Introduction
The World Health Organisation officially declared the outbreak of the novel Coronavirus Disease (known as COVID-19) as a global pandemic on March 11, 2020. By then the virus had already spread from Wuhan, China crossing international borders to many countries around the world. Given the rapid rate of infections and increasing number of deaths in the wake of the unprecedented escalation of COVID-19, various measures have been taken by states and authorities to limit the spread and contain the outbreak of the virus.
The outbreak of the virus has triggered many severe social and economic consequences for individuals, entities and governments worldwide. Notably markets and industries have been negatively affected by the disease and global stock and commodity prices have plummeted to increasingly low levels in recent weeks and days. There is a general understanding that this situation is not expected to reverse anytime soon, given the impact of current travel and border restrictions and lockdowns of large swathes of movements of persons through the frontiers of cities, countries and regions. To date, a significant number of domestic and international contractual obligations have been frustrated and performances put on hold.
This present article provides some considerations as to the situation in Poland in the light of the outbreak of COVID-19 as nobody knows how long the pandemic will persist.
2. Main issues for consideration and thoughts on entities and transactions
The COVID-19 outbreak will likely have a negative impact on the ability of many entities regarding fulfilment of their contractual obligations towards their lenders/creditors/suppliers etc. In addition, one of the side effects of the various measures against COVID-19 is the inability of employees to perform their duties for lengthy periods. On the other hand, the liability of the employers to continue paying salaries in such circumstances is now in question. Indeed, several employers may not be in a position to meet their salary obligations towards their employees due to possible difficulties in
receiving payments from their clients on time. This may force some employers to terminate contracts of employment, or convert the period of paid employment to unpaid leave or to reduce the salaries of employees without their consent. In addition, many employers currently allow their staff to work remotely although this kind of work from home is not subject to contracts of employment and internal bylaws introduced prior to the outbreak of the pandemic. Furthermore, the restrictions imposed by states on travel agencies and airlines have resulted in many abrupt cancellations of flights and trips. The determination of the party to bear the losses or liabilities arising under relevant contracts is now a major concern for the parties involved. Under current circumstances caused by COVID–19, legal questions arise as to the status of previously scheduled events and pre-paid bookings for hotel accommodation and event venues. Finally, operators in the construction and mining sectors may also face serious interruptions to the performance of their contractual obligations, for instance in cases of the delivery of construction materials, which have been stalled, or in the failure of workers from foreign countries required arriving at construction sites on time. Here the question arises as to whether they will still be entitled to payments and/or liable for delayed performance?
3. The recommended course of action
a. Force Majeure
A force majeure clause is often a part of business contracts and this term refers to a “superior power”. Typically, this type of clause excuses non-performance under specified circumstances.
In order to explain the nature of the force majeure term under Polish law, it is necessary to emphasize that there is no legal definition of ‘force majeure’ in any legal action. Polish jurisprudence understands force majeure as an external, inevitable, extraordinary and unpredictable force[1]. As defined above, the outbreak of COVID-19 in the case of many contracts should be considered a force majeure event.
For contracts containing force majeure clauses, the parties may invoke this clause in their commercial agreements to avoid liability for non-performance.
In cases of contracts, which do not contain force majeure clauses, parties to such contracts could invoke regulations applicable under Polish law, most notably, the relevant provisions of the Polish Civil Code:
aa) Force majeure as a basis for the nullity of a contract
In cases, in which force majeure events make a contract impossible to be performed, Article 475 § 1 of the Polish Civil Code applies stating
“If the fulfilment of an obligation has become impossible as a result of circumstances for which the debtor is not responsible, the obligation expires.”
In that case, the contract, which is impossible to be performed is terminated by the power of law. It should be stressed that the impossibility to perform a contract should be understood objectively and takes place in cases when not only the debtor but no one else would be able to fulfil the contract in the given circumstances. In other words, a state of complete, permanent and objective inability of the party to behave in a manner arising from the content of the obligation (not just a temporary difficulty) must occur.
The burden of proof of the impossibility of carrying out a contract is on the debtor. If it turns out that that performance of the contract is not possible, then the contract is terminated. The consequence of the termination of a contract is the obligation of the parties to return to each other everything they have received from each other up until the date of termination.
bb) The extraordinary clause of an extraordinary change of contractual conditions (rebus sic stantibus)
Obviously, the current situation caused by the COVID–19 pandemic will often require parties to a contract to make mutual concessions in terms of their further performance. However, if negotiations fail, the parties may make use of the clause of an extraordinary change of conditions (rebus sic stantibus) as stated in Article No. 3571 of the Polish Civil Code:
“If due to an extraordinary change in conditions, the performance of the service would be combined with excessive difficulties or would threaten one of the parties with a gross loss, which the parties did not anticipate at the conclusion of the contract, the court may, after considering the parties’ interests, in accordance with the principles of principles of equity, mark the manner of fulfilling the contractual obligation, the amount of the benefit or even decide to terminate the contract”.
