COVID-19 and Breach of Contract
The health emergency generated by the spread of COVID-19 has led different governments to take preventing measures aiming to stop the transmission of the virus in their territories. In Bolivia, the government ordered the total quarantine of the population as determined by Supreme Decree No. 4199 dated March 21, 2020, which provides in its Article 2, paragraph I:
“Article 2. – (Total Quarantine Declaration)
- In safeguard of life and health as fundamental rights of Bolivians, Total Quarantine is declared throughout the territory of the Plurinational State of Bolivia, from zero (0) hours on Sunday, March 22, 2020, until Saturday, April 4, 2020*, with the suspension of public and private activitiesin light of the national health emergency declaration against the transmission and spread of Coronavirus (COVID-19)”. [Added emphasis].
These determinations are adopted to adequately address the current situation generated by COVID-19. However, they also represent new legal circumstances that influence the fulfillment, or non-compliance, of contractual obligations.
These circumstances do not justify, by themselves, a failure to comply with the terms of a contract. To establish whether the current situation is a justified cause for non-compliance, the specific case must be assessed. The possibility that the pandemic and measures taken by governments are factors that influence contractual relationships depends on multiple factors such as:
- What type of contract is this?;
- Is there a clause that foresees this kind of situation?;
- Is there an alternative way to comply with contractual obligations?;
- What are the obligations regarding the communication of these circumstances?
For example, in some cases, these circumstances may result in the termination of the contractdue to supervening impossibility, in other cases, they justify a change in the term or schedule of compliance with obligations due to a cause of force majeure.
Bolivian jurisprudence, expressed in the Supreme Court of Justice Sentence No. 33/2015 of January 19, 2015, understands supervening impossibility and justified involuntary contract breach as “the insurmountable and unforeseeable obstacles presented after the contract signing, circumstances of “force majeure” and “act of God” that make it impossible to comply with the obligation, that is, when the person obliged does not comply with the obligation due to unforeseen reasons, unrelated to his will” [Added emphasis]. In other words, to claim the existence of an involuntary contract breach, it is necessary to prove that it is: i) an unforeseen event, ii) outside the will of the parties, and iii) that has occurred after the contract signing.
It is also possible for the parties to a contractual relationship to have agreedon a force majeure clause that determines aspects such as:
- What circumstances are considered force majeure (using a broad or restrictive definition). If the clause provides for a restrictive definition that does not specifically consider situations such as the ones created by the sanitary emergency, there may be differences among the parties as to the applicability of the clause.
- There may be a dutyto give notice of an event, in writing to the other party within a limited number of days, in which case the party that wishes to defer or stop contract compliance must act quickly and provide notice.
- The party claiming force majeure may need to take damage mitigation duties, and show that they tried to mitigate the damage caused by the unforeseen events.
In such cases, these clauses must be understood as an expression of the free will of the parties to the contract and, for the time being, Bolivian jurisprudence has not set limits on their contentand applicability.
We recommend that the decisions taken by the parties are always within the framework of contractual good faith. If one of the parties intends to invoke a circumstance of force majeure as a result of the current situation caused by COVID-19, the parties must respect any specificagreements between them and act diligently.
- Mar 26, 2020
- by Nina Leguizamon