The spread of COVID-19 and the measures taken by the authorities to combat it has begun to affect economic and trade relations around the world. What effects can this have? The spread of COVID-19 and the measures taken by the authorities to combat it has begun to affect economic and trade relations around the world. What effects can this emergency have on contracts governed by Colombian law? Here are some questions and answers:
What can be force majeure events or acts of God associated with COVID-19?
It is necessary to distinguish between at least three types of events:
1. COVID-19 , that is, the disease caused by the SARS-CoV-2 virus (or coronavirus), which has been declared a pandemic by the World Health Organization.
2. The acts of authority , national or foreign, in response to the spread of COVID-19 and with the aim of mitigating or containing the advance of the pandemic. For example: port and airport closures, travel restrictions, forced quarantines.
3. The facts of third parties derived from COVID-19 or the acts of authority that occurred after the disease. For example: breach of contracts for the supply of inputs, loss of inputs, interruption of services.
When is an event considered a force majeure event or fortuitous event under Colombian law?
According to Colombian law, “ force majeure or unforeseen event is called the unforeseen event that cannot be resisted ”, which as a general rule must meet three characteristics:
1. Be irresistible: The fact must make it impossible to fulfill the obligations that the debtor has contracted, being impossible to resist or avoid its occurrence.
2. Being unpredictable: The parties could not have reasonably foreseen the consequences of the event at the time of contracting. Some decisions also require that the event itself be unpredictable.
3. Being external or alien to the debtor: The debtor may not have caused or contributed to the occurrence of the event that is intended to be classified as force majeure.
What are the consequences of an event being classified as force majeure or fortuitous event?
If an event is classified as force majeure or fortuitous event, and it is found that this was the cause of the debtor not being able to fulfill its obligations, the obligation can terminate and the debtor exonerate liability – that is, not to compensate the creditor for not complying with the obligations.
When the unfulfilled obligation is not about a delivery of a thing, but the provision of a service, in some events the return of the money paid may proceed, without compensation for other damages. When the unfulfilled obligation is not about a delivery of a thing, but the provision of a service, in some events the refund of the money paid may proceed, without compensation for other damages.
Colombian law does not provide as a general rule that force majeure allows suspending the effects of a contract, unless the parties have so agreed.
Is there a difference if it is contracts between private parties or contracts with the State?
In principle, force majeure or fortuitous event must always be irresistible, unpredictable and external or unrelated to the debtor.
However, in contracts with the State, a distinction has been made between force majeure as an irresistible event and external to the contract activity; and fortuitous event as an event of unforeseeable consequences and of unknown cause, but inherent to the activity of the contract. In state matters, both the fortuitous event and force majeure may be appropriate for the suspension of the contract – prior agreement between the parties – but the fortuitous event does not have the potential to exonerate liability.
Have pandemics and acts of authority been expressly recognized as force majeure events or acts of God?
Colombian law provides as examples of force majeure or fortuitous event “ acts of authority exercised by a public official “. In some judgments, arbitration awards and Colombian doctrine, epidemics and the acts of any government authority (national or foreign) have appeared as examples of possible force majeure events, although there is not an exhaustive development of these events.
How to define if the events associated with COVID-19 can be classified as force majeure or fortuitous event?
The classification of an event as force majeure or fortuitous event will depend on each case, considering factors such as the type of contract, the nature of the obligations and the specific effect that the event has had on the fulfillment of the same. It is useful to consider a few factors:
1. What is the especific event that is affecting compliance with obligations?
- It is important to identify what is the fact that prevents compliance with the obligations, because it is what will have to be classified as irresistible, unpredictable and alien to the debtor.
For example, if some workers have been infected and cannot manufacture the products, the event could be COVID-19; but if it is about port or airport closures, the event would be an act of authority or the act of a third party derived from the pandemic.
