COVID-19 | Legal Analysis Center
March 30th, 2020
- As a consequence of the health emergency situation generated by COVID-19, a series of regulations and restrictions have been imposed, which may sometimes modify contractual relationships and, in some cases, configure force majeure events.
- Taking into account that force majeure events may alter the performance of the parties’ obligations, we recommend to carry out a review of the relevant contracts in order to determine if the requirements established by the Civil and Commercial Code (“CCC”) for the configuration of the Act of God or Force Majeure event are met and, if so, analyze the most convenient way to proceed.
- It should be borne in mind that an Act of God or Force Majeure event must be notified to the counterparty in a timely manner as from its configuration. Also, notification deadlines contractually agreed, if any, must be complied with.
- Decision to notify a force majeure event must be previously analyzed from a legal perspective, since failure to comply with the parameters required by applicable regulations could give rise to an eventual claim for damages by the counterparty.
- It is also possible that, in some cases, the Act of God or Force Majeure event may affect only one section of the contract, in which case parties may renegotiate the agreement, adjusting or adapting only the obligations that were affected by the restrictions imposed in this new scenario resulting from the health emergency.
Act of God and Force Majeure. Detection.
The CCC indicates in section 1730 that it is considered an Act of God or a Force Majeure event –to these effects they work as synonyms- a fact that could not have been foreseen or that, having been foreseen, it could not have been avoided.
It is considered that, in order for an event to constitute an Act of God or Force Majeure, the following requirements must be met:
- It must be unpredictable. Objectively, the fact must not have been foreseen by an average man in knowledge of the circumstances of the case.
- It must be inevitable. Logically, a fact that could not be foreseen could not be avoided. Even if it could have been foreseen, but it couldn’t be avoided, it could still be a fortuitous event. The fundamental issue is that neither the obligated party, nor any average person in his place, could have prevented the fact or the damage.
- It must be external to the parties. The damage must not have been facilitated by the fault of the person who caused it and it should not be a risk inherent to the activity.
- Must be supervening. It must not have been known or existed at the time of contracting.
- Must be invincible. It must make the obligation assumed impossible to fulfill. If it were made excessively onerous, an equitable adjustment should be sought invoking the theory of unforeseen circumstances or excessive onerous supervening events (section 1091 CCYC).
- Must be current. It must exist at the moment of the enforceability of the obligation and not be a mere threat or possibility. If it existed at some point in the contractual relationship, but disappeared at the time of fulfillment, the debtor must fulfill his obligation.
The interpretation is restrictive, so the event really must have been extraordinary. These circumstances do not apply automatically to all contracts and they must be analyzed, case by case, whether the requirements are met in each legal relationship in which one of the contracting parties invokes this exemption. Consequences and issues to be considered. The impossibility of compliance derived from an Act of God or Force Majeure event can be definitive or temporary. The first case would happen, for example, if the exercise of the activity was permanently prohibited by a government regulation issued as a consequence of the crisis or if such regulation restricted the activity in such a way that its continuity would be impossible to comply with. We would also be faced with this assumption if the prohibition or restriction imposed prevents compliance in a period that is essential for the creditor or ends up frustrating the purpose that he had when contracting. Notwithstanding that the specific contractual clauses should be reviewed first, in some of these cases the contract could be terminated for reasons of Act of God or Force Majeure event. However, it is always important that the parties evaluate first, under the principle of contractual good faith, the continuation of the contract, renegotiating the aspects that they consider appropriate to avoid its termination and reduce the negative effects caused by the event of Act of God or Force Majeure. Likewise, in cases of long-term contracts, section 1011 CCC imposes a special duty of collaboration, trying to avoid its early termination. But in many cases, the impossibility of fulfilling one or more contractual obligations could be only temporary. We refer to cases in which the debtor would find himself temporarily unable to fulfill his obligations. In these cases, the fulfillment of the contract would be suspended until the event of Force Majeure ends and the damages derived from the suspension cannot be claimed to the debtor party. In short, if it is found that there is an Act of God or Force Majeure event and that due to these events the obligations assumed in a contract are breached, the breaching party would be exempt from any liability. However, according to section 1733 CCC, the debtor would not be exempted from liability if:
- He has assumed the obligation to perform even if a Force Majeure or an Act of God event occurs.
