Corporate Law FAQs before COVID-19 in Central America

In Guatemala, you cannot unilaterally suspend the fulfillment of contractual obligations. However, through Decree 12-2020, the Emergency Law to protect Guatemalans from the effects caused by the Coronavirus pandemic, it is decreed that, in case of non-payment of fees to educational centers or universities, fines, delays, administrative expenses, or interest cannot be collected. 

In the case of El Salvador, they can be suspended. In the Legislative Decree 593 (extended in Legislative Decree 631), Art. 9 established that people with contractual obligations, in civil and commercial matters, will not incur breaches as long as the direct effect can be verified.  It can be derived from the lack of operation by Executive Decrees that establish which industries and traders are authorized to operate. If one of the parties is not authorized to operate, it is clearly affected by what the contractual suspension can operate. In principle, it is advisable that the parties to a contract discuss so that a consensus can be reached to carry out the contractual compliance.

For Honduras, interpreting the applicable rules of the Commercial Code and Civil Code, suspension would operate as of right due to the slowdown in the economy, caused by a fortuitous event, force majeure, or impossibility, only if a contractual clause was agreed to that precisely refers to the suspension of the contract due to force majeure or a fortuitous event. In the absence of a contractual agreement, or in application thereof, Art. 757 of the Commercial Code may serve as a basis for requesting the termination of the contract and attempting to suspend its effects, since the other party may in fact request the equitable modification of the contract. Such an action must be brought before a judge who in turn must issue a ruling authorizing the suspension of the contract for the purpose of achieving its equitable modification. In any case, the advisable action to determine the possibility of suspending the effects of a contract, is to review it in order to verify the provisions that allow the temporary suspension of the obligation; or in case it had not been foreseen, to analyze the applicability of the referred article of the Code of Commerce in such a way to determine whether an action can be initiated before the competent Court.

In the case of Nicaragua, the possibility of suspending compliance with its obligations depends on several factors. The first is whether there is a clause in the contracts that regulates cases of force majeure and fortuitous cases; if so, it must be subject to what has been agreed; otherwise, it must be subject to the general rules established in the Civil Code and the Commercial Code.

In Costa Rica, obligations cannot be suspended. If no agreement on suspension is reached, the duties and responsibilities must be reviewed so as to avoid a breach of contract.

In Guatemala, force majeure is an exemption from liability in case of noncompliance with obligations, provided that the debtor is not in default. Likewise, the reasons that constitute force majeure must be duly accredited, must be impossible to foresee and cannot be attributable to any of the parties. The existence of a force majeure ground is declared by a judge.

The Salvadoran legislation in the Civil Code regulates the term force majeure, but it is necessary to evaluate it on a case-by-case basis, since, in practice, the parties stipulate how to proceed in cases of force majeure in contracts.

In the context of non-compliance with obligations, Honduras has only one dispersed rule referring specifically to force majeure. This is Article 1363 of the Civil Code, which does not define what a fortuitous event is and exempts the debtor from liability for failure to comply with an obligation due to a fortuitous event by regulating the degrees of fault in the failure to comply. In any event, the issue is that it is debatable whether such a rule, which again does not define the term “fortuitous event” or “force majeure”, operates as of right in cases where the absolute impossibility of performance of the contract is not determined. It will therefore always be necessary to go to court, unless the contract contains a clause providing for termination as of right and the fortuitous event is defined.

However, the Tenancy Law, in its Article 38, provides for the termination of the contract between the tenant and the sub-tenant provided that written notice is given at least 60 days in advance. This rule, although it refers to the fact that the written notice must be given “or notified by legal means”, “or” being the disjunctive, has been applied in effect as an automatic termination by means of a sixty-day notice. This can in any case be disputed by the landlord either in administrative or judicial proceedings.

It is important to consider that if what is invoked is the implicit termination of the contract in application of the applicable rules referring to the fortuitous case, force majeure or impossibility, which in effect do contemplate it, the case must be brought before the competent judge unless the absolute impossibility of contractual performance is established beyond doubt.

In view of the above, it is advisable to review contracts to determine which contractual provisions could be applicable in accordance with the law.

In the case of Nicaragua, the Civil Code establishes force majeure and fortuitous cases as excusable causes of noncompliance.

