CORONAVIRUS. NOTE ON FORCE MAJEURE AND JUDICIAL MODIFICATION OF CONTRACTS DUE TO CHANGE OF CIRCUMSTANCES IN SPANISH LAW.

Daniel Jimenez

Founder and Head of Litigation and Arbitration Department, SLJ Abogados

The declaration of alarm in Spain agreed by the Spanish Government on 14 March 2020 and the limitations on the mobility of persons make it necessary to consider what solutions or mitigating measures are established by Spanish law for the effects that these measures will have on current contracts. In this note we analyse: 1) force majeure as a cause for exemption from contractual liability; 2) the modification or judicial termination of contracts due to a radical change of circumstances (rebus sic stantibus clause).

I.- Force majeure.

The Spanish Supreme Court has analysed on different occasions what requirements must be met for the application of article 1.105 of the Civil Code; which refers to cases of force majeure and fortuitous cases when it establishes that: “Apart from the cases expressly mentioned in the law, and those in which the obligation is so declared, no one shall be liable for those events which could not have been foreseen, or which, if foreseen, would be unavoidable”.

(i). – The requirements that can lead to contractual irresponsibility due to force majeure are the following:

a) that the events involved are unforeseeable, because they exceed the normal course of life (Ruling of 2 January 1945), or that they are inevitable (Ruling of 23 March 1926), insurmountable (Ruling of 17 June 1964) or irresistible (Ruling of 10 November 1924);

b) that are not due to the will of the alleged debtor (Rulings of 10 December, 20 June 1950 and 9 May 1960);

c) that make it impossible to fulfil an obligation previously contracted or prevent the birth of one that may arise;

(d) that there is an efficient causal link between that result and the event which produced it.

(ii). – The legal consequence of the concurrence of these assumptions is not the total exoneration of the debtor from the fulfilment of his obligation, but an exclusion of any compensation for damages. Therefore, the obligor does not cease to be obliged to perform its obligation if this is still possible. However, the creditor cannot claim possible damages from the debtor.

However, the impossibility of performing the obligation due to force majeure may lead to a suspension of the enforceability of the obligation, which does not definitively release performance of the obligation once the circumstances which gave rise to the force majeure have disappeared.

(iii). – Force majeure does not apply to debts for the payment of money. In cases where the obligation consists of a monetary debt, case law considers that the impossibility of performance cannot be invoked, admitting at most temporary non-performance or mere delay (Supreme Court Rulings of 19 May 2015 and13 July 2017).

 

 

(iv). – Contractual liability exclusion due to force majeure doesn’t apply if: a) parties to the contract did agree so; b) it is stated by law.

II. – Clause rebus sic stantibus. Modification or judicial termination of contracts due to a radical change of circumstances.

The rebus sic stantibus clause (things thus standing) is a legal doctrine created by case law which allows for the modification or termination of an agreement due to a sudden change in the circumstances taken into account at the time of its conclusion, provided that: a) these new circumstances are unforeseeable, and b) they have resulted in a breach of the balance between the contracting parties which makes performance excessively burdensome for one of them.

If such circumstances occur and lead to repeated losses or the complete disappearance of any profit margin, it is possible to apply for the judicial termination of the contract or its modification.

The contractual modification shall be limited to the period in which the circumstances leading to the exceptional change of the contract occur (Ruling of 15 October 2014).

Temporary amendment of the contract is the preferred solution by case law, but it is also possible to apply for termination if it is impossible to restore the balance of the contract’s obligations.

Case law admits the “rebus sic stantibus” doctrine when it’s applied to contracts of successive and single performance of certain act, but with deferred compliance.

 

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SLJ ABOGADOS

 

If you have any questions about the issues addressed in this legal memorandum please do not hesitate to reach out to: Daniel Jimenez ([email protected]).