Breach contracts causes force majeure

On December 31, 2019 , the first case of a person with the presence of a very particular symptomatology in his body that worsened as the days passed was documented. Being the symptoms similar to those of pneumonia, in some cases, and a simple flu, in many others, the medical and nursing staff had a very short time spectrum to combat a pathology that was really very different and much more aggressive than they first thought. After hours of fierce combat, they realized that it was definitely not a common respiratory disease , but rather a potentially lethal virus with an extremely high capacity to reproduce.and spread at an unmatched rate, commonly known as the coronavirus . The epicenter? Wuhan, China. Force Majeure

introduction

This problem went from constituting a mere national medical concern to quickly becoming a true pandemic , which was declared as such and officially by the World Health Organization on March 11, 2020. In this way, it affected to dozens of countries and with it, including but not limited to, its citizens, health centers, penitentiary centers, economies, stock exchanges, businesses, etc.

In this sense, and taking into account the lethality potential of the virus, the governments of practically all the countries that have been affected by the coronavirus have implemented different protection, prevention and mitigation measures with a view to slowing down the spread and growth excessive of the cases of contagion. The purpose of this is to achieve the availability of beds and the medical and nursing personnel necessary to care for patients who present with symptoms severe enough to warrant hospitalization.

The most significant, for the purposes of this article, are:
i) mandatory quarantine
ii) suspension of work (consequence of the previous point)
iii) closure of borders (together, the ” Measures “)

The Measures caused people to stop working or to be forced to work remotely from home. As is logical, this imbalance generates a very pronounced deficit in terms of work activity and therefore, it is possible to conclude that the production and generation of wealth decreases considerably, a circumstance that affects practically all industries in one, several or all stages of production and investing value added to marketable goods and services.

Additionally, the closing of borders paralyzes international trade, by significantly reducing the amount of goods that are exported and imported between different countries with a current trade relationship, which is one more element to justify the aforementioned imbalance and deficit. As the sources of wealth are so biased, it is unavoidable the fact that the economic capacity of individuals and companies has decreased in different proportions and with it, their ability to pay and fulfill obligations, especially contractual ones.

II. Force Majeure

The most important principle of contracts and, naturally, under which the entire contract theory was built, is stated by means of the aphorism pacta sunt servanda . This means: covenants must be kept . Notwithstanding the foregoing, the legislation and jurisprudence contemplate certain assumptions where this principle may be inapplicable. In these cases, we would be in the presence of a breach of a contract by one of its parties.

In other words , the Mexican law contemplates that, in the event that an event occurs that is external to the will of the parties , unpredictable, irresistible and that causes the fulfillment of the contractual obligation in question to become impossible, it will be updated the figure of “force majeure” .

The force majeure implies that, if the assumptions provided for by the legislation are updated, the party that has breached by virtue of this concept will be exempt from compensating the damages and losses caused to the affected party or from paying the agreed conventional penalty. The ratio legis of this is that the legislator considered fair the applicability in these cases of another general principle of law that is that ” no one is obligated to the impossible .”

The foregoing is supported by the following articles of the Federal Civil Code , and the correlatives of the Civil Code for the Federal District and the other states of the Mexican Republic :

  • Article 1847. The penalty may not be effective when the person obligated to it has not been able to fulfill the contract due to the creditor, fortuitous event or insurmountable force.
  • Article 2111. No one is obligated to the fortuitous case except when he has given cause, contributed to it, when he has expressly accepted that responsibility, or when the law imposes it.

Does a pandemic qualify as a trigger for force majeure in Mexico?

That said, it is imperative , for the purposes of this article, to determine if a pandemic , such as the coronavirus, constitutes a sufficient factor to fit it within the concept of “force majeure” and, naturally, if it has the ability to comply with all the requirements established by legislation, jurisprudence and national doctrine to be considered as such.

We consider that:

i) this event is external to the will of the parties , in any type of contract, since no natural or moral person contributed with their volition for the uncontrolled spread of the coronavirus;

ii) it is an unpredictable event , since the contracting parties to the corresponding contract have no way of knowing or knowing when or how a virus evolves and spreads;

iii) it is irresistible because as of today, there is no vaccine approved and ready for administration in patients and therefore, prevention measures are scarce or null;

iv) the fulfillment of many contractual obligations may become impossible due to a multitude of factors, including the limit on freedom of transit, the closure of borders, the stoppage of international trade, the assurance of merchandise, the breakdown of products perishable etc.

