Coronavirus and contracts governed by foreign laws

The impact of COVID-19 pandemic on the ability to meet contractual obligations is likely to affect every company.

Additionally, the situation of a business may prove to be even more complicated if the contract is governed by foreign law or if – for other reasons – foreign law may apply to consequences of the contract non-performance.

Preparation for negotiations with a creditor or a court dispute requires a professional analysis of the contract from the perspective of the applicable law and its judicial interpretation in the country concerned.

Get ready now – analysis of contracts that bind you

In the current state of epidemic, it seems justified to invoke force majeure (vis maior) or a fundamental change of circumstances provided for by the Polish Civil Code (apply changed circumstances clause). However, when preparing for possible negotiations or disputes concerning contracts, it is necessary to make sure that the contract is governed by Polish law, or whether it may have been submitted to foreign law or whether, for other reasons, foreign law will apply to consequences of its non-performance or improper performance.

It is important to be aware that foreign legislations and jurisprudence may adopt different approaches to the above-mentioned legal institutions. Therefore, depending on the legal system, evading the effects of non-performance or improper performance of a contract due to force majeure or making judicial modifications to the provisions of the contract due to ‘unforeseeable’, ‘extraordinary’ circumstances may be permissible to a certain extent.

In addition, the provisions of such agreements may, consequently, also refer in their drafting to the national understanding and rationale of application of those clauses.

It is also worth checking how the agreement settles liability of the parties for non-performance or improper performance of an obligation and whether circumstances of force majeure, extraordinary or unforeseeable situations can be invoked against the contracting party.

It should be noted that in international trade contracts, there are quite often clauses in which the trader assumes responsibility for non-performance or improper performance of an obligation also due to (strictly defined) accidental circumstances or even force majeure. The contract may also restrict or even completely exclude the application of force majeure implicitly, e.g. by indicating that the parties assume all risks arising from the contract.

Therefore, it should be analyzed in detail whether the provisions of the agreement do not exclude the possibility of invoking force majeure events, or whether a party thereto otherwise assumed liability wider than that traditionally encumbering the contracting parties, and if it did, whether provisions on assumption of such additional liability can be considered valid.

As far as the changed circumstances clause is concerned, it should also be borne in mind that the legal situation of the trader can vary greatly depending on the law that applies to the contract. In different foreign legal systems, its application may have different grounds and scope. While in some European countries the changed circumstances clause is expressly provided for by law, not only may its legal basis vary from country to country, but the conditions for its application in practice will also depend on interpretation by national supreme courts. At the same time, in other jurisdictions, the admissibility of application of the changed circumstances clause is not based on an explicit provision of the law, but has been established by the courts based on the general provisions on the performance of obligations, and therefore the conditions for its application derive from judicial decisions. Furthermore, it is necessary to check whether the application of the clause on fundamental change of circumstances was not contractually excluded in our contract.

It is also worth mentioning that in international trading agreements, in accordance with the UNIDROIT Principles of International Commercial Contracts, it is also possible that the agreement itself contains an appropriate stipulation, providing for the possibility of renegotiating its provisions in the event of unpredictable circumstances (the so-called hardship clauses).

 

How can we be of help?

Our Law Firm offers comprehensive advisory services in all aspects of contract law. For many years we have been providing specialist legal assistance in this area to the largest domestic and foreign entrepreneurs. We also support clients in mediation, arbitration proceedings and court disputes.

As part of the global KPMG network, we offer comprehensive legal analyses, also in terms of foreign legal regulations, prepared by specialized lawyers from individual European and non-European jurisdictions.

If you are interested in our support in this area or have any questions about your contractual/legal situation in the context of the spread of coronavirus, please contact us.