COVID-19: Force majeure and theory of unforeseeability

GENERAL

In the last few days, a series of regulations have been issued in which in their motivating and operative part, expressions such as "public calamity", "surprise shock", "unusual", "unforeseen", "supervening" can be found, and reference is made to the fact that the country is in times that are not "normal", all as a result of the virus that altered the current rhythm of global and local life. By way of example, Colombia Compra Eficiente specifically cites "force majeure" as a cause for suspension of certain contracting processes, while the National Infrastructure Agency has stated that "the health emergency caused by the presence of the COVID-19 virus constitutes a force majeure, external, irresistible and unforeseeable event", on the basis of which it suspended a series of contractual obligations of the concessionaires.

This generalized feeling that the legal and economic traffic stops or slows down to a minimum, leaving aside activities that are not essential for the survival of the community, cannot be transferred purely and simply to the field of private law, and specifically to the field of civil and commercial obligations and contracts. In such line, in spite of the State of Emergency and the multiple restrictions imposed by national, departmental and municipal regulations, it is not possible today to sustain a categorical and universal statement that classifies COVID-19 as an event of force majeure or fortuitous event for the totality of private patrimonial contracting.

The figure of the extraneous cause as a reason for the non-performance of obligations is one of the most complex in terms of its structuring and application, not only because of the multiplicity of situations that may constitute it, but also because legal science has understood that no matter how hard and catastrophic a situation may be, the qualification of force majeure or fortuitous event is not automatic, having to be analyzed in reference to the particular circumstances of each contract, namely, its content, the practical development that has taken place until the time of occurrence of the event and the pending development.

Therefore, it is not prudent for the contracting party to affirm the existence of force majeure or fortuitous event without making a detailed study of the contract, of the obligations and of the services that are in doubt of execution, according to the following parameters.

I. COVID-19 AND THE CONFIGURATION OF THE EXTRANEOUS CAUSE

1. Verified objective elements:

1.1. COVID-19 is an unforeseeable natural event.

1.2. The acts of the competent authority, namely: decrees, resolutions, among others, issued due to the pandemic, consequently, are also unforeseeable events.

Unforeseeability is evaluated at the time of entering the contract, that is, in those entered into after the declaration of the State of Emergency, the natural phenomenon or its consequences may never be alleged as an extraneous cause.

1.3. COVID-19 may be presented as force majeure or fortuitous event: it shall be force majeure when it implies the paralysis of the person, the company or industrial sector on which the performance of the obligation depends, in compliance with the orders of the competent authority. It will be an act of God when, in spite of being able to develop the activity tending to fulfill the obligation, one of the persons whose intervention is necessary for its fulfillment is affected by the virus (e.g. the teacher who must give a virtual class, but falls prey to the disease; the legal representative who must write a check or authorize an electronic payment, and must be urgently hospitalized for having tested positive in the clinical test).

2. Particular elements of the contract:

The assumption of risks contained in the contract: It is possible that the contracting parties have distributed the risks in the contract, in accordance with the provisions of articles 1604, 1616 and concordant articles of the Civil Code. If there was an express stipulation that one of the parties assumed the risk of force majeure or fortuitous event, it will not be possible for the latter to allege them. The general rule is that "delay caused by force majeure or fortuitous event does not give rise to damages", but "the stipulations of the contracting parties may modify these rules". Thus, the contractual texts must be reviewed to verify whether there was a special distribution of the aforementioned burdens, different from the one contemplated in the rules.

A very delicate aspect to be taken into account at this point is that risks may also be assumed by contractual conduct; if despite the State of Emergency and all that it implies, the party implies that it will comply with the obligation, it cannot later deny and allege the extraneous cause.

2.2. Whether the contract is of instantaneous performance or of successive tract: This criterion is of capital importance, since as will be seen below, one of the most important factors in the decision of this type of cases is the determination of the survival of the obligee's interest, which may decay more frequently in contracts of instantaneous performance, where the parties have programmed to receive the benefits at precise moments, from which they plan other economic operations. On the other hand, it is worth anticipating that the theory of unforeseeability can only be raised in contracts of successive tract, i.e., where the obligations arise and are fulfilled periodically.

