The outbreak of diseases such as the coronavirus has a profound impact on many areas of people’s lives. It also affects legal relationships. Consider the cancellation of airline tickets (a contract for the carriage of passengers by air) and the controversy over whether or not the operating company must refund the price paid. Or the hypothetical infection of other patients at a health center treating an infected person, which would give rise to compensation claims (a case of civil or tort liability).
These are problems whose solution will depend on factual circumstances that cannot be analyzed before they occur. But it is possible to consider the legal framework for such an analysis. And although contractual and non-contractual liability equally require the repair of damage, contracts may be affected more broadly: one party’s performance may be prevented by the coronavirus while the other’s is not, some performances may become impossible but not others, the effects of the virus may merely postpone performance without necessarily preventing it, etc.
Our law allows these consequences to be attributed to fortuitous events and force majeure, known in international contracts as “Acts of God” and “Force Majeure”. The main rule in this regard is the first part of art. 1730 of the National Civil and Commercial Code, which provides that “…A fortuitous event or force majeure is an event that could not have been foreseen or that, having been foreseen, could not have been avoided”. The second paragraph of this article clarifies that both terms are used “as synonyms”. The article also states that its occurrence “… releases from liability, unless otherwise provided”.
Another case is treated in the same way (art. 1731): the act of a third party for whom one is not responsible (e.g., someone completely unrelated to the defaulting party, and not a dependent, employee, etc. of that party), but whose action also meets “… the characteristics of a fortuitous event”. In other words, it is ultimately not a new case, but a variant of the fortuitous event (or force majeure), so the action of this third party must also be unforeseeable or unavoidable.
When the Code states that it “… releases from liability…”, it means that the party to the contract affected by a fortuitous event or force majeure is released from performing its obligation or from compensating the other party for its non-performance: it does not perform because it cannot. But there are exceptions, detailed in art. 1733: (a) if the debtor undertook to perform even in the event of a fortuitous event; (b) if there is a legal provision to the contrary for a specific case; (c) if the fortuitous event occurs while the debtor is in default, unless the default is irrelevant to the case; (d) if the fortuitous event occurs through the debtor’s fault, which would require proving a causal link between, for example, the debtor’s negligence and the occurrence of the fortuitous event; (e) if the fortuitous event is “…a contingency inherent to the risk or activity…” of the debtor, again requiring proof of the causal link between the two; and (f) if the debtor must return a thing obtained through an unlawful act and the fortuitous event occurs before it does so. In all these cases under art. 1733, the fortuitous event or force majeure does not have its normal effect under art. 1730 of releasing the debtor from liability.
The impossibility of performance may be either permanent or temporary, but its effects may coincide. The first part of art. 955 provides that permanent impossibility extinguishes the obligation without liability. Temporary impossibility may also do so (art. 956) if the time for performance is essential or if the duration of the impediment “… irreversibly frustrates the creditor’s interest”. These ideas are reinforced in art. 1732, which also provides that “the existence of such impossibility must be assessed taking into account the requirements of good faith and the prohibition of the abusive exercise of rights”. In other words, even if the fortuitous event exists, it must be invoked reasonably and, above all, in good faith.
What can the other party, which is not affected by the fortuitous event, do? Art. 1032 allows it to suspend its own performance as a precautionary measure. But it must be exposed to a serious threat of harm (not just any threat) because “… the other party has suffered a significant impairment of its ability to perform…”. However, if the party affected by the fortuitous event ultimately performs or provides sufficient assurances of performance, the suspension is lifted and the party that invoked it must in turn perform its obligations.
The burden of proving the fortuitous event invariably lies with the party invoking it (art. 1736).
The regime of the Civil and Commercial Code applies by analogy to public law contracts, to which the State and its agencies are parties. Procurement regulations and tender documents often regulate fortuitous events and force majeure extensively, since in Administrative Law they have various effects on the relationship between the contracting authority and the contractor. But the basic system is the one described above, and it is often referred to directly.
Unlike Anglo-Saxon law or common law, which is often applied to international contracts, our legal system has no specific provisions requiring the mitigation of the effects of force majeure or prohibiting their aggravation. But these principles can easily be found in the provisions of the Civil and Commercial Code that impose contractual good faith (arts. 9, 10, 1061, 1067, etc.) and that require due diligence in performance (arts. 1725, 1728, 1729, etc.). Similar obligations are therefore also part of our system, and it is also common for contracts to provide for these scenarios exhaustively.
The application of this legal framework to the specific situations created by the spread of the coronavirus will, as we said, have different consequences depending on the particularities of each case. As a general idea, and with that limited scope, we can raise some questions.
Can the coronavirus constitute a fortuitous event or force majeure? Undoubtedly, to the extent that its occurrence in the contractual relationship could not have been foreseen or, if foreseen, could not have been avoided.
Can the affected party then be released from performing its contractual obligations or from liability for non-performance? Yes, but the exceptions of art. 1733 must be taken into account, since it could happen, for example, that the coronavirus affects a debtor who negligently exposed himself to infection, in which case he will hardly be able to avoid liability.
Can this result in the termination of the contract without liability for the affected party? Yes, if the impossibility of performance is permanent or, if temporary, if it completely frustrates the purpose of the contract.
What can the party not affected by the coronavirus do? Suspend its own performance as a precautionary measure until the other party performs or provides guarantees of performance. We could add here that if the party affected by the coronavirus nevertheless wished to perform its obligations and thereby put the other party at risk of infection, the latter could refuse to continue with the contract until it is assured that the situation has been brought under control, since it could be concluded that the former also suffers “… a significant impairment of its ability to perform…” under art. 1032 of the Civil and Commercial Code cited above.
Finally, in all circumstances the parties must act reasonably and in good faith, circumstances that will be assessed by the courts when determining whether there was liability or non-performance that must be compensated.
(*) Alfaro-Abogados
