Civil and commercial contracts are ruled by the principle of pacta sunt servanda contained in article 1602 of the Civil Code, pursuant to which the contract is binding to the parties, and consequently, the obligations contained therein must be complied with in the way that they were agreed upon, provided that the circumstances surrounding the contract have not changed (rebus sic stantibus).
Nonetheless, there are circumstances that may arise in the future which legitimately prevent one or both parties from being able to comply with their contractual obligations without having to provide redress to the other party (exonerating circumstances), or which allow the parties to renegotiate the initial terms of the contract.
In this article we will make reference to the occurrence of an event of force majeure which prevents one or both parties from continuing to develop a commercial agency or distribution contract or which makes the contract excessively onerous to one of the parties (breach of the contractual equilibrium or theory of unforeseen events).
The pandemic as a force majeure event in commercial contracts
It is a known fact that the pandemic COVID19 has affected the normal course of all kinds of contracts, since its immediate consequence was the total or partial cease of most commercial activities and has led to a forced transformation of the commercial activities and the development of businesses towards the new reality (i.e. preventive isolation and restriction of mobility and commercial activities).
Law 95 of 1890 defined force majeure as the “unforeseen and irresistible event such as a shipwreck, an earthquake, the imprisonment of enemies, acts of authority exercised by a public authority, etc.”, consequently, these events have two concurrent elements:
Unpredictability, i.e. it is not possible to anticipate the occurrence of the situation.
Irresistible, i.e. it is impossible to prevent, mitigate or correct the effects of the situation.
Accordingly, the pandemic does not become itself in a force majeure which may be used as a shield for a future breach or termination of a commercial agency or distribution contract; to be able to do that it is necessary to prove that the circumstances around the breach or the termination of the contract were due to irresistible and unpredictable events that, in that concrete case, made it impossible (or excessively expensive) for one or both of the parties to comply with their contractual obligations. (1)
Furthermore, it is possible that despite the pandemic the parties can continue with the development of the contract without being a rupture of the equilibrium of the contract, in which case, none of the parties may excuse itself from the compliance of their respective obligations or unilaterally terminate the contract with just cause, without having to indemnify the affected party.
On the other hand, if said unpredictable and irresistible circumstances affect the contract and make it excessively onerous or impossible to continue to perform for one or both parties, the parties or a judge (or arbitrator) may consider the alternative to terminate the contract without having to indemnify the counterparty, due to a lack of responsibility from the party who terminates the contract.
It is important to bear in mind that there will always be a risk of a future litigation related to the existence of a force majeure as a just cause for termination of a commercial agency or a distribution contract, especially considering that in Colombia only a judge (or arbitrator) may decide what constitutes a force majeure event in a concrete case that exonerates the party alleging it from any contractual responsibility.
Theory of Unforeseen Events in Contracts
Article 868 of the Code of Commerce provides that after the execution of a continued performance contract (i.e. commercial agency, distribution, among others), there may be subsequent circumstances which alter or aggravate the compliance of certain obligations for one of the parties, because it became excessively expensive for one of the parties. In this case, the affected party may request a judge to revise the contract, whether to order the corresponding adjustments to balance the charges or order its termination with just cause.
This is known under the UNIDROIT principles as hardship (2), where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, which results in the following effects (3):
1- The disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.
2- The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.
3- Upon failure to reach agreement within a reasonable time either party may resort to the court.
4- If the court finds hardship it may, if reasonable: (a) terminate the contract at a date and on terms to be fixed; or (b) adapt the contract with a view to restoring its equilibrium.
In Colombia, to justify the application of the theory of unforeseen events in the contract, the altering of the equilibrium of the contract must be one that imposes an excessive burden for the disadvantaged party. As the State Council indicated:
“It is imperative that the imbalance in the obligations is certain, serious, essential, fundamental, major, enormous or significant, and not any type of imbalance, to the point that it causes an excessive transitory or permanent hardship of the future service, a large imbalance with a disproportionate increase or perceptible decrease of the compensation, whether a money loss, due to a decrease of the assets or the expected profit, due to the increase of the liabilities as a consequence of the subsequent unforeseen and unpredictable event, whereby there must be an inextricable cause and effect relationship.” (Supreme Court of Justice, Civil Cassation Chamber. Judgment of February 21 of 2012, Reporting Judge: William Namén Vargas, p. 26)
Consequently, to apply the theory of unforeseen events in contracts and terminate or renegotiate a commercial agency or distribution contract, it is imperative that the following requirements are met:
1- That the supervening circumstances are unforeseen at the moment of execution of the contract, and thus exclude any type of attribution to either party.
2- That the imbalance against the disadvantaged party is certain, serious, essential, fundamental, major, enormous or significant.
Some have even alleged that the imbalance must be invoked by the disadvantaged party before continuing with the performance of the contract, so the theory of unforeseen events in contracts and is not used as an excuse to revise the initial terms of the contract. (4)
The pandemic effects in distribution and commercial agency contracts
It is possible that the pandemic effects have configured a force majeure or an excessive imbalance in distribution and agency contracts, which make them overly expensive for one of the parties, making it necessary that the parties consider the different alternatives that they have in the specific case and in accordance with the law.
First, if it is possible to continue with the performance of the contract, the parties in good faith may reasonably renegotiate the terms of the contract, such as the sales goals, minimum amounts of purchase of products, territorial coverage, exclusivity agreements, among others.
Furthermore, if it is impossible to continue to perform the contract, whether it is because it is extremely expensive or because it is physically impossible to perform the main obligations of the contract, the parties may mutually agree to terminate the contract without compensation for the damages caused due to the termination; the latter without prejudice o the severance payment that the agent may claim, all of which must be considered in the specific case.
In this case, and particularly in the case of the commercial agency, there are several gray areas, which could result in future litigation, since there will be discussions around the existence of a force majeure event that justifies the termination or renegotiation of the contact, the right of the disadvantaged party to receive a compensation for the damages caused to it due to the termination of the contact (since article 1325 of the code of commerce does not consider force majeure as a just cause for termination of the commercial agency contract) and the right of the agent to claim the severance payment provided in article 1324 of the code of commerce.
In conclusion, each alternative that is considered regarding distribution and commercial agency in the light of the current pandemic, must be carefully studied, considering the circumstances surrounding each case, in a manner that the parties reach mutually agreed and negotiated alternatives in good faith. The latter bearing in mind that in the long term these decisions are to the extent possible, pragmatically, sustainable and strategic for the businesses of the agents, distributors and companies, and always bearing in mind the preservation of the enterprise as a unit of economic exploitation and as a source of employment.
Gabriela Mancero, IDI agency & distribution country expert for Colombia and María del Pilar Duplat, PM Abogados
1- Judgment 03883 of 2019 State Council of February 20 of 2019. P.13; State Council Judgment of November 10 of 2016, Exp. 25000-23-41-000-2013-01041-01.
2- Article 6.2.2.UNIDROIT Principles. There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.
3- Article 6.2.3.UNIDROIT Principles
4- Supreme Court of Justice. Judgment of October 29 of 1936, judicial Gazette XLIV, 457.