WHAT’S HAPPENING WITH CONTRACTS?
Companies are facing, or expecting to face, problems in delivering products and services to their clients or in receiving them from their suppliers.
These problems derive from restrictions on products and on labor as a consequence of the measures put in place by governments —such as curfews or border closings— as well as by companies to protect their employees or simply because they have personnel who are sick. These are merely examples, and there are many more, ranging from relatively simple and short-term situations to others that are more complex, where there is no possibility of “getting back” to normal.
WHO IS RESPONSIBLE FOR THE CONSEQUENCES?
The question is knowing who has to assume the consequences. That is, determining whether the coronavirus and its consequences are “force majeure.”
That means using that concept, and similar ones, to determine whether a party can terminate or suspend performance of a contract —not deliver a product or service temporarily or permanently— without the need to compensate the other party. Or demand —as happens in contracts with the State— renegotiation.
The conclusion depends on the circumstances of each contract, company and market. The same event often allows one company, but not another, to suspend a service to a client.
HOW IS IT DETERMINED?
Beyond the specifics of each case, the following elements are always relevant:
- What the contract says, for example, about what constitutes force majeure or, more generally, about circumstances beyond the parties’ control, or about what the parties must do when they believe these situations exist. If the contract does not say anything about this, what the contract “does not say” is also important.
- The type of contract, for example, if it is an engineering or construction or supply contract —which tend to include detailed provisions on extensions of time and additional costs— or if the payment is a sum of money, for delivery of a product on a one-time basis or over a lengthy term, or for provision of a service.
- What the companies who are parties to the contract did, are doing or will do. The situation deriving from COVID-19 propagation is evolving very rapidly and requires assessing and “recalculating” what should be done moment by moment, based on own decisions and circumstances, as well as those of the other party, along with others, like governments.
ARE THERE SIMILAR PRECEDENTS IN URUGUAY?
Contracts under Uruguay law normally include clauses referring to strikes, wars, terrorism, changes in rules, and circumstances that may give rise to a shortage of inputs. It is not frequent, unlike in Asian countries that suffered the SARS and MERS outbreaks, for contracts to specifically address pandemics or epidemics. There are also no specific precedents of such situations locally, although Uruguayan courts have considered force majeure in many different circumstances, including restrictions on circulation and exports deriving from foot-and-mouth disease and bovine spongiform encephalopathy (“mad cow disease”).
In any event, Uruguayan law and other rules that may be applicable —such as the UNIDROIT Principles, the United Nations Convention on the International Sale of Goods, and certain FIDIC contract models (red and green books)— address the possibility in contracts of invoking events that could not be reasonably foreseen. All of them rest on the notion that events must be “alien,” “beyond the control,” or that they were not possible to “reasonably expect” or “take into account” at the time of signing the contract.
WHAT MUST BE DONE, WHERE AND WHEN?
Act in good faith, proactively, transparently and in cooperation with the other party to the contract.
Inform.
- Inform the other party if there are, or are expected to be, negative effects on contract performance.
Request information on possible effects on the provision of goods or services by the other party.
Reasonably maintain the flow of information; inform and ask questions.
Implement the procedures provided for in the contract to give notice of problems deriving from COVID-19 and its effects or, when it is not possible to do so in full, either temporarily or permanently, indicate the reasons and expectations. If no procedures are stipulated in the contract, in any case keep the other party updated within reasonable timeframes.
Mitigate.
- Make reasonable efforts to attempt to eliminate or reduce the negative consequences for the contract.
- Don’t “sit and wait”; discuss with the other party the possible alternatives and compromises to reduce risks.
- If there are negotiations, keep them constant but organized: propose definition of roles, agendas and specific timeframes for the tasks of each party.
Maintain communication.
- Maintain fluid communication to maximize the negotiation of adjustments or rescheduling.
- Maintain a single channel of communication so as to avoid confusion and inconsistent messages.
- Remember that what is said by telephone, WhatsApp, email or letter can all be relevant for the contract.
- Choose your words carefully.
Record and save.
- Implement a system for saving and safeguarding internal information and communications with the other party.
- Keep notes of calls and face-to-face and virtual meetings. It is difficult and expensive to reconstruct information later.
COVID-19 IS NOT AN “EXCUSE” TO SHIRK A CONTRACT
It can be expected that judicial courts and arbitral tribunals will soon have to answer questions of whether a party to a contract validly claimed “force majeure due to COVID-19” to avoid contract performance.
Force majeure is one of the reasons used most to sustain that there is no liability for not performing a contract.
Insofar as the effects of the pandemic continue to evolve it is not possible to give a single unchanging answer as to whether or not there is “force majeure,” and, if there is, until when. What is needed, as with the virus itself, is constant tracking of the situation and applying the legal test at regular intervals and with clarity in light of the changes in the situation.