FORCE MAJEURE AND THE THEORY OF THE UNPREDICTABLE WITH REGARD TO COMMERCIAL CONTRACTS IN MEXICO November 2020

I. INTRODUCTION.

The current Covid 19 pandemic has lasted more than anyone had expected and in many countries there is again a partial or total shutdown of the economic activity. In view of this "accordion" situation in which the economy opens and closes derived from an intermittent Force Majeure event dragged on in time, it is important to consider again the impacts that this peculiar event is causing to commercial contracts. This situation would have already caused a general breach of contracts had many of them not been freely renegotiated by the parties in good faith. In any event, the unprecedented Force Majeure event and its consequences has resulted for some in the impossibility to fulfill their contractual obligations and for others, in a higher difficulty and extra cost to meet them. 

II. FORCE MAJEURE RELATED TO COMMERCIAL CONTRACTS.

Force Majeure events are those unforeseeable, unavoidable, insurmountable, beyond the control of the parties, caused by nature or by acts of man, which make it impossible for a party to fulfill an obligation. The Force Majeure principle applies to all areas of Law and goes hand in hand with the general principle of Law that no one is obliged to do the impossible.

The principal rule on Force Majeure in Mexico is set forth in article 2111 of the Federal Civil Code, which establishes that "no one is obligated to a fortuitous event except when they have contributed to it, have expressly accepted that responsibility, or when the Law imposes it." Likewise, article 1847 of the Federal Civil Code, in its relevant part, provides that a penalty may not be enforced when a party obligated to it has not been able to fulfill the contract due to a fortuitous event or insurmountable force. In turn, article 2 of the Commercial Code establishes that "in the absence of provisions of this ordinance and the other commercial laws, those contained in the Civil Code applicable in federal matters shall be applicable to commercial acts." Thus, the Federal Civil Code is suppletory to the Commercial Code for commercial acts not provided for in the Commercial Code. Therefore, the afore mentioned Force Majeure articles set forth in the Federal Civil Code apply in a suppletory manner to commercial contracts.

In relation to the consequences of the Force Majeure, it is necessary to analyze case by case if the contracts are unilateral, bilateral, of giving, of doing or not doing something.

III. THE "PACTA SUNT SERVANDA" PRINCIPLE.

"Pacta sunt servanda" means that contracts must be fulfilled by the parties according to their terms agreed, irrespective of the variations of the circumstances surrounding them. The "pacta sunt servanda" principle is reflected by the Mexican legislation in article 1796 of the Federal Civil Code.  Furthermore, article 385 of the Commercial Code, in its relevant parts, establishes that commercial sales shall not be terminated due to injury (i.e. unpredictable harm). Even though the aforementioned article refers specifically to commercial sales, it gives a sound hint as to the spirit of the Commercial Code which supports the "pacta sunt servanda" principle and rejects the Theory of the Unpredictable or "rebus sic stantibus". 

So, the soul of contracts which is that they shall be fulfilled by the parties no matter of the changing circumstances is protected by the commercial legislation in Mexico. Nevertheless, the question arises if such "changing circumstances" may be unlimited or if there is a boundary where the judicial power would need to intervene to re-balance the obligations of a certain contract on request of the affected party, in prejudice of the legal certainty which contracts are to provide.

IV. THE THEORY OF THE UNPREDICTABLE (REBUS SIC STANTIBUS) WITH REGARD TO COMMERCIAL CONTRACTS.

Rebuc sic stantibus means "things being like this". The Theory of the Unpredictable or rebuc sic stantibus applies when, derived from an unforeseen event, obligations may be still be fulfilled but have turned much more onerous for one of the parties, unlike the Force Majeure principle which applies where obligations have turned impossible to be complied with. From ancient Rome to date there are jurists who have defended the principle of rebus sic stantibus. This theory has had more or less relevance depending on the different circumstances of history. It applies to long lasting or successive tract contracts; the drastic change in circumstances needs to be at a national level, generalized and objective; the contract at stake must have turned excessively onerous for one of the parties due to such material change in circumstances. For instance, a country's economic fluctuations are not a triggering cause for this principle. The affected party may judicially trigger the renegotiation of the contract at stake to re-balance the obligations or may alternatively terminate it.

The civil codes of some important entities in Mexico such as Jalisco and Mexico City expressly contain the Theory of the Unpredictable. Such local civil codes adopted the principle after the H1N1 pandemic back in 2009 under which the economic activity in Mexico shut down for a short period of time. It is possible that after this 2020 pandemic further legislative actions could follow this path.

