CONTRACTUAL COMPLIANCE IN TIMES OF COVID 19

It is possible to imagine that even in his worst nightmares, Andrés Bello foresaw that his article 45 of the Civil Code would represent such a great challenge for legal analysis as the one we are experiencing today.

By Juan Eduardo Palma Cruzat

The economic crisis caused by the current COVID 19 outbreak, preceded by the social and political events that unfolded in our country as of October 2019, have put lawyers in a tremendously challenging situation from a professional and intellectual point of view. Faced with this issue, no one can say that it has a generally applicable solution, rather the path goes in the opposite direction. The situation is so challenging that there is no professional practitioner today who has experienced a similar situation.

We have seen countless businesses that have simply not been able to function, only think of businesses linked to the gastronomic industry, businesses linked to the retail sector that do not qualify as essential goods, and others of the most diverse nature, whose level of sales has been dramatically affected.

The Government and the authorities have promoted various palliative measure packages in this regard, but does our legal system provide us with sufficient tools to face this situation in the private world? Much has been said about the concept of fortuitous event or force majeure and its effects in the area of ​​contractual compliance.

Article 45 of the Civil Code defines it as the unforeseen that it is not possible to resist, for example, a shipwreck, an earthquake, the arrest of enemies, the acts of authority exercised by a public official, etc. As we said at the beginning of this note, even in his worst nightmares, Andrés Bello could not imagine, including within these examples, that a virus would literally be able to “paralyze” the world.

But, faced with this situation, let us briefly analyze how this institution of private law can operate.

It is well known that the occurrence of a fortuitous event or force majeure would operate as an exemption or would enable the suspension of the enforceability of certain contractual obligations, but this cannot imply that the door is simply opened to one of the parties to disregard obligations that it has legitimately assumed, and that, on the other hand, they grant rights to a creditor who has legitimately acquired them. In other words, if a situation such as the one caused by COVID-19 were to be a fortuitous event or force majeure, it would be for everyone and not just for one of the parties, which leads us to the exciting challenge of finding mechanisms that allow for the distribution of this burden, in an equitable and fair manner among the contracting parties.

For a fortuitous event or force majeure to produces these effects, two essential elements must meet: /i/ unpredictability and irresistibility, hence the parties have not been able to diligently foresee the occurrence of this circumstance and, on the other hand, /ii/ the effect that this circumstance produces must be irresistible, meaning making it really impossible to fulfill the obligations in question.

In our opinion, it is more than difficult to have foreseen the effects of a pandemic such as the worldwide outbreak of COVID 19, now do its effects make it impossible to fulfill contractual obligations? Clearly, this is a tremendously casuistic issue for which we cannot set a general applicable rule, such as a sort of clipper manual to follow, each particular situation has its merit.

Notwithstanding the above, in general terms, it can be established that there is an important difference regarding the analysis that must be made with respect to obligations to do in relation to the analysis relative to payment obligations.

Thus, for example, analyzing the effects of this pandemic, where economic activities have been tremendously depressed, freedoms of movement restricted, and many businesses have been forced to keep their activities to a minimum, it is very likely that an obligation to do as for example, the provisioning of certain goods may become impossible to fulfill, the fulfillment of the obligation in question may have even been made physically impossible. But, on the other hand, if we refer to payment obligations, could these become impossible to fulfill? Material impossibility of fulfillment does not yet exist, payment systems work, therefore a particular analysis must be carried out in light of whether, as a result of the COVID 19 pandemic, businesses would have been affected to such an extent that they have been unable to comply with certain monetary obligations.

If the above was the case, and the affected party has acted with the degree of diligence that the respective contractual obligation imposes, it could be facing a particular situation of fortuitous event or force majeure. The analysis is not easy, and clearly must be done in light of the particularities of each specific case.

But the challenge goes further, COVID-19 affects everyone equally, therefore it would also not be equitable or in accordance with the Law, that the economic burdens produced as a consequence should be borne by one of the parties. We must find mechanisms that allow all parties to face these burdens equitably and avoid, as far as possible, a run to insolvency proceedings that could mean a generalized economic collapse, without neglecting that – in certain cases – bankruptcy law also may be a viable solution. In this sense, the challenge is great, and we are all called to contribute, which is why at Palma Edwards Veszpremy we are analyzing the issue in depth in order to find the best solution criteria that make contracts viable and protect reasonably and equitably the legitimate interests of the parties in the face of an unforeseen event that affects everyone in a way that is equal, similar and equivalent.