The pandemic that affects most of the world has caused various unforeseen and unexpected events, which have an effect on the business world, and specifically, on the aspects and laws that govern the fulfillment of contractual obligations.
By Rodrigo Cortés
Government measures to prevent, mitigate and deal with COVID-19 necessarily imply /a/ the attempt to reduce the negative effects, and /ii/ the need to take charge of the universe of contractual breaches that will arise, making it necessary to face them in an extrajudicial or judicial manner.
Presumably, the performance of contractual obligations in this time of pandemic, became for some of the parties more difficult or impossible. For example, the lease of commercial premises with prohibition of the sanitary operating authority, produces that the lessee does not receive income to satisfy the rent, thus taxing his patrimony in an excessively greater, onerous, and inevitable way. It is already a reality that of the unemployment rate, that sanitary measures are increasingly burdensome, an increase in the price of certain goods and services, and other situations that will expose various debtors to the difficulty or impossibility of complying with their obligation.
Although the current law was not expressly prepared for a pandemic of the COVID-19 type, it contemplates various tools to face – case by case – the various adverse effects of this unfortunate situation.
1.- Theory of unpredictability.
The theory of contractual unpredictability aims to regulate the situation in which the cost of the execution of contractual obligations, due to extraordinary and unforeseen events, increases significantly and, causing damage to one of the parties, which as a general rule is the debtor.
It could be understood in a first analysis, that this institution is the one that could resolve most of the contractual breaches that originate under the pandemic (periods of quarantine, social isolation and as soon as the prohibition of businesses to operate is in force). However, the jurisprudence of the ordinary courts is somewhat divided between the Court of Appeals and the Supreme Court, the former accepting it despite not being regulated, and the latter, obviously taking precedence over the former, determines the inadmissibility of said theory in our legal order for not being expressly regulated by our civil law.
Despite the opinion of the Supreme Court, /i/ most of the doctrine continues to patent the need for an express and determined regulation of the theory of unpredictability, and /ii/ our system frees the courts to decide with relative freedom and without absolute subjection to what was resolved by previous rulings. In this sense, we believe that it is very likely that we will see an adjustment of the jurisprudential criteria in line with what is supported by most of the doctrine in favor of this theory.
A minority group of the doctrine is against the fact to an express regulation in our legal system of this theory, stating that /i/ it would deliver a tool to the judges that will allow to transgress the principle of pacta sunt servanda as stated in article 1545 of the Civil Code, /ii/ the litigation burden of the courts would increase, and /iii/ the legal security provided by the current absence of express regulation would be affected.
Professor Enrique Alcalde R., is in charge of indicating that the acceptance of the theory of unpredictability is expressly consecrated by law at the international level. The Argentine Civil Code treats it in article 1198: “In commutative bilateral contracts and in onerous and commutative unilateral contracts of deferred or continued execution, if the provision by one of the parties becomes excessively onerous, due to extraordinary and unpredictable events, the injured party may demand the termination of the contract. The same principle will be applied to random contracts when the excessive onerousness is produced by causes external to the own risk of the contract.“; the Italian Civil Code contains a similar rule in its articles 1897 and 1898; This is replicated as well by Germany, Greece, Bolivia, Paraguay, and the Colombian Commercial Code, which in its article 868 contemplates the following rule: “When extraordinary, unforeseen or unforeseeable circumstances, subsequent to the conclusion of a successive, periodic or deferred, alter or aggravate the provision of future compliance by one of the parties, to such an extent that it is excessively onerous, it may request its review … “.
The international experience gathered by the Mayor provides various samples of the international behavior of the Courts of Justice, in line with the majority position of the doctrine. It is understood that the various rules dealing with the theory of unpredictability are strict law and carry all the effects of being considered as such. Now, the exceptional application of these norms and the great wear and tear that implies to carry out an ordinary and well-known judicial process, causes that in various countries, including ours, extrajudicial agreements are drawn up by the parties to adapt the obligation to the factual circumstances that they are living, like a pandemic.
