Contracts during the pandemic - how to avoid a disaster

What results of the introduction of the state of epidemic threat in the territory of the Republic of Poland is, undoubtedly, a drastic decrease in the revenue of companies from various sectors of the economy. What steps should be taken in such a situation by entrepreneurs who are bound by various types of contracts whose performance has become much more difficult or has, for the time being, lost any business sense, and, to make matters worse, may lead to loss of liquidity by the entrepreneur in a longer term, as well as more far-reaching consequences?

In the first place, the entrepreneur who has been directly affected by economic consequences of the pandemic should try to renegotiate the contract that binds him with the counterparty, by agreeing its new terms and conditions to be applied, at least temporarily, i.e. throughout the period of the pandemic and immediately after it. There may be numerous solutions in this respect, depending on the contract we deal with in a given situation. What is important is that the parties to a contract, renegotiating its terms and conditions in good faith and with due care, lead to a situation in which the economic consequences of the pandemic are divided between them in a balanced way. For instance, in the case of a lease agreement entered into for an indefinite period it may be exemplified by a temporary decrease in the lease rent in exchange for extending the lease period, in a situation in which the lessee, due to the new circumstances, is not able to conduct business activity or it has been significantly limited.

One should also be aware of the fact that not every "crisis” situation can be solved amicably, without resorting to court proceedings. What should an entrepreneur do, if his counterparty, in view of differences in positions and expectations, has not agreed to change the contract's terms and conditions? First of all, it needs to be determined if, from the legal perspective, a given contract can be performed further. In view of the regulations introduced by the legislative branch, numerous entrepreneurs have completely lost the ability to conduct business activity, e.g. stores in shopping malls, fitness clubs, artists, event companies and many more. Disregarding – at this moment – the planned statutory regulations, e.g. the so-called anti-crisis shield (which is expected to come into force at the beginning of April), the parties should, in the first place, conduct an analysis of the contract and determine if the obligations provided for in it will not be fulfilled at all due to the legal regulations introduced. If the conclusions of the analysis are negative, then the party whose counterparty has lost the ability to fulfil the obligation  has been granted by the legislator, in Article 495 of the Civil Code (hereinafter referred to as the “CC”), unique rights, whereas for the party who has lost the ability to fulfil the obligations, the above-mentioned regulation imposes certain limitations.

If one of the mutual considerations has become impossible (in the current state of pandemic it will definitely be non-pecuniary consideration) due to the circumstances for which neither party can be held liable, (as is the case with the pandemic), the party which was supposed to perform that (impossible) consideration may not request a mutual consideration, and, in the case in which it has already obtained it, that party is obliged to return it in accordance with provisions about  unjust enrichment. In other words, in a situation in which a given party has lost the possibility of performing the consideration it may not request a mutual consideration (e.g. a payment), and if it has already obtained such a consideration (e.g. a down payment), it is obliged to return it.

However, in a situation in which a consideration of one party has become partially impossible, that party loses the right to a relevant part of the mutual consideration (e.g. will receive only the partial payment), whereas the other party may withdraw from the contract, if the partial performance would not be significant to it due to the nature of the obligation or due to the purpose of the contract assumed by that party, known to the party whose consideration has become partially impossible. Consequently, the party which was supposed to receive the consideration which, as a result of the pandemic, has become impossible, may, on one hand, pay only for that part of the mutual consideration which may be or has been performed, and if such a “division” of the considerations does not make economic sense to that party, it may withdraw from the contract in its entirety. Withdrawal from the contract means that, from a legal point, such a contract is deemed not to have been entered into, and if earlier the parties performed, on its basis, any considerations to each other (or even unilaterally), they are obliged to return the considerations received to the other party in kind or settle them.

Importantly, the above-mentioned Article 495 CC applies even if the parties did not provide for it in the content of the contract itself, and, furthermore, allows “leaving” the contract through withdrawal only to the party towards which the consideration which has become impossible should have been performed. The party which – due to the pandemic and the latest legal regulations adopted by the legislative and executive – is not able to perform its consideration, may not, under Article 495 CC, seek the possibility of being released of its contractual obligations.  

However, a much more frequent situation during the pandemic than the one described above, in which we deal with the so-called impossible consideration (e.g. as a result of legal regulations introduced on an ad hoc basis), is a situation in which the parties may, in fact, perform their respective considerations to which they are obliged under the contract, but due to the so-called extraordinary change of relationships the performance would involve undue burden or suffering material losses by a party, which the parties did not foresee at the time of contracting. The onset of the pandemic, both on local and international markets, was an unpredictable phenomenon, and, consequently, it will be difficult to find provisions (clauses) which regulate the parties’ rights and obligations in such circumstances in the contracts entered into before that event.

The legislator has provided for an extraordinary regulation for such a situation, and included it in the provisions of the Civil Code in Article 3571 § 1 CC [rebus sic stantibus clause (Latin for “things thus standing”)]. The regulation in question may be applied to all types of contracts, irrespective of whether the consideration which would involve undue burden or suffering material losses by a party is of pecuniary or non-pecuniary nature.

If, due to the so-called extraordinary change of relationships, performance of a consideration involved undue burden or suffering material losses by a party, which the partied did not foresee at the time of contracting, then the court may, considering the parties" interest and the rules of social conduct, determine the manner of performing the obligation, the amount of the obligation or it may even rule on termination of the contract. Consequently, the court, on the basis of the verdict, may not only interfere in the content of the contract itself, e.g. by modification of the business terms and conditions set out in the contract (including, e.g. those regarding the price or delivery date), but it can also rule on termination of the contract. In its verdict, the court may determine a different way in which an obligation is to be performed than the one originally agreed, or change the amount of the consideration, however, it may not change its type.

It seems that the current situation is an “extraordinary change of relationships” within the meaning of Article 3571 § 1 of the Civil Code, as its nature is exceptional and extremely rare. It is also hard to expect from entrepreneurs that they could anticipate the onset and escalation of the pandemic, and, in particular, the consequences of the legal regulations introduced on an ad hoc basis, as well as social consequences in the situation in question which directly affect the economic environment, and, thus, the manner in which contracts are performed. However, we should clearly differentiate the “extraordinary change of relationships” from an ordinary (normal) contract risk which entrepreneurs should each time take into account when making a decision to enter into contracts in business transactions. Undoubtedly, the onset of the pandemic cannot be considered to be an event which should each time be taken into account when assessing the risk in the company’s ongoing operation.

What is predominant in the decisions of both the Supreme Court and common courts is the belief according to which a party may bring an action aimed at unilateral modification of the contract until there is a civil law relationship which, as a result of a verdict issued on the basis of 3571 § 1 CC, is intended to be modified. In other words, the court cannot interfere in the content of the contract to the extent to which the contract has expired. This is due to the fact that an obligation-based relationship which does not exist, has expired e.g. as a result of performance (e.g. through payment) cannot be modified. An opposite opinion is also presented according to which Article 3571 § 1 CC may apply to contracts which have already been performed, but due to the fact that this belief is quite uncommon, it should be treated with caution in the context of pre-trial activities and those related to the proceedings. What also seems to be a right solution is to submit a motion for securing a claim based on Article 3571 § 1 CC, in which one can request the court for temporary regulation of the manner in which the contract is to be performed (e.g. by determining the amount/scope of the performance) for the period of the court proceedings. It needs to be pointed out that the court – in the situation in question – is not bound by the plaintiff's demand, i.e. one cannot rule out a situation in which the plaintiff will call for a verdict terminating the contract, whereas the court will rule on a change in which a consideration needs to be performed or on its amount. When taking a decision to admit the petition, the court, as a matter of principle, will, in the first place, consider the possibility of “keeping” the contract, and if it is not possible or justified (e.g. due to rules of social conduct), then, as a last resort, the court may rule on its termination. Even if entrepreneurs do not find, in the contracts which have already been entered into, clauses which could be used in the case of a pandemic, application of the above-mentioned regulations from the Civil Code may be useful, as, currently – in view of a broader picture of economic relations – they have become more significant.

Irrespective of which of the above-mentioned remedies is used by the entrepreneur, it is important that he should take pre-trial or proceedings-related activities immediately, i.e.  now – contrary to what Jan Kochanowski wrote, i.e. that it is easy to be wise after the event.