Therefore, we affirm that the coronavirus is apt to be considered as a very important factor for the purposes of determining the update of the phenomenon of force majeure in a contractual obligation. Consequently, it would update the normative hypothesis that gives rise to the exclusion of the payment of damages and conventional penalties by the subject in default, since compliance has become materially impossible.

In this situation, and notwithstanding the aforementioned, we consider it essential to clarify that it is impossible to generate a general conclusion on this topic for all types of contracts and in all cases, since each of them, together with their clauses, must be analyzed specifically, case by case. However, the intention is to offer a global overview of the structure of the law regarding the concept of force majeure and the possibilities and remedies that a contracting person might find that is materially unable to comply with its contractual obligation by virtue of an external event, unpredictable and irresistible, as irrefutable is the coronavirus.

Unpredictable Theory

Parallel to the doctrinal, legal and jurisprudential development of the general principle of the right of pacta sunt servanda , the force majeure and the maxim of “no one is obligated to the impossible”, Mexican law has recently been nourished with the modification and incorporation of a couple of articles of the Federal Civil Code, and the correlatives of the Civil Code for the Federal District.

The purpose was to add the legal principle called rebus sic stantibus , or “theory of unpredictability”. This concept aims to provide the parties within a contract the option of recovering the balance between the obligations assumed between them when extraordinary events of a national nature arise that are not possible to foresee and that cause the obligations under their responsibility to become more onerous. .

In this sense, the legislation offers two options to the party that is affected in the fulfillment of its contractual obligation by the events specified in the previous paragraph:

i) modification of the obligations with a view to reestablishing the balance of the contract;

ii) termination of the contract .

Specific procedures

In any case, a negotiation procedure between the parties must be followed and if an agreement is not reached , a procedure must be carried out before a competent judge , in order to determine in what proportion the onerousness of the corresponding obligation will be reduced or, on the contrary, the contract will be terminated.

The above is supported by the following articles of the Civil Code for the Federal District:

Article 1796. Contracts are perfected by mere consent, except those that must take a form established by Law. Since they are perfected, they contract the contracting parties not only to comply with what is expressly agreed, but also to the consequences that, according to their nature are in accordance with good faith, use or the law, with the exception of those contracts that are in the case indicated in the following paragraph.

Except for those contracts that appear concluded at random, when in contracts subject to term, condition or successive agreement, extraordinary events of a national nature arise that are not possible to foresee and that generate the obligations of one of the parties. are more onerous, said party may attempt the action aimed at recovering the balance between the obligations according to the procedure indicated in the following article.

Article 1796 Bis. In the case of the second paragraph of the previous article, you have the right to request the modification of the contract. The request must be made within thirty days after the extraordinary events and must indicate the reasons on which it is founded.

The request for modification does not, by itself, give the applicant the right to suspend performance of the contract.

In case of lack of agreement between the parties within a term of thirty days from the receipt of the request, the applicant has the right to contact the judge to settle the dispute. Said action must be filed within the following thirty days.

If the provenance of the action is determined by the occurrence of the events referred to in the preceding article, the defendant may choose between: 

    1. The modification of the obligations in order to restore the original balance of the contract as determined by the judge;
    2. The resolution of the contract in the terms of the following article.

Now, it only remains to determine whether a pandemic, such as the coronavirus, constitutes a sufficient factor for the natural clause of rebus sic stantibus , also known as “theory of unpredictability”, to be detonated . We are of the following opinion:

i) first, the contract must be commutative as opposed to random (commutatives are those in which the contractors know the benefits they will receive by virtue of their conclusion and random ones are those in which the contractors are unaware of them, because they are subject to a future and uncertain event) such as a lease, a deposit agreement and a contract for the provision of professional services;

ii) the contract must be subject to a term, condition or successive agreement (examples are the lease, a sale with title reservation and a lease (as regards the lessee), respectively);

iii) the coronavirus is a pandemic that undoubtedly constitutes a national event, since it has affected all the states of the Mexican Republic;

iv) it is unpredictable because no contractor has a way of predicting an epidemiological phenomenon of these proportions;

v) causes the obligations of the parties to become more onerous in many cases (based on the example of the lease, a tenant will experience an increase in the onerousness of their obligation to pay rent if they reduce their salary, they have no opportunity of selling merchandise in your business, your customers begin to fail in payments, etc., because you will lack the means to pay in a timely manner).

