Article 05 May. 2020

Contractual Breaches Because of COVID-19: Mediation Agreements

El Semanario, April 2020

Originally published by El Semanario on April 24, 2020. Click here to read the original article in Spanish.

The coronavirus pandemic faced by the world at large has evidently led to, among other serious consequences, the obligatory cessation of all types of activities that are not considered to be essential for tackling the virus. However, this has already triggered breaches of agreements and contracts across the many different areas affecting our daily lives, including the provision of food and sustenance to our families, the paying off of credit which supports our daily living and the payment of rent for the properties we live in and lease, as well as other economic activities such as paying salaries, delivering goods, paying off debts and even laying off employees. Businesses - whether large or small, domestic or international, listed or unlisted - will also face these problems when undertaking significant infrastructure projects or providing core services etc. This means that we are all caught in a vicious cycle of potentially breaching our contractual obligations.

For this reason, governments around the world have been implementing, to greater or lesser extent, fiscal policies to provide liquidity to individuals - particularly the most vulnerable, such as those who have lost their jobs. Such policies have started with small or medium-sized businesses, and by and large have involved giving flexible loans and fiscal support to larger businesses. The key driver behind these policies is to avoid, to the greatest extent possible, redundancies and insolvencies, and to bolster each country’s economy.

Furthermore, different laws throughout the world include various ‘coping mechanisms’ to deal with unforeseen circumstances or events of a force majeure nature. Such mechanisms allow an obligor to circumvent liability in respect of events which are outside his or her control or are otherwise unpredictable or unavoidable, and which prevent the obligor from complying with his or her contractual obligations. When such mechanisms are invoked, the obligor is not under a legal duty to compensate the obligee in any way, despite any harm or injury which may have been caused as a result of the obligor’s failure to comply with his or her contractual obligations.

Natural events, such as a hurricane or even a pandemic, would fall into the category of events covered by such ‘coping mechanisms’. So too would certain acts of the state (or, as referred to in Spanish, hechos del príncipe), such as an official order or decree, like those recently issued by the Mexican authorities, which have the effect of suspending non-essential activities for a certain period of time. Such events limit the obligor’s financial means for complying with his or her contractual obligations, or prevent the obligor from being able to continue supplying goods or services as before. The basic principle behind these ‘coping mechanisms’ is that nobody is expected to do the impossible.

However, the coping mechanisms described above relating to unforeseen circumstances or force majeure apply in very specific circumstances, and each and every contractual breach triggered in such circumstances must be analyzed on a case-by-case basis (or in Mexico’s case, on a federal entity-by-federal entity basis) with reference to the applicable governing law which varies from country to country.

This may lead to the parties to a contract taking opposing legal positions, which could justify the involvement of an impartial judge to assess the strength of each party’s legal argument and ultimately decide whose argument should prevail. In the current circumstances, courts which have temporarily closed will inevitably be overburdened when they eventually resume, which will likely wreak havoc on the judicial system and leave litigants with few options.

Amidst this chaos and backlog, litigants from all backgrounds will be able to take advantage of alternative dispute resolution methods, such as the hetero-compositive approach of arbitration. Arbitration involves one or one impartial third parties, called ‘arbitrators’, who are called upon by the parties to consider their respective legal arguments in connection with a dispute, before ultimately deciding in favour of one of the parties. Other methods include the auto-compositive approach of mediation or conciliation, which aim to help the parties reach a negotiated solution to the dispute at hand. With regards to mediation or conciliation, the mediator or conciliator does not assess the parties’ legal position, but instead helps the parties to consider their respective interests and needs in such as way as to produce a creative solution for their mutual benefit. This can even involve adding elements which are unrelated to the underlying dispute to the agreed solution.

An advantage of involving mediators and conciliators is that, by using skills from their respective fields, they can identify the parties’ needs and align the parties’ interests towards a common goal, for the purpose of creating a better long-term solution for the parties. This is, in part, due to the difference between litigating before a tribunal, whether judicial or arbitral, and pursuing mediation or conciliation. With the latter, there is greater focus on the future, rather than the past. Similarly, in mediation or conciliation the interests and needs of the parties are focused on to a greater extent than the application of blackletter law (while, of course, the law is still complied with).

Another key advantage of private mediation, especially in Mexico City, is that mediation agreements are formalized and registered in the presence of a private mediator who is certified by the Court-Annexed Mediation Center of the Superior Court of Justice of Mexico City. In the same way as judicial or arbitral decisions, mediation agreements also enjoy legal privilege, are legally enforceable and are seen as final and binding (i.e. they have the force of res judicata).

Since, by the will of the parties, a dispute is resolved conclusively through mediation or conciliation, it cannot be subsequently considered by a judge or arbitral panel unless one of the parties has failed to comply with the terms of the mediation agreement. In which case, a judicial authority may intervene, but solely for the purpose of enforcing the terms of the agreement.

Furthermore, in mediation, certified mediators are vested with the same official attestation authority than a notary public (or, as referred to in Spanish, fe pública) which represents and added bonus for the agreement.

Using effective methods (similar, in fact, to those used by therapists, but of course confined to the context of dispute resolution), mediators and conciliators pave the way for mutual collaboration between the parties to a dispute, by conferring equal power on each party and controlling the parties’ emotions. While these methods are normally implemented ‘in person’, in light of the current pandemic technologies such as videoconferencing can offer fresh opportunities for conducting mediations online, and they can even go as far as facilitating the conclusion of a mediation agreement by electronic signature. The use of technology in this way is already codified in certain laws.

Mediation can bring out the best in people, by enabling them to resolve their own disputes whilst preserving, and even improving, relations between parties who were previously at dispute. This could prove to be particularly valuable in these dark times of suffering, sadness and misfortune.

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