Can an epidemic excuse late performance of a contract? | In Principle

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Can an epidemic excuse late performance of a contract?

The simplest answer is “it depends”—primarily on the specific clauses included in the contract and the governing law. This issue is worth considering under Polish law, because economic globalisation means that factory closings in China could also disrupt supply chains in Poland.

Governing law

To assess a given contract, the law governing the contract must first be determined. Sometimes this is expressly stated in the contract. Other times the issue may also be clear, for example when the contract is concluded between two Polish entities and is performed in Poland.

But when there is an international element, and the contract does not contain relevant provisions, the court or arbitral tribunal hearing the case must determine the governing law under applicable conflict-of-law rules. These are set forth in the Rome I Regulation (593/2008). Under Rome I, if no choice of law has been made, a contract for the sale of goods (or provision of services) is governed by the law of the country where the seller (or service provider) has his habitual residence (Art. 4(1)(a)–(b)). There are certain exceptions to this general rule, the most important of which involves consumer contracts, which are generally governed by the law of the country where the consumer has his habitual residence (Art. 6(1)).

Delay in performing contract under Polish law

If the contract is governed by Polish law, the contract should first be analysed to determine how it divides the risks between the parties. It might provide that the supplier or service provider guarantees to perform the contract on time regardless of the circumstances. Such an obligation need not be expressly stated, but may also be determined by interpreting the contract based on its purpose and the mutual intent of the parties.

If the contract does not include any particular provisions on this issue, the Civil Code should be consulted. Art. 471 of the code contains the general provision on liability for non-performance of contracts, under which the party failing to perform the contract is obligated to make up for the loss, unless non-performance is due to circumstances for which the party is not responsible.

Demonstrating the absence of responsibility is tantamount to proving that performance of the contract was impossible for reasons which could not reasonably have been foreseen or prevented. The coronavirus epidemic raging in China at the moment, and the related safety measures, are an example of such a specific, unforeseeable event. If a Polish company relies on this circumstance, it must also show that it undertook performance of its obligation before it learned of this specific situation, and that it could not find a subcontractor that could perform the contract within a similar period. The same argument may be raised by the defendant if the contract provides for contractual penalties for delay or non-performance of the contract, in place of or alongside damages.

Extraordinary change of circumstances

When a supplier realises that it will not be able to perform the contract due to extraordinary circumstances, it need not wait for a claim from the customer but may itself file a claim with the court or arbitral tribunal seeking to modify the contract in force between the parties. This is permitted by Civil Code Art. 3571, which provides that if due to an extraordinary change in circumstances, performance would entail excessive difficulties or would expose one of the parties to a glaring loss, which the parties could not have foreseen when concluding the contract, the court may, after weighing the interests of the parties, designate a method for performing the obligation or even rule that the contract is dissolved. Thus the court may, at the least, extend the deadline for contract performance.

Such proceedings can last months, which means that it is worthwhile to consider seeking interim relief from the court regulating the relations between parties during the pendency of the dispute.

Resolution of disputes in a blocked supply chain

Blocking of deliveries by a subcontractor within a longer supply chain may give rise to claims between entities further along the chain. If the manufacturer of key subassemblies does not perform its obligation, neither can the entity second or third in line. Each of them is exposed to liability to its own customer. In the worst-case scenario, this may lead to a series of judicial or arbitration cases, each generating significant costs and covering similar issues. Before this happens, it is worth seeking legal advice and taking efforts to resolve these issues amicably, which can help contain the costs as well as enable continued fruitful cooperation.

Piotr Golędzinowski, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners