Force Majeure and Related Principles in Mexico: Five Essential Questions Answered
Can a Party be Excused from Contract Obligations by Citing the COVID-19 Pandemic?
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. The quick spread of COVID-19, combined with the impact of various government responses, have caused unprecedented disruptions to business on a global scale, including travel, supply chains, and many other commercial operations and relationships. As a result, some companies have asserted or plan to assert that the outbreak constitutes a force majeure event, or that it may give rise to other legal bases excusing contractual performance.
For companies that are considering issuing a force majeure notice, or those anticipating that their contractual counterparties may do so, we provide answers to key questions on how these types of clauses are treated by Mexican courts.
1. What is a force majeure clause?
The inclusion of a force majeure (FM) clause in commercial contracts is common in Mexico, particularly in long-term commercial contracts. FM clauses define circumstances beyond the parties’ control that can render contractual performance too difficult or even impossible. Where an event, or series of events, triggers an FM clause, the party invoking the clause may suspend, defer or be released from its duties to perform without liability, provided certain formalities, usually part of the same FM clause, are met.
Under Mexican law, there are three categories of events constituting the fortuitous event or force majeure (Mexican law uses both terms interchangeably and gives the same effects to both), depending on whether the event is a result of nature, human events or acts of authority. Natural events include fire, floods and earthquakes. Human-caused events may include invasions, wars, armed attacks and strikes. Acts of authority that constitute FM generally include all those impediments that result from an order or a prohibition emanating from the public authority, provided that the contract party has not caused that determination.
The FM event must be an unforeseeable and insurmountable obstacle. That said, even if contract performance is impossible, FM cannot be invoked if the party asserting it is responsible for the event due to its own fraud, negligence or recklessness. In such cases, the asserting party remains responsible for fulfilling its obligations.
2. How do Mexican courts interpret force majeure provisions?
Mexican courts have been consistent in requiring a party invoking FM to bear the burden of proving the following elements:
- External: The existence of an event outside of the party's control
- Insurmountable: The cause of the default was impossible to overcome.
- Unpredictable: The event was not foreseeable.
- Inevitable: Even anticipating the event, it was unavoidable.
When invoking COVID-19 as an FM event, the most difficult element to satisfy may be establishing that such event “is impossible to overcome.” Therefore, it is important to gather evidence demonstrating that the company cannot perform, which may include official reports published by the WHO, the Health Ministry in Mexico and the General Health Council; travel warnings issued by the Ministry of Foreign Affairs; and other materials that support the FM defense.
The legal effect of COVID-19 and the application of any FM clause is a question of contractual interpretation, which Mexican courts resolve on a case-by-case basis. It will be up to a court to decide the parties’ rights and obligations in the event an impacted party elects to invoke an FM clause.
The first step a court will take is to identify whether the outbreak of COVID-19, objectively interpreted, falls under a specified FM event. FM clauses typically provide a non-exhaustive list of specific events outside of the contracting parties’ control, frequently including a catch-all language such as “other events beyond the reasonable control of the parties.”
If the FM clause, objectively interpreted, covers the COVID-19 outbreak, the second step will be to consider the following:
- Notice periods. FM clauses typically contain written notice provisions. Failure by the impacted party to provide notice within this time period (in the term agreed in the contract or, absent such agreement, in the term and with the formalities provided by the law) will void the party’s FM rights. When proper notice is given within the relevant timeframe, the FM rights will be deemed to have commenced retroactively from the start of the FM event.
- Causation. An FM clause generally requires that the impacted party establish that the event has affected its performance to the extent required by the language of the contract, which usually requires that the impacted party's performance be either prevented, hindered or delayed.
- Mitigation. FM clauses in Mexico do not typically include an express duty to mitigate on the part of the impacted party, nor is such an obligation expressly provided in Mexican law. However, there is a general statutory obligation to repair any and all damages that are a direct and immediate consequence of a breach of an obligation or unlawful conduct. Thus, failure to mitigate damages to the fullest extent possible may be considered negligence by the party invoking FM, and that party may be held liable, at least partially, for such damages.
3. What are the consequences of an FM clause on contractual performance?
In general terms, the effects of invoking an FM clause, which may be derived from the law or per the agreement by the parties, are as follows:
- Initially, only to delay performance by the impacted party for the duration of the FM event
- To seek a reduction in the price of the contract or in the consideration to which the other party is entitled
- To entitle the invoking party to terminate the contract entirely (usually after a specific time period has elapsed and the FM event continues)
4. What if a contract does not contain an FM clause?
The principle of autonomy of the will of the parties in civil and commercial matters means that the parties are free to agree on contract terms, as long as they do not contravene legal provisions or affect the public interest. If the parties did not agree to any covenants or clauses regarding FM, the relationship will be governed by statutory provisions and case law (jurisprudence). Under the statutory provisions found in Mexican law, the party invoking the FM event may suspend, defer, reduce or be released from its duties to perform, without liability.
The doctrine of frustration is not recognized under Mexican law. However, in some specific cases governed by the Mexico City Civil Code, a party may invoke the principle of rebus sic stantibus (“things thus standing”) to excuse its performance. Under this principle, when extraordinary national events that are not foreseeable and cause the obligations of one of the parties to be more onerous arise while the contract is in force, the affected party may attempt to recover the balance between the obligations, obtain a reduction on the price of the contract, or even cancel the obligation.
5. What can companies do to address FM rights (or risks) in the face of COVID-19?
- Be proactive and organized. Identifying and assessing agreements and your company's ability to meet its contractual obligations is essential. Review commercial contracts to assess what FM rights, remedies and requirements may apply if a party’s operations are disrupted.
- Obtain as much information as possible about any FM claim, documenting the timing, the number of impacted people/parts/facilities, and when the event is expected to conclude, as well as any mitigation efforts or efforts to comply with contract terms or to find other means by which to comply.
- Understand local regulatory actions and restrictions regarding public policy and public health, and monitor new regulatory actions taken in response to COVID-19 to determine if the company must act in a way that affects contractual commitments.
- Manage communications with counterparties, bearing in mind the importance of global coordination of what may be local relationships to ensure a company-wide, consistent approach.
- Consider the effect of an FM declaration in one commercial contract across other agreements and legal obligations. For instance, some financial agreements include representations regarding, or covenants to provide notice of, material events that could lead to litigation or anticipated loss outside of the ordinary course of business. Such events may also constitute an event of default in related agreements.
A proper assessment of the impact of the COVID-19 outbreak requires a fact-specific analysis of a company's business and contractual relationships. Management should proactively review with their in-house and outside counsel the rights and obligations provided in the company's commercial contracts, and under applicable law.