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Coping with Covid-19 - the Business Response

Covid-19 and international trade

By Natalia Jodłowska, attorney at law, Gessel Attorneys at Law
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Although international trade may seem to be only one of numerous sectors affected by the Covid-19 pandemic, disturbances at the initial stage of a trade chain may cause a domino effect on various business activities, with implications for individual lives and for public health.

International trade constitutes a crucial base for food products and their ingredients, daily-use items such as cosmetics and hygienic products, medicines and medical equipment, electronic equipment and its components, or building materials and machinery.

In light of the coronavirus epidemic, the Polish government (like most counties around the world) decided to impose significant restrictions on cross-border travel. Beginning at midnight on Sunday, 15 March 2020, the Polish border closed to foreigners (with certain limited exceptions, such as foreign nationals based in Poland). Polish citizens returning from abroad had to submit themselves to a compulsory 14-day quarantine. International passenger traffic on the railways has been suspended, as have scheduled passenger flights. Although the Polish government declared that goods can enter and leave Poland unimpeded, the overall global situation has disrupted the international movement of goods. International commerce is influenced by legislative restrictions imposed by national governments (these may vary between supplier and recipient countries), and by corporate policy and by the human factor. These include internal limits on travel imposed by specific companies, mandatory home-office regimes, necessity of childcare, quarantine and – in the worst case – the illness of individual employees, and finally the individual reactions to the stressful situation in which we now find ourselves.

The coronavirus pandemic has hit international supply chains, at different stages and to varying extents, bringing losses down on suppliers and buyers. All such factors may impact the possibility of successfully completing an international delivery.

Parties to an international sale or delivery agreement affected by the pandemic should begin by assessing their contractual clauses regarding liability for failure to perform, or for improper performance of their contractual obligations. Often, especially in the case of long-term relationships and framework agreements, international sale or delivery contracts provide for so-called force majeure clauses, and specific obligations of the parties in extraordinary situations, that are usually exhaustively listed in the contract text.

Liability for non-performance, or improper performance, of contractual obligations is also regulated by national legislation. As a rule, under Polish law, contractual liability is based on the culpability concept – in short, a party may avoid liability for failure to perform, or to perform duly, where the cause of such failure does not result from lack of due care and skill on such party’s side. Although Polish law does not provide for explicit regulations on force majeure, harm arising from a force majeure event such as the present epidemic should, as a general rule, give rise to a presumption of lack of fault on the part of the entity to perform under the contract.

Potential exemption of liability for a party affected by the coronavirus epidemic will, in every instance, require assessment of the force majeure factor’s impact on that party’s possibility of performing the contract as originally stipulated, presuming due care and skill.

The Polish Civil Code provides also for the so-called rebus sic stantibus (‘things thus standing’) clause.  This is a qualification in a treaty or contract that allows for its nullification in the event fundamental circumstances change. If, owing to an extraordinary change of circumstances, the performance of an obligation would entail excessive difficulties or would threaten one of the parties with a glaring loss which the parties did not predict at the moment of the conclusion of the contract, a court of law may, having weighed the parties' interests, according to the principles of community coexistence, determine the manner of the obligation's performance and the value of the obligation, or may even rule on termination of the contract. The rebus sic stantibus clause confers far-reaching competences to the court that may even terminate the contract or rule on the settlements between the parties. Application of this clause, however, requires in each and every instance bringing an action to the court.

Apart from the contractual provisions and national legislation, the United Nations Convention on Contracts for the International Sale of Goods (CISG) drawn up in Vienna on 11 April 1980 can play an important role in cross-border transactions. The Convention has a broad scope of application, also to parties whose places of business are in states that are not signatories to the Convention. To date, the Convention has been ratified by almost 100 countries, including most EU member states (among them Poland), the US and China. Although the UK has not ratified the Convention, it may quite conceivably apply to contracts executed by British entities.

The Convention applies to contracts for sale of goods as long as both parties to a contract are from countries that have signed up to the Convention, or when the rules of private international law lead to the application of the law of a signatory state. In particular, in the event that the law of a signatory state has been specified as the law governing the contract, the Convention shall apply even if not expressly provided for in such contract.

As we consider the present coronavirus crisis and its bearing on the market situation, special regard should be had for art. 79 of the CISG, which provides that a party is not liable for failure to perform any of its obligations if such party proves that the failure was due to an impediment beyond its control and that the party could not reasonably be expected to have taken this impediment into account at the time of the contract’s making or to have avoided or overcome it, or its consequences. Significantly enough, in light of the Convention, this exemption from liability applies also where the failure to perform was due to failure by a third person (sub-supplier) whom the party to a main contract has engaged to perform the whole or a part of the contract, provided that the same exemption prerequisites apply also to such third party.

This exemption from liability applies only for as long as the impediment in question persists, and the party which fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If such notice is not received by the other party within a reasonable time after the party which fails to perform knew, or ought to have known, of the impediment, the party is liable for harm resulting from such non-receipt.

The Convention on Contracts for the International Sale of Goods is somewhat neglected and underappreciated in international commerce, yet it affords an instrument of considerable power, and one quite independent of the express provisions of the given contract or of general laws in any one jurisdiction. If anything, the Convention’s somewhat obscure status only adds to its potential. Accordingly, it is well worth knowing, and in times such as these its provisions on exemption from liability (and the timely notification upon which any such exemption will be predicated) should be kept in mind.

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