2.3. Whether the obligations to be performed are of means or of result: although in both types of obligations the exculpation of non-performance is appropriate, in those of result it is much more demanding the verification of the occurrence of force majeure or fortuitous event, since those are obligations in which to excuse non-performance it is not sufficient to demonstrate that diligence and care were exercised, but a plus is required from the obligor to guarantee the performance of what is due.

2.4. That the performance of the obligations becomes impossible: The element of unforeseeability is deemed to be accredited, but its complement, without which the extraneous cause cannot be configured, is the determining factor: irresistibility. Therefore, although COVID-19 is a global phenomenon that sowed chaos, paralyzed transportation and undermined economic production, the fundamental task of the contracting party is to prove that both the natural phenomenon and the regulations issued made the execution of the obligation objectively impossible, since no reasonable measure could have avoided its effects, that is, to prove that the situation created is insurmountable and definitive; definitive being understood as that which prevents the giving, doing or not doing, in the form and terms agreed in the contract.

At this point the proposed test reaches its highest level of detail: the contracting party will have to study one by one all the situations that in fact or in law have been subject to regulation in the State of Emergency decree, in the national decrees 418 to 470 of 2020, in the resolutions of Ministries, Agencies, Institutes and other national entities, circulars and departmental and municipal decrees that have effects on the territory of execution of the contract, to make a confrontation or contrast with the performance pending performance, in order to determine whether it is physically and legally possible. This is the only way to find out if, for example, a transportation restriction prevents the delivery of products or the arrival of professionals who would carry out a field study, or if the mandatory social isolation blocks the possibility of moving its personnel to perform maintenance of equipment, in short, to make a match between the factual situation that was altered by the crisis and the interruption of the possibility of performing the conduct expected by the counterparty.

It is important to remember that the Supreme Court of Justice has emphasized that the extraneous cause "...must consist of an extraordinary event that is unleashed from the outside on the industry, an unforeseeable event that could not have been avoided even by applying the greatest diligence without endangering the entire industry and the economic progress of the company and that the industrialist had no reason to take into account or take into consideration".

The key then for the extrajudicial and judicial allegation of the figure under study, is the verification that the extraordinary measures that have obligatory force, are the causes for which the obligation could not be "fulfilled" in its original tenor. To this end, the nature and scope of the measure, its date of issuance, its validity (beginning and end) and other relevant factors must be taken into account.

Only an in-depth analysis such as the one advised will allow distinguishing the situations of impossibility from those of greater onerousness, a matter that is essential to adopt the necessary decisions; the extraneous cause -it is insisted- only arises on the impossibility, and not on similar situations such as the greater difficulty, the increase of costs, the serious variation of the exchange rate, sudden price fluctuation, among others, which would be subject to an action for review of the contract, which will be reviewed below.

2.5. No default or fault of the obligor: The allegation of the extraneous cause requires that the obligor is not in default, which means that at the time of the occurrence of the constitutive event, the obligations that are overdue may not be covered by the release phenomenon, and furthermore, the defaulting obligor must assume all the negative contractual consequences arising from the breach.  On this point, it is necessary to be careful when determining the moment from which it is intended to allege force majeure or fortuitous event, because although the declaration of pandemic by the WHO was dated March 11, such promulgation does not seem sufficient to establish the structuring of extraneous cause at least in terms of national legal traffic, except for exceptions that have to do with essential aspects of the contract that depended on countries in manifest crisis such as Spain, Italy and China.

Nor can there be fault on the part of the obligor, since it would break the most important character of the figures, that they are "alien". Any fraudulent or culpable conduct that influences the causes of the non-performance may defeat the claim for exoneration from liability. Thus, recklessly exposing oneself to contagion, not complying with mobility restrictions, performing work where the proper conditions are not met, reducing the safety and health conditions of a certain activity, and in short, interfering in any way with the prevailing conditions, so that the lack of skill, recklessness, negligence or malice concur with the external and insurmountable factors, will cause COVID-19 to cease to be a possible cause under which to protect oneself.