In Costa Rica, to the extent that there is a direct causal relationship between force majeure and noncompliance, there may be a release from liability. In that case we prefer to speak of inability to comply rather than non-compliance

In Guatemala, they will apply the measures that apply to all contracts, including demanding the performance of the contract, the termination of the contract and the collection of damages.

In the case of El Salvador, the decrees have not been clear and do not provide a specific way, so it is recommended that an agreement be reached with the debtor to establish the manner in which it will be paid; it may be a partial payment, a subsequent payment, or a dilution of the payment in the following months together with the corresponding fees or royalties. For the creditor party who would be in a disadvantageous position in this case, it is recommended to make the following considerations: verify by means of audit opinions the economic stability of the debtor party (if possible) but request a document that proves the capacity to pay. Second, whether the debtor is duly authorized to operate as stipulated in the emergency decrees. If it is not proven that the debtor lacks the capacity to pay (e.g. Apple, they are not authorized to operate, but they clearly have the capacity to pay) in these cases if the debtor wants to take advantage of the situation to not pay, it can exercise its action for conflict resolution as stipulated in the contract generating the obligation, which can be Arbitration or judicial proceedings.  It is worth clarifying that for reasons of Legislative Decree 593 (extended in Legislative Decree 631), the procedural deadlines have been suspended, so the judicial action or arbitration must be carried out at the end of the quarantine.

For Honduras, the resolution action for noncompliance due to fortuitous case or force majeure would have to be resolved before a Court. If the contract is not fulfilled, one must go before a judge to oppose the resolution by fortuitous case or force majeure, that is to say, if I am not fulfilled for another reason due to noncompliance, to exercise the legal actions of resolution or to demand that the same contract be fulfilled, all by means of a judicial action.

In Nicaragua, it will depend on what has been stipulated in the contract. If there is nothing stipulated, there is the possibility of demanding the performance of the contract plus damages or the termination of the contract plus damages.

Similarly, for Costa Rica, the typical measures will be applied according to the interest of the other party insofar as it is not also in a situation of non-performance: either demand compulsory performance or terminate the contract in both cases with damages.

In Guatemala, Ordinary Meetings must be held within 4 months following the close of the fiscal year (December 31). However, if it is impossible to hold meetings and the deed does not contemplate the possibility of virtual meetings or shareholders cannot delegate representation to a single person, the meeting can be postponed until it is possible to have face-to-face meetings.

In El Salvador, the Code of Commerce only contemplates the holding of Board of Directors meetings by video call, according to the rules of Article 258. Therefore, the administration of the Corporation (whether Board of Directors or Sole Proprietorship Administrator) is prevented by fortuitous case or force majeure to carry out the respective call and also the shareholders from attending the meeting.  Article 9 of Legislative Decree 593 (extended by Legislative Decree 631), which provides for a State of Emergency, has suspended the terms and procedural deadlines for administrative and judicial proceedings, whatever the subject matter or instance. Likewise, it establishes that those persons (whether natural or legal persons) who are unable to comply with their obligations because they are affected by the Decree will not incur any breach of contractual obligations and will not be subject to civil and commercial penalties. In that sense, the terms that companies have to comply with certain commercial obligations (possibly the reason why it is necessary to hold the General Shareholders’ Meeting) would be suspended until the end of the State of Emergency.

