COVID-19: Guidelines to contractual Issues

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COVID-19: Guidelines to contractual Issues

How is the applicable law determined by the courts in case of commercial contracts?

Articles 2605, 2650 and 2651 of the Argentine Commercial and Civil Code “CCC”) allow the contracting parties to decide on choice of forum and applicable law.

Pursuant to Article 2651, the law chosen by the parties governs its validity, nature, effects, rights and obligations. Consequently, courts will generally enforce choice of law provisions.

However, Article 2651 also provides that the principles of Argentine public policy (“orden público internacional”), the Argentine overriding mandatory rules (“normas internacionalmente imperativas”), or overriding mandatory rules of third countries with relevant economic contacts with the case will be applicable to the contractual relationship between the parties, regardless of the foreign law chosen to govern an agreement.

Further, Article 2651 provides that agreements executed in Argentina to circumvent overriding mandatory rules of a third country that are necessarily applicable to the case will have no effect.

Are there any statutory provisions relating to force majeure? 

Section 1730 of the CCC defines force majeure as an unforeseeable event that is beyond the reasonable control of the parties. The CCC provisions refer to unforeseeable events and force majeure concepts as synonyms. Under this provision, the debtor will not be liable for damages and interests caused to the creditor because of lack of performance of the obligation. 

Legal scholars have identified some requirements under Argentine Law for force majeure:

 The event must be: 

·         unforeseeable, taking into account the nature of the expected performance, the parties’ intentions (representations) and relevant circumstances;

·         irresistible, a total, unexpected impossibility of reasonable performance;  

·         currently occurring, therefore excluding potential facts; and

·         beyond the control of the parties, meaning that it must not be connected in any way with the party claiming force majeure.

           

Section 1733 of the CCC provides that, even in the event of force majeure, the non-performing party will be held liable if:

·         the parties have agreed on contractual performance by a contractual provision even in case of such event;

·         if by a legal provision, the debtor is not exonerated from liability in such event; or

·         if the event would have occurred because of the debtor´s fault or would have occurred when already in default, even if the default had not been motivated by such fortuitous event or force majeure.

 How are force majeure clauses in commercial contracts applied and interpreted in practice?

Force majeure clauses are narrowly construed under Argentinian law and questions relating to the interpretation of such clauses will depend on the specific contractual language and the underlying facts and circumstances.

 In order to rely on a force majeure clause, the non-performing party must demonstrate that the event was

unforeseeable, taking into account the nature of the expected performance, the parties’ intentions (representations) and relevant circumstances;

unexpected, by showing the impossibility of reasonable performance; and

not connected in any way with the party claiming force majeure (for example, a strike restricted to the personnel of the non-performing party cannot be an excuse, while a general strike or a revolutionary strike does qualify for such an excuse).

 Although certain force majeure clauses may specifically identify epidemics or pandemics as events that would excuse a party’s performance, there is little precedent in Argentina examining such provisions. As regards Covid-19, in the event of government-imposed quarantines or other restrictions, force majeure clauses with language relating to “acts of government” could be invoked to excuse a party’s non-performance, depending on the specific circumstances. Otherwise, a broad catch-all provision may apply, subject to the limitations discussed above.

Invoking a force majeure clause may allow either the non performing party or both parties to terminate the entire agreement. Alternatively, parties may temporarily suspend performance of the contract, and limit the scope and duration of the suspension, in the hopes that the force majeure event can be resolved and the contract can remain in force. Because of the potentially drastic consequences of invoking force majeure, parties may wish to explore alternative options to maintain the contract and the business relationship.

 

In the adsence of statutory provisions and/or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations? 

In the absence of a force majeure clause or if the parties have agreed to perform obligations by a contractual provision even in case of such event, the parties could attempt to rely on the doctrines of impossibility or frustration of purpose to excuse their contractual performance. These doctrines can be raised either as a defense in a pending proceeding or via a judgment action, where the party asserting the defense seeks a ruling on whether contract performance may be excused. 


Impossibility

Section 1732 of the CCC provides that the debtor will not be liable to the creditor due to lack of performance of the obligation resulting from an objective and absolute impossibility that is not attributable to the obliged party.

The impossibility has to be extraordinary, beyond the control of the parties and absolute (i.e. barring any possibility of performance, excluding the application of impossibility if the performance could have been achieved by extraordinary means and costs).

 

Frustration of purpose

 Section 1090 of the CCC allows an aggrieved party to terminate the entire agreement due to frustration caused by an extraordinary event that alters the underlying reasons for performing the contract. Although literal performance under the contract is still technically possible, the destruction of the purpose of the contract would leave no reason to want performance.

The frustration must be substantial and the triggering event must be extraordinary, unforeseeable and beyond the control of the parties.


 What else needs to be considered by clients that are party to a contract which is affected by Covid-19?

Generally, a party seeking to rely on a force majeure clause must give proper and timely notice of the force majeure event (subject to the terms of the contract in question or by provision of Section 1078 of the CCC). Notice provisions may require parties to provide additional information, such as specific details about the event, its effects, and its expected duration.

In any case, the aggrieved party may have a duty to use reasonable efforts to mitigate the effects of a force majeure event, in light of the bona fide principle governing Argentine Contract Law (Section 9 and 961 of CCC), which requires good faith efforts to amend or modify the contract to compensate for the effects of a force majeure event.

Furthermore, Section 1011 of the CC establishes a special duty of cooperation in long-term contracts, with respect to the reciprocal commitments, by giving the other party a chance to renegotiate in good faith.