COVID-19 - Effects on Contractual Obligations 

March, 2020 - Eva Cacacho Gonzalez

The outbreak of Coronavirus (COVID-19) which has been recently declared as a Pandemic by the World Health Organization, has affected our country and the entire world.


In Guatemala, the Government has been taking an active role by implementing progressive measures to prevent the spread of the virus, measures that will have a significant impact on the country's economy.


Under the Guatemalan Constitution and in accordance with the Public Order Act, the Government declared State of Emergency through the Executive Decree 5-2020, adopted by the cabinet of Ministers. The rule includes restrictions and precautionary measures applicable to the public and private sector.


COVID-19:QUALIFIES AS AN ACT OF GOD OR A FORCE MAJEURE EVENT?


As the outbreak worsens, the risk of businesses being unable to perform their contractual obligations increases. Therefore, terms like “An act of God" and 'Force Majeure” become relevant.


First, neither the concepts "Act of God" nor "Force Majeure" are codified in the Guatemalan Civil Code.


Both legal figures have been defined by the doctrine as unforeseeable events or, if being foreseeable, they are inevitable; external beyond the will of the parties, irresistible, relevant, inescapable and of direct affectation that prevent the fulfillment of obligations.


  • The Act of God is an overwhelming, unpreventable event caused exclusively by forces of nature, such as earthquake orfloods;
  • Force Majeure originates from an extraordinary circumstance triggered by an act of people (e.g. a robberyor illness).

The COVID-19 outbreak could be considered as a Force Majeure event, for being predictable, but unavoidable, caused by factors beyond the control of the parties, inescapable and of direct affectation.


A careful contractual analysis is required to determine the severity of the impact that the outbreak has on a party’s ability to perform its obligations.


FORCE MAJEURE EFFECTS IN CONTRACTUAL PERFORMANCE:


Article 1426 of the Guatemalan Civil Code, states the following effects:


"The debtor is not responsible for the failure to perform an obligation, due to an Act of God or Force Majeure, unless that at the momentit occurred hewould have beenin default."


Various rulings of the Guatemalan Constitutional Court[1], determine the release of the contractual obligations as a result of events that constitute an Act of God or Force Majeure: When an obligation canno longer be performed by the debtor, he can be released from its obligations, by giving notice (prior to the expiration of the term of the contractual obligation) that the performance of the promise is different from what should reasonably have been within the contemplation of both parties when they entered into the contract.


RECOMMENDATIONS:


After analyzing potential consequences that may derive from the COVID-19 outbreak and in accordance with the Governmental measures, our recommendation is to sustain contractual good faith and take fair positions to reach an agreement and avoid unnecessary future litigation.


If risk of failure arises in the performance of contractual obligations, its will be necessary to identify and review them, in order to verify if the contract contemplates any limitation or an Act of God or Force Majeure provision.


In the event that the breach of a contract is expected to be linked to the COVID-19 outbreak or any of the Government's precautionary measures, an immediate dialogue, before incurring in default, will assist parties in mitigating damages. Determine whether or not a contracting party may be relieved from performance of its contractual obligations as a result of the outbreak, will involve a factual and legal analysis on a case-by-case basis.







 


Footnotes:

This document is for informational purposes only and in no way shall be interpreted or construed as a legal advice.


Please do not hesitate to contact us if you require further information.

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