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Legal Eye: Contracting for catastrophes

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A good contract should anticipate ways of dealing with the usual commercial problems, such as delays, quality claims, or warranties (or lack thereof). Not every potential permutation of a problem, however, can or should be drafted into a contract. Frankly, you wouldn’t want your lawyers to put together dozens of pages of “what ifs” for a normal deal. In business, when the best laid plans of mice and men go awry, general principles of contract law will apply (apologies to Robert Burns). These include the doctrine of force majeure.

Agreed in writing

The recent tragedy in Japan will not only affect domestic business, it will also have international dimensions. Already, there are reports of price increases for computer chips and speculation about automobile prices. For those doing business with Japanese companies, you may want to take a look at your contracts, even if the official stance of your Japanese business partners is “business as usual.”

Let’s say that I had a two-year contract for monthly deliveries of lucky beckoning cat statuettes, manufactured in Japan for lawyers. And I’m concerned that my next shipment (for which I already have buyers) may be delayed or even canceled. I should open up that contract to review those clauses that potentially might be relevant.

The obvious first would be the clause on force majeure. If there is one, it would typically be tucked in the back of a contract. This clause is meant to specify what happens when the truly unexpected and uncontrollable happens.

Aside from listing what might qualify, that clause might also elaborate on the consequences. Are the parties allowed to delay deliveries? If so, for how long Should I receive notice about this?

The review should not stop here. Other clauses could contain relevant information. For example, the termination clause may allow me to terminate the contract if my business partner claims a force majeure situation.

Background rules

While not exciting reading material, the basic principles of contract law establish the background rules to cover situations that have not been specifically addressed in a written contract. If the transaction is not complicated, it is possible that there is no force majeure clause in your contract.

Polish law does not specify the affect of force majeure circumstance on a contract. Rather, it identifies a broader principle of contractual liability for non-performance or improper performance. Basically, you’re on the hook to perform the contract unless you can show that, due to no fault on your part, circumstances arose that prevented you from doing what you were supposed to do. Force majeure is considered to be one of those exonerating circumstances.

There is also no official definition of force majeure in Polish law. In the legal world, it’s generally accepted that it refers to extraordinary, external events that could not be prevented. Natural disasters, such as earthquakes and tsunami, are classic examples.

There are, however, some events, such as labor strikes, that could, but don’t necessarily, qualify as a force majeure. For this reason, it can make sense to agree in writing in a long-term sales or services contract about what qualifies as a force majeure event.

What then?

In light of the unfolding consequences of the recent earthquake in Japan, I should expect that deliveries of lucky statuettes are not likely to be a priority. Claiming force majeure, unless your contract specifies otherwise, is similar to hitting a pause button. There are no hard and fast principles of contractual law about how long the pause is allowed to last or what happens next. If your contract does not specify this, you should consider your alternatives and plan to have a frank discussion with your business partner.

Source: Judith Gliniecki, Warsaw Business Journal, 21st March 2011

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