COVID-19, contractual and tax obligations and acts of God and force majeure

COVID-19, contractual and tax obligations and acts of God and force majeure

On March 11, 2020, the WHO declared the spread of COVID 19 as a pandemic. Governments worldwide have adopted a series of measures to slow the spread of the virus and in recent weeks we have seen how this situation has affected practically all facets of daily life. Nicaragua has not been the exception.

In Nicaragua, this situation is expected to have a particularly strong economic impact and, as usual in these situations, small and medium-sized companies tend to be the most exposed. Once again, we find ourselves in Nicaragua facing a situation that tests the resilience of our entrepreneurs and businessmen. The measures that many companies have decided to adopt combined with the economic situation of the country, forces us to evaluate alternatives that can be taken in the event of a situation that implies the inability to comply with some contractual obligations. Given this situation, it is worth analyzing whether the current situation caused by the spread of COVID19 can be considered a 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 make a differentiation on such concepts since such an exercise would be useless for the purposes of this article. Rather, with this writing we intend to expose in the most succinct way that we can, the elements that make up these concepts and the legal effects related to them.

Conceptually, the fortuitous event and force majeure are similar in that both are understood as extraordinary circumstances that have their origin in natural phenomena or acts of man, that are unforeseeable or that, being foreseeable, are unavoidable even when carrying out diligent actions. to avoid them.

In Nicaragua, the legal basis of the fortuitous event and force majeure is found in article 1864 of the Civil Code, which establishes:

“Arto. 1864.- Outside of the cases expressly mentioned in the law, the debtor will not be responsible for the damages and interests that originate to the creditor due to lack of fulfillment of the obligation, when these result from a fortuitous event or force majeure, unless the debtor has taking charge of the consequences of the fortuitous event or force majeure, or this may have occurred through their fault, or it may have already been the one constituted in arrears, which is not motivated by events that could not have been foreseen, or that, if foreseen, were inevitable. ”

The relevant point of the aforementioned article is that it establishes an exemption from liability of the debtor (understood as any person who has an obligation to give or do to another person) towards the creditor in case of breach of obligations for reasons of Fortuitous event or force majeure. However, the same article is clear when establishing that for this exemption to take effect, the following elements must be present:

• That the debtor has not assumed the risk or consequences of the fortuitous event or force majeure.
• That the event did not occur because of the debtor's fault.
• That the debtor has not been in default prior to the event of a fortuitous event or force majeure

Taking into account the foregoing, it is important to emphasize that the mere existence of a fortuitous event or force majeure is not in itself sufficient for the liability exemption to take effect. In this sense, the doctrine usually mentions two elements that we must take into account when analyzing whether a debtor is able to claim exemption from liability for this cause, these elements being the following:

• The existence of a direct link between the event of force majeure and the inability of the debtor to comply with its obligations.

• Debtor's diligence. The debtor must have diligently carried out all the necessary acts not only to comply with the obligation but also to avoid being affected by the event of a fortuitous event or force majeure.

In the event of the aforementioned elements, then we can claim that the debtor (be it an entrepreneur, small or medium-sized company) can claim exemption from liability for breach of contractual obligations. This can be a tool for:

• Suspend or terminate existing contractual relationships. In this case, it is important to check if the contracts contain clauses for acts of God and/or force majeure and, if so, to verify the procedure that these clauses establish for such events. If the contracts do not contemplate this type of clauses, then in principle the debtor is exempt from liability for compliance with obligations and it will be up to the parties to continue, suspend or terminate the contract.

• Renegotiate contract conditions (leases, services, supply, distribution, etc.). In cases in which the debtor has assumed the consequences of the fortuitous event or force majeure (as it is with contracts with financial institutions, for example), evidencing before the creditor the existence of the fortuitous event or force majeure and its effects on the debtor's ability to meet its obligations may be an argument to reach an agreement with the creditor and renegotiate or modify the contractual conditions.

What about tax obligations?

In the performance of their daily activities, both individuals and legal entities in their capacity as taxpayers or responsible withholding agents must comply with a series of tax obligations and duties established by law, among these we find, for example, the presentation of tax returns in the times and manner established by law, payment of taxes, delivery of information requested by the tax authority, allow tax audits, among others.

Failure to comply with these duties or obligations consigned in the Law means the commission of tax offenses which entails the imposition of different administrative sanctions that range from fines and loss of concessions and tax benefits, to administrative interventions in businesses and even their closure. .

Having said the above, the Tax Code establishes some circumstances that constitute EXEMPTIONS from administrative, civil and criminal responsibility, among which we find the Act of God or Force Majeure duly verified.

For the specific case of tax obligations, the General Directorate of Revenue issued in 2006 the ADMINISTRATIVE PROVISION No. 03-2006, Published in La Gaceta No. 180 of September 18, 2006 regarding the ESTABLISHMENT, APPLICATION AND EFFECTS OF AN FORTUITOUS EVENT OR FORCE MAJEURE defining the Act of God or force majeure as "any event that could not be foreseen or that, foreseen, could not be resisted. It must be facts that are not attributable to the taxpayer, that come from a cause entirely beyond his control; unpredictable within its ordinary and current calculations, and irresistible or inevitable.”

The Administrative Provision states:

1. a) Natural Events: Landslide, flood, earthquake, hurricane, overflow of rivers, pests, storms, lightning, damage caused by animals or inanimate things, etc. b) Acts of Man: War, riots, riots, currency devaluation , strike that prevents compliance with tax obligations, sudden lack of electricity supply that damages machinery or equipment, traffic accidents, etc.

To request the exemption from fines or other sanctions, the taxpayer or person responsible must accompany the waiver request, with sufficient supporting documents that prove the occurrence of the Act of God or Force Majeure.