Likewise, and within their capacities, the arbitration judges have been more exposed to the practical exercise of this institution, adapting by virtue of a process, the contractual clauses that are excessively onerous for one of the parties, it is necessary to show that the intellectual work and interpretation that these magistrates carry out, it is oriented exclusively to the interpretation of the will of the parties at the time of contracting and according to the general rules of the interpretation of contracts. Therefore, it has been established that, the theory of unpredictability constitutes an interpration function of the contract, respecting the common intention of the contracting parties, interpreting the will of the parties from the perspective of what they would have agreed taking into account the facts that are judged.
2.- Fortuitous Case.
Given the facts raised at the national level, it could be argued that the pandemic has the characteristics of being a fortuitous case, however, one of the main characteristics of this institution is that the impossibility of non-compliance is absolute, with attention to this and to scientific perception that at some point the pandemic will cease and consequently the legal relations will remain in force, it is something temporary and not absolute. If we gave you the understanding of being a fortuitous case, the debtor of a consumer credit may use this exception to avoid executing the obligation and therefore extinguish it, in large respects, there would be legal instability giving the effect of a fortuitous event or force majeure to a pandemic whose characteristics do not meet all the requirements to be considered as such.
However, the application of this institution and, therefore, the materialization of its effects, understanding by this, the extinction of the obligation of the debtor will take place to the extent that the guidelines of the health authority produce absolute negative effects related to the capacity to comply with the agreement.
The determination of the aforementioned will be the direct work of our Courts of Justice in a case by case exercise that will be forced to rethink what the absolute nature of the impossibility means. It is a fact that for many, the pandemic – which although we hope to cease as such – will produce definitive effects for many during its term.
2.- Objective and subjective obligations.
The scope of the concept of provision in contracts has been widely discussed. Considering was has been mentioned by the Spanish jurist Luis Díez-Picazo, it is understood that the benefit can be understood in two ways: /i/ according to the first, the effective behavior of the debtor is confused with the proper fulfillment of the obligation, and /ii/ secondly, it is related to the ideal plan or project and that it is hoped that it will become a reality at a later time. According to this author, said plan or project is the true object of the obligation and not the thing or the fact on which it falls, therefore, a series of duties are imposed that have as their object the previous activity necessary to give impetus to comply with the obligation.
Following in this same sense, Professor Rodriguez Grez, points to the obligation as a typical duty of conduct referred to a benefit, that is, the obligation involving observing a behavior described in the law, reaching both the effectiveness of the obligation as well as its fulfillment, observing the care, activity and diligence that the parties must display to satisfy the contract, having to go back to the configuration of the responsibility that the parties give or in subsidy the law, to describe what is the correct behavior of the debtor. Of course, we are referring to the degree of care and efficiency that the debtor must display according to the rules of negligence, slight or very slight.
Analyzing the exposed positions, it can be concluded, following Rodriguez Grez, that nobody contracts an obligation to fulfill it objectively, always and without any possible excuse, the debtor will respond for its breach only if his behavior does not conform to due diligence and activity that it imposes the convention. As it has already been expressed in national doctrine, the obligation brings a shadow to the body, that is why there are no objective obligations that take attention only to the result and that must be fulfilled always and in the face of any event, as unexpected as it may be, but that they are subjective obligations, which take attention to the means exercised by the debtor to comply with the agreement.
Enrique Alcalde summarizes the aforementioned, pointing out that the pacta sunt servanda is not a rigid rule that classifies the debtor to the exact and inexcusable fulfillment of the obligation, but, on the contrary, the obligation links the debtor to a duty of conduct, and to a type of behavior duly typified either by convention or by law. The obligatory force of the contract does not impose the execution of a benefit, it is satisfied with the display of the typical behavior due, as long as it is possible as it was conceived at the time of being agreed.
By way of conclusion, what is indicated by these authors remedies to a certain extent the absence of an express regulation of the theory of unpredictability or eventual weaknesses of force majeure, taking care that the behavior of the debtor is exclusively oriented and by all means possible to comply with what is due, however, to the fact that the result of this is not the exact fulfillment of the agreement or, even eventually, the exception of complying with it due to impossibility. Undoubtedly, the scenario generated by COVID-19 will compel jurists, courts and the parties to contracts to evaluate case, perhaps, the way in which they will distribute the risk and its effects due to the impossibility of fully or partially fulfilling the contracts that are affected by the new circumstances.