the perspective of the party affected by COVID-19 pandemic, the most important issue is to determine at the earliest convenience the rights and obligations of that party under the agreement and the law applicable to it in order to possibly release from liability and then to efficiently and effectively take relevant actions in this respect.

 

Contact us

Beata Kiedrowicz

PwC Legal Partner, Attorney-at-law, PwC Poland

Tel: +48 519 506 383

Wojciech Trzciński

PwC Legal Partner, Attorney-at-law, PwC Poland

Tel: +48 519 506 653

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