The Impact of COVID-19 on Contracts and Force Majeure

Polish civil law does not define force majeure. However, it provides for legal instruments that allow one of the parties to modify the contract under extraordinary circumstances that make the performance of the contract impossible, or too expensive to be economically viable.

These instruments are:

1. Clausula rebus sic stantibus (Latin: "things thus standing"). The legal doctrine allowing for a contract or a treaty to become inapplicable because of a fundamental change of circumstances.
2. An inability to perform the contractual obligations.

The first of these means that in case of an extraordinary change in circumstances that the parties had not foreseen while entering into the contract, but which results in the further performance of an obligation being unreasonably burdensome, or would lead to a material loss, the affected party may request the revision or termination of the contract. The weakness of this instrument is that the revision or termination must be applied for in court, which may lead to a situation where the affected party may already have incurred an irreparable loss before the court ruling.

Under the second instrument, if a contractual obligation becomes objectively impossible, then the obligation will expire. This applies only to extraordinary situations where the performance of an obligation is impossible, and thus this solution is rarely available in issues caused by the COVID pandemic.

Consequently, the Ecovis advisers in Poland recommend that the only effective solution is a precise contractual clause that provides for such situations and forces the parties to modify the contract.

English Law

English law is quite different; it is not based on a civil code. There are no consistent rules for what happens on events outside the parties’ control, nor on impossibility.  

The ideas in English law which are most comparable are:

1. Frustration: A contract may be discharged when something occurs which renders it impossible or radically different from that agreed.
2. Impossibility: A party may be excused by a court if the contract becomes impossible.

Neither option is helpful; the contract will not be undone as if it had never existed or terminated in full. Instead, accrued rights survive and although money paid can be recovered, money due but not paid ceases to be payable and the court may allow recovery of expenses incurred and a “just” payment for any benefit gained.

This is too much uncertainty. Well-advised parties use contracts with explicit force majeure clauses. These typically:

• excuse one or both parties from performance (and liability) on force majeure
• define force majeure as events outside a party’s reasonable control
• give non-exhaustive examples
• contain duties to notify, to mitigate the consequences and to discuss and agree a preferred outcome
• allow the parties to suspend the contract to allow such discussions
• ultimately, allow the affected party to terminate
• contain clear and agreed consequences of termination.

Neither Brexit nor COVID-19 has caused any cases which have caused us to think again about the law on force majeure. We have seen lots of disputes where parties disagree about the effect of COVID-19 on their contracts (typically contracts for events and conferences). All have been settled by agreement. We are not aware of any cases which are likely to change the law, say the legal experts from the UK.

For further information please contact:

Nikodem Multan, Attorney at law, Partner, ECOVIS LEGAL POLAND PRUŚ AND PARTNERS LAW FIRM, Warsaw, Poland
Email: nikodem.multan@ecovis.pl

Mark Lucas, Lawyer, Moore Barlow LLP – Member of ECOVIS International, Guildford, Surrey
Email: mark.lucas@moorebarlow.com