I. Labor
The COVID-19 Resolution establishes that the private, public, and social sectors shall comply with the following measures:
- Individuals older than 65 or at risk of developing a serious illness and/or dying as a result of COVID-19, that are pregnant or nursing mothers, mothers of minors under 5 years of age, individuals who are disabled, suffer from a chronic non-contagious disease or have a suppressed immune system (represent Covered Employees) will enjoy full salary and benefits and shall not attend the work place, or public or crowded places.
- A temporary suspension of school activities until April 17, 2020.
- A temporary suspension of activities that involve the physical attendance, transit, or movement of people.
- An order that essential activities related to mitigation and risk control of COVID-19 including medical, financial, news, and telecommunication services, hotels, news services, gas stations, supermarkets and groceries, transportation services and utilities unless they entail confined and crowded spaces will continue.
- A temporary prohibition of events involving more than 100 people.
- An order to comply with basic hygiene measures.
- Other applicable measures that the Ministry of Health shall issue.
Although the Mexican Federal Labor Law (FLL) allows employees to "work from home" or remotely in any place freely chosen by the employee by registering the arrangement in the corresponding "Registry of Employees Working from Home" it is unlikely to apply to the current COVID-19 crisis given that this Registry is only for employees that work remotely year round.
The FLL does not describe the measures for temporary remote work (not even in the case of a disease such as COVID-19), and as long as the Mexican authorities do not issue a health contingency declaration that suspends the labor relationship, which has not yet occurred, for all non-Covered Employees the following scenarios may apply:
A. If work can be performed from home, the employer should agree in writing the guidelines with employees. As a practical matter, this could be achieved by incorporating such guidelines into the employer’s electronic internal policies requesting the electronic consent of employees;
B. Salaries may be reduced if working hours are also reduced, both parties are in agreement and there are no waivers of rights affecting employees;
C. If the work can not be performed from home, and the employer decides to close the workplace as a contingency measure, the employer shall continue paying full salary and benefits, unless an agreement to the contrary is reached with employees.
D. If certain employees are not able to perform work from home, they would need to go to the corresponding workplace.
If an employee is diagnosed with COVID-19 the employer shall suspend the existing labor relationship, and the Social Security Institute shall pay 60 percent of the employee’s salary for up to 78 weeks.
If the competent Mexican authorities issue a health contingency declaration that suspends the labor relationship, the employer must pay an indemnity equal to the minimum wage in force in the region where the work center is located for up to one month. The employer is not required to continue paying salary and benefits.
Action Guide
Mexico's Social Security Institute has issued certain work place measures that include issuance of an emergency plan that includes publishing preventive measures in the workplace, practicing social distancing, screened entries to the workplace, sending ill employees home, maintaining records of ill employees, sanitary cleaning of facilities, providing training, and identifying vulnerable employees among other measures.
II. Current Economic Scenario
Mexico's current economic situation has been complicated by the effects of COVID-19 in combination with lower production and falling oil prices. It is likely that Mexico will continue increasing political-economic policies and increasing austerity measures aimed at reducing its deficit (with the exception of key Administration projects, namely the Dos Bocas refinery and the Mayan train) and social programs. The Senate has approved, nearly unanimously, constitutional changes to include social programs in the Constitution and create a health and education system for vulnerable groups.
Some mitigating measures that Mexico may attempt to bring to bear to cope with this economic crisis could include:
- 7 billion USD left in the stabilization fund to cope with economic challenges.
- Oil hedging to protect federal government revenues – however these funds may only be used at year end after netting out the average price of oil for the year; as such, this could result in significant cash flow issues.
- Federal reserves at the Central Bank of Mexico for 80 billion USD.
- IMF credit line of 61 billion USD; although the federal government does not want to increase debt so this option may not be pursued in the short term; and
- Reallocation of the federal budget. We expect the fiscal package in April to adjust fiscal target expectations for 2020.
III. Civil
The current economic downturn is likely to result in additional disputes where the parties may be more inclined to argue force majeure, impossibility or changed circumstances in order to justify noncompliance with certain contractual obligations.
Companies will want to consider auditing existing contracts to review terms and conditions with clients, suppliers, partners, contractors and subcontractors. Absent applicable contractual force majeure provisions, where Mexican law applies to a commercial transaction, Article 2111 of the Federal Civil Code (described below) would likely apply; alternatively, the Civil Codes of different states may be applicable to a given commercial relationship.
Absent existing contractual language, force majeure claims may exist but will require a fact intensive and case-by-case analysis.
Parties under Mexican law are, in general, free to choose the governing law applicable to their contractual arrangement. If the relevant contract does not provide for a specific choice of law, the applicable law will be the law where the contract is performed. In case of real estate, the applicable law would be that of the location of the real estate in question.
Force Majeure
Article 2111 of the Federal Civil Code sets forth the elements of a force majeure event. No person is required to comply with an obligation where there is a force majeure event, unless such person caused or contributed to the event, has agreed to be obligated during such event, or where the law expressly imposes such duty.
Impossibility
Mexican law, jurisprudence, and doctrine have recognized the rule of ad impossibilia nemo tenetur (“no one is bound to the impossible”).
