[co-author: Bernardo Benitez-Landa]
According to the Mexican Constitution, Mexico's Consejo de Salubridad General (the National Health Council) is the governmental body authorized to declare the COVID-19 pandemic a national sanitary emergency on the grounds of its posing an imminent and significant health risk to the Mexican population.
The National Health Council (NHC) was established on March 24, 2020. It issued two official decrees on March 27, 2020, that established extraordinary actions to confront COVID-19 as a "disease that requires priority attention."
On March 30, 2020, NHC declared a sanitary emergency of COVID-19 due to force majeure. As a consequence of this declaration, NHC can take necessary actions to attend to the pandemic for the necessary time. A formal decree was expected for publication on March 31, 2020.
The declaration could support a force majeure case for a private or public contract. However, as the situation is steadily evolving with complexity, it is necessary to consider the specific details of each contract. Below are some considerations to have in mind.
For the time being, it is up to the courts to confirm whether force majeure claims based on such declaration have sufficient merits to trigger a force majeure event.
General Considerations Under Mexican Law
In Mexico, a general principle of pacta sunt servanda applicable to civil and commercial contracts is that the contracting parties fully agree with, and consent to, all the terms and conditions under such contracts and all natural consequences thereof. Contracts should be honored despite any type of event that may prevent its compliance. No matter how unpredictable these events may be, such as the COVID-19 pandemic, parties are still bound to comply with the obligations to which they have agreed under civil and commercial contracts.
However, as is customary in other countries, Mexican laws and courts have excluded responsibilities to contractual obligations on the principle rebus sic stantibus, depending on the particular circumstances of each case, based on the concepts of force majeure or acts of God. Mexican law provides an almost identical application of force majeure events and acts of God.
The first step is to confirm whether an executed contract expressly provides for pandemics as a force majeure event, and if so, then identify requirements to apply for any available contractual relief.
Where contracts are silent on this topic, exceptions to comply with obligations established in private agreements by reason of force majeure events are recognized by law. The following are some examples that apply under certain circumstances and jurisdictions:
- A sort of equitable relief is provided to adjust contracts so parties' obligations are balanced to prevent force majeure from terminating the scope of contract.
- The lessee is not bound to pay rent if it cannot entirely make use of the premises.
- Usufruct obligations are not affected.
- Some conventional penalties are not generated due to breach.
- In obligations of giving, the owner loses the goods.
- Shippers are not liable for loss or damage.
- Some government contracts and law provide for certain exclusions or temporary suspension of certain obligations for the contracting entity and private party.
- Some proceedings before authorities are also suspended.
It is also a good contractual practice to include force majeure clauses to define exactly the triggers, extent and consequences for the parties. While these clauses are not identical, it is customary to have clauses with the following provisions:
- Specific. Depending on the industry, some events are excluded or have tolerable ranges. For example, in finance and energy projects, the range of cost increase can be established for triggers of force majeure events.
- Unpredictable. Parties must present evidence validating that such an event could not be prevented and/or mitigated despite their best efforts. Efforts include the timely performance of the contract, notices, and diligence to obtain and maintain the validity of any necessary permits.
- Reciprocal. Either party may report a force majeure event.
- Temporary. Force majeure events shall last for a definite period of time, and in some cases, consequences are adjusted or the contract is terminated.
What To Do: A First Approach
The above paragraphs contain general considerations. Specific circumstances, actions and omissions carried out by people involved in projects and operations have a direct impact on how force majeure events are interpreted according to the law and by courts.
In other words, a timely and correct approach can help your organization qualify for relief or exception. Here are some recommendations to consider before triggering and preserving force majeure rights:
- Adhere to the contract. Force majeure does not provide an automatic right to stop the execution of a contract. Any suspension of obligations needs to be analyzed to prevent contract breaches, and evidence needs to validate a force majeure event. As the COVID-19 outbreak started a few months ago before reaching Mexico, it is important to carefully assess the facts that support the parties' incapacity to perform.
- Keep record and order of operation contracts, permits and important related documentation. While this may seem obvious, many organizations do not always have document systems or access to the physical or digital location of files for the full assessment of the circumstances of the force majeure event.
- Assess all related files to identify red flags and deadlines. All details count. The sooner you have a defined strategy and weak points, the better and easier it will be to develop a legal strategy that meets the financial and operational needs of the company. Assessment will be continuous as the legal outbreak effects are evolving on a daily basis.
- Prioritize actions to qualify and keep force majeure reliefs. It is of the utmost importance to understand the legal extent of the accepted terms and conditions, and if any, reliefs that can defer or reduce breach costs.
- Communicate these actions to other departments in the company to prevent the preclusion of rights or actions. Most people will not be aware of how to react, so communication is key.
- Recognize that in pandemics such as COVID-19, third parties might not be able to immediately respond to or process your requests. This is especially important for subcontractors and suppliers that could incur a breach of multiple contracts on big projects. Subcontractors must assess the possibility of incurring a breach and any rights that could apply in their favor. This balanced assessment allows a more realistic approach to the situation.
- Remember that pandemics are extraordinary situations. As such, organizations should not be afraid of discussing legal actions, court proceedings or even setbacks to preserve their business. The complexity of the problem requires analyses from many different angles. Some treaties could apply to cross-border operations.
Some Contracts That Should Not Be Put Down
As indicated, in some industries, contracts have customary force majeure clauses. In fact, some industries have vast experience, knowledge and court resolutions addressing such events under Mexican law. Below are a few agreements that commonly have force majeure clauses and require continuous stakeholder attention in order to enforce these clauses for their benefit or reject notifications from counterparties:
- Power Purchase Agreements (PPAs). Since the first energy reform legislation of 2012, PPAs have leveraged the construction of power plants in Mexico under several capacities, technologies and modalities. Force majeure has been present many times in discussions, controversies and terminations. In this regard, PPAs are runners-up for permanent and special review.
- Project Finance. Project finance in any type of infrastructure projects make projects susceptible to force majeure. Contractual framework, syndication of creditors, supply synchronicity and other aspects force all stakeholders to evaluate exposure and allocated risks. This is also true for passive investors involved in infrastructure projects that most likely have this financial model. New York law is present many times in contractual frameworks.
- Government Contracts. Under Mexican law, government contracts have extraordinary clauses and public order protections. As such, force majeure may sometimes operate in favor of Government entities for public works, procurements or public-private partnership (PPP) contracts. A full review of the public legal framework and international treaties shall be required.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis.