Coronavirus' Impact on contracts under Mexican legislatio...

Coronavirus' Impact on contracts under Mexican legislation

The Supreme Court of Justice of the Nation (the “SCJN”) refers that “the parties may agree in their contract all those clauses that they deem appropriate, among which is the criminal clause, which consists of the early quantification of damages that may be caused by a breach of contract”.

Likewise, it mentions that there are exceptions in the application of penalties or payment of damages, in case of breach of contractual obligations. In addition, it also contemplates the causes in which some of the parties can be exempted from the fulfillment of their obligation and, therefore, from the conventional penalty. Being one of them the fortuitous cases or cases of force majeure.

The Federal Civil Code establishes that “the penalty may not be effective when the person obligated to it has not been able to fulfill the contract due to the creditor, acts of God or insurmountable force.”

Therefore, the party interested in the exclusion of the payment of a conventional penalty, derived from a contractual breach by fortuitous event or force majeure, must satisfy the following requirements:

    • Being external: That is, having a cause alien to the will of the bound.

    • Be insurmountable or irresistible: The cause of the breach must be insurmountable.

    • Be Inevitable: The cause for which the party failed to comply should be beyond its control.

    • Be unpredictable: The cause of the breach should have been unpredictable at the time of hiring.

    • In addition to the above, as a general principle of law the SCJN mentions that “no one is forced to the impossible”.

In the specific case of the COVID-19 pandemic, it is possible that this could be considered as a fortuitous and/or force majeure event. Therefore, in the event of a breach of a contractual obligation of any of the parties, the corresponding judicial authorities may consider that said party is not liable for damages or conventional penalties applicable to said breach.

To sum up, in the event that you are at risk or unable to comply with any of your contracts concluded with both suppliers and customers, we recommend reviewing these contracts to identify whether they are subject to the exception of unforeseen circumstances or force majeure.

The opinions expressed in this article are the sole responsibility of the author and don't necessarily represent the opinion of Grupo Consultor EFE™.

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