Impact of COVID-19 on Existing Legal Relationships

In Argentina, these measures include the closure of borders with the consequent suspension of international flights, the temporary suspension of long-haul flights and land transport, the suspension of artistic and sports events, the suspension of academic activities and international conferences and the suspension of school activities at all levels.

 

The impact that such events may have on existing legal relationships is recognized in every country’s legislation and case law.

 

The Argentine Civil and Commercial Code has specific provisions regarding the legal institutes that might be applicable in the face of a pandemic such as the one we are experiencing. Before reaching conclusions on the application of any of those institutes to a specific case, it is necessary to consider the facts of each case and, above all, to carefully examine the content of the contracts that may be involved.

 

The contracts usually contain waivers of unforeseeable circumstances and assumptions of unforeseen events; they also usually require the sending of communications within short periods of time denouncing the existence of any fact that may constitute an “unforeseeable event” or affect the balance between the parties of the contract.

 

Those clauses are generally fully effective, especially in contracts between parties that have equal or similar bargaining power. On the contrary, such clauses are usually rendered invalid when written in consumer contracts or in other situations in which there is a manifest imbalance of bargaining power between the parties.

 

It may be worthy to analyze whether the impact that COVID-19 has produced (or may produce) on current contractual relations could be included in any insurance coverage, so as to adopt the measures that may be relevant within the legal deadlines.

 

1. Fortuitous event or force majeure

 

This legal institute applies in case of an event that could not be foreseen or that, having been foreseen, could not be avoided. Under those circumstances, the obligation is extinguished without liability, unless otherwise provided in the contract (article 1730 of the Civil and Commercial Code). 

The application of this principle is not automatic to every contract. The following aspects should be considered in each particular case:

 

• The event must be objectively unpredictable and unavoidable. 

 

• The event must not be attributed to either of the parties. The debtor is not released if the obligation could have been fulfilled before the unforeseeable and unavoidable event occurred.

 

• The event must have taken place after the legal relationship that is affected by it.

 

• The event must render impossible the fulfillment of the obligation.

 

Both the pandemic itself and the measures taken by the government could be considered unpredictable, unavoidable and alien to the parties. So, if the legal relationship predates the outbreak of COVID-19 —and therefore the government measures that were taken in response to it— it would only be possible to analyze whether the event also rendered the fulfillment of the obligation impossible. The conclusion of such analysis would determine if the pandemic and the consequent measures qualify as fortuitous event.

 

It is clear that, in cases in which the government measures have prohibited certain activity or conduct, the parties would be unable to comply with their obligations. Such fulfillment would be impossible. In contrast, if the government measures do not imply the prohibition of the activity or conduct, the party must prove that the measures are sufficiently important so as to render impossible the fulfillment of the obligation.

 

Also, if the impossibility of performance is temporary, the obligation is extinguished only in case the time for the fulfillment of the obligation was essential to the parties, or in case the deferral irreversibly frustrates the creditor's interest.

 

The party alleging a fortuitous event or force majeure has the burden of proving precisely how the pandemic or the measures taken by the government affect the possibility of fulfilling the obligations that derive from the contract.

 

2. Theory of unforeseen events 

If the events caused by the pandemic or by government measures do not prevent the fulfillment of the obligation, the parties could not invoke the existence of a fortuitous event or force majeure. However, if such events turn the fulfillment of the obligation significantly more onerous, it would be possible to invoke the theory of “unforeseen events”, a theory contemplated in article 1091 of the Argentine Civil and Commercial Code.

 

That theory could be invoked in the context of commutative contracts, of deferred or permanent execution, in which the obligation undertaken by one of the parties becomes excessively onerous due to an extraordinary alteration of the circumstances (it is important to note that the alteration must meet the conditions already set out in relation to the fortuitous events: it must be objectively unpredictable and unavoidable; not be attributed to either of the parties; have taken place after the legal relationship that is affected by it; and render the fulfillment of the obligation impossible. Also, as in the case of fortuitous events, the theory of unforeseen events may not be invoked by a delinquent debtor).

 

The theory of unforeseen events would enable the debtor to request the total or partial cancellation of the contract or its adaptation. That party can make the claim out of court or through judicial channels. Although the Argentine Civil and Commercial Code does not expressly provide for it, we understand that a respondent party could also offer the adaptation of the contract.

 

3. Frustration of the purpose of the contract.

 

The Argentine Civil and Commercial Code also states that the frustration of the purpose of the contract may serve as a specific cause for the termination of a contract. The rule is new and has yet not been widely applied. It applies in case an abnormal, supervening event, that is beyond the will of the parties, precludes the fulfillment of the purpose of the contract. Once again, the Argentine Civil and Commercial Code requires that such frustration is not caused by the party that invokes it.

 

4. “Suspension of enforcement” and “preventive guardianship”.

 

The Argentine Civil and Commercial Code contemplates two additional legal remedies that, depending on the particularities of the case, could be applicable in the context of the global spread of COVID-19.

 

The first remedy, which will be referred as “suspension of enforcement” (article 1031), enables each party of the contract to suspend the fulfillment of the obligation until the other party fulfills (or offers to fulfill) the corresponding obligation. Such a suspension may be invoked in the case that one of the parties is unable to perform the obligation due to a permanent or temporary fortuitous event.

 

The second remedy, the “preventive guardianship” (article 1032), entitles a party to suspend the fulfillment of the obligation in case the other party has suffered a significant impairment that affects his or he ability to fulfill the obligation under the contract.

 

This "guardianship" is rooted in the “anticipatory breach of contract” and could operate not only in the face of the counterparty's insolvency but also in the face of significant impairment of his or her ability to fulfill the obligation. This remedy applies in a variety of factual situations, for example in the case of a fortuitous event that temporarily prevents the ability of one party of the contract to perform. For this reason, it is possible to keep the contract alive until such temporary impossibility disappears.