Contributed by Penteris
How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?
(1) SOLVENCY ISSUES – businesses which have been directly affected by government preventive actions are in the most serious position now, including airlines, the travel industry (also digital intermediaries) and other firms engaged in passenger transport, enterprises providing publicly-available services (e.g. restaurants, theatres, cinemas, hotels, shops), and training firms. There will be a domino effect and the effects in the above sectors will spread to others causing reduced profitability.
Another factor affecting revenue is weaker demand from cautious consumers. This may warrant widespread restructuring actions (to reduce costs) and in some circumstances even declaration of bankruptcy. The Polish government has announced support mechanisms for businesses affected by the pandemic but the specifics of this assistance are still unknown.
(2) DISRUPTION OF SUPPLY CHAIN and other problems in performing contractual obligations – many businesses rely on supplies (or assistance) from other countries (regions, cities) in order to perform their contractual obligations and the lockdown of transportation (and other services) and manufacturing activities can make it extremely difficult or even impossible to fulfil contractual obligations. This may be remedied by renegotiating terms of contracts and if that proves to be undoable, businesses will be forced to assert their rights in courts of law.
(3) ABSENCE OF EMPLOYEES AND HR ISSUES – businesses are facing employee absences due to mandatory quarantines and their inability to return home due to cancelled flights and restrictions on borders. There is no specific legislation in this regard and our experience suggests that most employers do not have a clear roadmap on how they should handle these situations from a legal standpoint i.e. if they should pay employees for their time off, and whether they are obliged to let employees work remotely and the suchlike. Another issue concerns the risk of spreading disease and the steps employers may/must take if they think that an employee might be affected by Covid-19.
(4) TECHNOLOGICAL INADEQUACIES – some companies are not ready to quickly make the switch from traditional working models to a remote working model. One barrier is technology, another, a lack of procedures that would ensure effective and lawful supervision of employees (“checking in” vs. “checking up”), as well as the necessity to secure the safe flow of information.
(5) POSITIVE SIDE EFFECTS – often crisis situations lead to positive outcomes. Companies and employees are already innovating and finding work-around solutions in order to keep one step ahead in this VUCA environment (volatile, unpredictable, complex, ambiguous). Remote working can actually be incredibly efficient thanks to modern collaboration tools. Our hope is that these positive outcomes will mitigate some of the negative effects of Covid-19.
In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?
The general rule is that if the performance of an obligation becomes impossible as a result of circumstances for which the debtor is not responsible, such an obligation expires. Even though there is no obligation that binds the parties, if the object of the performance has been transferred, forfeited, or damaged, the debtor will be obliged to release everything that he obtained in exchange for it or as redress for the damage (Article 475 of the Polish Civil Code).
The above general rule is supplemented with some other provisions with regard to obligations stemming from mutual contracts. In such contracts, if the performance of one of the mutual obligations becomes impossible as a result of circumstances for which neither party is responsible, the party who was to make the performance cannot demand mutual performance, and if already received , the party shall be obliged to return it in accordance with the provisions on unjustified enrichment. If the performance by one of the parties becomes impossible only in part, that party loses the right to the appropriate part of the mutual performance. However, the other party may rescind the contract if partial performance would have no significance for it in view of the nature of the obligation or in view of the intended purpose of the contract, known to the party the performance of which become partially impossible (Article 495 of the Polish Civil Code).
There are some key issues to note here:
- impossibility of performance must be objective (i.e. it can no longer be performed by anyone) or subjective (i.e. pertaining to the debtor), but in the latter case only if the debtor is obliged to make the performance personally;
- impossibility must be permanent and definitive (not transient or temporary) but this does not always mean that it must be infinite – each case must be assessed also from the point of view of the creditor's interest or obligation's nature;
- impossibility may be of a factual or legal character. it also covers restrictions introduced by the authorities;
- impossibility does not pertain to pecuniary obligations; if the debtor becomes insolvent, he should file for bankruptcy;
- the obligation expires once it becomes impossible and this expiration is only for the future (effective ex nunc);
- it is not an imperative provision of law which means that the parties may contractually regulate such a situation differently. It is, however, worth remembering that impossibility clauses forged by parties are subject to all restrictions and rules stemming from the applicable law so parties are not entirely free in their discretion in this regard (especially in contracts with consumers);
- there are limited exceptions to the above-mentioned rule e.g. if the object of the performance is something indicated as to its identity, the debtor who is delayed shall be liable for the loss of, or damage to, the object of the performance unless the loss or damage would have taken place and also if the performance were undertaken in the appropriate time (Article 478 of the Polish Civil Code).
In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?
Yes, there are courses of action designed for such events. Below is the most important one:
According to Article 357* of the Polish Civil Code, if due to an extraordinary change in circumstances, the performance of contractual obligations entails excessive difficulties or exposes one of the parties to a substantial loss which the parties did not foresee when concluding the contract, the court may, having considered the parties’ interests, in accordance with the principles of community life, designate the manner of performing the obligation, the value of the performance or even terminate the contract. When terminating the contract, the court may, as needed, decide how accounts will be settled between the parties, being guided by the principles set forth in the preceding sentence.
Below are some key features of the above course of action:
- it is designed to mitigate the extraordinary effects of certain events and states that interfere with contractual obligations and not to simply free the party from typical contractual risks that it took upon itself;
- the change in circumstances should be in the sphere of social relationships (including economic relationships) and should be universal, widespread (not limited to this particular contract) and have a degree of permanency (changes that are only transient are not relevant);
- it is not an imperative provision of law, which means that the parties may contractually regulate such a situation differently. It is, however, worth remembering that force majeure clauses forged by parties are subject to all restrictions and rules stemming from the applicable law so parties are not entirely free in their discretion in this regard (especially in contracts with consumers);
- it is an exceptional measure which undermines the key rule of contract law i.e. pacta sunt servanda (“agreements must be kept”), so it should not be interpreted broadly;
- this measure is only available to an obliged party if it was not in default when the extraordinary circumstances occurred;
- the unforeseeability of effects that the change in circumstances have on the contractual obligations must also be objective i.e. a party acting with diligence could not foresee this;
- a party interested in a modification of contractual obligation(s) must sue its contractual partner and demand a specific modification (or termination of the contract) to be ordered by the court; however, the court is not bound by the party's demand and may rule in any way it sees fit guided by the criteria outlined above (interests of parties, principles of community life, etc.);
- the court should endeavor to improve the situation of the claimant in a way that would be least adverse for the defendant;
- termination of the contract is a last resort.
* Apart from the above course of action (and impossibility of performance described above), it must be noted that under Polish Contract Law the party is, as a rule, not liable for damage caused by the non-performance or improper performance of contractual obligations if this is a result of the circumstances for which the obliged party is not responsible. The parties may stipulate in their contract for which circumstances they are responsible. If they will not regulate this matter, it will be on the obliged party to prove that it acted with due diligence in order to perform the obligations properly.
If yes, what considerations should be borne in mind by such parties, in particular in relation to:
Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)
No, there is no specific obligation but it may be helpful to prove in court the party's case and the fact that it acted in good faith or in accordance with the principles of community life. What is more, the party may use this course of action at any time (it is not subject to limitations of claims time periods) until the obligation (contract) is still in force. This means that if the party fulfills its obligation before lodging the lawsuit it may not demand anything from the other party. Also, if the other party effectively rescinds the contract and e.g. charges the party with contractual penalties the party affected by extraordinary circumstances is not able to take advantage of this course of action anymore.
Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)
Yes, the fact that performance of contractual obligations entails excessive difficulties or exposes one of the parties to a substantial loss must be due to an “extraordinary change in circumstances”. The onus of proving this (as well as other elements of this course of action) in court is on the party who wants to take advantage of this course of action in court.
Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)
Yes, such obligation stems from the general rule of contract law which requires the parties to take actions in order to mitigate the loss (acting diligently). What is more, in case of the discussed course of action the court takes into account the principles of community life which includes contractual loyalty, also after the “extraordinary circumstances” occurred. Therefore in general, the better the affected party acts in the wake of unexpected events, the better outcomes it can expect.