Over the last few days, the COVID-19 pandemic has impacted day-to-day activities and many businesses across Mexico. Even though restrictions and limitations in Mexico have been mainly self-imposed as precautionary measures up to this point, impacts on contractual obligations and businesses’ ability to perform are equally real.

Clients across many industries are concerned about their ability and that of their counterparts to perform their statutory and contractual obligations.

On March 19, 2020, the General Health Council (Consejo de Salubridad General) (“CSG” for its acronym in Spanish) of the Mexican Government convened to declare the disease caused by the virus SARS-CoV2 as a serious disease that requires priority attention. This decision by the CSG was published in the Federal Register (Diario Oficial de la Federación) (“DOF”) on March 23, 2020.

As a consequence of the first CSG meeting and the aforementioned publication, many agencies across the federal government have formally suspended activities (at least partially). Moreover, this declaration authorizes the Ministry of Health (Secretaria de Salud) to establish any “necessary measures” to protect the Mexican population.

Accordingly, on March 24, 2020, the Ministry of Health issued the first General Order establishing the preventive measures to mitigate and control health risks arising from the SARS-CoV2 virus (COVID-19). In accordance with the General Health Law (Ley General de Salud), and the Executive Branch has also endorsed these measures.

The preventive measures that have been dictated for the public and private sectors include but are not limited to:

1. For persons at risk of developing a serious disease or dying from it (who are entitled to a paid leave), avoid physically attending  workplaces, public spaces and other crowded areas. These persons include, among others, pregnant or nursing women, children under the age of 5, disabled individuals or persons with chronic diseases;
2. Temporarily suspend all school activities until April 17, 2020;
3. Temporarily suspend all activities that entail physical concentration, transit or displacement of people until April 19, 2020.
   
   For the private sector, those businesses, companies, commercial establishments and all other enterprises that are “necessary to face the contingency”, including but not limited to hospitals, clinics, pharmacies, laboratories, medical, financial, telecom, and media services, restaurants, gasoline stations, markets, supermarkets, small grocery stores, gas distribution and transportation may continue to operate provided they are not carried out in confined and crowded spaces.
   
   Labor relationships shall be maintained and be enforced in accordance with the relevant individual or collective labor agreements, law-based contracts and/or general working conditions during the term of the Order pursuant to the Federal Labor Law (Ley Federal del Trabajo) and other applicable laws and regulations; and
4. Temporarily suspend, until further notice, massive events and gatherings of more than 100 people.

In this context and given the decreed restrictions, businesses and companies are required to determine whether the law or contracts excuse them from performing their obligations on the basis of an act of God or force majeure (caso fortuito o fuerza mayor) event or, in some cases, whether they could seek to balance obligations under a contract as a result of the occurrence of unforeseeable extraordinary circumstances which may have caused the performance of obligations more onerous for them (the rebus sic stantibus clause also known as the theory of unpredictability).

Below we briefly examine both theories and provide our thoughts about their application in the context of the COVID-19 pandemic.

I. Force Majeure

Under Mexican law, a party may be excused from performing certain obligations upon the occurrence of an act of God or force majeure. Although there is no statutory definition for these concepts, court precedents and doctrine have essentially defined act of God or force majeure as an unpredictable or unavoidable event that prevents a party from performing an obligation.

In Mexico, the parties to a contract are free to agree and establish a definition for acts of God or force majeure, the procedure to invoke it, and the extent to which such exculpatory provision will excuse a party from performing its obligations. In the absence of such exculpatory clause, both federal and local civil legislations regulate acts of God or force majeure events.

Mexican courts have determined that an act of God or force majeure event shall satisfy the following test: (i) it is caused by natural phenomenon or through the action of men, but is otherwise unrelated to the obligated party, (ii) it prevents the obligated party from performing (in whole or in part) on a temporary or definitive basis, (iii) it is unforeseeable or, even if foreseeable it is unavoidable, and (iv) has a general nature (i.e. performance is impossible to any person and not just the obligated party).

II. Rebus Sic Stantibus

This theory of unpredictability is only accepted by some local jurisdictions in Mexico. Unlike the exculpatory nature of the act of God or force majeure clause or provision, the rebus sic stantibus clause is a remedy that the affected party may invoke in order to balance the obligations under a contract when unforeseeable events not caused or controlled by the affected party have made performance of its obligations substantially more onerous.

In the case of Mexico City, Article 1796 of the Civil Code for Mexico City establishes that in the case of contracts subject to term, condition or continuous performance (tracto sucesivo), in the case of “extraordinary events of a national nature that could not have been foreseen” which entail that the obligations of one of the parties become more onerous, such affected party may seek to restore the balance of the parties’ obligations under the relevant contract.

This same theory is applicable in other local jurisdictions in Mexico. The choice of law provisions and specific characteristics of each contract will determine whether a party may avail itself of this theory as a remedy to affectations by the COVID-19 pandemic.

III.  COVID-19

How can business and clients reconcile the concepts discussed above within the context of the COVID-19 pandemic in Mexico?

Although most contracts contain a force majeure clause/provision which typically sets out the procedure and requirements to invoke an act of God or force majeure event, a common element for these types of provisions is the requirement to properly document and support the relevant claim. Reports, statements and official publications by the Mexican government (see above), the World Health Organization and other agencies are useful for these purposes.

Whether performance is affected or prevented by the mere occurrence of COVID-19 is a matter to be analyzed on a case by case basis considering, among others, the scope of the contract and unperformed obligations. To the extent possible, it is advisable to gather all possible evidence of the direct and specific effects of  the COVID-19 pandemic (or the preventive measures dictated by the governmental authorities) over the parties’ ability to perform their obligations, because this part of the elements that need to be evidenced in an act of God or force majeure claim – this should also include documentation related to performance of subcontractors. This, of course, becomes even more important for cross-border transactions with counterparties based at countries where strong quarantine measures were adopted for the COVID-19 crisis.

A key issue in all of this is to determine when the affected party becomes aware (or should have been aware) about the occurrence of the act of God or force majeure event. Most contracts establish deadlines to notify/invoke the occurrence of an act of God or force majeure event; failure to notify such occurrence may result in the forfeiture of the contractual remedy. Thus, learning and understanding the effects of official publications/notices by the Ministry of Health, the CSG and other Mexican authorities (sector regulators) become especially important.

In the context of government contracts (e.g. contracts for the exploration and extraction of hydrocarbons) companies and businesses should be aware that previous acts of God or force majeure cases may provide guidance on how a specific governmental authority would handle the specific case.

On the other hand, with respect to potential liabilities as a result of acts or omissions of the Mexican State, stemming from its administrative activities, it is important to point out that recent court precedents have excused administrative authorities and agencies from liabilities when the administrative irregularity derives from acts of God or force majeure. This may apply for administrative processes related to applications for permits or other governmental authorizations.

Considering that the Mexican government has mentioned that additional measures/steps to protect the health of the population will be decreed in the following days/weeks, performance of most contracts will be impacted one way or another. Thus, understanding and properly managing acts of God or force majeure events is critical to minimize liability and potential claims.

In the context of labor, you should be aware that the Federal Labor Law (Ley Federal del Trabajo) and other regulations (including the Order by the Ministry of Health) establish specific rules regarding payment of wages, medical leaves and potential suspension and/or termination of existing labor relationships.