- From a legal provision results that the he is not released due to a Force Majeure event or impossibility to perform.
- He is in default, unless it is indifferent to the production of the Force Majeure event or the impossibility to perform.
- The Force Majeure event or the impossibility of performance arises from his fault.
- The Force Majeure case and, where appropriate, the impossibility of performance that results from it, constitute a contingency inherent to the risk of the object or the activity.
- He is obliged to return as a consequence of an illegal act.
Thus, it is important to carefully review the clauses of the contracts that could be affected, especially those related to terms, delay in benefits, agreed interests, breaches, penalties, possibilities of renegotiation or revision, possibility of suspending or reducing benefits or some of them, causes of termination, etc., to evaluate if there are resignations of any kind (e.g. to invoke unforeseen circumstances, Acts of God or Force Majeure events), liabilities assumed, etc.
Likewise, the contract must be reviewed taking into account the activities that it foresees (and if these or their related activities are allowed or limited during quarantine), the industry to which the contract refers and the specific regulations that may be applicable, the possible insurance coverage, the bargaining power of the parties at the time of concluding the contract and the other factual circumstances of the case.
Good faith, burden of proof and notifications.
The attitude of someone who is unable to perform due to the Act of God or Force Majeure event, whether permanently or temporarily, must be in good faith at all times and respecting the prohibition of abusive exercise of rights (sections 9, 10, 961 and 1732 CCC).
At first, the burden of proving an exemption from liability or an impossibility of performance corresponds to the party who alleges them (sections 1734 and 1736 CCC). Thus, it becomes important that the parties leave documented all their actions during the determination phase of the Act of God or Force Majeure event and its notification to the counterparty.
For what is explained in the preceding sections, it is important to notify the counterparty about the impossibility of performance due to an Act of God or Force Majeure event as in advance as possible, clearly explaining the circumstances of the case and the effects that prevent compliance with the obligations assumed. At first, the notification should be made by all the persons that form one party against all the persons that form the other party (section 1078 CCC).
It is important to respect the deadlines and procedures to make notifications provided by the parties in the contract, if there are clauses to that effect. Notwithstanding this, we believe that this notification should also be made in a form that can be proven. Ideally, it should be done by letter document, in notarial form, by registered letter with return notice, or at least with a note sent to the counterpart with its corresponding receipt stamp. However, in case of impossibility, considering the current circumstances, we suggest to be done in writing at least. In case of e-mail, it is important to obtain a response from the counterpart or insist with successive e-mails in the same sense. At the moment, according to Resolution 304/2020 of the National Communications Entity, the postal services of letters with acknowledgment and document letters, among others, will continue to function during social, preventive and mandatory isolation, with the particularities foreseen there.
In all cases, it is important to maintain an open channel of dialogue to offer future guarantees of compliance, resolve problems that may arise between the parties as quickly and efficiently as possible, etc. Any special negotiation or renegotiation, readjustment or revision of the contract must be reflected in a new written document and duly signed.
Many times the adequate position to close these negotiations can be through a mediation process and a litigator lawyer may be needed.
For these reasons, we recommend to our clients to carefully analyze with their legal services and advisors the relevant contracts that may be directly or indirectly affected by the emergency situation. Once this has been done, the effects of the emergency situation must be evaluated in each contract to determine whether or not they comply with the conditions to be considered an Act of God or Force Majeure event (or some other type of legal exemption such as unforeseen circumstances, excessive expensiveness, enrichment without cause, frustration of the purpose of the contract, etc.) and if it is determined that it is the case, define a negotiation or defense strategy to protect your contractual rights. Nicholson y Cano has a team dedicated to these issues including, when appropriate, to analyze a potential judicial conflict.
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