In addition to the above, it is also pertinent to analyze case by case whether the obligations in question are of giving, doing or not doing, positive or negative, joint or several, of kind or kind, alternative or optional, conditional or modal, intuito personae, security, and other classifications, since each typology presents singularities that must be adapted to the general rules of the extraneous cause.

II. EFFECTS OF FORCE MAJEURE AND FORTUITOUS EVENT

What happens if force majeure or an act of God is proven? Is the obligation extinguished or suspended? Is the contract terminated or terminated? These questions are the second major issue to be resolved, and of course, the most delicate, because not only are at stake the delay, the penalty interests, the fines, the penalty clauses, but the very life of the contractual bond.

When the obligation is not performed or does not materialize by means of the performance because of an extraneous force, one cannot speak of "non-performance", but simply of non-execution. As a matter of principle then, this non-performance does not entail negative consequences for the obligor, i.e., it does not incur in default, is not qualified as "non-performing" and is not subject to fines, penalty clause or other agreed sanctioning mechanism. Whether or not it can demand the consideration from whoever is at the same time its debtor is another matter.

Now then, such obligation not executed as a general rule is deferred to be undertaken at the moment in which the strange force disappears, as the jurisprudence has pointed out. Thus, although the suspension releases from the effects of the default, there is not initially an extinction of the obligation itself. The postponed execution is another critical issue, since in order to examine its legality, factors that no longer depend on the debtor come into play, such as the creditor's interest in receiving the performance and, of course, in delivering the consideration due, which is based on articles 1627 and 1648 of the Civil Code, which give great weight to the creditor's right to have its credit honored in the form and terms agreed upon.

It has been accepted with meridian agreement by the doctrine that if the interest of the creditor has disappeared for justified and objective reasons, the contract will be definitively deprived of its effects, since there is a frustration of the purposes that make the contract dysfunctional, not only for the parties, but also for the economic traffic in general. From there follows a whole regulatory line to determine the mutual restitutions and the way to liquidate the contract.

It cannot be left aside that force majeure and fortuitous event have their own regulation as to the risk of the thing owed, both in the Civil Code and in the Commercial Code, so that in each situation it must be examined whether such legal provisions come into play in the normative equation, and of course, it is not superfluous to review the contract again to verify whether those provisions, which have a dispositive character, were altered therein.

The scheme to be followed is as follows:

a- Determination of the existence of the extraneous cause.

b- Determination of the suspension or extinction of the obligation.

c- Determination of the survival or extinction of the contract.

d- Determination of the conditions of continuation or liquidation, performance of pending services, or liquidation of the contract and mutual restitutions.

III. COVID-19 AND THE THEORY OF UNFORESEEABILITY

The Colombian legal system, in search of guaranteeing security and equity in each of the legal transactions entered into, established a figure called "Theory of unforeseeability".

This theory brought with it the possibility of reconsidering the obligations contained in a contract of successive tract, or periodic or deferred performance, when its performance is excessively onerous for any of the parties.  Its raison d'être results from the complexity that could become the compliance of legal businesses that have been entered into when the political, economic, environmental, sanitary or different variables, direct and indirect, prevent the performance agreed at the beginning to be executed with the same benefit or profit that was expected when the contract was signed.

That is to say, under the postulates of this theory, the parties may review the contractual obligations, in order to find a new benefit balance that facilitates its continuity.

This institution today is again analyzed and taken up by jurists due to the declaration of Sanitary Emergency due to COVID-19, dictated among others, by the Ministry of Health and Social Protection through Resolution 385 of March 12, 2020, since its applicability is necessary in the midst of a situation that makes it impossible for the parties to continue with the initial conditions. It is at this moment where its content becomes important; otherwise, many of the legal transactions entered into to date could incur in: breach of the agreed obligations, indemnities, forced compliance, among others.

