Impact of the pandemic on businesses among private parties

Published 06 April 2020 by Canosa Abogados

We are experiencing an unprecedented situation in the modern world: the outbreak of a new pandemic against which human beings have very few defense mechanisms. Both the existence of the new virus (COVID-19) and the measures adopted by the different countries in view of the sanitary emergency have a direct impact on business. In this brief article, we will deal with the effect of this new pandemic and the regulations issued after it on the financial relationships among particulars.

First, it is important to stick to what was originally agreed by the parties in each contract and particular situation. The Argentine National Civil and Commercial Code (“CCC”) provides for the principle of party autonomy (Section 958 of the CCC.), so the parties could have freely arranged how to deal with their obligations and its enforcement in case fortuitous or force majeure events arose. In this case, it would be a matter of just complying with the parties’ will; at least it becomes evident that one of the parties was in a privileged position during the negotiations.

After the clarification made, we will analyze briefly some institutes of the argentine law that could be applicable during the sanitary emergency that we are going through.

Fortuitous case or force majeure

Although there were some doctrinal attempts to differentiate these terms (being the fortuitous case unforeseen and the force majeure would be an event that, having been possibly foreseen, could not be avoided); the CCC (Section 1730 of the CCC.) makes it clear that these are treated as synonyms and both have the same consequences: they exempt from responsibility, except the parties have agreed the contrary.

This unpredictable and unavoidable fact becomes the real cause of the damage suffered by the victim. It could be an act of nature or human actions beyond the parties’ control (which could be, in this case, the regulations issued by the national government).

The fact that breaks the causal link must have the following characteristics:

  • objectively unpredictable and unavoidable;
  • not attributable to the parties, which means that the agent must have not acted in any way that could enable the upcoming damage (for example, the debtor would not be released if he should have complied with his obligations before the unpredictable and unavoidable event);
  • happened after the affected legal relationship;
  • causes the impossibility to comply with the obligation.

The outbreak of the pandemic and the governmental regulations issued as a result could be considered as unpredictable and unavoidable events, beyond the parties’ control. However, it is important to analyze each case in particular to understand whether these facts have caused the impossibility to comply with the parties’ commitments.

There are cases very easy to solve, as there are some activities that have been completely banned, but there are also “grey” situations, for example, those obligations which deadline is not essential and, therefore, could be fulfilled later. 

The party trying to invoke force majeure should clearly prove in which way the pandemic or the new legal measures have affected completely the chances to comply with its contractual obligations.

Frustration of the purpose

The CCC sets for the frustration of the purpose of the agreement as a contract ineffectiveness scenario (Section 1090 of the CCC.). In this sense, it establishes that the definitive frustration of the agreement’s purpose entitles the damaged party to declare its termination, if it is originated in an extraordinary alteration of the existent circumstances at the time the parties entered into the contract, which is beyond the parties’ control and exceeds the risk assumed by the party concerned.  The termination is not automatic; the party concerned must notify its intention to terminate the agreement to the other party.

The frustration affects the reason of the agreement itself and, therefore, the law does not provide for the chance to review the contract. In this case, the possibility to accomplish the purpose of the agreement becomes completely inexistent, even if the parties were able to fulfill their obligations.

Uncertainty

In case that the obligation could be accomplished even with the existence of this new unpredictable and unavoidable fact non-attributable to the parties or the risk assumed by them, it should be considered if the obligation becomes extremely onerous (“hardship”), which the CCC defines as “uncertainty” (Section 1091 of the CCC.).

Hardship related to the fulfillment of an obligation may occur when:

  • it increases the sacrifice for one of the parties, with the same retribution;
  • when the sacrifice remains the same, but the retribution decreases;
  • both values are altered in a reverse way, which affects negatively the inner balance of the agreement.

Uncertainty can only be applicable to onerous commutative agreements of differed or permanent execution or to those aleatory contracts of differed or permanent execution, where the hardship comes from facts not contemplated in the uncertainty accepted in these specific kind of agreements. 

The debtor whose obligation has become extremely onerous might claim for the complete or partial termination of the agreement or its adaptation in or out of court.

Suspension of performance of obligations and preventive protection

The CCC also sets for two solutions that could be useful in the current situation of emergency.

On one hand, it establishes that when the parties must comply simultaneously, one of them may suspend the performance of its obligations, until the other party complies or offers to comply (Section 1031 of the CCC.). The requirement of suspension may be done in or out of court. This could be a useful solution in case one of the parties cannot comply with the obligations agreed because of a force majeure event.

On the other hand, under the preventive protection (Section 1032 of the CCC), one of the parties could suspend the performance of its own obligations if its rights are threatened because the other party has suffered some damage in its ability to comply or its solvency.

The facts behind a fortuitous case or force majeure could cause a damage in the ability to comply of one of the parties, in which case the other party could suspend its own performance. It is intended that the agreement survives until those facts disappear.