In order to invoke the above-mentioned regulation, it is necessary to bring the appropriate action to the court.
cc) Force majeure as a basis for excluding contractual liability
Article 471 of the Polish Civil Code which is deemed to be the legal basis for the debtor’s contractual liability provides as follows:
“The debtor is obliged to rectify any damage resulting from non-performance or improper performance of the obligation unless the non-performance or improper performance is a consequence of circumstances for which the debtor is not liable.’”
In connection with the above, force majeure as a result of the COVID-19 pandemic, may constitute a condition excluding the debtor’s liability for non-performance or improper performance of an obligation. It is important to emphasize that contractual liability is based on the presumption of guilt. The burden of proof that the non-performance or improper performance of an obligation is a consequence of inability to perform any obligation caused by force majeure, lies with the party who is not fulfilling his/her obligation.
Whether COVID-19 will find the application under the general term “force majeure” of a certain contract or will be adjudged a “superior power” event by operation of Polish law, will depend on the nature of the contract along with unique facts and circumstances of each case. In the light of COVID-19, the parties to a contract may finally seek its termination or suspension or be relieved from the performance of their contractual obligations and duties in full or in part.
b. Employment
The COVID-19 virus has also had a profound impact on the economy. Forced shutdown of factories, sales outlets and other establishments, and the need to address problems caused by compulsory quarantine and social distancing measures make employers look for ways to continue operation under epidemic conditions and to reduce losses and curb payroll expense.
To help employers fulfil their obligation to ensure healthy working conditions for their employees under the Labour Code, the Polish Government adopted the Act of 2 March 2020 on special solutions to prevent, counteract and fight COVID-19, other contagious diseases and crises caused by them. Article 3 of the above Act provides for the possibility for the employer to instruct an employee to work remotely for a definite period of time. The Polish Labour Code already contains the institution of “teleworking”. However, “remote work” provided for in the COVID-19 Act is a broader term than “teleworking”. Unlike teleworking, remote work may also be performed outside the permanent place of its performance, e.g. at home without the use of electronic communications (a computer and access to the Internet). Remote work is only about changing the place where work is performed. Therefore, “home office” does not affect the employee’s salary. It is the decision of the employer to instruct the employee to work remotely. The employee may suggest or request “home office” work, but such a suggestion or request is not binding for the employer.
However, there are types of jobs, where remote work is not possible. The shutdown is the mechanism provided for in the Polish Labour Code in such a situation. In the opinion of the Polish Labour Inspectorate, the need to temporarily shut down the workplace in order to prevent COVID-19 will be a reason attributable to the employer, even though it is a reason by no fault of the employer. As a consequence, for the period during which the employee is unable to perform work due to that reason, the employee is entitled to remuneration determined in accordance with the principles under Article 81 of the Labour Code.
The Act of 2 March 2020 on special solutions to prevent, counteract and fight COVID-19, other contagious diseases and crises caused by them provides for an opportunity for the employer to obtain state aid to maintain employment during a shutdown caused by the COVID-19 epidemic. An entrepreneur who experienced a lower turnover due to COVID-19 may file an application for benefits to protect jobs, for payment of funds from the Guaranteed Employee Benefits Fund to finance salaries of employees affected by an economic shutdown, or reduced FTE in accordance with the principles laid down in the Act. An employee affected by the economic shutdown is paid a salary by the employer reduced by no more than 50% and which is, however, not lower
than the minimum remuneration for work with the relevant portion of FTE taken into account. However, there may be problems for entrepreneurs, where trade unions operate, as an agreement with trade unions is required to introduce a shutdown and the entrepreneur only has five days to report the agreement with trade unions or representatives of the workforce to the National Labour Inspectorate.
It is also worth noting that, pursuant to the Polish labour law, the occurrence of the epidemic cannot be the reason for mass layoffs of workers on its own, but the effects of the epidemic such as lower demand for certain services or the employer’s financial problems may be such reasons.
4. Final Conclusion
Commercial entities and individuals, which experience disruptions to business caused by the COVID-19 pandemic, should consider seeking proper legal advice in order to mitigate risks associated with the outbreak of the COVID-19 pandemic and to tailor their contractual relationships/arrangements and obligations to this situation.
In case of any further questions related to this subject please contact us at the following email address: [email protected].
