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State of alert. Force majeure and long-term contracts.

[Warning: this report is for information purposes only and does not constitute a legal opinion under any circumstances]

Effects on contracts

Force Majeure

  1. What is force majeure?

Force majeure is regulated by Article 1105 of the Civil Code, which states

“Apart from the cases expressly mentioned in the law, and those in which the obligation is so stated, no one shall be responsible for those events that could not have been foreseen or, if foreseen, were unavoidable.”

Our courts base the concept of force majeure on the inevitability/irresistibility/unpredictability (“vis cui resisti non potest“) of an event that must take place in relation to the “business sphere of the obligor or debtor”[1].

In a contractual relationship, force majeure is to be understood as constituting

  • An event arising a posteriori from the beginning of the contractual relationship and from the obligations acquired by each party.
  • It must be an event outside the sphere of the obligor or debtor’s business and completely independent of the party alleging it[2], and it must not be confused with circumstances that must be assumed and foreseen by the contracting party on whom performance depends.
  • There must be a total absence of fault[3] because fault is incompatible with force majeure and fortuitous event.
  • Such force majeure renders useless any diligent effort to achieve what has been contracted[4].

In short, “force majeure” must consist of a force beyond all control and foresight[5] and its occurrence must be weighed against the normal and reasonable foresight that circumstances require to be adopted in each specific case, or unavoidable in a practical possibility[6].

  1. What are the consequences of force majeure?

A case or event constituting force majeure may excuse one of the parties from fulfilling the contract without any liability, being released from the obligation to perform, in accordance with Articles 1.105 and 1.184 of the Civil Code. Force majeure is, therefore, the release of the debtor from the obligation if as a consequence of the force majeure performance becomes impossible[7].

  1. What is the difference between force majeure and the application of the rebus sic stantitbus clause?

The application of the rebus sic stantibus clause refers to a situation of mere change of circumstances and of balance of performance in which performance does not become completely impossible[8]. This is dealt with in the following paragraph.

A distinction must be made between the supervening impossibility of performance, which concerns only obligations to deliver a certain thing or to do something, and not the financial debts of, for example, those cases in which performance is exorbitant or excessively burdensome, which are covered by the doctrine of rebus sic stantibus, which operates independently of the content of the agreed performance.

  1. What is the difference between force majeure and unforeseen circumstances?

According to our Civil Code, force majeure means an invincible obstacle even if it was foreseen, and a fortuitous case constitutes an unforeseeable impediment using normal diligence, although not absolutely insurmountable.

Another difference is that the fortuitous case occurs in the internal sphere of the debtor’s activity, while force majeure constitutes an event outside the circle of such activity, in which it bursts in as an external obstacle[9].

  1. So, is COVID19 an assumption of force majeure, fortuitous case or rebus sic stantibus application?

The COVID19 declared as a pandemic by WHO is, in principle, an event of force majeure with respect to those obligations that are impossible to fulfil (a service that cannot be provided), as it is inevitable and unpredictable, and outside the sphere of business; and it can be considered an event of application of rebus sic stantibus with respect to which compliance is exorbitant or excessively onerous (payment for a service that cannot be received).

Only in the case of contracts concluded in COVID’s current situation19 can it no longer be considered an event of force majeure because it will presumably have been taken into account in the obligations assumed by each party.

With regard to the contracts signed with knowledge of the existence of COVID19 before it arrived in Spain and knowing the effect this virus would have throughout Europe, taking into account the diverse and confused reactions of those who had all the information (the different governments), in our opinion there is little doubt about the unpredictability of its effects and its inevitability, taking into account its classification as a pandemic and the progressive measures taken by most governments of European countries.

Long-term contracts (rebus sic stantibus)

  1. Can contracts be modified or terminated as a result of the COVID19 and the Alarm Status?

The doctrines of the basis of the legal transaction and of the so-called rebus sic stantibus clause (as long as things remain the same) entitle the party bound by a contract that extends in time (successive contract) to request the modification, and even the termination of the contract, when there has been an extraordinary and unforeseeable change of circumstances that absolutely breaks the contractual balance.

Its application has traditionally been very restrictive, but with the financial crisis of recent years, the Supreme Court, in Plenary Session rulings dated 17 and 18 January 2013, has extended its scope, stating that “the current economic crisis, with its profound and prolonged effects of economic recession, can be openly considered as a phenomenon of the economy capable of generating a serious disorder or mutation of circumstances and, therefore, altering the bases on which the initiation and development of contractual relations had been established”.

  1. What are the conditions for its application?

Its application, the Supreme Court clarifies, cannot be generalized, without the mere existence of the extraordinary alteration of circumstances being sufficient for its application to proceed. Rather, each specific case must be analyzed to see if the second premise of the legal syllogism is fulfilled: “that the change operated entails a legal significance worthy of attention in the cases presented,” and “that we must begin to assess its real impact on the contractual relationship in question”.

If there is such a breach of contractual equivalence, so that the excessive hardship caused by the new situation leads to the frustration of the economic purpose of the contract (that the contract is not viable because it is excessively burdensome for one of the parties), the affected contracting party may request the courts to review the contract in order to adapt the content of rights and obligations to the new circumstances or, in extreme cases, even to terminate it. However, taking into account the expected duration of the State of Alarm, it is not easy that it can be set up as a cause for a full termination of the contract.

  1. In what type of contracts could it be invoked?

The typical contractual scenario for the application of the clause is that of long-term contracts: agency, distribution (adaptation of the minimum requirements in the period of upheaval), lease (difficulties in paying rent in exceptional circumstances), service lease (impossibility of provision), financing contracts, partnership contracts, etc.

  1. Are we in the situation required by case law?

The COVID19 and the effects derived from the State of Alarm undoubtedly constitute an extraordinary and unforeseeable circumstance for the purposes of the application of the rebus sic stantibus clause and similar doctrines, but it will be necessary to analyse in each case the concurrence of the second requirement, the excessive or exorbitant cost of the services, which would authorise the modification or, in extreme cases, the termination of the contract.

As this is a subject of interpretation, the most advisable thing to do at this time for anyone who is suffering from a major imbalance in contractual performance that causes great difficulty or excessive hardship is to seek the advice of a lawyer in order to find the best possible negotiated solution that will protect the interests of all parties to the contract.

19 March 2020

[1]   STS of 24 October 2003, Supreme Court (Civil), S 02-03-2001, no. 185/2001, rec. 747/1996

[2]   SS. 19 May 1960, 28 December 1997, 13 July and 24 December 1999 and 2 March 2001.

[3]   SS. 31 March 1995, 31 May 1997, 18 April 2000, 23 November 2004), S. 2 January 2006 .

[4]   S. 22 February 2005.

[5] S. 20 July 2000

[6] S. 4 July 1983, reiterated at 31 March 1995, 31 May 1997, 20 July 2000 and 15 February 2006.

[7] Supreme Court (Civil), section 1, S 19-05-2015, no. 266/2015, rec. 721/2013, Supreme Court (Civil), section 1, S 19-05-2015, no. 266/2015.

[8] Supreme Court (Civil), Sect. 1, S 19-05-2015, No. 266/2015, Rec. 721/2013.

[9] AP Almería, section 1, S 12-01-2016, No. 11/2016, Rec. 188/2015.