An example of this principle under Mexican law is found in Article 1847 of the Federal Civil Code, which provides for non-enforceability of liquidated damages when the obligated party has not been able to comply with the obligation because it became impossible - among other issues - due to force majeure. There are judicial precedents that have determined that this rule is applicable even if some laws do not expressly regulate it.
Unpredictability theory
Some states have chosen to adopt the "unpredictability theory" (teoría de la imprevisión), according to which contractual obligations may be extinguished or modified as a consequence of a substantial change in the conditions under which they were assumed.
Articles 1796, 1796 Bis and 1796 Ter of Mexico City’s Civil Code provide that when "extraordinary, unforeseeable events of a national nature" arise during the performance of a contract, causing the obligation of one of the parties to become more onerous, such a party may request the modification of an underlying contract in order to reestablish the balance between obligations, within thirty calendar days after the extraordinary events occurred, and articulating the reasons for the request.
In the event that parties fail to reach an agreement within thirty calendar days after the receipt of the request, the applicant may, within the subsequent thirty calendar days, request judicial intervention to settle the dispute, seeking either modification of existing contractual obligations in order to restore the original balance of the contract, or seeking its termination. Both of these alternatives will only apply to obligations due after the extraordinary event occurred.
It is important to highlight that the unpredictability theory is not applicable in commercial matters and only applies to civil matters in certain states such as Mexico City, Aguascalientes, Coahuila, Guanajuato, Jalisco, San Luis Potosi, Sinaloa and Tamaulipas which expressly incorporate and adopt this theory.
The United States and Mexico recently closed the border to all nonessential travel by road in an effort to curb the spread of COVID-19. Corresponding authorities may impose further restrictions that could impact foreign trade. To the extent they have not already done so, companies should explore additional delivery and logistical alternatives to attempt to mitigate future additional transportation restrictions and/or disruptions.
IV. Liability for transmission of COVID-19
If someone knowingly and willfully transmits a contagious disease such person may be liable for damages and, moreover, may be subject to criminal liability.
Depending on the specific circumstances, employers may be shielded from liability where employees were to fall ill in the workplace due to COVID-19 because COVID-19 is likely to be considered a general disease rather than a work-related disease.
V. Mexico City
The government of Mexico City has ordered the temporary closure of the following establishments from March 23, 2020 until April 16, 2020:
Museums, gyms, churches, cinemas and theaters, zoos, sports arenas and stadiums, nightclubs, bars, as well as private and public events involving more than 50 people.
The government of Mexico City has pledged to create economic programs to help support employees it deems as vulnerable, and micro businesses.
VI. Courts and Tribunals
Several government and jurisdictional agencies at the federal, state and municipal levels, have agreed to suspend legal terms and declare non-working days. Some key authorities include:
The Supreme Court (Suprema Corte de Justicia de la Nación) has suspended activities from March 18 through the April 19, 2020 a period during which no hearings will be held and it will only entertain constitutional controversies of an urgent nature that require suspension of an act.
The Federal Judicial Council has suspended activities for all tribunals and courts from March 18, 2020 through April 19, 2020, except for urgent activities as determined by applicable regulations.
The Federal Administrative Justice Court has suspended activities for all of its chambers from March 18, 2020 through April 19, 2020.
The Mexico City Judicial Council has suspended activities from March 18, 2020 through April 20, 2020, during which time where no procedural terms will run, except for criminal matters.
The Mexico City Administrative Justice Tribunal has suspended activities from March 18, 2020 through April 17, 2020, resuming activities on April 20, 2020 with the exception of injunctions, which will remain available.
VII. Financial Institutions
On March 25, 2020 the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) issued certain general accounting guidelines for financial institutions granting relief to personal and commercial loans in effect as of February 28, 2020.
It is important for issuers in the stock market to be aware they may be required to publish the impact of COVID-19 as a relevant event and may be subject to other specific regulations.
VIII. Conclusions and Outlook
It is likely that Mexico's federal government has not suspended labor relationships for fear that the current health crisis (and its possible protracted nature) could have a severe economic impact on all workers.
The Mexican Bar Association (BMA) and the National Association of Corporate Counsel (ANADE) have issued statements considering that the labor relationship between employer and employees, resulting from the health contingency declaration, has not been suspended although some labor attorneys have attempted to advance an alternative interpretation arguing that employers are to grant indemnity to employees for up to one month of minimum wages.
The COVID Resolution is already subject to varying interpretations given potential textual ambiguities and the fact that articles 42 Bis (health contingency declaration) and 429 section IV (indemnity) have not been interpreted by the courts given their recent addition to the FLL in 2012, as a result of the H1N1 flu virus.
Despite the imminent economic downturn in Mexico, we believe the energy industry will continue to be a priority for the current Federal Administration along with the Dos Bocas refinery and the Mayan train.
We expect additional relief measures and social programs to be unveiled very soon. Bailouts to large companies, however, are highly unlikely; it is more likely that governmental focus will be aimed at helping microbusiness and small companies mitigate the economic hardship. We will continue to monitor this very fluid and dynamic situation, including the much anticipated and expected energy program expected to be unveiled in the next few days aimed at providing job creation and infrastructure incentives for the energy sector.
Client Alert 2020-163
