Contractual Relations in times of COVID-19

Marcelo Longaric – Associate 

The arrival of COVID-19 in Bolivia and the consequent declaration of National Sanitary Emergency, not only modified and affected the personal relationships of our society, it also affected contractual relationships and the fulfillment of its obligations.

When it comes to contracts, there are two fundamental principles: (i) the principle of the autonomy of the parties’ will and (ii) Pacta Sunt Servanda. The first of these principles refers to the power that the parties have to freely regulate their interests and create any type of legal relationship, as long as they do not go against the law, morality and good customs.

In our legal system, the principle of the autonomy of the parties´ will is regulated in Article 454 of the Civil Code, which has as Nomen Juris “Contractual Freedom: Its Limitations”. Regarding Pacta Sunt Servanda, it states that contracts bind the undersigned parties, making the contract and each of its clauses mandatory, that is, they have the force of law between the parties and these must be complied with at verbatim, a principle that is regulated in Articles 519 and 520 of the aforementioned legal body.

It is on the basis of these two principles that the parties forge and build their contractual relationships that are embodied through contracts, documents that contain obligations that must be fulfilled by each of the parties as agreed. However, sometimes these obligations cannot be fully complied with by external factors and totally unrelated to the will of the parties, in some cases there are exceptions to avoid sanctions against these breaches, such as the Fortuitous Case – Force Majeure.

Currently, due to the pandemic and the consequent declaration of a National Health Emergency that implied the total suspension of activities, have been unable to fulfill the obligations they had agreed to in their contracts, a situation that can lead to the application of fines or the obligation to pay compensation for the damage that this breach may cause. In this situation, although our legislation does not expressly regulate the Fortuitous Case – Force Majeure, it establishes the figure of the supervening impossibility as a way out of the breach that may arise in these cases.

It is necessary to clarify that, to allege the supervening impossibility, three requirements must be met, (i) that the event is unforeseen, that is, that neither party has been able to prevent the event that caused the default or delay; (ii) that it is irresistible, that is, that the service becomes impossible to fulfill and (iii) that it is imputable, that is to say, strange to the parties.

In this sense, taking into account that COVID-19 (an external and unpredictable event) is a pandemic that is affecting several countries in the world, where many governments have opted for the policy of confinement (quarantine) and closure of borders (facts of the Prince), causing many contractual obligations to be breached, both in foreign and internal trade, the parties can claim the supervening impossibility.

Thus, at this time it is necessary to review the contracts that have been signed in order to verify whether the Fortuitous Case and/or supervening impossibility is included. In the event that this situation is in fact included, a thorough analysis must be carried out to identify if this situation was unforeseen, irresistible and unimpeachable to the parties. And, in the event that all these requirements are fully configured, the party that is in breach, must notify its counterpart of the situation that prevents it from complying with the agreement.

Against this situation of noncompliance due to COVID-19 and government decisions, the parties have different paths to follow: (i) fulfill their obligations once the total quarantine measures have been lifted; (ii) terminate the contract in the event that it is impossible to fulfill the agreed provision and/or (iii) renegotiate the contract.

Therefore, we recommend that when negotiating contracts and/or signing them, documents should necessarily include the Fortuitous Case – Force Majeure clause in the clearest way possible, so that this can be applicable in the event that a situation arises that implies a delay or impossibility in the fulfillment of the obligations.