COVID-19 has and will continue to pose a series of challenges and legal issues to companies doing business in Mexico. The more a company understands about the current challenges, as well as their potential development, will better position your company to face them.
1. The Federal Government enacted an executive order (the “Executive Order”) imposing a set of preventive measures to be mandatorily applied by the private sector. Within those measures, employers must refrain from:
Private sector organizations, whose businesses are essential to cope with the contingency shall continue operating, such as hospitals, clinics, pharmacies, laboratories, medical services, financial services, telecommunications, news outlets, hotels and restaurants, gas stations, supermarkets, transportation services, and gas distributions services, as long as they do not involve closed spaces with large groups of people (a number that does no enable social distancing). Since the relevant authorities have not issued yet a declaration of sanitary contingency, the obligations imposed under the Executive Order shall be abided by all sectors. More detail shall come from the Ministry of Health which shall be enacting construction guidelines of the Executive Order.
More importantly, the Executive Order sets forth that employees that are precluded from attending the workplace will continue to receive full salary; thus, imposing an economic burden on employers.
2. Under the Federal Labor Law (“FLL”) employers are bound to provide a health-safe environment and to comply with safety and health regulations in place. To that end, FLL provides two potential options to temporarily suspend their collective labor commitments. The first implies the involvement and acknowledgment by the labor courts of the existence of force majeure or an Act of God. However, labor courts will remain closed until further notice. The second scenario implies the acknowledgement by the relevant health authorities of a sanitary contingency. Under this second scenario, the employer shall be exclusively bound to indemnify its employees with payment of one minimum wage, as opposed to full salary, for a maximum of one month. Once such term expires, the employer shall not be bound to continue to perform payment until the sanitary contingency is lifted. Under this scenario, employers do not need the acknowledgement of labor courts.
The FLL enables employers to apply testing to employees to prevent spreading of diseases; however, such right can only be enforced to the extent that it has been agreed in the internal regulations of the workplace. This particular measure, along with abidance with the ones set in the Executive Order, may reduce exposure of employers to potential civil actions related to COVID-19 as moral damage (similar to pain and suffering).
3. During the course, or in the aftermath of COVID-19, this issue will be addressed in a different section hereunder, an employer may need to reduce its workforce to enable economic viability of the company. FLL acknowledges such a scenario as rescission of collective labor relations; hence, under a potential reorganization scenario, same should be approached from different angle (e.g., labor, contractual and in many cases, from domestication of international reorganization or bankruptcy procedures). If employers desire to acquire control of such scenarios, a strategic approach to the relevant labor union should be kept in mind to secure a smooth reorganization.
In light of the mobility and working restrictions imposed by the Executive Order, along with other practical issues, companies should revisit their supply contracts and commitments. Mexican law acknowledges in law and through court precedents force majeure and Acts of God as a mean to be released from contractual commitments. To begin assessment of such potential defense, companies must be clear that legal precedents have been consistent and that three elements must exist: (i) the event must be inevitable and unsurmountable; (ii) unforeseeable (it does not qualify if reasonable or not); and (iii) that the victim of such has not contributed in any manner to it. If any of those elements fail to exist, the claiming company would not be in position to validly raise and uphold that defense.
Contracts governed under Mexico City law (leases of assets located therein are mandatorily governed by such law), are subject to be renegotiated in light of the substantial change of circumstances (e.g. decrease of the rent attributable to the exchange rate, impediment to use the totality of the facility etc.). The referred circumstance would have an impact on real estate companies and affect financiers of such projects by potentially reducing amount of proceeds stemming of those contracts. In that vein, since court houses will remain closed until April 20th, negotiations prior to a forced judicial action take high relevance.
Companies with a business interruption policy should revisit its terms and conditions since, as provided under the Insurance Contract Law, whenever the insured party commits acts that increase the covered risk (e.g., not abiding the terms of the Executive Order) or that fail to inform to the insurance company such circumstances would enable the insurance company to reject coverage. Additionally, the referred terms should be carefully revisited since under the referred statute, insurance coverage for risks that take place in Mexico are only subject of being insured by an authorized Mexican Insurance Company; hence, umbrella coverages may pose a different defense to insurance companies to reject coverage.
Many companies that are planning to attend to a reorganization process abroad should be aware that in order to be able to secure its assets and subsidiaries’ operations in Mexico, filing at the relevant jurisdiction would not suffice. Mexican Reorganizations Law provides specific provisions to foreign insolvency processes to be acknowledged at Mexico. Hence, guidance with such process would be required. Moreover, as commented in the Labor section, reduction or reorganization of operations in Mexico should be tackled from both perspectives.
Infection and death by COVID-19 in the workplace, if the employer fails to apply reasonable measures to prevent dispersion of infection and failure to abide the provisions of the Executive Order, may provide grounds to moral damages (pain and suffering) claims and potentially, depending on the number of individuals affected, to class actions.
Each State and Mexico City government local authorities have also issued or will be issuing their own restrictive provisions due to COVID-19, which should be also regarded on a case-by-case basis, in addition to the Federal provisions or implications mentioned above.
For more information, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the websites of the CDC and the World Health Organization.
Foley has created a multi-disciplinary and multi-jurisdictional team to respond to COVID 19, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.