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Performance of contracts in epidemic conditions 

by Piotr Wcislo, adwokat, M&A and Corporate practice

Published: March, 2020

Submission: March, 2020

 



Even such unusual circumstances as apandemic donot overthrow the general principle that contracts should be performed (pacta sunt servanda). But this does not mean that the current situation has no impact on the substance or performance of contractual obligations.


Two main situations should be considered here:


  • As aresult of the circumstances, performance of acontractual obligation has become impossible.

  • Despite emerging circumstances, performance of an obligation remains at least theoretically possible.

Performance of the obligation is impossible


The first instance arises in asituation where the contractual performance by one of the parties, although originally possible, has become impossible due to achange in circumstances, and the impossibility is objective and lasting. If the obligor is not responsible for the emerging impossibility of performance (and certainly that will be the case if the sole cause of impossibility is circumstances resulting from the outbreak of pandemic, which the obligor did not contribute to), this will constitute subsequent impossibility of performance, regulated by Art. 475 §1 of the Polish Civil Code.


The effect of subsequent impossibility of performance is extinguishment, by operation of law, of the obligation that has become impossible. In that case, the party whose performance has become impossible cannot be held to contractual liability for non-performance of the obligation. In other words, that party cannot be required either to perform the impossible obligation or to pay damages for not performing it.


The reasons for subsequent impossibility of performance may be factual or legal. Afactual reason would be, for example, breakdown in the supply chain in asituation where production has become objectively impossible due to atotal inability to source components for production or due to the unavailability of the workforce necessary to maintain production. Alegal reason, in turn, would be for example arestriction on the possibility of conducting economic activity enabling performance of the contract.


Here it should be pointed out that under the Regulation of the Minister of Health of 20 March 2020 Declaring aState of Epidemic in the Territory of the Republic of Poland (superseding the Regulation of the Minister of Health of 13 March 2020 Declaring aState of Epidemiological Threat in the Territory of the Republic of Poland, previously exerting comparable legal effects), the performance of economic activity consisting of, inter alia, operating restaurants, organising fairs, exhibitions, and conferences, collective forms of culture and entertainment, operating dance clubs, nightclubs, swimming pools, gyms or fitness clubs, screening films at cinemas, operating casinos, and certain forms of retail trade, has been banned until further notice.


From the point of view of aparty who as aresult of subsequent impossibility of performance has lost the ability to demand performance of its obligation by the other party to the contract, Civil Code Art. 495 §1 is avital provision. The party whose performance has become impossible cannot demand the other party’s mutual performance (e.g. the fee for the performance which it now cannot render), and if it has already received consideration from the other party, it must return it. However, as may prove particularly relevant in periodic contracts, if the performance by one of the parties has become impossible only partially, that party ceases to be obligated to perform only in that respect, but also loses the right to aproportional part of the mutual consideration. It should be pointed out that in such acase, the other party may renounce the entire contract if partial performance would serve no purpose for that party (Civil Code Art. 495 §2).


Performance of obligation theoretically possible


The other instance described above is the situation where despite the outbreak of the pandemic, performance remains theoretically possible, but presents serious problems for the obligor. Civil Code Art. 3571 §1 provides that if due to an extraordinary change in circumstances, performance of an obligation would entail excessive difficulties or expose one of the parties to aglaring loss which the parties did not anticipate when concluding the contract, the court may designate anew method of performing the obligation or amount of consideration, or order dissolution of the contract, also ruling on the settlements between the parties (known as the extraordinary change in circumstances or rebus sic stantibus clause).


For purposes of this provision, an extraordinary change in circumstances means achange in circumstances of ageneral and universal nature (i.e. achange not applying only to the parties to the contract, for example because one of the parties has fallen into debt or lost customers as aresult of failure of its business), and also extraordinary (extending well beyond the ordinary economic risk which the parties to the contract should reasonably be expected to bear), which was objectively unforeseeable for the parties.


This means that evaluation of the possibility of applying the rebus sic stantibus clause in order to modify the contractual relationship must always be tailored to the specific instance. For example, such protection could not be obtained by an entity that concluded acontract with the aim of profiting from asituation where objectively it could anticipate the possibility of achange in economic circumstances, but decided to incur that risk. It should be stressed that contracts concluded by commercial entities will be assessed from the perspective of the heightened diligence expected of professionals.


Rulings by the courts to date have found an extraordinary change in circumstances in the change in the country’s socio-economic system (moving from acentrally planned economy to amarket economy) or in major changes in law (e.g. tax regulations). There is no doubt that in agiven territory, the occurrence of astate of natural disaster, halting of road transport or the like, may have the character of an extraordinary change in circumstances. It thus seems undoubted that occurrence of astate of epidemiological threat or astate of epidemic may, under the given set of facts, constitute an extraordinary change in circumstances.


It should be remembered, however, that recognition of astate of epidemiological threat or epidemic as an extraordinary change in circumstances does not in itself constitute grounds for modifying acontractual relationship. Evaluation of the possibility of modifying the substance of the contract must always be individualised, and an essential condition for applying the rebus sic stantibus clause is significant difficulty in performing the obligation or arealistic risk that aparty to the contract will suffer aglaring loss which the parties could not originally have foreseen.


Here it should be stressed that although the civil law authorises the courts to modify contractual relationships due to an extraordinary change in circumstances, the parties can reach an agreement to this effect themselves through good-faith negotiations. This approach seems the most appropriate in the current situation, when the dynamic of commercial relations in the face of aspreading epidemic will require rapid decisions, without the practical opportunity to resort to ajudicial ruling which could be obtained only after conducting time-consuming proceedings.


It should be pointed out by the way that auxiliary application of the rebus sic stantibus clause appears possible, and in some instances called for, also in cases of subsequent impossibility of performance. After all, the occurrence of subsequent impossibility of performance, resulting in extinguishment of the obligation, may be causally connected with astate of epidemiological threat or epidemic, and the justified interests of the parties may call for an appropriate allocation between the parties of the economic burden of non-performance of the contract (e.g. through settlement between the parties of costs incurred preparing for performance of the dissolved contract).


 


Source: www.inprinciple.pl


 


 


 

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