Following the World Health Organization's classification of COVID-19 as a pandemic with a sustained risk of further spread worldwide, and its declaration not only as a public health crisis but as a crisis across every sector, questions automatically arise regarding the impact that COVID-19 will have on companies and businesses, as well as on the performance of contracts and other obligations in our country.
Although no Presidential Decree similar to the one issued in 2009 during the outbreak of the H1N1 influenza virus (by which activities were suspended and various general restrictions were established) has been issued to date, the economic effects caused by COVID-19 and the various measures adopted so far by governmental authorities and the private sector in Mexico draw attention to the actions that companies and businesses must take in the face of this widespread crisis, and to the legal mechanisms provided under our law to address the problems surrounding the performance of contracts and other obligations. As regards the impact at the corporate and business level, the directors and officers of public and private companies must make decisions and implement swift, well-informed actions to confront the crisis caused by COVID-19 and its possible future ramifications. The priority must be to ensure the survival of companies in the short and medium term, the well-being of employees, business partners and the public in general, as well as to understand the risks to their companies and to seek solutions aimed at mitigating them. Companies must assess their viability in the short and long term in order to generate solutions and changes in their corporate strategy that ensure their viability, as well as the business opportunities that arise in this changing environment. As regards the performance of contracts and other obligations in light of the effects of COVID-19, it will be necessary to analyze the cases in which our law allows either (i) release from the performance of contractual obligations because an act of God or force majeure event has occurred; or (ii) a request that the balance between the obligations of the parties to a contract be restored owing to the existence of extraordinary and unforeseeable events that render the performance owed by one of the parties more onerous (the doctrine of unforeseeability or the rebus sic stantibus clause). Both scenarios are briefly outlined below: (i) Release from the performance of obligations due to an act of God or force majeure. In general terms, an act of God or force majeure is an unforeseeable or unavoidable event that makes it impossible to perform an obligation. Thus, release from the performance of an obligation on this ground is based on the principle that no one is bound to do the impossible (unless they have expressly assumed liability for the act of God or force majeure event) and likewise entails release from liability for the non-performance of the obligation. Under Mexican law, the parties to a contract may validly define what is to be understood as an act of God or force majeure, as well as the other requirements that must be met to invoke it, the extent to which performance of the obligations is released, and even the circumstances in which the existence of an act of God or force majeure may result in termination of the contract. The parties to a contract normally include specific formalities and time periods to give notice of and invoke the occurrence of an act of God or force majeure event, formalities and time periods that are of the utmost importance to observe in order to be released, in whole or in part, from the performance of an obligation. If the contract does not provide a definition of an act of God or force majeure, then in order to determine whether or not an act of God or force majeure exists, and whether it may release, in whole or in part, the performance of an obligation, it is necessary to abide by the provisions of the applicable legislation (in civil matters it is regulated in the local civil codes, while in commercial matters it is regulated supplementally in the Federal Civil Code) and by judicial criteria. Under Mexican law, for an event to constitute an act of God or force majeure, it must satisfy the following requirements: (a) that it be an event arising from nature, from human acts, or from acts of authority; (b) that the event not be attributable to the debtor; (c) that the event cause the debtor an absolute physical or legal impossibility to perform the obligation; (d) that the event be unforeseeable and unavoidable, that is, that it can neither be anticipated nor prevented; and (e) that the impossibility to perform the obligation be general, that is, that the execution of the act (in other words, the performance of the obligation) be impossible for any person to carry out and not merely more difficult or onerous. (ii) Applicability of the doctrine of unforeseeability or the rebus sic stantibus clause. In the event that an occurrence does not meet the requirements to qualify as an act of God or force majeure and to release the debtor, whether partially or totally, from the performance of an obligation, it is worth analyzing the cases in which the affected party may demand the application of the rebus sic stantibus clause to restore the balance between the obligations of the parties or the termination of the contract. In general terms, the rebus sic stantibus clause, also known as contractual unforeseeability, which finds its basis in the principle of good faith that applies to all the parties to the contract and in the principle of equity that must underlie every contract, is applicable: (a) to contracts of successive performance (such as leases and other contracts whose term extends over time); (b) when, during the term of the contract, extraordinary and unforeseeable events arise; and (c) when those events have the consequence that the obligations owed by one of the parties become more onerous than originally contemplated. This doctrine of unforeseeability is provided for in some local civil codes, so that in order to determine its application to a specific case it will be necessary to analyze each contract in light of the legislation applicable to it. In conclusion, it is unquestionable that the effects of COVID-19 will impact, to a greater or lesser extent, the course of business of companies, both worldwide and in Mexico, so that it will be necessary to analyze the specific situation of each company, as well as those of the various obligations undertaken whose performance could be affected by this situation. This is in order to find the best solutions and mechanisms available to bring about business continuity and the least possible impact across all sectors. For additional information, contact our experts: Luis Burgueño, Partner: +52 (55) 5258 1003 | lburgueno@vwys.com.mx Marisol Márquez, Associate: +52 (55) 5258 1003 | mmarquez@vwys.com.mx
