Many industries are beginning to show the financial and social impact that the COVID-19 is creating. Companies are changing their way of doing business in order to protect their employees and assure the continuance of the operation. These changes may be easily executed by some companies and will be a major threat to small and medium sized business, in some cases.
Regardless the size of the business and the specific industry in which they are focused, the COVID-19 pandemic will impact the contractual relationships with suppliers, shippers, landlords, employees and other business partners that will not be able to fulfill their contractual obligations.
Usually, the breach of a contract will carry on the forced performance or indemnification of damages for breach. Notwithstanding, Costa Rican legislation recognizes some possibilities in which the breach of contract will not produce the responsibility of the party in default. These exceptions are: the fault of the creditor, the Force Majeure and the Fortuitous Event.
Some examples of Force Majeure and the Fortuitous Event exceptions regarding the breach of contracts can be found in articles 702 and 1071 of the Civil Code – that governs general contract relationships – and articles 43, 53, 55 and 98 of the General Law for Urban and Suburban Rents, that regulates commercial and domestic rentals. Force Majeure and Fortuitous event are also considered to be one of the valid reasons – if there is a public interest requirement – for the Government to terminate procurement contracts, as it is established in article 11 of the General Public Procurement Law.
Some Civil Law tradition countries (as Costa Rica) make a difference in the interpretation of Force Majeure and Fortuitous Event, even when the difference between both concepts is subject to theoretical discussion and modern laws use both concepts as synonyms. The difference is based on predictability of the event.
Force Majeure is usually considered to be a superior and irresistible event that avoids the party to fulfill its obligations and that even if foreseen by a diligent businessperson, is unavoidable (such as be natural disasters or calamity situations). On the other hand, the Fortuitous Event is linked to the standard of diligence the businessman applies to predict the event (is an event that is inevitable even after all diligence to anticipate the event is used) if the business man made a “good” effort to avoid the circumstance and it occurred regardless, it can be exonerated from its responsibility, but if the breach was caused due to the negligence predict the event, it will be responsible.
Our case law has endorsed the above difference, for example the First Chamber of the Supreme Court has declared that Force Majeure is an event that must be unforeseen, inevitable, derive from the nature, strange and exterior to the parties1. On the other hand, the Fortuitous Event has been defined as “fortuitous event, contrary to Force Majeure, that is characterized for the inescapability, has a core idea the unpredictability, for that reason is decisive that the subject, before the production of the circumstance acted diligently to determine the predictability the actions to foresee must be carry out with reasonable care [buen padre de familia]”2.
Some particularities must be taken into consideration under current pandemic circumstances. First, parties affected by a breach of contract related to the COVID-19 must considered if it is a partial or full breach of contract. The COVID-19 epidemic may produce certain delays in shipments or fulfillment of contracts due to the partial shutdown that certain countries initiated to protect their population (these cases can be arguable to be considered a Force Majeure) other events such as the Government prohibitions or new regulations that can affect the fulfillment of a contract may be considered as Fortuitous Event.
Felipe Riveros focuses on complex judicial and arbitral procedures involving national and foreign clients and legal teams.
José Luis Campos advises and represents local and international clients on labor and social security compliance matters and disputes.
As co-director of the Dispute Resolution practice, Roger Guevara represents both plaintiffs and defendants in complex commercial litigation and arbitration, especially relating to civil liability matters due to breaches of contract, damage claim and product liability.
For more information, please contact Roger Guevara at rguevara@batalla.com
1 First Chamber of the Supreme Court, ruling number 376-2006, issued on June 21, 2006.
2 Administrative Court, ruling number 319-2001 issued on October 12, 2001.