A few months ago, probably no-one, as farsighted and responsible as someone can be, could have foreseen the current public health situation we are facing as a result of the COVID-19 outbreak. The furious expansion of the coronavirus pandemic not only affects our personal, professional, and contractual relationships, but also the normal development of public tasks, in a complete unforeseeable way.
It is very likely that public offices, businesses and people in general will be highly affected by the social distancing measures, that although extremely necessary in order to avoid a further expansion of the disease, will have a deeply negative impact on the economy. This naturally includes goods and services provision.
Considering the situation, inevitably all types of agreements will be affected as well. Certainly, the pandemic’s legal and economic effects will be the cornerstone of discussions and analysis throughout its expansion, and eventually, and perhaps even more, when the COVID-19 outbreak is finally mitigated or even eliminated.
CONTRACTS ARE MEANT TO BE KEPT, BUT…
Let’s set the following scenario: a person booked a tourist package, the service provider informs the customer that the government imposed several restrictions on crowd gathering along with mandatory lockdown, and therefore, the booking is cancelled. Or the scenario in which a person rented a venue for a party: the venue is available, however due to the government-imposed-measures, the party cannot take place.
Therefore, we wonder, in these times of uncertainty, what are our contractual rights and duties? One of the pillars of contractual law is that agreements are meant to be kept under good faith. However, it is now, when facing this extraordinary and beyond-our-control situation, that provisions such as “force majeure”, “acts of God” acquire main importance. Because of particularities of the Paraguayan legal system, we will further refer to these terms as “unforeseeable events”. These “unforeseeable events” can produce commercial frustration or a temporary frustration, and the legal provisions allow, in certain cases, for parties in an agreement to be exempted from their contractual obligations or to obtain a modification of the terms of the contract, so that economic balance is restored among parties of the contract.
WHO ASSUMES THE RISK?
The events of unforeseeable events deeply affect the costs of an agreement. Now the question is, who assumes these costs?
The general governing principle is that if performance is prevented, or it becomes excessively onerous due to an unforeseeable event, the parties’ contractual obligations should be equally shared, and therefore the risk distributed. This is, if there is an impossibility to perform the contract, because of these events, the contract should be immediately terminated, and both parties released from performance. However, this carries the obligation of restitution of the benefits obtained from the other party, because of the contract, with the purpose to restore the original equilibrium between the parties.
In other words, Paraguayan law does not intend for unforeseeable events to allow parties to obtain unjust enrichment. On the contrary, the main objective of the law is to restore the patrimony of the contractual parties as they were before the time that the contract was concluded.
Therefore, it is extremely difficult to determine, in general terms and without further analysis, whether an event constitutes an unforeseeable event with the above described consequences. And as massive as the event may seem, it can be difficult to establish whether this event finally has an impact on a specific legal relationship or obligation.
THE EXPERIENCE IN LOCAL COURTS
There are no reported cases, in the recent history of Paraguay, related to commercial frustration or temporary frustration caused by massive events, such as epidemics and its related measures, as it probably will occur as a result of the coronavirus outbreak. Albeit epidemics, such as the one caused by dengue fever, are not unusual in our country, never has one resulted in such extreme measures, causing major suspension of most social activities.
Nonetheless, precedent from the Civil Chamber of the Supreme Court of Justice of Paraguay, are clear and consistent on the fact that the party invoking the consequences of an unforeseeable event has the burden of proof, as per the event per se and its effects on that party’s obligations. Therefore, it has become of utmost importance to assume the necessary steps to prove the link between coronavirus pandemic and its measures and the contractual obligation in an eventual court proceeding.
HOW IS THE INTERNATIONAL EXPERIENCE IN THE MATTER?
In recent years, a similar epidemiological event, the SARS (Severe Acute Respiratory Syndrome) outbreak, affected Asia between 2002 and 2003. China, one of the most affected countries, heavily debated on whether the epidemic event and the deriving protective measures constituted unforeseeable events with its correspondent effects, with uneven conclusions.
The issue regarding the SARS outbreak effects would have been settled with the solution provided by the Supreme People's Court, which stated that the force majeure doctrine should have been applied during the prevention period of the SARS. However, many have claimed that such treatment of epidemiological events, with a general approach considering SARS as a force majeure or acts of God derived event, would in fact be a protectionist approach of the Chinese Government in favour of its industry[1].
All signs suggest that China will be applying the same reasoning to the COVID-19 pandemic outbreak, thus recognizing this event as a case of force majeure to numerous companies’ activities, which already has raised concern among several sectors[2].
Notwithstanding the fact that there is no consistent conclusion on the interpretation and enforcement of force majeure clauses around the globe, international experiences and interpretations should be useful in order to raise concern on the fact that the COVID-19 outbreak must not be invoked lightly as a mere excuse for a breach of contract.
