log in
All Articles | Back

Member Articles


Special Report: Coronavirus and its Effects on Contracts 

by Carlos Brandes, Javier Berdaguer, Martin Balmaceda

Published: March, 2020

Submission: March, 2020

 



The spread of the COVID-19 virus (“Coronavirus”) worldwide has had, in addition to the enormous impact on the health of the population, a notorious effect on the economic life of individuals and companies, and also on the execution of contracts. It affects the internal processes of a company, the production or services on which it depends to subsist, and even makes it difficult to fulfill the obligations assumed with third parties. These situations are going to be invoked as events of "force majeure" or "strange cause", which may justify eventual breaches or delays, and exonerate the debtor from liability.

Last Friday, March 13, the national authorities reported on the first cases of Coronavirus in Uruguay. In the following days, new cases have been released. The authorities, in the intrim, have announced measures to prevent infections that go through isolation or eventual quarantine.


In this context, we ask ourselves if an eventual proposal of the Coronavirus would be possible in Uruguay as a strange cause or force majeure event, and what general recommendations we can take into account from now on, without prejudice to the necessary case-by-case analysis of each particular situation.


In this opportunity, and as a primary reflection on this topic, we are going to refer to some effects that the Coronavirus could have as an event of "force majeure" in civil or commercial contracts, whose compliance is affected by events determined to consequence of the mentioned virus.


I. Statement of the situation at the international level.


In many countries, measures are being taken to deal with the consequences of the Coronavirus on contracts. For example, the China Council for the Promotion of International Trade (“CCPIT”) has decided to issue “force majeure certificates” to different Chinese companies, in order to prove that they were affected by the Coronavirus and that for the company this implied an event of force majeure, for the corresponding purposes. The validity, efficacy, and where appropriate, probative force of these certificates must be analyzed in each specific case in accordance with the legislation applicable to the contract.


In India, authorities of the Ministry of Finance issued a Memorandum stating that, within the framework of public procurement, companies with production chains that have been altered by the Chinese Coronavirus, or any other affected country, could invoke situations of force majeure for being a “natural calamity” (“act of God”).


In Italy, the Government has already imposed restrictions on the movement of people, and announced that it is studying measures to suspend payment of bills, mortgages and certain taxes to promote liquidity, in a context of analysis of other measures to contain the advance of the virus.


In Spain, purchasers of air tickets destined for regions at risk of contagion, have demanded the full refund of the money invoking reasons of "force majeure", and some airlines have rejected it for not considering the virus included in this assumption.


II.  The "force majeure" from the perspective of Uruguay


It is customary for at least certain types of contracts to provide clauses by which the parties agree and regulate the situation in the event of force majeure. Thus, it is usual to find forecasts that define the concept of force majeure between the parties, what situations are covered, consequences in each case, and even a procedure to communicate the occurrence of the event to the other party. These clauses may have a different denomination on a case-by-case basis and scope for their situations (for example: foreseeing events of nature, government measures, changes in the law, etc.). It can also be agreed that force majeure situations do not cover whoever is affected by it. However, even when it is not agreed in a contract, in Uruguay the exemption from liability for "strange cause not attributable" (which includes "force majeure") is of legal origin and protects the party who invokes it, provided that the assumptions that are traditionally identified as force majeure are given, namely: that it is an external event, unpredictable and irresistible, and that it generates an impossibility of compliance for the affected party. Thus, it has been argued that force majeure is verified by one or more events that are presented as extraordinary (that is, not reasonably foreseeable) and that are imposed on man with a force that he cannot resist. In this same sense, it has been argued that ultimately, what characterizes the event of force majeure is the fact of being inevitable, irresistible. It is also indicated that it must be objective, that is, that the impossibility or impediment should not exist only for the debtor but for any person or company that is in the same conditions. It has also been understood that the impossibility must be absolute, in the sense that the debtor must have exhausted all available means to achieve compliance, not being sufficient for it that compliance, although possible, is more difficult or more onerous.


In this sense, the force majeure since its legal regulation in Uruguay has been presented as an element based on casuistry and it is not possible to quantify or qualify in detail in advance, requiring a case-by-case analysis. Despite the rigidity of the concepts mentioned above, civilist doctrine has postulated during the last two decades that the concept of impossibility has to be relativized in order to encompass a broader cast of situations.


III. General recommendations as a "force majeure" event in contracts.


Below we present some general recommendations for contracts, without prejudice to the necessary case-by-case analysis of each particular situation.


