On the occasion of the publication of the “RESOLUTION establishing preventive measures to be implemented in order to mitigate and control the health risks posed by the SARS-CoV2 virus (COVID-19)” and the “RESOLUTION establishing extraordinary actions to address the health emergency caused by the SARS-CoV2 virus”, we suggest to analyze the concepts of Fortuitous Case and Force Majeure, as well as the Theory of Unforeseen Events applicable to Civil and Commercial matters, in order to consider their effects on contractual obligations and on the operation of all businesses.

I. Pacta Sunt Servanda

Articles 1796 and 1797 of the Federal Civil Code incorporate the general principle Pacta Sunt Servanda to the Mexican juridical system, according to which agreements always must be faithfully fulfilled as agreed between parties. However, during their performance it is possible that circumstances beyond the control of the contracting parties occur: (i) making it impossible to comply with the original terms or the agreement; or (ii) modifying the conditions under which they were originally agreed, thus generating an imbalance between the parties.
In this regard, through two figures, Mexican legislation regulates the cases in which circumstances beyond the control of the contracting parties occur during the performance of contracts:

II. Fortuitous Case or Force Majeure

The Fortuitous Case or Force Majeure consists of a single normative hypothesis provided for in Articles 2017 and 2111 of the Federal Civil Code. When updated, it is considered that the failure to comply with a given obligation is not attributable to the person responsible for it, since it has become impossible to comply with. According to this figure, neither the fulfilment of the obligation established in the contract, nor the consequences derived from the lack of it can be demanded; provided that the supervening impossibility has not been caused by the person responsible for fulfilling the agreed obligation.

However, at least three elements must be present for this concepts to be updated, namely:

• Unpredictability. Circumstances that gave rise to the impossibility of compliance with the obligation are (i) external to the debtor; (ii) subsequent to the creation of the obligation; and, therefore, (iii) could not be foreseen or if they could be foreseen it was impossible to prevent their consequences.
• Generality. This refers to the fact that the circumstances which make performance impossible do not only affect the debtor who intends to invoke the fortuitous event or force majeure, but that these circumstances make it impossible for any other person to perform.
• Impossibility. Even though the doctrine states that this must be absolute and definitive, our highest courts have established that such impossibility may be partial or temporary. In any case, in order to argue the appearance of the Fortuitous Case or Force Majeure, it is not enough that compliance with the obligations has become more onerous or complex, since this would only generate an economic imbalance between the parties, but would not generate the impossibility of the compliance with the agreed obligation.

In relation to the specific effects of Fortuitous Event or Force Majeure, it is relevant to note that the absolute and definitive impossibility implies the total release of the obligation by the debtor. However, in the case of partial or temporary impossibility, it only entails the partial or temporary release of the obligation, as appropriate.

Therefore, in case of partial impossibility, it is understood that the rest of the obligation -or obligations- that was not affected by the Fortuitous Case or Force Majeure must be upheld. In the event of temporary impossibility, the updating of such normative hypothesis implies the suspension of the term of compliance and with it the suspension of the possibility of incurring in default, thus avoiding the consequences of the default, such as the payment of moratorium interest, conventional penalties and the payment of damages.

It should be noted that there are exceptions to the normative hypothesis of Force Majeure or Fortuitous Case, based on which its consequences may not have effects between the parties. Such exceptions may derive both from a rule -specific regulation of certain contracts- and from the will of the parties themselves. When such exceptions arise from a regulation, the latter establishes that even in the event of a Fortuitous Event or Force Majeure, the debtor will be liable for the agreed obligation. With respect to contractual defenses, the debtor may accept in the relevant contract the performance of a given obligation, despite the impossibility thereof, unless expressly prohibited by law.

In this regard, on many occasions, the stipulation of certain clauses -different from those that establish the debtor's express acceptance to respond to the updating of the Fortuitous Event or Force Majeure- seeks to anticipate the consequences that could arise from such events, as the obligation of the debtor to take out insurance in the event that the thing owed is lost due to some natural event. In such circumstances, if the debtor fails to take out the relevant insurance, it is understood that it cannot invoke the Fortuitous Event or Force Majeure to discharge its obligation.

III. The Theory of Unforeseen Events

In general terms, the Theory of Unforeseen Events states that if a substantial unforeseeable alteration arises in a contractual relationship, caused by some extraordinary event of a general nature that generates an excessive economic imbalance between the parties, the party affected may require the modification of the conditions of the contract in order to re-establish the balance between the contracting parties.

a. Theory of Unforeseen Events in Civil and Commercial Matters

Our regulatory system in civil matters reflects this theory through various local legislations. Although it is true that there is no homogeneous treatment of this figure in the respective State codes, most of them agree that in order for this concept to be invoked, at least the following elements must be met: (i) that the change in circumstances occurs after the execution of the contract; (ii) that such circumstances are economic and of a general nature; (iii) that such circumstances are alien to the parties -which are not subject to or linked to the will of the parties-; (iv) that as a consequence of such circumstances there is a reduction or increase in the agreed consideration; (v) that the obligation has not been fully performed; and, (vi) that due to the unforeseeable nature of such circumstances, they could not be considered at the time of contracting.

Finally, it should be noted that as of today, in accordance with the content of national commercial legislation and the criteria issued by our highest courts in this regard, the Theory of Unforeseeable Events and, therefore, the action derived from it, is not appropriate in commercial matters. Consequently, in order to determine the possibility of modifying or terminating a contract under the Theory of Unforeseeable Events, it is essential to determine the material scope of the legal rule applicable to it, as well as the territorial scope of its application.

This content is provided for informational purposes only and is not intended and should not be interpreted as legal advice. For more information, please visit:
www.villarabogados.com.mx