There is general consensus that the outbreak of the coronavirus disease 2019 (COVID-19) has developed into a global threat. On March 11, 2020, the Word Health Organization declared the COVID-19 outbreak a global pandemic, as the number of countries with cases of the viral disease increased, and various governments have responded with isolation, quarantines or compulsory vaccination.
Venezuela is no exception. On March 12, 2020, the Maduro Government declared the Venezuelan health system in emergency, suspended for a month public gatherings and flights from Europe and Colombia to Venezuela to combat the COVID-19. On March 13, the Venezuelan government suspended all activities, and on March 16, decreed quarantine regions of the country, including the city of Caracas. On March 17, a nationwide quarantine was ordered after detecting new cases of COVID-19.
Decree No. 4,160 of March 13, 2020, published in the Special Official Gazette No. 6,519, declared the State of Alarm throughout the national territory due to COVID-19. Based on this Decree, the National Executive ordered: (i) the suspension of activities throughout the country (including commercial flights), with the exceptions related to certain sectors (e.g., pharmaceutical, telecommunications and social media, electricity, water, gas, fuels, and transport only for the acquisitions of basic goods); and (ii) a social quarantine subject to the aforementioned exceptions.
The impact of the global pandemic has caused important disruptions for business including closure of worksplaces, cancellation of travels and commercial operations. As a result, some companies could consider that the outbreak constitutes a force majeure event to excuse delay or non-performance of obligations.
In this alert, we provide the following comments regarding the possibility to consider the COVID-19 as a case of force majeure from a Venezuelan law standpoint.
Force Majeure under Venezuelan law
Force majeure refers to circumstances beyond the parties’ control that can render contractual performance impossible. Besides the impossibility to fulfill their obligations, such circumstances must be unforeseeable (at the time of entering into the contract by the parties), unavoidable in terms of occurrence or impact and subsequent to the emergence of the obligations. The key elements of force majeure are the unforeseeable and unavoidable circumstances that prevent one or more parties from fulfilling their obligations under agreements, and further provided that such circumstances are not imputable to any party.
As a preliminary remark, in order to determine if COVID-19 could be considered as a force majeure event, the parties must first confirm what is the governing law of the relevant contract. Determining whether an event is a force majeure involves applying the objective test found in the relevant law and/ or written in the contract. If the governing law is Venezuelan law, then the obligations set forth in the agreement must be fulfilled according to Venezuelan contractual principles. Venezuelan law will also govern the non-compliance of such obligations.
From a Venezuelan legal standpoint, force majeure is generally governed by the Civil Code (Articles 1271 and 1272) and the relevant provisions set forth in the relevant agreement. Moreover, Venezuelan case law also suggests that international commercial contracts should be broadly interpreted according not only to legal standards but also to economic and financial criteria. In this sense and according to Venezuelan private international law rules, the UNIDROIT Principles for International Commercial Contracts 2016 (UNIDROIT Principles) may be applicable (Articles 1 and 31 of the Venezuelan Act on Private International Law). According to Venezuelan scholars, the UNIDROIT Principles supplement domestic rules on contracts.
The UNIDROIT Principles establish in their section on force majeure, Article 7.1.7, the following:
- Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
- When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.
- The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.
- Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.
According to the commentaries on the UNIDROIT Principles, Article 7.1.7 does not restrict the rights of the party who has not received performance to terminate the contract if the non-performance is material or fundamental. What it does do, where it applies, is to excuse the non-performing party from liability in damages. In some cases, the impediment will prevent any performance at all but in many others it will simply delay performance and the effect of the article will be to give extra time for performance. It should be noted that in this event the extra time may be greater (or less) than the length of the interruption because the crucial question will be what is the effect of the interruption on the progress of the contract. The definition of force majeure in paragraph (i) of Article 7.1.7 is general so the parties may therefore find it appropriate to adapt the content of such article taking into account the particular features of the specific transaction.
