Covid-19 as a force majeure event in civil law jurisdictions
|Construction Law International homepage » September 2020|
The Covid-19 pandemic is affecting almost all aspects of business. The aim of this article is to show how Czech, German and Polish law approach the pandemic as an event of force majeure affecting (the implementation) of construction projects.
Force majeure event
The Czech Civil Code, the German Civil Code (Bürgerliches Gesetzbuch or BGB) and the Polish Civil Code have no explicit provisions defining a force majeure event. However, in each of these jurisdictions, a force majeure event is generally perceived as an unavoidable and unpredictable event of a widespread and extraordinary nature.1 In principle, this term also includes diseases and epidemics.2
In Polish civil law, a force majeure event would interrupt the statute of limitations and exclude liability for non-performance of obligations even in cases where, based on general principles, there is a strict liability for breach of contract.
Events such as epidemics may also lead to an extraordinary change in circumstances within the meaning of Article 357.1 of the Polish Civil Code (rebus sic stantibus clause) or a significant change in circumstances within the meaning of section 313 of the BGB (frustration of purpose clause).
The Czech Civil Code contains a damage liberation clause in section 2913(2). It states that if a party is prevented, whether temporarily or permanently, from fulfilling an obligation by an exceptional unforeseeable and insurmountable obstacle that is beyond its control, the party is not obliged to compensate for damage. Section 2913(2) still leaves the affected party in contract default – it only prevents damage – but the affected party may still be liable for contractual penalties, contract termination or other remedies. Under the Czech Civil Code (section 2006), contractual obligations expire or are extinguished if a performance cannot be made, even under more difficult conditions, at higher costs, with the help of another person or after a period of time. The burden of proving impossibility to perform lies with the contractor. Thus, in most cases, Covid-19 can lead to frustration of construction contracts under Czech law only in theory.
At the end of March this year, the German construction and infrastructure ministries released statements saying that Covid-19 may be considered a force majeure event if the performance of a construction project was affected by the measures introduced to combat the pandemic. Even though no such statement has been issued by the Polish authorities, the pandemic is widely perceived as a force majeure event in Poland as well.
Laws and procedures introduced in response to Covid-19
Although the German legislature has not introduced new rules or regulations to help the construction sector cope with the crisis, measures for averting danger to individuals or the general public set out in the German Infection Protection Act are extensive. This includes quarantine measures, which can be ordered by local authorities under section 30. If, for example, workers were ordered to stay home for quarantine or foreign subcontractors were hindered by their government to travel to Germany to avoid infection (or to avoid spreading the virus) or a supplier factory for building material was officially closed for infection measures, a delay to a construction project would be likely to occur. The implementation of these measures gives grounds for a claim for an extension to construction completion dates, the basis of such claim being section 6 paragraph 2 of the VOB/B (German standard conditions for construction contracts) or section 313 of the BGB.
In response to Covid-19, Poland introduced a state of epidemic on 20 March 2020. Updated every few days, the regulations introduced significant restrictions, including a ban on movement (with some exceptions, for example, the performance of economic and professional activities), restrictions on border traffic (including the re-introduction of EU border controls) and a ban on aircraft landings (except for cargo traffic). The activities of the public administrative authorities have also been significantly limited. Individual employers (especially in the case of critical infrastructure) have themselves begun to introduce special security procedures at construction sites. The Act on Counteracting Covid-19 adopted by parliament has also introduced a specific procedure for notifying the consequences of the pandemic on public contracts leading, after negotiations between the parties, to amendments to public contracts.
Pursuant to a constitutional act, the Czech government declared a 30-day state of emergency throughout the country from 12 March 2020 to combat the health threats arising from Covid-19. Consequently, a number of measures were adopted, such as the closure of restaurants and most shops, quarantine for people returning from abroad and border restrictions.
No measures have been adopted in the Czech Republic, Germany or Poland to stop construction works. Work was carried out on construction sites throughout March and April 2020 and was even encouraged in some places by government agencies. A minimum distance between work stations has been set in the Czech Republic (at least two metres, but ‘provided this is possible’) and in Poland (at least 1.5 metres, unless impossible due to the nature of the work). In Germany, regulations in this respect are decided by individual states. State regulations generally provide for a minimum distance of at least 1.5 metres, in workplaces too where possible.
At the end of March this year, the German construction and infrastructure ministries released statements saying that Covid-19 may be considered a force majeure event if the performance of a construction project was affected by the measures introduced to combat the pandemic.
Duty to notify
There is no requirement for formal notification under Czech law in the event of force majeure. However, contracts usually provide for immediate notification or at least notification without undue delay. Usually contracts also include a form for notifications and stipulate which rights depend on prior notification.
