COVID-19, performance of contracts governed by foreign law, and the hardship clause | In Principle

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COVID-19, performance of contracts governed by foreign law, and the hardship clause

Many businesses and their lawyers are now analysing the impact of the coronavirus on their contractual obligations. In the case of some contracts the situation is further complicated by the fact that the contract is governed by foreign law.

We have already written about the grounds for invoking force majeure or an extraordinary change in conditions (rebus sic stantibus) under the Polish Civil Code, as well as performance of contracts under epidemic conditions. But in preparing for a potential contractual dispute, it should be determined whether the contract is governed by Polish law or foreign law, and whether relief may be invoked under the Civil Code.

It should be borne in mind that the provision on extraordinary change in circumstances (Civil Code Art. 3571) is unusual in the context of other legal systems (although there is a similar provision in the Italian Codice civile). In most countries (such as common-law jurisdictions, Germany and Switzerland), solutions functionally comparable to Poland’s extraordinary change in circumstances are derived from the legal literature and court decisions (as discussed by Piotr Olechowski in his article “O przejawach klauzuli rebus sic stantibus w zagranicznych porządkach prawnych i prawie międzynarodowym” (Rebus sic stantibus clauses in foreign legal systems and international law), Przegląd Prawno-Ekonomiczny no. 40 (3/2017)). But some legal systems, strongly attached to the principle of enforceability of contracts, totally reject the notion of an extraordinary change in circumstances clause. There the fundamental instrument for protection of the interests of a party against the negative impact of a change in circumstances is the institution of force majeure (e.g. Belgium). (A few years ago France was such a jurisdiction, but from 1 October 2016 the institution of l’imprévision, the French answer to the hardship clause, became an integral part of French contract law.)

Thus international contract practice has developed a number of autonomous solutions, including hardship clauses. They provide that if an unforeseen event materially alters the contractual balance (for example forcing a party to source products from another, more expensive supplier), the parties must take up good-faith renegotiation of the contract. A hardship clause has also been enshrined in provisions of soft law, such as the standard terms from UNIDROIT, the International Chamber of Commerce, and FIDIC.

An advantage of including a hardship clause in the contract over the Polish statutory provision is that it does not always require commencement of litigation before the court. This is worth remembering not only when analysing existing contracts in international trade but when concluding new contracts.

The ICC proposes a model hardship clause with three levels. Initially, the parties to a contract are bound to perform their contractual duties even if events have rendered performance more onerous than anticipated at the time of conclusion of the contract. Nonetheless, if one of the parties proves that continued performance has become excessively onerous due to an event it could not reasonably foresee or avoid, it may summon the other party to negotiate alternative contractual terms reasonably allowing for the consequences of the event. Finally, if alternative terms cannot be agreed, the party invoking the clause is entitled to termination of the contract.

And there is nothing preventing the parties from drawing up their own version of such a hardship clause, tailored to their own needs.

Anna Olejniczak-Michalska, attorney-at-law, Private Client practice, Reprivatisation practice, Wardyński & Partners