Impact of coronavirus on contracts governed by foreign law

The impact of the coronavirus pandemic and its severe consequences on the ability of businesses operating in Poland to meet their contractual obligations, are unprecedented.

Many contracts to which businesses operating in Poland are parties to are subject to foreign law, either as a result of an explicit contractual provision or for other reasons. The analysis of rights and obligations stemming from them, as well as preparation for discussions with a debtor or a creditor or for a possible court dispute, requires a professional analysis of the contract in the light of the applicable law. It is worth noting that different legal systems and jurisprudence of foreign courts may often result in a drastically different outcomes for the respective parties, despite the literally identical wording of the contract.

The SSW team comprises of experienced lawyers with qualifications to practice foreign law, including English, German, French, Spanish and Korean law. This allows us to give advice on foreign law locally, cost-effectively and in Polish. In addition, we work closely with a number of foreign law firms that are leaders in their respective jurisdictions.

SSW currently advises many clients who wish to invoke (or whose counterparties are invoking) the occurrence of force majeure, due to the coronavirus pandemic – with a view to escape liability for non-performance or late performance of a contract or as a basis for contract termination. Many factors may have an impact on the contracts, ranging from the general economic situation; special legislative acts introducing a number of restrictions and obligations; as well as direct modification of the contractual relationships of the parties. Moreover, these contracts may contain provisions providing for (i) modification of the agreed prices or remuneration; (ii) limitation or exclusion of the parties’ liability; (iii) the right to terminate the contract in the event of a change in the law governing the contract or its performance; and/or (iv) the right to terminate or withdraw from the contract in the event of a material adverse change. These provisions may, depending on the content of the particular agreement, apply in connection with a coronavirus epidemic.

So, can the coronavirus epidemic constitute a basis for withdrawal from a contract or non-performance of obligations therein?

Below, our partner Mateusz Chmielewski (a graduate of the University of Cambridge, English Solicitor and Polish Legal Counsel), answers this question, discussing the legal position in relation to contracts governed by English law:

Possible grounds for exemption from the obligation to perform a contract under English law

English law provides limited grounds for relieving of parties to a contract from the obligation to perform it. Such grounds are: (1) frustration; and (2) contract terms, including the so-called force majeure.

Frustration

The doctrine of frustration results in automatic termination of the contract in case of an event that occurs which (i) was unforeseeable; (ii) was beyond the control of the parties; and (iii) made performance impossible or caused a fundamental change in the nature of the contractual obligations, so that performance would effectively be an entirely different performance from that agreed by the parties at the time of the contract.

In the context of the coronavirus epidemic, it is worth citing the 2003 Hong Kong court ruling (based on common law principles) in a case related to the SARS – Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754. In this case, the court disagreed with the position of the tenant, who, citing the doctrine of frustration, took the view that the lease to which he was a party was automatically terminated as a result of a decision of the Hong Kong Department of Health’s administrative department, which prohibited the use of the property for 10 days. In the court’s view, this period was of such little significance in view of the two-year term of the lease agreement, and, that while the SARS epidemic could potentially have been regarded as an unforeseeable event, in the actual circumstances it did not result in a significant change in the nature of the rights and obligations of the parties under the lease agreement.

The parties can argue that, due to the coronavirus pandemic, the doctrine of frustration applies to their contract for the following reasons, for example:

unlawfulness – when the performance or further performance of the agreement would constitute a breach of the newly introduced law;
objective temporary impossibility to fulfil the obligation – for example, due to provisions introducing border traffic restrictions preventing the performance of the contract within the time limits indicated in the contract;
inability to perform the contract in the manner provided for in the contract – however, the frustration will not apply, if the contract can be performed in a manner other than that provided for in the contract, given that the differences are not fundamental;
unavailability of the subject matter of the agreement – if the subject matter of the agreement is, for example, raw materials supplied by specific producers or from specific geographical areas, which become unavailable for reasons beyond the control of the parties, e.g. because of border traffic restrictions introduced, resulting in the impossibility of importing or exporting from or to a specific country.

Effective recourse to frustration results in automatic termination of a contract. However, frustration is used by English courts relatively rarely and is generally not used where the fulfilment of a benefit is only delayed. In any case, a detailed analysis of the facts must be carried out in the light of rulings by English courts in similar factual and legal situations.

Force majeure

A consequence of the relatively rare use of frustration by English courts is the frequent use of force majeure by the parties.

The standard force majeure clause provides that a party to a contract shall not be liable for non-performance where it is unable to perform or perform on time – to an unforeseeable event outside its control. The clause also generally includes a list of such events (exemplary or closed) – such as war, acts of terrorism or disasters (often referred to as ‘acts of God’).

It should be stressed out that English law has not developed a doctrine of force majeure applicable to contracts by operation of law. Moreover, force majeure clauses are interpreted literally, according to the wording agreed by the parties. Whether or not a given event or circumstance constitutes force majeure, and what are the consequences, depends on what the parties have agreed.

Hence, whether the coronavirus pandemic constitutes force majeure or not can therefore be assessed only on the basis of a detailed analysis of a given contract concluded by the parties. For example, the model force majeure clause proposed by the International Chamber of Commerce lists an ‘epidemic’. However, each contract must be analysed individually.

In this context, it is worth noting the certificates issued recently with increased intensity by the China Council for the Promotion of International Trade; and the Chinese agency for foreign trade promotion, confirming the occurrence on the part of Chinese producers, exporters, and importers of instances of force majeure related to the coronavirus pandemic, resulting in restrictions on freedom of movement, limitations on the availability of workers, or delays related to the lack of opportunities to do work for other reasons. The purpose of these certificates is to exempt Chinese companies from liability for non-performance or partial non-performance of contracts. While such a certificate may carry some weight, whether an English court would find that there is a case of force majeure in such circumstances, justifying non-performance, would depend on a detailed analysis of the facts, as well as the provisions of the specific contract (with another, practical issue being, of course, the likelihood of enforcing an English court judgment against a Chinese contractor in China in such circumstances).

If a given event or circumstances constitute force majeure as defined in the contract, the next step would be to analyse the impact of such event or circumstances on the contract and the parties’ obligations pursuant to it. Such consequences also depend on what constitutes a contract. A contract may, for example, provide for:

an express or implied obligation of the parties to take certain actions to counteract the effects of force majeure;
the right of the parties to temporarily suspend the performance of the contract for the duration of the force majeure event;
no liability of the party for non-performance or untimely performance of the agreement;
extension of the time originally foreseen for the execution of the agreement (e.g. setting a later date for the completion of construction works); and/or
the right to terminate the contract, generally after a certain duration of circumstances constituting force majeure.

The above list is only an example. The actual content of the contract between the parties is decisive.

It is also worth noting that the contract may also contain a number of other provisions that may apply in connection with a coronavirus pandemic, providing, for example, (i) modification of the agreed prices or remuneration; (ii) limitation or exclusion of the parties’ liability; (iii) the right to terminate the contract in the event of a change in the law governing the contract or its performance; and/or (iv) the right to terminate or withdraw from the contract in the event of a material adverse change.