Dear Clients and Friends,
In view of the concerns and interest generated by our release “COVID-19 and Real Estate”, we decided to broaden our commentary to take into consideration other points which will help us better understand this phenomenon.
The world is currently facing a health crisis due to the COVID-19 pandemic. In Mexico we have entered the second phase of our national contingency plan as we are already experiencing community dispersion.
With the end goal of avoiding the spread of the virus, the Federal and State Governments of the Mexican Republic have implemented various sanitary measures that, while they have worked to some extent, will probably not be enough to contain it. Consequently, small, medium, and large businesses have been forced, or will soon be forced, to suspend their activities, partially or totally. Such circumstances will bring grave economic consequences.
With the temporary suspension of work, it will be a matter of time before some of those businesses will be unable to continue meeting their contractual obligations.
CASUS FORTUITUS OR FORCE MAJEURE. HARDSHIP.
Casus fortuitus or force majeure is the name of the phenomenon which arises when extraordinary, unsurmountable and unpreventable circumstances come about, or while being preventable cannot be overcome, which can be considered justification for the breach of an obligation. In casus fortuitus or force majeure event, the justification for the breach is derived from the impossibility of the obligor to fulfill its contractual commitment.
In multiple legal statutes, casus fortuitus and force majeure are treated as synonymous; however, some scholars have attempted to distinguish them, pointing out that casus fortuitus can be applied to events produced by nature, while force majeure refers to events made by man (including acts of authority, known in the theory as “acts of the prince” or fait du prince). They point out that casus fortuitus is characterized by unpredictability and force majeure by irresistibility.
It is important to keep in mind that whenever there is malice, negligence, imprudence, or lack of diligence, the performance of contractual obligations will not be excused, and the obligor will remain bound by the terms originally agreed.
THEORY OF UNFORESEEABILITY
In addition to what has been stated on casus fortuitus or force majeure, legal scholars and some legal systems recognize the doctrine know as Hardship, “Theory of Unforeseeability” or the “rebus sic stantibus” clause under which upon the ensuing of extraordinary, unforeseeable circumstances, a grave imbalance in the consideration agreed by the parties to a contract is generated, which renders the performance of the originally agreed obligation although not impossible, excessively onerous.
Thus, since the times of Roman Law, regarding the issue of the unconditional performance of contracts there is a dispute between two principles:
a) “Pacta Sunt Servanda”, which means that the contract must be fulfilled as agreed, based on the fact that the conditions of the contract are perfected from the moment of its conclusion, and also on the principle of legal certainty in the fulfillment of the obligations.
b) “Rebus Sic Stantibus”, which means that obligations must be fulfilled “as long as things remain the same”; that is, the parties will not be obliged to perform a contract when the circumstances change to such a degree that the obligation of one of the parties becomes very disproportionate.
There is a conflict in the two principles between legal certainty and justice.
Based on what has been stated, although subject to the concrete effects of COVID-19 in each contract, we consider that the actual health contingency could be considered a casus fortuitus or force majeure, as it is an unforeseeable, inevitable, and insurmountable fact, and it may absolutely or partially impede the fulfillment of some contractual obligations.
The situation of a casus fortuitus or force majeureis generally foreseen in contracts (used as synonyms), and it is in the contract where the boundaries of such concepts are defined. The problem arises when casus fortuitus or force majeure have not been foreseen, or when having been foreseen, their scope has not been defined. It is important to review what the applicable legal systems provides.
Regarding the applicability of the Theory of Unforeseeability or Hardship that would allow the parties to modify the terms of the contract for the purpose of balancing the parties’ considerations in case of extraordinary events, it is necessary to first determine under which law is the contract to be governed, for such a theory is only available in some jurisdictions (for example: Mexico City, the States of Chihuahua, San Luis Potosi, Sinaloa, and Veracruz), and only for certain types of contracts, such as those which are performed over time.
Normally, for the Theory of Unforeseeability or Hardship to be applicable, the extraordinary and unforeseeable phenomenon must change the general conditions under which the contract is fulfilled, and as a result bring about an extraordinary burden to one of the parties such that, had the parties known about it, they would not have agreed to the terms of the contract.
On that basis, in our opinion COVID-19 could be invoked by the parties in such contracts to the extent that there is causality between the events and the imbalance between the agreed upon terms.
CIVIL AND COMMERCIAL CONTRACTS
It is necessary to make a distinction between obligations which arise from civil contracts under the Civil Code of the States, and those which arise from commercial contracts; this is to say, those regulated by the Commercial Code and the Federal Civil Code.
1. In the first (civil contracts), health crises may be considered a force majeure event, which could release some of the parties from their obligations. It is important to point out that such a release is neither absolute nor automatic and must be analyzed in each concrete instance, as it will be necessary to prove the following:
a) The impossibility of fulfilling its obligations is exclusively due to the consequences derived from the pandemic denominated COVID-19, that is, there must be a direct causal relationship between the contingency and its consequences and the impossibility of not complying with the obligation
The above, because although it is true that most businesses will be affected by the pandemic, not in all cases will they be directly affected, or not to such a degree, that justifies their failure to comply with their obligations.
In certain civil contracts, depending on the applicable law and the nature of the contract, the theory of unpredictability or hardship could be invoked to modify contracts equitably or to terminate them.
b) That before the pandemic started, even during the first phase of the pandemic, they were up to date in the performance of their obligations, that is, that the non-compliance they have incurred is strictly due to the health crisis and the consequent crisis economic that this will bring.
2. On the other hand, in commercial obligations (which are ruled by federal norms), even when the existence of a force majeure event is demonstrated, this does not release the parties from fulfilling their obligations.
In this In this sense, the Federal Courts have ruled in relation to force majeure in commercial contracts. It is only foreseen that when the casus fortuitus or force majeure occurs, that the conventional penalties agreed for the case of default or, in the case of leasing, the reduction of rents or the of request the termination of the respective contract. Theory of Unforeseeability or Hardship doctrine is not regulated by Federal law, which governs all commercial contracts
CONTRACTUAL OBLIGATIONS CLAIMED IN TRIAL.
As for the breach of obligations that have already been, or are intended to be claimed, before the courts, we have that the process of judicial processes is suspended, since following the recommendations of the World Health Organization (WHO), various courts have announced security measures in the country, among which it is worth mentioning the suspension of work of the Federal Courts, the Federal Court of Administrative Justice, as well as the Local Judicial Courts in some States of the Republic of Mexico. Such measures began to be applied between March 18 and 23, 2020 and will last until April 19, 2020.
Any judicial term for proceedings shall be suspended, as well as any judicial proceedings themselves. Only some courts will remain on duty, exclusively for the attention of urgent or exceptional matters, as is the case of some family and criminal matters.
The present analysis is neither exhaustive nor being examined in a particular case, and as a consequence, does not constitute legal advice.We recommend that in case that you have any question of commentary on the above, please communicate with your usual contact at our firm to analyze the specific contractual reach of your obligations and your judicial position before adopting any measure.