2. Are there force majeure clauses in the contract?
- Some contracts have force majeure clauses in which they define the events that are considered as such, and sometimes include (i) epidemics or pandemics and / or (ii) acts of authority. • Some contracts have force majeure clauses in which they define the events that are considered as such, and sometimes include (i) epidemics or pandemics and / or (ii) acts of authority.
- Furthermore, these clauses sometimes define what effect each force majeure event has on the contract. For example, although under Colombian law the contract is not suspended as a result of a force majeure event, the parties may have agreed to do so.
3. Is it an irresistible, unpredictable and foreign event to the debtor?
- Although it has not been possible to interrupt the spread of COVID-19 as of today, it must also be considered whether the specific fact derived from it (for example, an act of authority) is mandatory or not, whether it supports mitigation or not, whether is under the control of the debtor or not, and whether it directly impacts him or not.
- It is very likely that it is considered that, for contracts prior to the spread of COVID-19, it was not foreseeable that this pandemic would arise, nor that it would be translated into the health, economic, migratory and regulatory measures in which it ended, being then an event of unforeseeable consequences. In any case, the analysis should always be done in terms of the specific event that is alleged.
- Except for certain contracts with the State, in which the State itself is the one that has adopted the acts of authority as a consequence of COVID-19, the facts would be foreign or external to the debtor.
4. Does the event prevent the fulfillment of obligations?
- It must be verified if the fact makes it impossible to fulfill the obligations, that is, if there is a clear and direct relationship between the event of force majeure and the impossibility of complying with the service that the debtor had to fulfill.
- It must be identified what was the nature of the obligation that the debtor had to fulfill, as this may impact whether it has really been made impossible or not.
For example: identifying if it is an obligation to deliver a certain thing that has not been able to leave the port, an obligation to deliver any kind of things that can be obtained in other places, an obligation to provide a service or organize an event that has been restricted, and so on.
If compliance with obligations is not impossible, but more expensive, is there a solution under Colombian law?
If the fulfillment of the obligations becomes considerably more expensive, but not impossible, it would not be a case of force majeure or fortuitous event.
However, it could be a phenomenon of contractual unpredictability -for contracts between individuals- or economic imbalance -for contracts with the State-.
The general rule is that, meeting certain particular requirements for each case, the contract is not terminated, but rather that a judge readjusts its terms to adapt to new unforeseen circumstances. It is also possible that the contract includes adjustment mechanisms that do not require going to the judge or arbitral tribunal.
Can there be other consequences under Colombian law if a contract is not fulfilled for events derived from COVID-19?
In the event that the force majeure requirements are not met, but COVID-19 or events derived from it have had a decisive impact on the fulfillment of the contract, despite the diligence of the debtor, it may be considered a decrease in the fault or even exoneration for absence of fault, depending on the content and scope of the obligation.
For contracts that have not been signed or are being signed so far, how to regulate the possible effects of COVID-19?
For contracts that are being signed so far, COVID-19 would no longer be an unforeseeable event, so it is advisable to regulate the distribution of possible risks derived from this situation between the parties. For example:
- Carry out judicious due diligence exercises to identify the main risks of itself and of the counterparty in order to comply with its obligations.
- Specify by consideration ones, declarations or guarantees the capacity of each of the parties to respond for the obligations of the contract given the emergency of COVID-19.
- Establish insurance policies or other guarantees that allow to protect some of the risks derived from COVID-19 or successive events.
- Establish periods of suspension of obligations if compliance is impossible or excessively costly.
- Provide flexible terms and conditions for the fulfillment of obligations, with clear and timely information duties on the part of all contracting parties regarding their compliance status.
- Assign the risk of losses or higher costs to any of the parties, or distribute it among them.
- Establish resolution conditions or allow the exemption of responsibility from certain obligations as a result of COVID-19 or events derived from it.
- Regulate possible scenarios of early termination of the contract due to events that prevent the parties from substantially complying with their obligations.
In any case, it is possible that unforeseen situations or consequences arising from the health emergency may arise in the future, which will have to be evaluated in due course to determine whether they meet the requirements of force majeure or unforeseen circumstances.