In this order of ideas, Javier Andrés Franco Zarate in his article entitled "The supervening hardship in commercial contracts: an approach from the perspective of the civil jurisdiction in Colombia" (2012), exposes its applicability in the commercial and civil law stating that, in commercial matters, the Code of Commerce in its article 868 recognized its application only to contracts of successive, periodic or deferred performance when those circumstances alter or encumber a future performance.

Likewise, and once the jurisprudence on the characteristics and scope of the theory in civil matters has been analyzed, Professor Franco considers that its recognition has been focused exclusively on unilateral contracts, and that in practice it has had the greatest application with respect to the mutual contract for the financing of housing. In short, its exclusive applicability to this type of contract in both legal systems is due to its nature, since, as they are services that are performed over time, the original circumstances may vary and unbalance the initial charges.

In addition to the foregoing, the Colombian legislator reaffirms that the occurrence of this type of unforeseeable or unforeseen circumstances must occur after the execution of the contract and the rebalancing intended to be made will have effects only in the future.  For this reason, Barbosa Verano and Neyva Morales in their text "La teoría de la imprevisión en el Derecho Civil", point out that it must be an objective circumstance, that is to say: "a factual phenomenon, a factual matter, verifiable with the senses and with the understanding... where the agent affected by its occurrence did not foresee it" (Barbosa Verano, 1992). (Barbosa Verano, 1992).

From that assumption where it is required that the eventuality be objective, there is also a really important requirement for its application: that the event must cause a notable imbalance between the parties. That is to say, the circumstance must produce an economic disruption with respect to the initial burdens, in such a way that the continuity of its execution under the original parameters is detrimental.

On the other hand, it is important to refer to the role of the judge or arbitrator in the middle of a dispute of this nature, since he must order the contractual readjustments, examining principles such as: contractual good faith, equity, justice, among others.  However, when the judge perceives the impossibility of rebalancing the benefits, he may even determine whether it is feasible to suspend the contract or any of the obligations arising therefrom, or its termination. In relation to the above, Franco states that the judge, in his analysis, will be under the obligation to avoid: "an excessive profit of a contracting party with the correlative extremely burdensome prejudice of his negotiating counterpart".

Finally, and by way of conclusion, the teleology pursued by the application of this legal figure is the preservation of the contract; in such a way that the parties, as contractual subjects, may promptly decide on the excessive onerousness generated by its performance, so that together they may take beneficial measures or readjustments.

IV. CONTRACTUAL DUE CONDUCT

In every civil and commercial contract there is a duty of information that covers from the formation of the agreement to the post-contractual obligations, so that a situation of extraneous cause or excessive hardship must be immediately communicated to the counterparty. There is a fundamental difference between the two figures studied here, because if the conclusion is the existence of a force majeure or fortuitous event, the figure is immediately applicable and the contracting party who alleges it may suspend the performance of the obligation; but if it is determined that the circumstances constitute an event of revision of the contract for hardship, the contract will have to continue to be performed until there is an agreement or a court decision on its readjustment or termination.

It is reiterated that, in either of the two events, a communication must be sent to the counterparty with the specific background of the decision, the clear, explicit and complete content thereof, the proposals for handling the situation, the manifestation of the willingness to recompose the contractual conduct once the crisis is over, and any other considerations deemed appropriate.

Finally, and in view of the accelerated dynamism of the crisis situation, the constant issuance of rules and the pace of events, one must be attentive day by day to the new regulations in order to be able to adjust the contractual conduct as appropriate. The analysis of extraneous cause and the theory of unforeseeability must be guided by one principle: prudence.

References:

Barbosa Verano, J. y. (1992). La teoría de la imprevisión en el Derecho Civil Colombiano. Bogotá: Ediciones Jurídicas Radar.

Zarate, J. A. (2012). La excesiva onerosidad sobrevenida en la contratación mercantil; una aproximación desde la perspectiva de la jurisdicción civil en Colombia. Revista de Derecho Privado. Universidad Externado de Colombia, 245-277.