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Force Majeure and Hardship as exemptions of liability in Mexico

Analysis regarding the Coronavirus / COVID-19 Pandemic

Force Majeure and Hardship as exemptions of liability in Mexico (Analysis regarding the Coronavirus/COVID-19 Pandemic)

The outbreak of SARS-COV2 (“COVID-19”), first identified in December 2019 and formally declared a Pandemic by the World Health Organization (WHO) on March 11th, 2020, is causing deep economic and social impacts on a global scale, particularly affecting certain industries, which are especially vulnerable to the outbreak’s contingency measures (hospitality, aviation, transportation, automotive, retail, sports, among many others). These affectations are causing numerous commercial entities and individuals to incur in serious contractual breaches.

Based on the above, it is essential to identify the cases in which an exemption of liability can be invoked considering the circumstances, or to what degree such liability can be reduced or modified.

I. What is Force Majeure?

Broadly, force majeure is an unforeseeable occurrence that is beyond the parties’ control, which cannot be overcome, and which impedes the fulfilment of a contractual obligation.

In Mexico, force majeure as an exemption of liability is recognized by the Federal Civil Code (which supplements the Commercial Code, applicable to most commercial transactions) and also, by practically every State civil code, establishing that no one is bound to the terms and conditions of a contract in the event of force majeure scenarios, unless: i) they contributed or caused the event; or ii) expressly accepted the risk of the event occurring; iii) when the risk of said event was imposed to a party by law.

This means that in case a contract does not contain a clause specifically addressing force majeure, the exemption of liability should be applicable. However, in case such a clause exists, its content could show that the parties agreed to assume responsibility for certain events that would have been otherwise considered as force majeure.

Since Mexican law and precedents do not list the specific events which can be considered as force majeure, contracts commonly distinguish the events that should be considered as such. Usually, these include accidents, acts of war or terrorism, civil or military disturbances, and nuclear or natural catastrophes such as hurricanes, earthquakes, tornados, wildfires and floods. A case of epidemic or pandemic is seldomly mentioned in said clauses, but its absence does not necessarily mean it cannot be considered as such.

Therefore, a case-by-case analysis must be made in each scenario in order to determine if an affectation may be considered an unforeseeable impediment beyond the parties’ control, analyzing the specific circumstances of each contract and obligation thereunder. In case it does, the affected party would be exempt of liability for a breach caused by said event, and thus, no sanctions or penalties would be applicable for said breach. It is important to remark that this exemption will be temporary, applying only while the force majeure event endures.

Separately, a different concept that may also apply as to modify the liability originally agreed to by the parties under a contract in Mexico is hardship.

II. What is Hardship?

Also known for its Latin expression “rebus sic stantibus”, hardship is a legal principle which sustains that a contract can be subject to change, in order to re-equilibrate its conditions if its fulfillment becomes excessively burdensome, due to an unforeseeable and severe variation of the circumstances under which the contract was executed.

Unlike force majeure, hardship is not recognized by the Federal Civil Code, but it is included in several local codes such as the Civil Code of the Federal District (Art. 1796 second paragraph), which makes its application more or less complex depending on the applicable law to each contract. The procedure that must be followed to apply this principle consists in requesting the modification of the contract before a competent court.

Examples of current circumstances that can lead to the application of hardship (not only deriving from COVID-19) are, among others, the following: the fall of oil prices, extreme increase in the price of materials, government restrictions regarding labor or operations, decline of costumers due to quarantine measures.

III. General Suggestions

A party which intends to apply or challenge the application of any of these principles should:

1) Identify if the contract contains specific clauses regarding force majeure or hardship;

2) If this is the case, identify if the text of the contract covers the event at point, and review if the event was not assumed as a risk (in the text of the contract or even in previous written agreements or negotiations);

3) Identify if there are special terms or requirements to give notice to the other party about the force majeure or hardship;

4) Implement mitigation and protection measures to reduce as much as possible the negative effects caused by the force majeure or hardship (failure to mitigate could lead to inapplicability);

5) Document, in the best possible way, the existence of the event and its effects, since this evidence will be essential in a potential dispute resolution procedure (evidence of additional expenses, delays, amount of damages suffered, price increases, affected employees, government orders, etc.), and;

6) Contact specialized legal counsel to receive advice during the preparation of any notice to the other party, or for the issuance of an opinion or strategy to successfully apply or challenge the application of the force majeure or hardship.