COVID-19: The impact of extraordinary circumstances on contractual performance

Due to the ongoing pandemic, we would like to present some of the provisions of the Polish legal system allowing to modify agreements or enabling exemption from liability for their non-performance or improper performance due to changes in widely understood social and economic relations, and the so-called force majeure. However, in order to assess the possibility of their implementation in a particular case the provisions of such an agreement between the parties need to be verified each time.Article 357¹ § 1 of the Polish Civil Code^[i]

Pursuant to this provision, a court may either make amendments or terminate an agreement if all of the following conditions are met:

1. there is an extraordinary change in broadly understood social and economic relations,
2. this change causes excessive difficulties in the performance of the agreement or leads to a serious loss for one of the parties,
3. when concluding the agreement, the parties have not predicted the abovementioned excessive difficulties or the risk of a serious loss to arise.

Article 632 § 2 of the Polish Civil Code

This provision shall apply to contracts for specific work and construction agreements the parties of which have agreed on a lump sum remuneration. According to this provision, a court may increase the remuneration or terminate the agreement if all of the following conditions are met:

1. there is a change in the broadly understood social and economic relations,
2. this change could not have been predicted,
3. as a result of this change, performance of the agreement may lead to a serious loss to the contractor.

It should be noted that there is a significant difference between Article 357¹ § 1 of the Polish Civil Code and Article 632 § 2 of the Polish Civil Code. The first one requires the parties not to predict excessive difficulties or the risk of a serious loss resulting from the change of relations, while the second one requires that the change of relations itself could not be predicted.

Article 471 of the Polish Civil Code

This Article shall oblige the debtor 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.

Such a circumstance may be the so-called ‘force majeure’ which is understood as an extraordinary situation impossible to predict by any party of the agreement and beyond their control, the consequences of which the party could not prevent. Force majeure is usually exemplified by natural disasters (e.g. floods, earthquakes). Undoubtedly, force majeure in the above understanding shall also mean an epidemic or pandemic.

Article 79 the United Nations Convention on Contracts for the International Sale of Goods^[ii]

The Convention shall apply to agreements regarding sales of goods between parties having their registered offices in different countries where the Convention applies.

Article 79(1) of the Convention exempts from liability for non-performance by a party of the agreement which proves the following:

1. the non-performance was due to an impediment beyond his control and
2. could not reasonably be expected to have taken this impediment into account at the time of conclusion of the contract; or
3. the impediment or its consequences could not reasonably have been avoided or overcome.

Therefore, the above considerations comply with the aforementioned definition of force majeure.

Commentary:

Within the context of the above provisions, we pay attention to the following issues:

1. for each of the above provisions to be effectively relied on, it is not sufficient to refer to social and economic changes or force majeure alone. It is necessary to determine their impact on the implementation of a specific agreement between the parties,
2. the date of conclusion of the agreement is important for demonstrating the condition of unpredictability – chances of effective demonstration of the unpredictability of the consequences of a pandemic, if the agreement was concluded in January 2020, are different from those of April 2020, when the effects of the pandemic could have already been estimated,
3. it should be emphasized that courts require entrepreneurs to exercise due diligence within the scope of the conducted business activity, taking into account its professional nature. As a rule, this means that higher requirements are imposed on them, also in terms of prediction that certain events may affect their business activity.

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^[i] Act of 23 April 1964, the Polish Civil Code

^[ii] The United Nations Convention on Contracts for the International Sale of Goods (the so-called Vienna Convention, CISG), drawn up in Vienna on the 11^th of April 1980.