Currently, the parties to commercial contracts may agree to a scheme similar to the Theory of the Unpredictable by including provisions for the exclusion or decrease of responsibility or for a right to re-negotiate under certain events which make obligations much more onerous for one of them.

The criteria of the courts in Mexico have been closed and resistant to accepting the Theory of Unpredictability in commercial matters in favor of the "pacta sunt servanda" principle. However, there are arguments and general principles of Law, such as those of Fairness and Good Faith that would make it possible to defend an implicit existence of the spirit of the Theory of Unpredictability in commercial contracts.

V. APPLICABILITY OF THE GENERAL PRINCIPLES OF LAW TO COMMERCIAL CONTRACTS.

Even though there is no express provision in the Federal Civil Code or in the Commercial Code regarding the Theory of the Unpredictable, nothing prevents invoking the general principles of Law, especially those of Equity and Good Faith in the interpretation of commercial contracts. In this regard the "pacta sunt servanda" principle reflected in article 1796 of the Federal Civil Code, in its relevant parts, provides that contracts oblige the contracting parties, not only to comply with what is expressly agreed, but also to the consequences that, as per their nature, are in accordance with the good faith, the uses or the Law. According to the foregoing, even if contracts shall be fulfilled according to what they expressly provide, the element of good faith plays an essential role both, in their fulfillment and in their interpretation.

The applicability of the general principles of Law (in absence of a legal provision) in the civil order is based on article 14 of the Constitution, which mentions that in civil court trials, the final judgment shall be in accordance with the literal or legal interpretation of the Law and, in the absence of this, shall be based on the general principles of Law. The applicability of these principles in the commercial sphere (in absence of a legal provision) is also based on article 1,324 of the Commercial Code, which provides that judicial awards shall be based on the Law, and if neither by the natural sense, nor by the spirit thereof, the controversy may be solved, the general principles of Law shall be addressed, taking into consideration all the circumstances of the case. Furthermore, article 20 of the Federal Civil Code (which is suppletory to the Commercial Code) establishes that "whenever there is a conflict of rights, in the absence of an applicable law, the controversy shall be decided in favor of the party who tries to avoid damages and not in favor of the one who intends to obtain profit."

VI. IN PRACTICE.

In front of an unforeseen event of the dimensions of the pandemic at stake (or a black swan in business terms), the reality may overcome the legal system. In many cases, given a shutdown of the courts during the first weeks or months of the contingency, people and companies have had to renegotiate in good faith their impaired contracts in order to save their commercial relationships irrespective of the "pacta sunt servanda" principle or the applicability or not of a Theory of the Unpredictable. In many cases, lawyers have served as mediators to achieve these renegotiations based on equity and good faith. Moreover, even when the courts may have re-opened, they must now deal with a bulk of cases which have piled up during the contingency period. In such a situation, the alternative methods for the solution of controversies, such as mediation, have proven to be an excellent aid for the parties in the re-negotiation of contracts or the solving of controversies.

VII. CONCLUSION.

1. The current pandemic will continue to push the legal system to its limits. It is possible that the Theory of the Unpredictable as applicable to contracts may revive in some jurisdictions derived from it.

2. The "pacta sunt servanda" principle provides legal certainty to the parties to commercial contracts by knowing that what they have agreed will stay no matter of the changing circumstances. Is it then advisable to allow the courts to interfere in such agreements whenever the circumstances have changed drastically? Who would decide the threshold for a "drastic" change?

3. According to the Law, the principle of Good Faith is inherent to the performance and interpretation of contracts in Mexico, irrespective of the "pacta sunt servanda" principle. 

4. To allocate the consequences of a Force Majeure event it is necessary to analyze the specific case and the type of contract at stake.

5. The alternative methods for the solution of controversies have proven to be of great help to the parties and the courts for the re-negotiation of contracts or the solving of controversies in these challenging times.

6. To avoid confusion, it is highly advisable for the parties to include a sound Force Majeure provision in their contracts regulating in detail which events are to be considered as such and their consequences, suspension of the agreement, time extension, which party shall bear the risk and extra costs, the need for the affected party to mitigate the consequences, the time period after which the agreement may be terminated, notification periods, etc. The parties may also include another provision regarding unforeseeable events which, while not impeding the fulfillment of obligations, make them more onerous, as well as their agreed solutions. Sound contractual provisions covering in detail Force Majeure and unpredictable events may save a lot of time and stress to the parties in circumstances such as the current ones.