The parties to a contract can define the scope of what should be considered force majeure for purposes of their agreement. Situations when the law authorizes the early termination of an agreement are, for example, when a party fails to fulfill its obligations under the agreement, or when a party is unable to fulfill its obligations under the agreement due to unforeseen circumstances or a force majeure event.
Force majeure clauses typically provide a list of specific events outside of the contracting parties’ control that, upon occurrence, would excuse or delay the invoking party’s performance, or permit the cancellation of the contract, without liability. Depending on the drafting, if the event, or potentially one of multiple events, causing the non-performance is excluded, force majeure event remedies may be precluded. The parties will often use this type of drafting to allocate risk to the affected party of events, which are outside their control and might otherwise technically meet the definition of a force majeure event but are generally seen as attendant risks of doing business (risk allocation provisions or pactum de non praestando casus).
Where an event conforms a force majeure scenario, the party invoking it may suspend, defer, or be released from its duties to perform, without liability. Depending on the nature of the obligation, the force majeure event does not excuse the non-performance of an obligation entirely or permanently. In such case, the obligation is suspended only for the duration of such event.
Force Majeure and COVID-19
In the event that the parties of a contract disagree as to whether COVID-19 constitutes a force majeure event, it will ultimately be up to a Venezuelan court (if they have jurisdiction), a foreign court (if they have jurisdiction) or arbitral tribunal (if applicable) to decide the parties’ rights and obligations according to the contract' s governing law. The application of force majeure is an issue of contract interpretation and application of Venezuelan contract law principles.
COVID-19 may be considered as a potential force majeure event under Venezuelan law. However, this will depend on the nature of the obligations agreed between the parties and it should be reviewed on a case-by-case basis.
Alternative Theories to Force Majeure
Besides the force majeure or act of god provisions, there are other theories under Venezuelan law that may excuse non-performance of obligations in a COVID-19 situation.
- The “frustration of the purpose of the contract" theory, which may be invoked to excuse contract performance under certain circumstances.
- The "Hecho del Príncipe" theory (Factum principis) refers to all those measures taken by the State for general public interest that must be observed by the parties and cause a breach of their duties. The same elements for a force majeure event apply. It is important to bear in mind that COVID-19 is not per
se a case of Hecho de Príncipe but the measures implemented by the Venezuelan authorities to combat the COVID-19. The key element is that such measures preclude the party to fulfill its obligations.
The theory of "Imprevisión". This is particularly relevant in case of long-term contracts. This theory refers to “non-compliance due to the fundamental change or alteration of circumstances” or extreme difficulty in the fulfillment of an obligation. In this case, there is no impossibility of complying with the obligations but there is a great difficulty in its execution due to unreasonable hardship. The change of the circumstances turns out the agreement unduly burdensome for one or more parties. The key elements for the application of this theory are that such circumstances must (i) turn out the performance of obligations extremely difficult (not impossible), (ii) occur after the execution of the contract, (iii) be unforeseen, (iv) beyond parties' control, and (v) cannot be avoided.
This theory is akin to the theory of “hardship” as received in the UNIDROIT Principles, and is based on the principles of contractual balance, justice and good faith and despite it is not expressly provided in the Venezuelan Civil Code, courts and scholars discuss its applicability to contracts.
Article 6.2.2 of the UNIDROIT Principles defines hardship as follows:
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and
- the events occur or become known to the disadvantaged party after the conclusion of the contract;
- the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
- the events are beyond the control of the disadvantaged party; and
- the risk of the events was not assumed by the disadvantaged party.
Considering the above, hardship is a situation where the occurrence of events fundamentally alters the equilibrium of the contract, provided that those events meet the requirements which are laid down in sub-paragraphs (a) to (d). According to the UNIDROIT Principles a fundamental alteration in the equilibrium of the contract may manifest itself in two different but related ways. The first is characterised by a substantial increase in the cost for one party of performing its obligation. This party will normally be the one who is to perform the non-monetary obligation. The substantial increase in the cost may, for instance, be due to a dramatic rise in the price of the raw materials necessary for the production of the goods or the rendering of the services, or to the introduction of new safety regulations requiring far more expensive production procedures.
