Puerto Rico: Potential solutions for business agreements affected by the COVID-19 pandemic
The coronavirus disease 2019 (COVID-19) pandemic and the measures taken to control contagion will inevitably affect commercial agreements in the near future. As businesses start to reopen and redefine their operations in Puerto Rico, they should also prepare for potential litigation − or negotiations to prevent an adversarial proceeding − resulting from noncompliance with contractual obligations.
Contractual force majeure provisions
As a first order of business, companies should closely review all existing contracts and their terms, as courts interpreting those contracts will begin by analyzing the contract’s plain language and will apply that language whenever possible. Many contracts include a force majeure clause that alters the parties’ obligations when a qualifying extraordinary event or circumstance beyond the parties’ control occurs that prevents or precludes a party from performing its obligations under the contract. Force majeure clauses may define what is considered “force majeure” under the contract to include epidemics, pandemics, government-imposed quarantines or lockdowns, or other language clearly applicable to the current COVID-19 emergency situation. These clauses also may provide guidance regarding what notice must be given in such situations; contract modifications that may be acceptable under the circumstances; obligations that are not subject to the force majeure provisions; efforts that must be made to mitigate damages; measures that must be taken to resume compliance with the obligations under the contract, and applicable timeframes for such acts.
If the noncompliance cannot be resolved by reference to the contract’s force majeure provisions, the parties may be able to renegotiate the contractual terms, following good faith principles. Maintaining an open line of communication during the emergency period and keeping a record of such negotiations and interactions is essential.
Legal principles applicable to litigating contractual breach due to the pandemic
If parties cannot resolve their contract dispute by reference to specific contractual provisions or through negotiations, and litigation arises, several legal doctrines may apply to the dispute if it is litigated in Puerto Rico.
Businesses should be aware that, even if there is no force majeure clause in the contract, the force majeure doctrine may still apply. Under the Puerto Rico Civil Code, unless otherwise expressly established in a law or contract, no one will be held liable for events that were unforeseeable or, if foreseeable, were inevitable. An event may be considered force majeure, allowing a party to take advantage of this Civil Code provision, when any effort to comply under such circumstances would be futile. The relevant Puerto Rico case law instructs courts to analyze whether the effects of the event were foreseeable in light of previous experience and what measures the party took to avoid the common effects of such events, in order to determine if it is warranted to modify or excuse the obligation.
For bilateral contracts in which a reciprocal principal obligation has not yet been executed, the other party may refuse to comply until the reciprocal obligation is carried out (or carried out correctly, if it was done unsatisfactorily). This principle, too, may excuse certain contractual obligations where a necessary reciprocal obligation has been prevented or delayed due to the COVID-19 pandemic.
For contracts of continuous or ongoing performance, the rebus sic stantibus doctrine may apply if the circumstances in which the parties entered into the agreement have changed dramatically due to unforeseeable events, making the obligation much more onerous. Under this doctrine, courts may provide certain flexibility by temporarily suspending the effects of the contract, establishing moratoriums, revising prices in the contract, equitably modifying or eliminating terms or clauses of the contract or, ultimately, terminating the contract. This doctrine is exceptional and has rarely been applied in Puerto Rico.
Other relief for affected businesses
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses can also benefit from economic assistance that may mitigate the effects of the pandemic. These relief measures may help businesses comply with their existing contractual obligations and avoid contract disputes or litigation.
The Paycheck Protection Program (PPP) allows small businesses and nonprofits, sole proprietorships, independent contractors, and self-employed individuals with 500 or fewer employees to apply for and receive loans to cover their payroll and certain other expenses through existing Small Business Administration (SBA) lenders. Businesses that have more than 500 employees in certain industries may also be eligible if they meet applicable SBA employee-based size standards for those industries (small business classification requirements according to individual NAICS codes). For the PPP, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries (must check NAICS code 72 to confirm); (2) that are franchises in the SBA’s Franchise directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.
The PPP loans have a 0.5 percent fixed interest rate. Loan payments are deferred for six months and will be due in two years, with no prepayment penalties or fees. Further, no collateral or personal guarantee is required. The loans will be forgiven as long as the loan proceeds are used to cover payroll costs, as well as mortgage interest, rent, and utility costs over the eight-week period after the loan is issued, and employee and compensation levels are maintained. The loan forgiveness will be reduced if the business decreases its full-time employee headcount or decreases salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019. Businesses have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Additionally, the CARES Act amended the SBA Economic Injury Disaster Loan (EIDL) and Emergency Grant programs. The EIDL offers up to $2 million in low-interest loans to businesses that cannot obtain credit elsewhere to meet financial obligations and operating expenses that could have been met had a disaster not occurred. The loan amount will be based on an organization’s actual economic injury and financial needs. The CARES Act created within the existing EIDL a new Emergency Grant of $10,000 to keep employees on payroll, deal with supply chain disruptions, or pay debts, rent, and mortgage payments. This grant does not need to be repaid. To receive the grant, applicants must first apply for the EIDL.
Expanded eligibility for the EIDL and the Emergency Grant is available from January 31 to December 31, 2020. The grants are backdated to allow those who had already applied for EIDL before passage of the CARES Act to be eligible to request a grant. Small businesses and non-profits with 500 or fewer employees or meeting SBA’s size standards for small business (whichever is higher); sole proprietorships, with or without employees; independent contractors; cooperatives and employee-owned businesses; and tribal small businesses may apply. Unlike the PPP and most SBA loans, the EIDL and Emergency Grants are available directly from the SBA.
Businesses can obtain both a PPP loan and an EIDL. However, it is our current understanding that the PPP and new EIDL loans cannot both be used for the same expenses. Further, those who take out an EIDL between February 15 and June 30, 2020 are permitted to refinance that loan into a PPP loan.
As of May 1, 2020, PPP loans had been approved for more than 23,000 businesses in Puerto Rico, totaling more than $1.6 billion. Small businesses, which provide close to 40 percent of private sector jobs in Puerto Rico, have been collaborating closely with participating commercial banks and credit unions since the program’s inception.
Although extensive guidance has been issued by the Department of the Treasury and the SBA, further modifications to the program are expected to be included in the next round of legislation that will be debated in Congress in the coming weeks/months. If you have any questions, please contact the authors or your DLA Piper relationship attorney.
If you have any questions regarding these developments and their implications, please contact the authors or your DLA Piper relationship attorney.
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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.
