Would a state of extraordinary measures change the issue of damages for businesses? | In Principle

No one expects the Polish State Treasury to bear full responsibility for businesses’ losses due to the coronavirus epidemic. However, the regulations should provide some recompense for parties injured by the introduction of sweeping commands, limitations and prohibitions on business operations. This is required first and foremost by concern for the state of the national economy for which businesses are the driving force.

No state in the world could bear up under the duty to redress the injuries suffered by all its citizens and businesses due to the crisis caused by the coronavirus epidemic. It would hardly be reasonable to expect such a weight be borne by a state which also suffers huge losses for the same reason. But the state should nonetheless partially make up losses of individuals and businesses to allow them to survive this difficult period in the best possible condition. This would allow jobs to be maintained, positively contributing to economic growth and consequently also to the condition of the state budget. After the crisis ends, businesses will play a key role in setting the economy back on its feet.

State of epidemic and state of natural disaster

Despite the highly unusual situation in Poland, so far no state of extraordinary measures has been introduced as provided for in Art. 228 of the Constitution, i.e. a state of natural disaster regulated in detail by the Natural Disaster Act of 18 April 2002.

A state of natural disaster is understood to mean, among other things, a natural catastrophe whose effects endanger the life or health of a large number of people, property on a large scale, or the environment across wide areas, when aid and protection may be effectively undertaken only using extraordinary measures. A natural catastrophe thus means an event associated with the action of the forces of nature, including widespread incidence of infectious disease.

But initially a state of epidemiological threat was declared, and from 20 March 2020 a state of epidemic, based on the Infectious Diseases Act (Act on Preventing and Combating Infections and Infectious Diseases in Humans of 5 December 2008). Under that act, a state of epidemic is a legal situation introduced in a given area in connection with occurrence of an epidemic in order to take actions against the epidemic and preventive measures provided for in the act to mitigate the effects of the epidemic, i.e. a state where there is a greatly increased incidence of infection or infectious disease compared to the previous period, or infections or infectious disease not previously occurring.

The difference between a state of epidemic and a state of natural disaster involving infectious disease has to do with the mass incidence of such disease in humans. In this respect, a state of natural disaster could be regarded as the next step in the battle with the epidemic threat, interfering most extensively with the functioning of the state and individuals. It appears that these stages should be introduced gradually, if the epidemic takes a turn for the worse. An exception would be a directive to declare a state of natural disaster immediately, for example in a situation of sudden mass infection caused by a terrorist attack using biological weapons (Art. 3(2) of the Natural Disasters Act).

Same restrictions, different effects

Despite the differing legal grounds, the restrictions and prohibitions on economic activity introduced in a state of epidemic generally overlap with those that may be imposed in a state of natural disaster (this is mostly due to entry into force of the Anti-Crisis Act—the Act on Special Solutions for Preventing, Countering and Combating COVID-19, Other Infectious Diseases, and Crises Caused by Them of 2 March 2020).

But the consequences of introduction of restrictions and prohibitions with respect to businesses in the two states are diametrically different. In a state of epidemic, there is generally no one legal regulation enabling real redress of businesses’ injury caused by introduction of this state.

But in the event of institution of a state of natural disaster, the Extraordinary Damages Act (Act on Compensation for Material Losses Resulting from Limitation of the Freedoms and Rights of Persons and Citizens During a State of Extraordinary Measures of 22 November 2002) would apply. At first glance this act might appear to provide for redress of losses to the property of natural persons only, but an examination of the justification for the bill dispels those doubts, as it indicates that the act applies to losses to natural persons and other entities subject to limitations on human and civic rights and freedoms—including businesses—in the event of introduction of a state of extraordinary measures.

Under the Extraordinary Damages Act, the State Treasury bears liability for redress of injury. But damages will cover only actual injury, not lost benefits. In other words, injured parties may seek only what they have actually lost (out of pocket), not the value of what they could have gained if the state of extraordinary measures had not been introduced.

An application for damages under that act is filed with the province governor, who should issue a decision promptly, but within three months at the latest. A party unsatisfied with the province governor’s decision is not entitled to an administrative appeal, but can file a statement of claim with the state court seeking damages, which is exempt from court filing fees (Art. 95(1a) of the Act on Court Costs in Civil Matters of 28 July 2005). This claim becomes time-barred one year from the date on which the injured party learned of the material loss, but no later than three years after lifting of the state of extraordinary measures.