  1. Regarding contracts that are currently under negotiation, or those that may be negotiated in the future.

At least as long as the current world status of the Coronavirus is maintained, analyze in each case the obligations that the parties will assume, and whether or not it is appropriate to provide force majeure clauses that understand the consequences of the virus affecting any of the parties (for example, outbreak at the internal level of the company, measures adopted at the government level, lack of inputs, non-compliance with contractual deadlines, etc.).


If so, foresee the consequences of the occurrence of the event, a procedure to communicate it to the other party, forecast regarding costs incurred, and if the contractual regulation nullifies the legal regulation of force majeure, among other things.


From the debtors' point of view, it may also be convenient to agree on the limitation of the specific means that the debtor will use to fulfill his obligation, so that if those means fail (for example, a container cannot arrive due to measures imposed in the country of origin), disclaims liability.


It may also be relevant to include a pact on the law applicable to the contract, and if, in the event of a dispute, it is to be resolved by ordinary justice or by an arbitral tribunal.


  1. Regarding the contracts in force, and which may currently or potentially see the fulfillment of their obligations. In this case, we recommend at least the following course of action:

 1) First, analyze whether there is a written contract between the parties that provides for a regulation of force majeure events, and the type of obligation that would be currently or potentially at risk of default. The regulation that the parties themselves have established for force majeure events will be decisive for the analysis of the origin of this institute, its effects and the procedure to be followed. Notwithstanding this, it is also important to analyze whether there is a legal agreement applicable to the contract and its validity, a dispute settlement clause (if the dispute is to be settled by arbitration or by ordinary courts), if the force majeure clause It replaces or not the legal regime applicable to the relationship between the parties, among other things.


2) Secondly, if there is no written contract, or it does not contemplate force majeure events, analyze the type of non-compliance and the impact of the event on the company, under the applicable rules of law. 3) Finally, in the event that, as a consequence of the previous analysis, it is intended to invoke the specific situation that affects the company as a cause of "force majeure", it is generally recommended to adopt at least the following actions: i. Take all precautions in order to document the situation of force majeure that is intended to invoke to justify a breach, and the causal link between the event of force majeure and the breach (that is, that the consequences caused by the Coronavirus, such as force majeure event, must be the cause of the breach). This is especially relevant in the event that a dispute arises between the parties, in which the non-complying party is surely the one with the burden of proving the event of force majeure (this includes, as a minimum, the burden of proving the existence of the event, its characters such as force majeure event, and causation with default). ii. Notify the other party of the occurrence of the event of force majeure, with the greatest diligence and as soon as reasonably possible. The way in which the other party must be notified in principle must be done considering the means provided in the contract itself, and in the absence of a contract, preferably through a communication channel that has already been previously validated between the parties, if any, and if there were not by reliable means (collated telegram, notarial certificate, letter received by the debtor, etc.)


3) Finally, in case, as a consequence of the previous analysis, it is intended to invoke the specific situation that affects the company as a cause of "force majeure", in general it is recommended to adopt at least the following actions:


i.  Take all precautions in order to document the situation of force majeure that is intended to invoke to justify a breach, and the causal link between the event of force majeure and the breach (that is, that the consequences caused by the Coronavirus, such as force majeure event, must be the cause of the breach).


This is especially relevant in the event that a dispute arises between the parties, in which the non-complying party is surely the one with the burden of proving the event of force majeure (this includes, as a minimum, the burden of proving the existence of the event, its characters such as force majeure event, and causation with default).


ii.  Notify the other party of the occurrence of the event of force majeure, with the greatest diligence and as soon as reasonably possible.


The way in which the other party must be notified in principle must be done considering the means provided in the contract itself, and in the absence of a contract, preferably through a communication channel that has already been previously validated between the parties, if any, and if there were not by reliable means (collated telegram, notarial certificate, letter received by the debtor, etc.)


iii. Take all precautions to mitigate the damages that the breach, consequence of the event of force majeure, will cause to the other party.


In Uruguay, doctrine and jurisprudence peacefully recognize the existence of a generic duty not to harm, and as a consequence thereof, the duty to mitigate damages by taking all actions that are reasonably required for this purpose.


This analysis is only a first approximation to some aspects of the subject, but each particular situation must be analyzed taking into account the contract, the facts and the applicable law.


 



Link to article

 

MEMBER COMMENTS

 

 

WSG Member: Please login to add your comment.

    Disclaimer

WSG's members are independent firms and are not affiliated in the joint practice of professional services. Each member exercises its own individual judgments on all client matters.

HOME | SITE MAP | GLANCE | PRIVACY POLICY | DISCLAIMER |  © World Services Group, 2021