COVID-19 | Legal Analysis Center
March 30th, 2020
Given the COVID19 pandemic situation that is hitting almost the entire world, and its unforeseeable consequences, some agreements between individuals or companies, or between privates and the State (whether it is Nation, Province, or City) are being affected by some limitations and obstacles regarding their execution and fulfillment.
This situation includes almost every activity, commercial, financial, banking, labor, real estate, construction, pharmaceutical, public services, international trade, among others.
The reasonable restrictions imposed by the government, through decree 260/20, decree 297/20 and complementary regulation (at national, provincial, and municipal level), have direct impact over the supplies provision, human resources and services that are essential in order to fulfill contract obligations.
There’s no doubt that the impacts will not be the same depending on the type of contract. For example, the impact over a supply agreement for an essential state service (like healthcare, public security, or transport) will nott be the same compared to a contract that is not within the scope of the exceptions of the decree N° 297/20 and complementary regulations (like financial activities or insurance). Therefore, there are unlimited variables and cases with different levels of difficulty regarding its fulfillment and execution in the conditions that were originally agreed, especially in situations where sub contracts were signed, or when there is a contractual connection between different agreements.
First practical considerations to be analyzed for contract fulfillment:
Based on the above mentioned facts, which are the issues to be considered -as a first approach to the topic-?
1. Type of Contract: Identify which is the type of contract we are dealing with (purchase, immovable property lease, construction contracts, services, finance or loan, supply, multiple purpose contract, etc.)
2. Parties: Identify the parties involved (public or private, public or private service provider, etc.), and the activities that each party develops (not only the main ones but its accessories and related activities).
3. Linked obligations: Clarify if there are linked obligations with other linked contracts. In some cases the contractual relationship will only have effects between the signing parties, but it sub contractual scenarios and connected contracts shall be analyzed as well, in order to detect possible impacts in such contracts whether they are direct or indirect.
4. Payment methods: Identify pending payments (which will allow -or not- the agreement fulfillment).
5. Payment terms: Determine the payment terms (which may be modified or even be suspended).
6. Term: Review the term to fulfill the contract (which might be extended, accelerated or suspended).
7. Financing: Analyze the financial sources (to see what are the real possibilities to accomplish the contract fulfillment given the actual circumstances).
8. Personnel, Supplies, and Technical Resources: Determine the human and technical resources, supplies, etc. required for the contract fulfillment, and which are the possibilities to strengthen or substitute said resources.
9. Contingency plan: Mitigate the crisis effects during the contract life.
10. Scenarios: Analyze different future scenarios.
11. Planning: Implement of a contract follow-up plan.
Possible impacts that may affect the ongoing contracts.
There might be some cases regarding certain contracts, that won’t be affected by the Government regulations so far enacted. Nevertheless, we shall consider that these agreements could be subject to new regulations, other essential conditions like extension of contract terms, or to the enforcement of new obligations which were not originally included, among other changes.
Likewise, these regulations might be mandatory rules or “public order” regulation; could be challenged as unconstitutional regulations; they might trigger administrative claims or constitutional protection requests, or they might give enough grounds to question the mandatory nature or applicability of said consequences over ongoing contracts. Anyway, the possible scenarios list is quite long, and it must be analyzed under a case by case rule.
Particular analysis of each agreement.
Furthermore, each particular contract shall be analyzed under the framework of the activity for which it was signed, to evaluate and determine the applicable regulation in order to define its normal execution, the suspension of effects or its termination, if that is the case.
There are some practical considerations which would make this analysis easier:
1. Is it a contract which its purpose falls into the scope of the exceptions held in decree 297/20?
2. Some of the related activities may fall within the exceptions mentioned in 1?
3. What kind of impact does a connection have, between a services contract that is exempted, and a contract which is not?
4. What would happen with the supplies provisions, human resources, or services that are needed to fulfill a contract?
5. What would happen in case one of the parties cannot fulfill its contractual obligations?
6. Which are the valid means of proof to base a claim related with this bullet points?
Of course that contract sections regarding delays, term breach, penalties, force majeure, unforeseeable events, contractual reconversion, reduction or suspension of obligations –or some of them-, renegotiation and balances review of the contract performance obligations, total or partial quits to invoke unforeseeable events, sections to govern the exercise of said rights, among others, are of a substantial importance.
Regardless the previous considerations, it seems useful to consider the following recommendations:
1. Analyze each particular contract and do not take a hasty, quick and/or “a priori” definitive conclusion.
2. Define the applicable legislation given that some agreements may be local but could be regulated by foreign legislation.
3. Review specific contract sections, specially the abovementioned ones.
4. Consider the effects that force majeure, unforeseeable events, unjustified enrichment, frustration of the contract purpose, etc. may have over the future execution of the contract and/or the reasonable balance between the parties’ obligations.
5. Verify that there are not sections regarding quits, limitations or restrictions to said rights.
6. Identify if the parties or any of them have given fulfillment guarantees.
7. Evaluate the impact in costs and terms, in order to repair the contract situation and the pendant obligations of both parties, without losing sight of the reasonable equity in the analysis.
8. Prepare a mitigation plan while the force majeure or other unforeseeable event lasts, and its implementation feasibility.
9. Document every single event that have led to the impossibility of fulfill the contract obligations, and the consequent invocation of force majeure, unforeseeable events, etc.
10. Verify if the contract has a minimum term after which the agreement may be terminated.
11. Pay special attention to contracts sections containing disclaimers, or other liability limitations, and penalties.
12. Analyze the possible settlement clauses.
13. Comply with the formalities requires in each contract regarding the force majeure, unforeseeable events, unjustified enrichment, etc. for example, terms for its communication to the other party, support documentation, contingency and mitigation plan, estimated damage, contract termination causes, price adaptation, etc.
We insist that these practical recommendations could not apply to every contract given that in a bunch of them, our suggestions might be regulated through the agreement itself.
Finally, we recommend to our clients as a best practice of their legal department, senior management and board of directors, to identify the significant contracts that might be affected by some of the extraordinary circumstances that this pandemic have caused, and might keep causing in the future, and taken into consideration the topics analyzed above, proceed to identify the potential breach of ongoing contracts, its mitigations and the legal steps required in each case.
For queries or suggestions please contact firstname.lastname@example.org
This publication is prepared to inform our clients. It has not and does not claim to have exhaustive nature. Due to the generality of its content it should not be considered as legal advice.
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