April 21, 2020 / COVID-19 / Litigation
Theory of imprevision. Act of God and force majeure.
I. Introduction.
BGBG seeks to address the legal consequences that the impossibility or excessive difficulty in complying with agreements entered into and between third parties due to the health emergency and during the suspension period of activities may bring to individuals and legal entities.
It is a fact that the health emergency decreed by the health authority as a result of the SARS-CoV2 virus (COVID-19) has slowed down and, in some cases, stopped the supply chain between companies. This situation will have legal consequences, mainly in those cases where companies and legal entities participate in activities deemed as non-essential by the health authority.
In this opinion, we will address the theory of imprevision and the concepts of act of God and force majeure, their application in contractual matters, and their effects on the breach of agreements as a result of the health emergency and extraordinary action issued by the General Health Council and the Ministry of Health.
II. Health Emergency and Extraordinary Actions Agreement.
On March 30, 2020, the General Health Council published the Resolution declaring a “health emergency due to force majeure” derived from the SARS-CoV2 virus (COVID-19) epidemic. “Agreement of Health Emergency Declaration”.[1]
On March 31, 2020, the Ministry of Health published the Agreement establishing the “extraordinary actions” to address the health emergency generated by COVID-19. “Extraordinary Actions Agreement”.[2]
Within the extraordinary actions, the immediate suspension was ordered from March 30 to April 30, 2020. This deadline was extended until May 30, 2020, and such suspension of all non-essential activities was in order to mitigate the spread and transmission of the virus within the community; reduce the burden of disease, its complications, and death in the population living in the national territory.
Additionally, it was determined that the only activities that may continue are those deemed essential, listed in the Extraordinary Actions Agreement and the Technical Guidelines for essential activities[3] issued by the Ministry of Health.
Finally, it was determined that a series of mandatory sanitary practices must be complied with in the places or venues where there are activities defined as essential.
III. Theory of imprevision.
The theory of imprevision consists of the power to request that the conditions established in an agreement be amended when, during the term of an agreement, a natural extraordinary event arises, and such event is impossible to foresee, or it is foreseeable but unavoidable, which generates that the obligations for one party are more onerous than originally agreed.[4]
In other words, if these extraordinary situations had existed, the clauses of an agreement would not have been agreed upon in those terms; hence, it would not be fair for the parties.
Now, it is important to mention that the theory of unforeseeability is only regulated in the civil codes of Mexico City, State of Mexico, Jalisco, Quintana Roo, Aguascalientes, Guanajuato, Tamaulipas, Morelos, Chihuahua, Veracruz, Sinaloa, and Coahuila. Therefore, this legal concept is only applicable to agreements executed in these legislations or between parties domiciled in those states. For the purposes of this memorandum, we will rely on the civil legislation of Mexico City.
In order for the theory of imprevision to apply, the agreement must be a civil agreement and have some of these characteristics: (i) to have a specific compliance date; (ii) to have continuing performance; or (iii) to be subject to conditions. Some examples of this type of agreement are the lease, purchase, mortgage, pledge, loan agreements, etc.
The circumstances that arise in the compliance of an agreement must be of a national, extraordinary, and unforeseeable nature, causing an imbalance among the obligations agreed upon by the contracting parties, and as a result, making the compliance of what was originally agreed upon excessively costly for one of the parties.
In such cases, the Mexican law provides to the disadvantaged party the right to request the amendment of the agreement in order for the parties to recover the contractual equilibrium[5], for which it must:
- Notify the other party of the extraordinary, national, and unforeseeable event within the following 30 (thirty) days after the occurrence of such event.
- Request the amendment of the agreement, indicating the reasons on which it is based, and suggest the adjustments so that the agreement is fair for the parties to recover the contractual balance.
In turn, the other party has the right to decide on the feasibility of the proposed amendments or, if applicable, to oppose them within 30 (thirty) days counted from the notification of the request to amend the agreement.
It is important to mention that the amendment request does not confer by itself the right to suspend the agreement compliance.
In case of the parties do not reach an agreement within the aforementioned deadlines, a court may be called upon to settle the dispute. If the action succeed, the advantaged party in the agreement [6] may choose between: (i) amend the obligations in order to restore the original equilibrium; or (ii) terminate the agreement.
However, in cases where an equitable amendment or a resolution of the agreement is chosen, it will only apply to the obligations to be covered after the extraordinary event. Therefore, the resolution will not proceed if the aggrieved party is in default or has acted fraudulently.[7]
It is important to highlight that the theory of imprevision does not apply to commercial acts since such acts are governed by commercial legislation [8] which only governs commercial acts by the pacta sunt servanda principle [9].
