Application of the concepts of fortuitous event and force majeure, as a consequence of COVID-19, in the oil contractual framework.

Following the declaration of a Coronavirus pandemic (COVID-19) by the World Health Organization on March 11, it is currently being questioned whether it is possible to consider the COVID-19 epidemic as an event of "fortuitous event or force majeure", and thus justify the breach of contractual obligations without any liability for the obligor.

In this article, we set out various legal and contractual considerations in relation to this question.

First, it is necessary to know the scope of the concepts of fortuitous event and force majeure, which are regulated in Mexican law and in criteria issued by the courts. There are situations in which the debtor cannot be held responsible for the non-performance of an obligation because he is prevented from doing so by an event beyond his control that he could not foresee or even prevent. Such events are generally referred to as "fortuitous event or force majeure", and a distinction is generally made between three categories, namely: (a) those generated by events of nature; (b) those generated by acts of man; and (c) those resulting from acts of authority.

It should be noted that, in Mexican Law, the legislator uses the words "fortuitous event or force majeure", as concepts that produce identical consequences; therefore, only for illustrative purposes, it could be indicated that the fortuitous event would be applied for facts produced by nature and force majeure for those produced by man or by the authority. If the event comes from any of these sources and causes the physical or legal impossibility of a person to comply with his obligations, it will result in the obligor not incurring the contractual or legal sanctions stipulated or deriving from the law, as he cannot be held responsible for such situation.

As example, we quote the following isolated thesis, from the Semanario Judicial de la Federación registration number: 245709: "FORTUITOUS EVENT OR FORCE MAJEURE. Regardless of the doctrinal criteria adopted as to whether the concepts of force majeure and fortuitous event have the same or different meanings, it cannot be denied that their fundamental elements and effects are the same, since they are events of nature or facts of man which, being alien to the obligor, affect him in his legal sphere, by temporarily or permanently preventing the partial or total performance of an obligation, without such acts being directly or indirectly attributable to him, and whose effect he cannot avoid with the instruments normally available in the social environment in which he operates, either to prevent the event or to oppose and resist it. ”

Thus, in order for the pandemic caused by the COVID-19 outbreak to be considered a fortuitous event or force majeure, it must fall into one of three categories (events of nature, acts of man or acts of authority); therefore, it is important to distinguish which event would be considered as a fortuitous event or force majeure: the mere existence of COVID-19, the declaration as a pandemic by an international organization, or the order by the authority to restrict certain acts in response to the emergency in question.

Regarding the mere existence of the COVID-19, in the understanding that a person has the disease and is disabled for that reason (confined, interned, hospitalized), a fortuitous event would be updated, since it is a fact of nature, that this fact has been unpredictable and has necessarily prevented the obligor from duly complying.

However, in the understanding that the obligor has not the disease, the mere existence of the COVID-19 is not sufficient to justify failure to comply with an obligation by reason of fortuitous event or force majeure (if it is intended to argue, for example, a risk of having the disease), since some facts have not been updated which inevitably prevents compliance with an obligation. Secondly, with regard to the alternative consisting the declaration of a pandemic by the World Health Organization or any international organization, it is important to point out that, in accordance with the Political Constitution of the United Mexican States and the system of hierarchy of laws in Mexico, the resolutions of the World Health Organization are not binding, since they are not coercive in Mexican territory, although they would surely imply recommendations on which the Mexican State should act through an act of government adopting such resolutions or through an international agreement or treaty.

This is the third scenario, which would allow the emergency by COVID-19 to be placed in a fortuitous event or force majeure. In fact, only an act of competent authority, by means of a law, regulation, or a corresponding administrative provision, could constitute a case of force majeure, considering that certain measures are taken therein that directly or indirectly restrict the debtor's capacity to comply with its contractual obligations. In such regard and as a support of this, there are Resolutions contained in some Court Theses on similar cases (e.g. Thesis on "PRESS RELEASES ISSUED BY THE COUNCIL OF THE FEDERAL JUDICIARY ON PREVENTIVE MEASURES RELATING TO THE HUMAN INFLUENZA EPIDEMIC AH1N1. THE INTERRUPTION OF THE PROCEDURAL TERMS FROM 27 TO 30 APRIL 2009 DID NOT IMPLY THE SUSPENSION OF WORK". In which they pronounced on the press releases issued by the Federal Judiciary Council on the occasion of the AH1N1 Influenza outbreak, and in which they warned that the authority's determination consisted of the interruption of the procedural terms in a specific period, In order for the courts to be attended only by those who really need to carry out some procedure, however, such a determination did not entail the suspension of work, since it was expressly established in those communications that the federal courts would not interrupt their functions, and would therefore continue to provide their services on a regular basis. The above is an example of why the mere existence of a pandemic or epidemic is not considered sufficient to prove an assumption of force majeure.

However, in the event of a pandemic or epidemic, in order to know the legal consequences in the contractual framework, the provisions agreed between the parties should be analyzed to determine whether such events can be considered as legally preventing the parties from fulfilling their obligations.

As a general principle, Article 1847 of the Federal Civil Code states: "the penalty may not be enforced when the party obliged to has been unable to perform the contract due to the creditor's act, fortuitous event or insurmountable force". On the other hand, the Civil Code for the Federal District (now Mexico City), in Article 2111, provides that "no one is obligated to the fortuitous event except when he has contributed to it, when he has expressly accepted that responsibility, or when the law imposes it on him", and in addition, Article 1847 provides that "the penalty cannot be enforced when the obligor has been unable to perform the contract due to the creditor's act, fortuitous event or insurmountable force". In this respect, the contracting parties may include specific stipulations and procedures regarding fortuitous event and force majeure, provided that such provisions do not contravene the abovementioned.

In the case of the COVID-19 pandemic, applied to public contracts, specifically with respect to contracts for the exploration and extraction of hydrocarbons tendered and awarded through public bidding processes (Petroleum Rounds) convened by the National Hydrocarbons Commission (the "Oil Contracts"), it must be considered the applicable legal and contractual provisions. Although the references contained in the Hydrocarbons Law regarding cases of fortuitous event or force majeure are applicable to permit holders that carry out the activities referred to in the title third of such law, these may be relevant for the business relationships between permit holders and Contractors, as shown below:

"Article 84.- Permit holders for activities regulated by the Ministry of Energy or the Energy Regulatory Commission shall, as applicable:

…

XII. Obtain authorization from the Ministry of Energy or the Energy Regulatory Commission, as applicable, for the suspension of services, except in the event of a fortuitous event or force majeure[1], in which case the corresponding authority must be informed immediately.”

Regardless of the above, the provisions of the Civil Code previously referred shall apply as supplementary law. Regarding the contractual provisions, these must be analyzed in order to understand which events are provided for in the corresponding Oli Contract and the consequences of updating an event of fortuitous event or force majeure in order to determine (i) the suspension of obligations under the contract without liability for one or more of the parties; (ii) the actions to be taken by the party due to such events; (iii) the duration of the event; (iv) the possibility of definitively terminating or renegotiating the contract.

Based on the different Oil Contracts, fortuitous event or force majeure is defined as follows:

"Fortuitous event or Force Majeure" means any act or fact that prevents the affected Party from fulfilling its obligations under this Contract, if such act or fact is beyond its control and is not the result of the deceit or fault of the affected Party, provided that such Party could not avoid such act or fact by taking diligent action. Subject to compliance with the stipulated conditions, Fortuitous Event or Force Majeure shall include, but not be limited to, the following facts or acts that prevent the affected Party from complying with its obligations under the present Contract natural phenomena such as storms, hurricanes, floods, landslides, lightning and earthquakes; fires; acts of war (whether declared or not); civil disturbances, riots, insurrections, sabotage and terrorism; disasters due to the transfer of Materials, quarantine restrictions, epidemics[2], strikes or other labor disputes other than due to the breach of any labor contract by the affected Party. It is expressly understood that Fortuitous event or Force Majeure shall not include economic difficulty or change in market conditions (including difficulties in obtaining capital funds or financing).

In such regard, the Oil Contracts foresee causal factors in health matters, in which the pandemic originated by the outbreak of COVID-19 could be included.

Regarding the procedure to be followed in the event of a fortuitous event or force majeure, the Oil Contracts stipulate the following terms:

• The parties are not responsible for breaches, suspensions or delays caused by fortuitous event or force majeure.
• The party unable to perform due to fortuitous event or force majeure must give written notice to the other party on the reasons for the failure to perform, including an explanation and, if applicable, documentation of the event that prevents the party from performing such obligations.
• The maximum period foreseen to give the referred notice varies depending on the Oil Contract; this period may be 5 or 15 days after the occurrence of the fortuitous event or force majeure is known or should have been known, having the National Commission of Hydrocarbons a period of no more than 30 days, from the reception of the referred notice, to recognize or not the fortuitous event or force majeure.

The Petroleum Contracts establish that the exploration, evaluation and development periods may be extended, as appropriate, for the same time that the event of a fortuitous event or force majeure lasts; furthermore, they provide that modifications to the plans may even be submitted for approval by the Commission, provided that the fortuitous event or force majeure has an impact on the petroleum activities carried out in a portion of the contract area.

If the case of fortuitous event or force majeure is of a prolonged duration, and oil activities are interrupted for a continuous period of 2 years or more, the parties may agree on terminating the contract. If one of the parties does not agree to the termination, the parties shall be subject to the dispute resolution processes provided for in the Petroleum Contracts.

As can be seen, it is advisable to verify that the characteristics of the fortuitous event or force majeure are duly foreseen in the respective clause, such as: absolute impossibility of compliance, unpredictability and exteriority of the event.

These aspects have been recognized by our courts in Mexico in the following isolated thesis, from the Seminarian Judicial de la Federación registration number 341341: "FORCE MAJEURE OR FORTUITOUS EVENT. According to the most authoritative legal doctrine, a fortuitous event or force majeure requires the existence of a true impossibility and not that the performance of an obligation has simply been made more difficult, that the event which constitutes the obstacle to the performance of the obligation has been unforeseeable and that the debtor has not incurred any prior fault".

By virtue of the foregoing considerations, in the absence of contagion, medical referral and/or hospitalization, if the character of a pandemic is recognized by the competent authority, and restrictive measures are taken by means of laws, regulations or circulars that make it impossible to comply with obligations, a case of fortuitous event or force majeure could be accredited, subject to compliance with the specific provisions agreed upon by the parties in contractual relations.

We emphasize the importance of reviewing applicable contracts and contractual provisions, as well as monitoring the current situation in connection to current contractual relationships.