Joanna Bogdanska participates in the IR Virtual Series – International Contracts: How has the global pandemic impacted international contracts?

Joanna BogdanskaPartner, KW KRUK AND PARTNERS LAW FIRM LP

Foreward by Andrew Chilvers

The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.

During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.

As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.

Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.

Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?

The occurrence of a force majeure event may exclude liability for non-performance or incorrect performance of the agreement. What is more, in cases of changes in circumstances caused by a pandemic, the code rules governing the consequences of a specific type of non-performance in the form of impossibility to perform may apply. If one of the counterclaims has become impossible as a result of circumstances for which neither party is responsible, the party who was to provide it cannot claim the counterclaim and, if it has already received it, is obliged to return it in accordance with the provisions on unjust enrichment.

However, it does not justify the unilateral imposition of new deadlines of cancelation of purchase orders.

If, due to an extraordinary change in relations, the performance of a benefit would be associated with undue difficulty or would threaten one of the parties with a gross loss, which the parties did not foresee when concluding the contract, the court may, after weighing the interests of the parties, in accordance with the principles of social coexistence, determine the manner of performance, the amount of benefit or even decide to terminate the contract. When terminating the contract, the court may, if necessary, rule on the parties’ accounts (rebus sic stantibus clause).

Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?

The impact of an event such as a pandemic and the associated constraints imposed by public authorities, and thus generally speaking the impact of changes in circumstances on contractual relations, are sometimes regulated in the contracts themselves.

Usually the parties do not attach much importance to such provisions, on the assumption that these provisions will not apply anyway in the course of performance of the contract. In addition, the practice of applying these types of clauses in Polish civil law transactions is of a residual nature and did not seem promising in the period preceding the pandemic.

However, it seems possible to use the suspensive, adaptive or even exceptionally extensive (termination of the agreement with the settlement of the consequences for the parties – distribution of costs, minimisation of losses, deductions, damages) schemes (mechanisms) provided for in such clauses to regulate the relationship between the parties. Both scenarios involving ex post and ex ante settlements will be considered. In the latter case, it will be a continuation of the agreement supplemented by new clauses, created to resolve disputes that may arise in the future in connection with the performance of the agreement maintained in force (although most often amended-adapted to the new conditions).

Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?

Under Polish law the doctrine of frustration does not apply. The institution that is most similar is clause rebus sic stantibus. However, in contrast to frustration, the rebus sic stantibus clause causes another effect. To the extent that frustration causes the obligations to lapse (combined with possible settlements of the parties), then the effect of invoking the clause (e.g. on the basis of the Polish Civil Code) is the possibility to demand a ruling on the existing undertakings under changed circumstances. Sometimes the legislature also decides to regulate separately the adjustment of cash benefits.