IV. Act of God or force majeure.
Mexican law defines force majeure as man or authority acts and acts of God as events of nature out of control of the parties or unforeseeable and unavoidable events that make it impossible to comply with the obligations agreed upon in the agreement.
Pursuant to Mexican law, a force major event and an act of God may be distinguished as follows:
a) Act of God.
Natural events: natural disasters, floods, fires, epidemics, earthquakes, storms, hurricanes, etc.
b) Force majeure.
Man acts: crimes, wars, invasions, strikes, blockades, demonstrations, sedition, riots, etc.
Authority acts: impediments based on an order or prohibition decreed by the authority, as long as one of the parties has not favored such resolution. For example, the prohibition against trading certain goods, expropriation, etc.
Mexican law establishes as a general rule that when it is impossible to comply with an obligation due to an act of God or force majeure event, such obligation is extinguished without obligation, in accordance with the general law principle, which states: “no one is obligated to the impossible.”
Notwithstanding the general rule, liability may not be exempted in cases where (i) there is an agreement between the parties in which liability is assumed regardless of the existence of an act of God or force majeure event. In other words, when there is an agreement in which the parties expressly accept such liability; (ii) one of the parties contributed to the occurrence of the event; and (iii) the law expressly provides so.
For these cases, it is necessary to carefully review what the parties agreed. Normally, the agreement establishes clauses regulating the consequences of inherent force majeure or act of God events and the procedures to be followed for this type of events when such events make it impossible for the parties to comply with their obligations. As well as the requirements and deadlines to enforce it.
In the case where there is no agreement between the parties regarding an act of God or force majeure event, the law must be applied. Therefore, we suggest following the next steps:
- If a cause of an act of God or force majeure event has been updated, it must be notified opportunely.
- To establish the particular obligation that became impossible to comply with due to an act of God or a force majeure event.
- Establishing the relationship between an act of God or a force majeure event makes it impossible to comply with the obligation.
V. Opinion.
It is a fact that the circumstances generated by the COVID-19 disease have affected Mexican companies in several ways. For example, some supply chains have been interrupted, and a large number of businesses whose activities are not considered essential have been closed. This situation has led companies to review their agreements to look for compliance alternatives that make the agreements more equitable.
We consider that Health Emergency and Extraordinary Actions Agreement are the documents from which the companies must determine if they will update:
- a national extraordinary event —which is impossible to foresee and generates that the contractual obligations are more onerous—, in order to apply the rights of the theory of imprevision, pursuant to the Civil Code of Mexico City, Articles 1796, 1796 Bis, and 1796 Ter; or
- an authority act deemed as force majeure.
In our opinion, Agreements may have both legal concepts.
Their application will depend on the type of agreement entered into by the company. In cases of civil agreements —loan, lease, purchase, and mortgage agreements— they may be considered as a national extraordinary event that may bring an imbalance in the obligations agreed upon by the parties.
In cases of commercial and/or civil agreements executed in jurisdictions that do not regulate the theory of imprevision, an act of God may be involved since the agreements are a State prohibition to perform activities not considered essential.
If you consider that the Health Emergency Declaration and the suspension of non-essential activities have made it difficult for you to comply with the agreement your company has executed or that the agreed obligations have become more onerous, we recommend you to contact us.
- Seek to negotiate with your counterparty the scope of the agreement, such as the suspension of some obligations, the granting of waiting periods for the compliance with obligations, and the termination of the agreement without liability for the parties with the purposes of maintaining the viability of the business and the long-term commercial relationship.
- In case of failure to reach an agreement, regarding civil agreements, we suggest following the procedure we have analyzed in point III.
- In commercial and/or civil agreements entered into in jurisdictions other than those that regulate the theory of imprevision, companies must review the clauses related to acts of God or force majeure events and apply the procedures indicated therein.
It is important to reiterate that the update of these legal concepts do not enable the parties to breach the agreement. Additionally, to determine the applicability of any of these legal concepts, there must be a case-by-case assessment and analysis of the nature and purpose of the agreement, the clauses agreed, the acts performed by the parties, the resolutions issued by the government, and more.
[1] Federal Official Gazette on March 30, 2020.
[2] Federal Official Gazette on March 31, 2020.
[3] Federal Official Gazette on April 6, 2020.
[4] Civil Code of Mexico City, Article 1796.
[5] Civil Code of Mexico City, Article 1796 Bis.
[6] In other words, the defendant.
[7] Civil Code of Mexico City, Article 1796 Ter.
[8] Code of Commerce, Article 75.
[9] Court precedent III.2o. C.13C. category: “Theory of imprevision. Inapplicability of it, in the case of acts of commerce”. Second Collegiate Court in Civil Matters of the First Circuit. Period nine. Weekly Newsletter of the Federal Court. Volume VIII, September, 1998. Page 1217. Register of Legal Professionals number 195622.