Institution of a state of natural disaster will not help redress losses already incurred

It is often pointed out that introduction of a state of extraordinary measures now would alter the situation of businesses, which could then seek damages. This claim is not entirely true. Even introduction of one of the states of extraordinary measures would not allow for coverage of losses which businesses have already incurred due to introduction of the state of epidemiological threat and the state of epidemic. Meanwhile, some of the greatest losses have already been suffered, as the bans and restrictions have caused many businesses to cease functioning. The losses differ from sector to sector. Some businesses have lost foods to spoilage (e.g. restaurants), while other have been left with goods they cannot sell but which generate storage costs (e.g. apparel, furniture, and automotive sectors). They have also incurred employment costs and rent for space they cannot use to operate their business. Some have incurred costs to comply with new hygiene standards at plants or other workplaces.

The general inability to cover these losses under the Extraordinary Damages Act (if a state of extraordinary measures were introduced) is because seeking redress of injury would require a finding of grounds for the State Treasury’s liability under the Civil Code. This would mean that the injured party would have to prove that it suffered an injury and the amount of the injury, but also a causal connection between the state of extraordinary measures (e.g. state of natural disaster) and suffering of the injury. Here a barrier would arise preventing the claimant from obtaining compensation for its losses. This is because it could not be found that these losses to the business’s asset position were tied to the state of extraordinary measures, because they arose before it was declared, as a result of the earlier restrictions and bans based on the regulations on the state of epidemiological threat and epidemic.

This situation can be depicted by the drawing below, where injury 1 is not covered by the Extraordinary Damages Act:

Injury arising after introduction of a state of extraordinary measures

The State Treasury’s liability for injury may thus be viewed based on the Extraordinary Damages Act if the injury arose after introduction of a state of extraordinary measures. In the drawing above this is identified as injury 2.

But here two different cases should be considered:

• The material injury is caused by new (further-reaching) restrictions and prohibitions affecting business, introduced along with the state of extraordinary measures
• The material injury continues to be generated by the restrictions and prohibitions introduced based on the acts and regulations prior to declaration of a state of extraordinary measures (under Art. 1 of the Extraordinary Damages Act, the material injury subject to redress must arise during the state of extraordinary measures, not in connection with its introduction).

While in the first case the situation is clear and the Treasury’s liability should not raise any doubts, in the second the Treasury may not be inclined to accept responsibility for the injury. This is because it cannot be ruled out that even if a state of extraordinary measures were introduced in Poland, the authorities might merely maintain the existing restrictions (the regulations governing introduction of states of extraordinary measures do not impose on the authorities an obligation to introduce any specific restrictions or prohibitions, but only give them the possibility to do so).

In this situation, a loss arising during the time when the state of extraordinary measures was in force could be viewed by the Treasury as indeed arising during that time but not causally connected to it, and thus not subject to redress. The Treasury could allege that the injury would still have arisen even if the state of extraordinary measures were not in force, as the source of the restrictions and prohibitions would be the earlier normative acts which would still be in force without introduction of the state of extraordinary measures. But it appears that such a far-reaching attempt at exculpation by the Treasury would not be justified.

Summary

The situation of businesses in connection with the coronavirus epidemic does not look optimistic. Introduction of a state of extraordinary measures would not enable redress of losses arising before such state was introduced. It seems that a basis for redress of such losses could be sought in the general regulations of the Civil Code providing for liability of the State Treasury, as there are doubts whether the restrictions on rights and freedoms were introduced in compliance with the Constitution. This route for pursuing claims for damages will not be easy, however, as we explain in the article “State Treasury liability for legal injury during the pandemic.” A solution for this problem could be legislative initiative expanding the operation of the Extraordinary Damages Act to cover losses caused by introduction of a state of epidemiological threat or a state of epidemic, while allowing it to be applied to injuries already suffered. But such legislation should not be anticipated.

Introduction of a state of extraordinary measures would open the path to seeking damages for actual losses suffered during the time that state is in force. But it should not be expected that the Treasury would redress injuries in that situation on a mass scale, and proving a causal connection between introduction of that state and the injury would not be easy. And the later a state of extraordinary measures is introduced the smaller will be the scope of losses whose redress would be covered by the Extraordinary Damages Act.

Leszek Zatyka, attorney-at-law, Government Claims practice, Wardyński & Partners