The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Mexico

How is Force Majeure regulated in Mexico?

If a Force Majeure clause was established under the contract, it is necessary to determine whether the Covid 19 spread and its effects can be considered covered within the scope of said clause.

It is advisable to give notice of the Force Majeure event to the other contracting parties.

If a Force Majeure clause was not incorporated to an agreement, then, the matter shall be analyzed in view of the provisions in Mexican law.

According to doctrine and legal precedents, unforeseeable circumstances and Force Majeure can be classified as follows:

  • Acts of nature, which includes natural disasters, such as earthquakes, hurricanes, fires, floods, storms, among others.
  • Human deeds, such as blockages, crimes, wars, invasions, among others.
  • Acts of authority, including all those impediments deriving from an order or prohibition issued by an authority, provided that the debtor has not given rise to such determination.

From a technical standpoint, the difference between unforeseeable circumstances and Force Majeure is that the first one refers to those acts of nature, while the second one refers to acts of men.

In order to exercise the exceptional release of liability for breaching contractual obligations due to unforeseeable circumstances of Force Majeure, two essential requirements must be met:

  • Unpredictability, understood as the impossibility of the debtor to be able to anticipate the situation, in order to prevent it.
  • Generality, which means that no person, under the same circumstances, could have prevented the event(s) considered as unforeseeable circumstances or Force Majeure.

The Civil Code for Mexico City and the Federal Civil Code state that no one is obligated in unforeseeable circumstances or Force Majeure except when i) it has contributed to it; ii) it has expressly accepted that liability; iii) or in case of mandate of the law.

On the other hand, the Commercial Code states that: in the absence of provisions of such Code and other commercial laws, those of common law contained in the Federal Civil Code shall be applicable.

From a systematic interpretation of said laws, there might be grounds to assert that the unforeseeable circumstances or Force Majeure exceptions can also be argued in commercial matters.

Under International Law, in the United Nations Convention on Contracts for the International Sale of Goods, particularly in its section on exemption from liability for non-compliance, it establishes a series of requirements and steps to be met and taken, to evidence the applicability of the exemption:

Requirements:

  • Unpredictability, if the event could not have been anticipated by the affected people.
  • Uncontrollability, when there is no possibility of controlling the results.
  • Impossibility of avoiding or remedying the consequences, referring to the fact that the consequences of said act or event cannot be avoided.

Action steps to invoke the non-compliance exemption:

  • Communicating the impediment to the other contracting parties.
  • In the event that the non-compliance is due to a third party breach, the obliged party will only be exempted from liability if the “second third party[1]”, also evidences that its non-compliance is due to the same Force Majeure cause.

[1] In this case, the second third party is in a multilateral relationship, whereby the non-compliance of one of them produces the default of another.

Hardship under Mexican Law

The legal treatment of Hardship is based on the General Principle of Law: “rebus sic stantibus” which sets forth that, as long as the circumstances remain the same, the contractual conditions shall remain the same.

Under Mexican law, Hardship is defined as extraordinary events of national nature that, being impossible to foresee, cause the obligations of one of the parties to become more onerous. In this case, the affected party may attempt a legal action aiming to recover the balance between the obligations of the parties.

In order to request the modification of an agreement under Hardship, please note the following:

  • The request must be made within 30 days of the extraordinary event.
  • In case that the parties thereto do not reach an agreement within 30 days of receiving the request, the applicant may request judicial assistance to solve the dispute.
  • The defendant in its case, may choose between adjusting the agreement to restore the balance of the obligations of the parties, or the termination of the contract.
What to do in case of notice of Force Majeure in Mexico?

Contractual relationships and business operations must be analyzed to evaluate if they fall within the scope of unforeseeable circumstances, Force Majeure or Hardship, to minimize exposure to liabilities deriving from breaching obligations. The aforementioned in order to avoid jeopardizing the business continuity.

Generally speaking, there could be grounds to argue that the situation the world is currently facing consists of an unforeseeable circumstances or Force Majeure from a Mexican Legal standpoint.

However, many other aspects shall be taken into consideration, such as: a) the moment in which such situation generated and b) if a modification of the obligations of the parties could be justified, if applicable. To determine the aforementioned, it is necessary to review the specific details of each contract, the conduct of the parties, and governmental notices or decrees, among other relevant legal matters.

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