WHAT TO DO? WHAT HAPPENS WITH THE CONTRACT?
Whether the COVID-19 pandemic outbreak will have the above-mentioned effects, will have to be analysed on a case by case basis and taking into consideration the events yet to come. In some cases, it could be applicable, in others it will not. This is not an easy discussion, therefore a further legal analysis is vital in every case, where circumstances such as the specific facts, the applicable law and the wording of the contract are to be considered.
Just a few recommendations: always keep track of the situation, stay informed, keep constant communication with the other party, and where possible, duly mitigate the pandemic’s effects on the contract.
It is very likely that most economic agents will be affected by the outbreak. We are only in the first phases of the pandemic and there has already been devastating effects on the economy. We will all suffer its consequences. Therefore, good faith negotiation will be vital in order to equally allocate the negative consequences of the contract to each party and to finally obtain a cost and time effective outcome. Now, if parties to a contract do not reach an agreement and instead resort to courts or arbitration, what will set the restraint of the negative effects of the pandemic, will be a correct interpretation of the current situation and a proper implementation of legal provisions and remedies.
It will be crucial to have a comprehensive understanding of the situation and to foresee an efficient and equitable solution in order to keep the economy afloat once the pandemic and its effects have ceased.
HOW DO UNFORESEEABLE EVENTS WORK IN PARAGUAYAN AGREEMENTS?
Unlike other judicial systems, Paraguayan law has considerably regulated the effects on unforeseeable events regarding obligations and contracts. This allows us to establish a general standard in order to guide individuals with reference to their rights and obligations when such events arise.
Further, parties usually include force majeure clauses, describing with more or less detail which unforeseeable events would have an effect on their agreement and the consequences that these may have.
Please find below some general considerations for these types of events:
| Which events are covered? | An extraordinary event or circumstance, beyond the control of the parties in a legal relationship, which influences an obligation contained in that legal relationship. This event may be caused by human actions (force majeure) or nature (acts of God). |
| The event should prevent parties from performance or should fundamentally alter the equilibrium of the contract | It is necessary that the event should (1) prevent the legal or factual performance of the contract or (2) that the performance of the contract becomes excessively onerous for one of the parties, therefore resulting in an alteration of the equilibrium of interests of the contract. The second scenario illustrates as follows: a person enters into a contract to produce and later ship the goods to another country. The final price of the goods was calculated under the base of production and shipment costs from location X at the time of the conclusion of the contract. Should a lightning destroy the only airport in location X, the new point of departure will be the airport from location Y, whose airport fees double the ones from location X, in addition to transportation fees from location X to location Y. The obliged party in this case is not prevented from performance, however the performance has become excessively onerous |
| Why should I invoke these clauses or solutions? | They are useful as they exempt a breaching party from its obligation, supposing the party was prevented from performance, and allow a party to obtain equitable modification of obligations in the event that performance has become excessively onerous. In the scenario previously illustrated, one may consider a price or shipment term modification. |
| When one cannot invoke these clauses and solutions? | The debtor who is in default or has assumed the risk of the contract. For example, a person that must deliver a specific art piece from a famous artist before March 2nd and later a lightning destroys the art piece on March 3rd. This person may not invoke the event in order to be exempted from its obligation, since the obligation was in default before the event took place. |
| When must a debtor return the benefits received from the other party of the contract (restitution)? | If the debtor was prevented from performance, he will be obliged to make restitution of the benefits obtained from the contract. Using the example of the art piece: if the art piece was destroyed by an unforeseeable and beyond-the-control-of-the-parties event, before the delivery date, the seller should not be held liable from breach of contract nor will he be held liable for damages, but he will have to reimburse the payments, if obtained, from the buyer. |
| What to do in the scenario in which a party is not prevented from performance however the creditor lacks interest in performance or does not profit from it? | In this scenario, the lack of interest, i.e. profitability, by the creditor will not have an impact on the performance. Accordingly, the debtor may perform and consequently demand or retain payment. Nonetheless, a specific aspect of a contract may be considered to be essential, by law or by agreement. This could be the case of a person who rented a venue for a party on a specific date in which parties are forbidden due to governmental measures. |
[1] Ewan McKEndric, Qaio Liu. Good Faith in Contract Performance in the Chinese and Common Laws. Chinese Contract Law. Edited by LARRY A. DIMATTEO, LEI CHEN. Cambridge University Press, 2018. Pág. 108.
[2] “Chinese firms use obscure legal tactics to stem virus losses”, The Economist, Business, Feb 22nd 2020 edition. https://www.economist.com/business/2020/02/22/chinese-firms-use-obscure-legal-tactics-to-stem-virus-losses