By virtue of the foregoing, we consider it essential to clarify that, as with force majeure, it is impossible to generate a general conclusion on this topic for all types of contracts and in all cases, since each of them, together with its Clauses must be analyzed concretely, case by case, but the intention is to offer a global overview of the structure of the law regarding these concepts.

III. Application of Force Majeure and the Theory of Unpredictability to Commercial Contracts

As has been explored so far, both force majeure and the theory of unpredictability are directly applicable to civil contracts , since their regulation is provided for in the Civil Code.

However, the pertinent question is whether these principles may be applicable to commercial contracts that are regulated in the Commercial Code or in other general or special commercial laws. The reason is that it is precisely these that are part of the day to day of multinational companies and that generate millions and millions of dollars a year with their daily operation. The supplementary nature of the norms is a legal mechanism that, in many occasions, can be extremely useful to fill the gaps that exist in the law and thus, be able to give an answer or solution to each controversial and uncertain case that arises.

Jurisprudence

The jurisprudence has determined that for there to be supplementarity , that is, that a legal system is nourished by the provisions of another, the following requirements must be met:

i) that the law that is intended to supply expressly admit it, and indicate the supplementary statute;

ii) that the law subject to supplementation provides for the legal institution in question;

iii) that notwithstanding this provision, the existing regulations in such legal body are insufficient for their application to the specific situation presented , due to total or partial lack of the necessary regulations;

iv) that the provisions or principles with which the deficiency is to be filled do not contradict, in any way, the essential bases of the legal system of support of the supplied institution.

Force majeure as a legal figure within Commercial Law

In view of the foregoing, we consider that force majeure is a legal figure contemplated in civil law that is applicable to commercial law and commercial contracts. This is supported by the fact that all the requirements established by the jurisprudence for supplementary status are met:

i) The Commercial Code establishes civil legislation in federal matters as supplementary legislation , in accordance with its second article;

ii) the law object of supplementation contemplates the legal figure in question, as it is expressly regulated in various articles of the Commercial Code;

iii) notwithstanding this provision, regulation is definitely deficient in commercial law ;

iv) the legal figure of force majeure does not alter the bases of the legal support system , since finally obligations and contracts are analyzed and interpreted, which are characteristic of both Civil and Commercial Law.

The above is supported by the following articles of the Commercial Code:

Article 2. In the absence of provisions of this ordinance and other commercial laws, those of common law contained in the applicable Civil Code in federal matters will be applicable to commercial acts.

Article 81. With the modifications and restrictions of this Code, the provisions of civil law regarding the capacity of the parties, and the exceptions and causes that terminate or invalidate the contracts, will be applicable to commercial acts.

Coronavirus force majeure?

This means that, once the requirements established by jurisprudence have been met , commercial law can be fed by civil law in all matters relating to force majeure, since we are of the idea that fits perfectly within the framework of legislative supplementary requirements and it provides a solution to the contractors who are affected in the fulfillment of the contractual obligations by causes external to them and who are completely irresistible.

Additionally, in these times of uncertainty and economic, political and health instability, it is essential to have an excellent communication channel with clients and suppliers in order to preserve the unity and uniqueness of the contracts concluded, preserving, as far as possible , the legal relationships generated so far and alleviating, as far as is reasonably possible, the onerousness of the obligatory burden of the parties by virtue of the spread of the pandemic.

On the contrary, since the legal figure of the theory of unpredictability is not contemplated in the federal common legislation, it is possible to conclude that the necessary requirements for the legislative supplementary nature to operate are not fulfilled and, therefore, that this principle is applicable to the commercial contracts , since as mentioned above, the Commercial Code makes express reference to civil law at federal and not local.

By virtue of the foregoing, the aphorism rebus sic stantibus will be applicable as long as it concerns local issues where the corresponding federal entity regulates said figure, it is a contract of a strictly civil nature and this is commutative, subject to term or of a successive tract and that the obligations derived from it become more onerous for one of the parties by virtue of an event of a national, unpredictable and irresistible nature.

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