April 3, 2020

Considerations for International Commercial Contracts Affected by the COVID-19 Crisis in Mexico

Holland & Knight Alert
Carlos Vejar | Laura Yvonne Zielinski | Josafat Paredes

Highlights

  • Mexico declared a sanitary emergency due to the COVID-19 crisis that may impact the ability of individuals and companies to maintain contractual compliance.
  • Contract terms or applicable statutory provisions will need to be analyzed to determine which remedies might be available to parties that cannot meet contractual obligations due to suspension of activities caused by the pandemic.
  • The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides for an exemption of liability in case of a failure to perform caused by acts of God or force majeure under certain circumstances.

COVID-19, the disease caused by the current coronavirus, is upending normal life around the world, and with it hindering the performance of many commercial contracts. With borders closing and people staying at home, most commercial relationships are affected or could be affected, and the need for contractual and statutory remedies will be increasing. The crisis has also reached Mexico, where the government enacted a sanitary emergency on March 30, 2020, which will last until April 30, 2020, suspending all "non-essential" activities for the time being.

Individuals and businesses fearing they will be unable to comply with their contractual obligations, or doubting whether a counterparty will be able to comply, should consider the options they have within their contracts in the face of noncompliance. If both contracting parties are expected to experience difficulties in performing their respective contractual obligations, it may make sense to initiate negotiations for the purpose of reaching a mutual agreement to suspend performance until the outbreak has been contained and the situation is clarified.

The starting point is always to a look at the contractual terms to check whether a contract in question includes provisions on force majeure and/or hardship, and if so, whether those explicitly exclude or include pandemics or public health emergencies. In the absence of contractual provisions on force majeure or its explicit exclusion of cases of a pandemic (or its equivalents), the parties have to analyze the applicable statutory provisions to determine which remedies might be available to them.

For example, since 1989, Mexico has been a signatory state of the United Nations Convention on Contracts for the International Sale of Goods (CISG), meaning that the CISG will apply to international commercial contracts for sales between Mexico and another contracting state to the CISG, as well as to international contracts of sale governed by Mexican law.

The CISG provides for an exemption of liability in case of a failure to perform caused by acts of God or force majeure (Article 79) if the non-performing party can prove that the failure to perform was caused by a reason beyond his/her control that he or she could not reasonably have been expected to take into account at the time of the signing of the contract, or to have avoided or overcome it or its consequences. The CISG imposes notice requirements, mandating that the affected party must give notice to the other party of the impediment and its effect on his or her ability to perform within a reasonable time.

The threshold for invoking Article 79 of the CISG has generally been considered high. Therefore, it is likely that only failures to perform caused directly by the COVID-19 crisis, such as travel restrictions or compulsory quarantines imposed by public authorities, will qualify as force majeure events, whereas disruptions caused by voluntary measures taken out of precaution might not. The date on which the contract was executed or renewed is also likely to be an important factor that will be taken into account in order to analyze whether a failure to perform is caused by force majeure. If this date appears to be subsequent to the announcement of the outbreak, it is questionable, for example, whether the failure to perform was truly "unforeseeable."

In the event that the CISG does not apply (for example because it has been explicitly excluded), Mexican law recognizes force majeure and/or acts of God under the general principle of law that nobody is obliged to the impossible. Similar to the CISG, to invoke force majeure under Mexican law as exemption of liability, the invoking party must demonstrate that the failure to perform was caused by an unforeseeable event beyond his/her control. For instance, difficult or more burdensome compliance is not enough to fulfill the applicable legal standard.

For a more detailed review of the force majeure doctrine under Mexican law, please see Holland & Knight's recent alert: "Mexico Declares COVID-19 Sanitary Emergency by Reason of Force Majeure."

In conclusion, under the current circumstances, it is possible that contracts could be terminated for force majeure under the CISG subject to a number of fact-specific conditions. Affected parties are well advised to review their contracts to analyze whether they contain a force majeure provision and to determine the applicable law, to consider all of their options to ensure performance (keeping in mind that force majeure is reserved for cases in which performance is impossible) and if necessary, to notify their contractual partners of a force majeure event as soon as practicable (to comply with the notification requirement).

Holland & Knight attorneys have extensive experience in International Trade matters in a variety of industries. For more information, contact the authors or Holland & Knight's Mexico City office.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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