In most cases, German law does not require any formal notification either. However, under section 642 of the BGB, if in the production of the work an act by the customer is necessary, then the contractor may demand reasonable compensation if the customer, by failing to perform the act, is in default of acceptance. The Federal Court of Justice (Bundesgerichtshof or BGH) requires a formal notice from the contractor in such cases.3 According to section 6.2(c) of the VOB/B, the contractor must issue a written notice if works are obstructed due to an event of force majeure. This notice is a precondition for an extension of time claim by the contractor unless is it obvious to the employer that the event in question does in fact obstruct the contractor’s performance of the works. There is no time limit for the notice (‘Behinderungsanzeige’), but it does not have retrospective effect.4 The employer is free to reject or ignore the notice because its only relevance is to reserve claims for extension of time and compensation to the contractor.
In accordance with Article 651 of the Polish Civil Code, the contractor should immediately notify the employer of circumstances that could hinder the proper performance of construction works. Polish law does not specify the content of or time limit for the notification. Based on general principles, in the absence of or delay in sending a notification, the contractor could be regarded as having contributed to its own damage. Detailed requirements could, of course, derive from the contract.
According to the Polish Act on Counteracting Covid-19, the parties to a public contract have to inform each other of the effects of the pandemic, and related circumstances are grounds for amending public contracts and subcontracts accordingly. Notifications should be made immediately. The Act does not specify the sanctions for the absence of or delay in notification.
There are no regulations in either Czech, German or Polish law on how to cope with force majeure events in formal procurement procedures. Public procurement – relevant in all infrastructure construction projects – is characterised by strict tendering procedures within certain time limits. Employers are not obliged to automatically prolong bid submission deadlines solely due to Covid-19. They do, however, have sole discretion to assess the situation and potentially prolong deadlines in pending procurement procedures. The German Ministry for Economic Affairs and Energy recommended flexibility as regards time and requirements in procurement procedures in a publication on 19 March 2020.
As aforementioned, the Polish Act on Counteracting Covid-19 introduced a special procedure for parties to public contracts to mutually notify a consequence of the pandemic, with the notification setting out the impact of circumstances relating to Covid-19 on the due performance of the contract. This includes the absence of employees, orders issued by the health inspectorate or the suspension of supplies. Based on the notification, the employer may, but does not have to, amend the contract by, for example, extending the deadlines or changing the scope of the works, provided that each change does not lead to an increase of more than 50 per cent in the contractor’s remuneration.
An equivalent regulation is included in section 222(6) of the Czech Public Procurement Act. According to this section, if a declared state of emergency affects the performance of the contract, the employer may prolong the time for completion or any milestones. However, a state of emergency declaration does not automatically mean that the conditions for changing the contractual commitments are met. It is always necessary to assess whether: (1) the need to change a commitment arises from circumstances that the employer could not have foreseen; (2) an amendment to a commitment does not change the nature of the contract; and (3) the value of the contractual amendment is not more than 50 per cent of the original contract value.
Liability for breach of contract
As a rule and absent any specific contractual provisions under Czech, German and Polish law, an event deemed to be force majeure gives exemption from liability for non-performance or improper performance of the contract to the extent that it was the cause of the non-performance or improper performance of the construction contract. However, the specific nature of section 2913(2) of the Czech Civil Code needs to be highlighted. Typically, it is the contractor that has to demonstrate the existence and scale of the impact of the force majeure on its performance of the contract.
Under German law, contractors are also required to take all reasonable measures to limit the impact of the force majeure on the performance of works (under section 6.3 of the VOB/B). This does not mean, however, that contractors have to spend money to mitigate the consequences of events beyond their control; they are only obliged to optimise their works schedules.
Extension of time
Interestingly, the Czech, German and Polish civil codes do not contain any specific rules on the extension of time specified in construction contracts due to a force majeure event. Issues related to delays in performing a construction contract are therefore usually resolved by determining whether and to what extent the contractor bears liability for breach of contract involving delayed performance (ie, usually whether it should pay a contractual penalty for delay in performance), applying the principles outlined in the preceding paragraph.
The construction contract itself (based on FIDIC or VOB models) may be more specific in this respect. FIDIC-based contracts give grounds for seeking in court a finding that the contractor has the right to perform the work by a longer deadline (which is disputable, at least under Polish law). According to section 6.2.1(c) of the VOB/B, milestones are postponed and, in case of doubt, have to be newly agreed upon by the parties. Extension of time due to force majeure is only granted until the obstructing event passes, though some time may be added for mobilising machinery and workforce in accordance with section 6.4 of the VOB/B.
In any case, the scale of the justified delay and the appropriate extension of the completion deadline will have to be adjusted to the actual impact of the pandemic and the regulations adopted on the agreed work schedule. Appropriate evidence will therefore have to be gathered to demonstrate the impact of the disruption caused by Covid-19 on the original timetable.
Despite a force majeure event, the rights of the parties to terminate the contract are preserved under Czech and German law unless otherwise stated in the contract. The standard German conditions of construction contracts (VOB/B) provide for the explicit right to terminate. According to section 6.7.1 of the VOB/B, either party may terminate a construction contract if the construction works are interrupted for more than three consecutive months or if it is certain that an interruption of more than three months is unavoidable.5 In this context, it is striking that the Polish Act on Counteracting Covid-19 deprives the parties to public contracts of the option to exercise their contractual right to terminate the contract if termination is based on circumstances relating to the pandemic.