Sometimes the change in circumstances is gradual, but the final result of those gradual changes may constitute a case of hardship. If the change began before the contract was concluded, hardship will not arise unless the pace of change increases dramatically during the life of the contract.
Under the UNIDROIT Principles, hardship can only become of relevance with respect to performances still to be rendered; once a party has performed, he/she is no longer entitled to invoke a substantial increase in the costs of its performance or a substantial decrease in the value of the performance he/she receives as a consequence of a change in circumstances which occurs after such performance.
As in the force majeure situation, the application of the hardship theory will depend on the particular features of the specific transaction.
People' s Republic of China (PRC) law perspective
Numerous force majeure claims involving a Chinese buyer or supplier have already been reported in the world media and it seems likely that claims with a wider ambit will follow as the ripple effects of the outbreak spread globally. From a PRC law perspective, force majeure exists as a doctrine under Article 180 of the General Rules on the Civil Law and Articles 117 and 118 of the PRC Contract Law. The regime applies automatically to commercial contracts governed by PRC law where the contract contains no force majeure provisions. Force majeure remedies under the Contract Law are (i) the affected party is excused from civil liability, including damages, in relation to its non-performance (or delay); and (ii) either party may terminate the contract where the essential purpose of the contract cannot be realised as a result of the event of force majeure.
While not expressed in the Contract Law, decisions of the PRC courts in the wake of the 2003 SARS outbreak demonstrate a willingness by the courts to also grant modification of the contract terms, though under a different doctrine. This doctrine offers the possibility to obtain a "Force Majeure" Certificate issued by the China Council for the Promotion of International Trade (CCPIT), a quasi government entity, to help companies deal with disputes with foreign trading partners arising from government control measures. To date, it has been reported that thousands of certificates have been issued purporting to shield Chinese companies against liabilities for non-performance. The effects of these certificates on contracts will depend on the different governing laws that may apply.
The purpose of these certificates is to facilitate the invoking of force majeure remedies where the contract requires the provision of such a certificate issued by a relevant government authority as a prerequisite to the bringing of the force majeure claim. Such certificates will not be binding on PRC courts either as to the existence of the relevant force majeure event or the effect of the event on the affected party's non-performance. Our colleagues from China do not recommend relying on them alone as a virtual shield against liability as implied in several media reports.
COVID-19: What companies can do
Considering the undeniable consequences of the COVID-19 and is classification as a potential force majeure event, companies should take actions to mitigate their risk (or maximize their rights) and to prepare for interruption to their operations or those of their suppliers/commercial contract counterparties.
- Review commercial contracts to assess what force majeure rights, remedies and requirements may apply if a party’s operations are disrupted. For example, some force majeure clauses require the delivery of a notice to the other party to terminate the agreement for non-performance.
- Find other alternatives by which to perform with their contractual obligations. If it is not possible, document efforts exhausting all the means by which to comply.
- Obtain and retain as much information as possible about the impact that a termination based on a force majeure event may have, documenting the relevant aspects to evidence the same.
- Review and follow-up local and international regulatory actions and restrictions - regarding public policies implemented in response to the COVID-19, to determine the course of action to be followed in each case.
We ratify that this matter should be reviewed on a case-by-case basis. The impact of the COVID-19 requires a fact-specific analysis of a company's business and contractual relationships.
To comply with the measures taken by authorities given the COVID-19 pandemic crisis, we are now working remotely. Our commitment is to keep servicing our clients whilst keeping our attorneys and personnel safe during this complex situation. Rest assure that we are providing our services in our customary and diligent way.
Should you have any comments or questions, please do not hesitate to contact us.
Prepared by: Eugenio Hernández-Bretón and Marie Roschelle Quintero, with the input from Baker McKenzie, PRC