The significant outbreak of COVID-19 (coronavirus) in a global scale represents a threat of unpredictable magnitude for multiple sectors and a challenging scenario from all perspectives.
This outbreak has caused an abrupt increase of the value of the American dollar in emerging markets and oil producing countries. The adoption of sanitary measures, as well as other public order measures issued by national and local authorities to control the current sanitary emergency, undoubtedly creates difficulties for businesses and commercial activities, such as air and sea transportation, as well as the hospitality and the tourism industries.
This set of circumstances, causes all sorts of concerns and queries as to how to continue performance of contracts in which, due to the current context, the agreed prices have substantially increased, or the form of payment has become impractical from a commercial and/or financial point of view; or, even, cases in which performance has become impossible or should be suspended for a time; as well as any other cases in which, in spite of performance being possible, it would entail an excessive financial cost to one of the parties.
Under Colombian law, there are some tools that may be used to recover the contractual and avoid excessive harm due to forced performance. Below, we will briefly discuss the theory of unforeseen events, as well as the legal concept of force majeure, that may be useful tools, from a contractual perspective, to consider at this time.
Unforeseen events theory
Article 868 of the Colombian Commercial Code, establishes the theory of “unforeseen events”. In accordance with such provision, if after an agreement has been executed, extraordinary and unforeseeable circumstances that gravely alter the performance of an obligation have occurred, so that its performance becomes excessively burdensome or costly (i.e. currency devaluation, abrupt shortage of raw materials, etc.), the affected party shall have the right to request a Court for the agreement to be adjusted to reestablish the balance between the parties and, if such an adjustment is not possible, to order the termination of the agreement. The Supreme Court has clarified the scope of the aforementioned provision, indicating that, before going to Court, the parties have the duty to renegotiate the agreement in order to balance it once again; this may imply, for instance, a mutually agreed amendment of the stipulated values, the form of payment and, even, the term of the agreement.
Hence, the unforeseen events theory may constitute a useful remedy to review and adjust, in good faith, the content of an agreement that, due to unforeseen circumstances, such as the COVID-19 global pandemic, has become unbalanced. Please note that, the applicability of the unforeseen events theory should be assessed in a case by case basis, in accordance to the characteristics and particularities of any the agreement.
Force majeure is defined as an event in which exclusion of liability may be alleged. In this regard, it is necessary to note that no event by itself constitutes an event of force majeure that entails the exclusion of liability. Force majeure must be analyzed in a case by case basis in accordance to the specific circumstances. Hence, the current sanitary crisis by itself does not constitute an indisputable force majeure event, that justifies the generalized breach of contractual undertakings.
The following are essential elements that are considered to determine when force majeure may excuse liability for nonperformance:
1. The event shall not be attributable to the nonperforming party.
2. The event shall arise out of the nonperforming party’s negligence.
3. The event should be such that it is deemed irresistible unpreventable and places the party in the absolute impossibility of performance; relative difficulty or impossibility to perform is not sufficient.
4. The event must be unforeseeable, meaning that the nonperforming party could not have reasonably undertaken precautions to avoid it.
In the case of Covid-19, it would be irrational to claim that it was caused by any particular individual. However, even with the current circumstances, there may be cases in which performance would have been possible if the nonperforming party had acted more diligently.
Also, the irresistible nature of the event provides scenarios for discussion as performance may have become more complex under the circumstances, but not impossible. Generally, payment obligations are not completely impossible, and therefore if there is a payment obligation it is very unlikely that liability for nonperformance may be excluded in such cases, especially considering payment options, such as electronic payments, currently available.
Lastly, if performance has become truly impossible, it is also necessary to assess whether the nonperforming party could have reasonably anticipated the impact of the sanitary emergency to undertake mitigating actions. It is essential to seek adequate legal advice to evaluate any available legal alternatives, such as the application of the above-mentioned concepts to a specific agreement in light of difficulties which may arise whilst performing contracts under the current complex circumstances.
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