Energy and Commodities Outlook 2022

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Cross-border disputes have been – and will continue to be – significantly impacted by the COVID-19 pandemic. Companies face a broad range of legal concerns arising from or relating to the outbreak, including labor, regulatory, supply chain, and liquidity issues. Moreover, government responses to the pandemic and the economic fallout of the COVID-19 crisis have affected parties’ abilities to fulfill their contractual obligations. These challenges are becoming ever more complicated within the realm of cross-border business relationships given the variations in countries’ responses to the virus.

Force majeure: What happens when contractual obligations are impossible to carry out

Legal issues are particularly complex where cross-border contracts are involved. This is in no small measure due to differences in how the virus is impacting and being managed in countries throughout Latin America and other regions around the globe.

For example, Peru’s Public Procurement Supervisory Body in March 2020 decreed that the government’s emergency declaration due to the pandemic constituted force majeure with respect to public contracts. For those jurisdictions that did not issue similar declarations, COVID-related questions and challenges will require determination on a case-by-case basis. Absent a specific and applicable declaration – such as Peru’s – analyzing pandemic effects will required statutory and/or case-by-case contractual definitions of force majeure.

In Latin American, force majeure is frequently regulated by the applicable civil code found in a given jurisdiction and, as such, applicable contracts may not be required to specifically address all of the events that could come to constitute force majeure. Some jurisdictions, such as Argentina, Chile, Colombia, and Peru, explicitly define force majeure in their codes (see article 1730 of the Argentinian National and Civil Commercial Code, article 45 of the Chilean Civil Code, article 64 of the Colombian Civil Code, and article 1315 of the Peruvian Civil Code). Other jurisdictions, such as Mexico, do not. The basic elements of force majeure, however, are similar across jurisdictions – an unavoidable event outside of the parties’ control that cannot be foreseen or overcome.

Some Latin American jurisdictions have express provisions that allow for termination and/or adaptation of a contract resulting from changed circumstances. For example, Brazil’s Civil Code contains provisions that allow termination or adaptation of a contract due to “excessive” onerousness (see articles 478-480). The concept of “excessive onerousness” is broader and more permissive than “impracticability” under, say, the U.S. Uniform Commercial Code. Lawyers are now attempting to incorporate these types of provisions – regardless of their own respective legal system – into their contracts to expressly allow for the modification of contractual terms based on changed circumstances.

Key takeaways
  • The pandemic has created difficult legal issues, particularly in foreign trade
  • Application of civil law – prevalent in Latin America – may have serious implications in force majeure claims
  • Proactivity is required to defend against force majeure claims
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