The State of Honduras, on the occasion of the state of emergency, has published Decree 33-2020 which in its Article 38, paragraph D) establishes the State’s protection of the corporate governance of commercial companies, authorizing them to call and hold their shareholders’ and board of directors’ meetings by electronic means for administrative decision-making, even though this benefit is not included in the articles of association. The requirement to implement this granted right is that it be recorded in an electronic format, together with the respective minutes with the autograph or electronic signature of the Chairman and Secretary (and commissioner if applicable). It is important to point out, however, that the retroactive application of this protection or benefit deserves a study of retroactivity, since the company is a plurilateral contract and the law applicable to the contract is the law in force at the time of its celebration, Art. 2370 Civil Code, especially in cases where the corporate agreement or statutes in effect contemplate the form of the calls, right to information and other rules applicable to the celebration of the Assembly and Board of Directors. The other issue is that of a nullity action by a shareholder under Roman II of Article 193 of the Commercial Code, the meeting held by electronic means and which is totalitarian should not have issues of this type. This is because Article 177 of the same Code already provides for the exception of unforeseen circumstances or force majeure, which it is advisable to invoke if the meeting is held by electronic means, but which, in the case of an invalidity action, must be proved: “Meetings shall be held at the registered office, except in cases of unforeseen circumstances or force majeure. In any case, there is always the argument that the meeting was in fact held at the registered office only by electronic means. Article 179 contains the right to call the meeting and guarantees the right to information, so the fact that the company’s documents have not been at the disposal of the shareholder may also present legal issues, which should be minimized by making them available to all shareholders, even if by electronic means. Finally, Article 210 of the Commercial Code provides that in the case of the Board of Directors, the bylaws will determine the manner of convening the board, the place of the meeting, the requirements for the preparation of the minutes, and other details on the operation of the board, so the analysis of the corporate agreement and bylaws in relation to the protection of the Decree is the important issue. Therefore, a review of the applicable social pact and statutes must be carried out to determine if they contemplate the operation of the assembly and council in order to determine whether or not the protection regulated by Decree 33-2020 is applicable. The celebration of totalitarian assemblies and councils in accordance with this guardianship minimizes any exposure, and in any case the electronic supports of the case must be left, the minutes must be duly written and signed, preferably in autograph form, stating the reason of force majeure, the agenda, that all the participants have had the social documents and the non opposition to the agreements taken

For Nicaragua, the Nicaraguan legislation does not regulate the issue, so the procedure established in the social pact must be followed. In case the corporate agreement does not provide for it, the meeting could be cancelled, for which the shareholders would be notified in compliance with the formalities for convening or communication regulated in the corporate charter.

In Costa Rica, if it can be postponed. The applicable regulations do not establish a material effect by not holding the ordinary meeting within 3 months after the fiscal closing. Once the health situation has been overcome, the meeting can be convened.

For Guatemala, we recommend that the possibility of renegotiating the company’s obligations be analyzed and alternative forms of financing be sought. In addition, there are various funds created by the Guatemalan government to finance small and medium enterprises in their operating expenses and payroll payments, which can also be considered.

In the case of El Salvador, we are still awaiting approval of the economic reactivation plan, which includes the following measures

  1. Application to finance a solidarity bond to guarantee income for workers in formal micro, small and medium enterprises that have ceased operations and for those affected by the COVID 19 pandemic.
  2. Rescue measures for businesses, especially micro, small and medium enterprises, through the creation of a credit at interest rates of 3%, terms of 10 years, and a grace period of one year.
  3. Fiscal measures that do not imply any tax forgiveness, but only its payment at a later date, which provides liquidity to the economy.
  4. Labour measures facilitate agreements between workers and employers for the enjoyment of holidays and reaffirm the existing labour framework.
  5. Purchase of goods and services with preference to national and local companies.
  6. Financing for municipalities and the Central Government to acquire goods and services, especially related to the management of the COVID 19 pandemic while complying with obligations to their suppliers.

These measures are not in force, but are under consideration, so they could change in the following days. In addition, they can be considered sources of financing, through flexible credits being offered by state banks, Banco Hipotecario and Banco de Desarrollo de El Salvador.

In the case of Honduras, it is necessary to have an approach to the other contractual party to explore or evaluate if suspension or modification measures can be taken by mutual agreement. Our opinion is that the judge should be approached to initiate the action of noncompliance due to a fortuitous case or force majeure.

In Nicaragua, some alternatives are:

  1. The renegotiation of obligations to prevent a breach of contract, by renegotiating contracts with various suppliers, including financing and bank loans.
  2. The capitalization of companies either through additional capital contributions by the partners or through debt capitalization.
  3. Corporate reorganization through a merger, for example, to improve the financial position of the company with the capital of the merged company.
  4. The sale of assets that are not essential to the operation of the company. Some of these alternatives, such as increasing the share capital, merging companies and transferring real estate, will be available as long as government institutions (courts, public registries) continue to operate.

For Costa Rica, the most reasonable measure in view of the cross-cutting nature of a company’s contractual fabric is to balance the burdens and negotiate in good faith an adjustment to the contractual performance of both parties

Scroll to Top