Corporate

COVID-19 and its potential effect on contracts

The global health emergency resulting from the spread of the COVID-19 virus and its declaration as a pandemic by the World Health Organization may affect the possibility to materially comply with many contractual obligations in different sectors of the economy.


In Argentina, this situation led to a number of emergency regulations issued by the public authorities at various levels and areas of the State, having restrictive effects on social and economic activity, as well as on the free movement of people and goods within the country and across its borders.

The COVID-19 pandemic and the regulations issued may consequently lead to the material or legal impossibility of complying with all or part of the obligations undertaken in certain agreements, either permanently or temporarily.

Is there a legal solution to this problem?

Under certain commercial contracts, the material or legal impossibility of complying with contractual obligations could be considered a force majeure event. A force majeure event takes place when there is a current and absolute impossibility to perform certain obligations, arising from unforeseeable and unavoidable events beyond the debtor's control.

The requirements for an event to be considered as a force majeure event are the following:

  • Objectively unpredictable.
  • Unavoidable.
  • Current, that is, taking place at the moment the damage or the breach is caused, without being an eventual threat or impossibility.
  • Unrelated to the breaching party, occurring beyond its range of control.
  • Subsequent to the creation of the obligation.
  • Absolute and unsurpassable, that is, an unavoidable obstacle for the compliance of obligations.
  • Prior, in the sense that there was no default by the debtor before the triggering event occurs.

Proof

Proving the existence of a force majeure event lies on the party who invokes it. Although the COVID-19 pandemic is a publicly known notorious fact, whoever claims it as a force majeure event must provide evidence as to how and why it affects its ability to meet its contractual obligations.

Effects

The effect of a force majeure event shall be the waiver of liability of the debtor who is unable to comply with its contractual obligations. 

In order to analyze the specific effect on contracts, it is necessary to consider whether the impossibility is definitive or temporary:

  • Definitive impossibility: it causes the termination of the obligation with all its accessories as well as the termination of the contract, without creating any type of liability to the breaching party. If both parties have yet to comply with their mutual obligations, the risk must be borne by both parties and, in that case, mutual and simultaneous restitutions shall be made, with the exception of those obligations already fulfilled. If the obligation has been performed solely by one of the parties, that party will have rights of recovery against the other.
  • Temporary impossibility: it solely relieves the debtor from the consequences of default as long as the situation persists. The contractual tie remains in place –but suspended– unless the compliance of said obligations needs to be rendered within an essential period of time, or if the creditor's interest is lost, in which case the contractual tie shall be terminated.

Exceptions

The impossibility to comply due to a force majeure event does not per se imply in every situation the waiver of liability, as there are several exceptions, including:

  • The assumption of responsibility for force majeure events under the agreement.
  • The transfer of responsibility for the force majeure event by a legal provision.
  • The force majeure event that follows a default.
  • The debtor's fault.
  • Inherence of the force majeure event to the property or activity performed.
  • Duty of restitution for a wrongful act.
  • Particular situations in consumer agreements.

Unaffected party by a force majeure event

The unaffected party in a force majeure event may, as a preventive measure and to avoid the aggravation of the damage, suspend its own performance until the other party complies or provides a guarantee.

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For further information and an analysis of your case in particular, please contact Santiago Sturla (ssturla@allende.com or by phone at +54.11.4318.9932), Diego Botana (dbotana@allende.com or by phone at +54.11.4318.9928), David Gurfinkel (dgurfinkel@allende.com or by phone at +54.11.4318.9901), or Laureano Genin (lgenin@allende.com or by phone at +54.11.4318.9963)

This report shall not be considered as legal advice or any other form of advice rendered by Allende & Brea. The effective possibility of invoking a force majeure event is subject to a more in-depth analysis of the particular circumstances in the specific case and the absence of any cause obstructing the configuration or invocation of the force majeure event.


For further information on this topic please contact Santiago J. Sturla, Diego Botana, David Gurfinkel and Laureano Genin