Renegotiation Of Contracts In The Case Of Force Majeure
Due to the current state of emergency declared in Costa Rica because of the COVID-19 pandemic, questions have arisen regarding whether it is possible to renegotiate contracts instead of terminating them. If a business is facing financial difficulties, those businesses should ensure that contracts are not terminated and that renegotiations take place in good faith within the original contractual terms. This includes modifications in the terms and forms of payment which would in the best interest of the country’s economy.
Currently, Article 702 of the Civil Code establishes the following:
“The debtor who fails to fulfill his obligation, be it in substance, or in manner, shall be liable for the same fact of the damages and losses caused to his creditor, unless the fault comes in fact from force majeure or a fortuitous event.”
Therefore, as you can see, this article releases from responsibility those who breach a contract because of force majeure, thereby facilitating the termination of the contract, instead of calling for maintaining the contract through a re-negotiation in good faith.
Last Thursday, March 26th, a bill presented by a senator was published with the goal of updating the Civil Code by providing for a more robust legal standing to deal with events of force majeure. According to this bill, the following addition is proposed:
“For the purposes of the previous paragraph, it will be understood that there is an event of force majeure before a Declaration of a State of National Emergency issued in accordance with the National Law on Emergencies and Risk Prevention, Law No. 8488 and its reforms. In the decree in which this declaration is recorded, the President of the Republic and the Minister of Economy and/or the Minister of Labor, will measure the effects of said declaration and take temporary measures that are necessary to seek the proper functioning of the economy, freedom of commerce, labor rights and the harmony between the rights of creditors and debtors. The measures may include the suspension or modification of the forms of payment and other contractual conditions.”
Currently, this bill is one of the multiple bills being discussed by the senators and, therefore, it is still not clear whether this bill will pass or not; however, the question still lingers about how to handle the possible renegotiation of all kinds of contracts in a way that represents the interest of both parties.
Numerous contracts, such as lease agreements, and purchase agreements of real estate to name a few, are being directly affected by the current situation, where an event has happened that cannot be foreseen or that foreseen, cannot be avoided (i.e.–force majeure), which translates to a radical change that directly impacts the terms initially negotiated and included in the agreements.
It is impossible know with certainty how this pandemic will personally affect each one of us and how long it will last, but what is certain is that renegotiating your agreement with the other party, especially regarding the payment terms, and closing dates (when applicable) will allow you to have more flexibility to better manage your money to cover basic need expenses right now, without having to part from your investment or having to move out from the property you are currently leasing.