• 19 March 2020

COVID 19: Impact on Agreements and other Obligations under Mexican law

As the COVID-19 pandemic progresses, we have been asked more than once: given the impossibility of complying with contractual obligations, can the parties to a contract be exempted, totally or partially, from complying?

The answer is “well, it depends”.

On one hand, it is clear that Mexican law and court precedents provide that upon occurrence of acts of God or force majeure the parties to a contract (whether governed under civil or commercial law) can be exempted from complying with their contractual obligations. On the other hand, Mexican law and precedents permit, in certain circumstances, that the parties request a re-balance of contractual obligations in case of an unforeseen change of circumstances.

What is more complex is determining when the right to resort to such legal protections kicks in.

Let’s make an analysis:

1. First, we must analyze whether the agreement itself defines what is an “act of God” or “force majeure”, if an occurrence of an act of God or force majeure effectively exempts the parties from complying with their obligations, to what extent, if it requires any notice and if a prolonged occurrence the act of God or force majeure can trigger the termination of the agreement.

2. In the event that the agreement does not provide for a definition of acts of God or force majeure, or a definition of such is not exhaustive, we must resort to civil law and court precedents to determine whether the occurrence of acts of God or force majeure can exempt, wholly or in part, from complying with contractual obligations.

3. In the absence of an act of God or force majeure that would exempt the parties from complying with contractual obligations, we can analyze the applicability of the theory of unpredictability or “rebus sic stantibus clause”.

Standard for Acts of God or Force Majeure

Acts of God or force majeure can be fully regulated in a contract. To request protection from an act of God or a force majeure the affected party must resort to the provisions of the agreement and whatever protection is awarded will be based on what the parties agreed to in the contract.

As discussed above, there is a possibility that the parties may have to resort to civil law to determine the occurrence of an act of God or force majeure. In civil matters, the act of God and force majeure are governed under the civil code of each Mexican state and Mexico City. In commercial matters, it is governed under the Federal Civil Code.

To determine the occurrence of an act of God or force majeure the following standard must be met: (i) a phenomenon occurs, whether of nature, of man, or acts of authority; (ii) this event is not attributable to the debtor; (iii) it causes a physical impossibility for the debtor to fulfill an obligation; (iii) is unpredictable or, even if it were foreseeable, it is insurmountable; and (iv) it is general, that is, for any person, not being sufficient that compliance is more difficult or onerous for just one party.

The main consequence of the occurrence of an act of God or force majeure is that the defaulting party is exempted from complying with the original obligation, without any liability, whether contractual or resulting from damages and losses.

Theory of Unpredictability (Teoría de la Imprevisión) or Rebus Sic Stantibus Clause

Some civil codes in Mexico accept the theory of unpredictability or “rebus sic stantibus clause” which is additional resource that protects the parties to a contract, in case that an act of God or force majeure event that exempts from contractual compliance does not occur.

Unlike the acts of God or force majeure standard, which justifies contractual breach, under a rebus sic stantibus clause scenario the affected party may request a recovery in the balance of contractual obligations or, where appropriate, request the termination of the contract in regard to outstanding obligations.

This theory applies to contracts of successive compliance (tracto sucesivo), such as leases, subject to a term or condition, when their compliance is limited by: (i) extraordinary events; (ii) that were not possible to foresee; (iii) have a general nature; and (iv) makes compliance more difficult than when originally agreed.

Note that the theory of unpredictability will not always apply:

1. First, it is only expressly accepted by the civil codes in the states of Aguascalientes, Chihuahua, Mexico City, Coahuila, State of Mexico, Guanajuato, Guerrero, Jalisco, Quintana Roo, Sinaloa, San Luis Potosí, Tamaulipas and Veracruz. This is relevant because the validity of this theory will only be accepted in agreements that are governed under each one of these civil codes.

2. Second, current court precedents (until now, isolated and thus, not binding) exclude the application of the theory of unpredictability to commercial matters, limiting it to civil matters, such as house leasing, agency, gratuitous loan, among others.

Relevant Aspects to Consider

The mere occurrence of the Coronavirus or COVID-19 in Mexico does not mean that an act of God or force majeure event would result in an automatic release of contractual obligations. A case-by-case analysis must be made.

There are few court precedents that can be used as guidelines (other than some isolated court precedents and not directly applicable to a pandemic), despite the influenza A (H1N1) pandemic of 2009 that directly hit Mexico. However, in our opinion, the occurrence of the COVID-19 pandemic in Mexico may be deemed, eventually, in an actual act of God or force majeure that will prevent compliance of contractual obligations, again, we insist that it is necessary to make a particular analysis in each case.

What we are certain of is that certain acts of authority issued to address the COVID-19 pandemic can be deemed as an act of God or force majeure,. because these actions have the purpose of establishing specific orders or prohibitions, such as the prohibition of public events, closing of bars, restaurants and other commercial venues.

With regards to the theory of unpredictability, we have already discussed that Mexican courts have discarded it for commercial contracts. These precedents are a cause of concern for merchants and various industry players in Mexico, as they imply that even when compliance of contractual obligations becomes radically and extraordinarily costly, debtors remain obliged to comply if they are not protected under an act of God or force majeure exemption.

For the above considerations, we always recommend a preventive legal analysis of current agreements and how they can be affected by the COVID-19 crisis and, if necessary, take appropriate measures.

In case of any inquiries about the content of this News, please contact:

Fernando Eraña (ferana@solcargo.mx)

Salvdor Vivanco (salvador.vivanco@solcargo.mx)

Fernando Pérez Correa (fernando.perez@solcargo.mx)

Download the News here.