On March 11, 2020, the WHO declared the spread of COVID-19 a pandemic. Governments around the world adopted a series of measures to slow down the spread of the virus, and in recent weeks we have seen how this situation has affected practically every aspect of daily life. Nicaragua has been no exception.
In Nicaragua, it is expected that this situation will have a particularly strong economic impact, and as is usual in these cases, small and medium-sized enterprises tend to be the most vulnerable. Once again, Nicaragua faces a situation that tests the resilience of our entrepreneurs and business owners. The measures that many companies have decided to adopt, combined with the country’s economic conditions, compel us to evaluate possible alternatives to address a situation in which fulfilling certain contractual obligations may become impossible. Given this scenario, it is worth analyzing whether the current situation caused by the spread of COVID-19 can be considered a case of fortuitous event or force majeure.
This article is not intended to be a doctrinal or jurisprudential analysis of the concepts of fortuitous event and force majeure. Nor will we differentiate between these concepts, as such an exercise would be of little practical use for the purposes of this article. Rather, our intention is to briefly outline the elements that constitute these concepts and their related legal effects.
Conceptually, both fortuitous event and force majeure are similar in that they are understood as extraordinary circumstances arising from natural phenomena or human actions that are unforeseeable, or that, even if foreseeable, are unavoidable despite taking diligent measures to prevent them.
In Nicaragua, the legal basis for fortuitous event and force majeure is found in Article 1864 of the Civil Code, which establishes:
“Article 1864. – Except in cases expressly mentioned by law, the debtor shall not be liable for damages or losses caused to the creditor due to noncompliance with the obligation when such noncompliance results from a fortuitous event or force majeure, unless the debtor has assumed responsibility for the consequences of the fortuitous event or force majeure, or if it occurred due to the debtor’s fault, or if the debtor was already in default, unless such default was caused by events that could not have been foreseen, or that, even if foreseen, were unavoidable.”
The relevant point of the aforementioned article is that it establishes an exemption from liability for the debtor (understood as any person who has an obligation to give or to do something for another person) in the event of noncompliance with obligations due to a fortuitous event or force majeure. However, the same article clearly states that for this exemption to take effect, the following elements must be present:
- The debtor must not have assumed the risk or consequences of the fortuitous event or force majeure.
- The event must not have occurred due to the debtor’s fault.
- The debtor must not have been in default prior to the occurrence of the fortuitous event or force majeure.
Taking the above into account, it is important to emphasize that the mere existence of a fortuitous event or force majeure is not, by itself, sufficient for the exemption from liability to take effect. In this regard, legal doctrine often points out two elements that must be considered when analyzing whether a debtor is in a position to claim exemption from liability on these grounds. These elements are as follows:
- The existence of a direct link between the force majeure event and the debtor’s inability to fulfill their obligations.
- The debtor’s diligence. The debtor must have diligently carried out all necessary actions not only to fulfill the obligation but also to prevent being affected by the fortuitous event or force majeure.
If the aforementioned elements are present, then it can be argued that the debtor (whether an entrepreneur, small, or medium-sized business) may claim exemption from liability for breach of contractual obligations. This can serve as a tool to:
- Suspend or terminate existing contractual relationships. In this case, it is important to review whether the contracts contain clauses related to fortuitous events and/or force majeure. If such clauses exist, the procedure established in them for these events must be followed. If the contracts do not include such clauses, then, in principle, the debtor is exempt from liability for nonperformance of obligations, and it will be up to the parties to decide whether to continue, suspend, or terminate the contract.
- Renegotiate contract terms (leases, services, supply, distribution, etc.). In cases where the debtor has assumed the consequences of fortuitous events or force majeure (as is often the case with contracts involving financial institutions, for example), demonstrating to the creditor the existence of the fortuitous or force majeure event and its impact on the debtor’s ability to fulfill obligations can serve as grounds to reach an agreement with the creditor and renegotiate or modify the contractual terms.
What about tax obligations?
In the course of their daily activities, both individuals and legal entities, in their capacity as taxpayers or withholding agents, must comply with a series of tax obligations and duties established by law. These include, for example, filing tax returns within the deadlines and formats established by law, paying taxes, providing information requested by the tax authority, allowing tax audits, among others.
Failure to comply with these legal obligations constitutes the commission of tax violations, which may result in the imposition of various administrative sanctions ranging from fines and loss of concessions and tax benefits to administrative interventions in businesses and even their closure.
That said, the Tax Code establishes certain circumstances that constitute EXEMPTIONS from administrative, civil, and criminal liability, among which are duly proven cases of fortuitous event or force majeure.
Specifically regarding tax obligations, the General Directorate of Revenue issued in 2006 ADMINISTRATIVE REGULATION No. 03-2006, published in La Gaceta No. 180 on September 18, 2006, concerning the ESTABLISHMENT, APPLICATION, AND EFFECTS OF FORTUITOUS EVENT OR FORCE MAJEURE, defining fortuitous event or force majeure as “any event that could not have been foreseen or that, having been foreseen, could not have been resisted. It must be a circumstance not attributable to the taxpayer, arising from a cause entirely beyond their control; unforeseeable within ordinary and reasonable calculations, and irresistible or unavoidable.”
The Administrative Regulation specifies:
- Natural Events: Landslides, floods, earthquakes, hurricanes, river overflows, plagues, storms, lightning, damage caused by animals or inanimate objects, etc.
- Human Events: War, uprisings, riots, currency devaluation, strikes that prevent compliance with tax obligations, sudden power outages that damage machinery or equipment, traffic accidents, etc.
To request exemption from fines or other sanctions, the taxpayer or withholding agent must submit the request for dispensation accompanied by sufficient documentary evidence proving the occurrence of the fortuitous event or force majeure.