According to the Czech, German and Polish civil codes, a force majeure event (such as a pandemic) does not give the contractor the right to bring financial claims against the employer. However, grounds for such claims could arise from the contracts themselves.
The severity of this rule is modified by the rebus sic stantibus and frustration of purpose clauses applicable in all three jurisdictions.
As regards contracts in general, under section 1765 of the Czech Civil Code, if: (1) the contract was concluded at a time when the spread of Covid- epidemic, the severity of its consequences and the measures taken by governments could not have reasonably been foreseen; and at the same time (2) there is a particularly gross disproportion between the performances of the two parties under the contract, the party affected by the disproportionate performance under the contract may request the other party to resume contract negotiations. The affected party must do so within two months of the date on which it becomes aware of the change in circumstances leading to a particularly gross disproportion in performance. If the parties do not reach agreement within a reasonable time, either of them may refer the case to court, which can amend or rescind the contract. However, as long as negotiations or court proceedings to amend the contract are pending, the affected party must perform as originally agreed in the contract. However, neither of these procedures is available to the party that assumes the risk of a change in circumstances. It is quite common on the Czech market for the contractor to assume this risk, one of the issues that is likely to change in the future.
As regards fixed price or budget works contracts, section 2620(2) of the Czech Civil Code provides that, if an ‘entirely extraordinary unforeseeable event that materially hinders completion of the works’ occurs, a court can (on the affected party’s request) decide ‘merely’ to increase the price of the works or that the contract be rescinded together with settlement between the parties.
In Polish case law, an epidemic is consistently cited as an example of an event causing an extraordinary change in circumstances.
Section 313 of the BGB provides for a frustration of purpose event. The legal provision reads as follows:
‘(1) If the circumstances on which a contract was based have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into a contract of a different content if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.’
This alteration could include an adjustment to the remuneration or the time schedule, including penalty clauses. German courts have in the past been hostile to claims for extra payments in respect of rising prices for steel, concrete and fuel.6 It remains to be seen whether this approach will be relaxed due to Covid-19.
According to Article 357.1 of the Polish Civil Code (general rebus sic stantibus clause), the court, on the request of one of the parties to a contract, may change the manner in which the contract is performed, the value of the performance or terminate the contract. The prerequisite for the court interfering in this manner is to demonstrate that each of the following conditions is met: (1) an extraordinary change of circumstances; (2) serious difficulty in performing the contract or threat of serious loss; (3) a causal link between (1) and (2); and (4) the parties’ failure to foresee the impact of the change of circumstances on contract performance when concluding the contract. In making its judgment, the court should take into account the interests of all the parties to the contract and the principles of social coexistence. A more specific rebus sic stantibus clause is set out in Article 632 section 2 of the Polish Civil Code (which is to some extent similar to section 2620(2) of the Czech Civil Code). It applies to specific work contracts and construction works contracts providing for lump sum remuneration. According to Article 632 section 2 of the Polish Civil Code, the court, on the request of a construction works contractor, may increase the lump sum remuneration or terminate the contract, provided that the contractor can prove that each of the following prerequisites is met: (1) a change in circumstances; (2) the change in circumstances could not have been foreseen; and (3) threat of serious loss to the contractor.
In Polish case law, an epidemic is consistently cited as an example of an event causing an extraordinary change in circumstances.7 Before Covid-19, however, these references served only as an introduction to and illustration of considerations of completely different events leading to an extraordinary change in circumstances, usually concerning economic relations. The fairly extensive Polish case law based on rebus sic stantibus clauses may be used in cases arising from Covid-19. It may be assumed that in these cases demonstrating a change in circumstances will be relatively simple and disputes will revolve around serious difficulty in performing the contract and the threat of serious loss. On the basis of past judgments, the courts can be expected to seek to divide costs caused by the pandemic between contractors and employers.
1 BGH, judgment of 22 April 2004, III ZR 108/03; judgment of the Court of Appeal in Lublin of 19 October 2019, III APa 15/19.
2 BGH, judgment of 16 May 2017, X ZR 142/15.
3 BGH, BauR 2000, 732.
4 Leinemann, VOB/B-Kommentar, s 6 Rn 20.
5 Leinemann VOB/B-Kommentar, s 6 Rn 275.
6 See OLG Hamburg, 28 December 2005, 14 U 124/05.
7 Judgment of the Court of Appeal in Katowice of 7 December 2018, I ACa 649/18; judgment of the Court of Appeal in Krakow of 10 July 2018, I ACa 1459/17; Supreme Court judgment of 8 March 2018, II CSK 303/17.
Tomasz Darowski is a partner of Domanski Zakrzewski Palinka and can be contacted at email@example.com. Josef Hlavicka is a partner of Havel & Partners and can be contacted at firstname.lastname@example.org. Ralf Leinemann is a partner of Leinemann Partner Rechtsanwälte and can be contacted at email@example.com.