FIVE IDEAS ON COMPLIANCE WITH COMMERCIAL AGREEMENTS IN A STATE OF ALARM
Approach to the issue:
The declaration of the state of alarm for the management of the health crisis situation caused by COVID-19 agreed by Royal Decree 463/2020 of 14 March (“RD 463/2020“) and its subsequent extension by Royal Decree 476/2020 of 27 March (“RD 476/2020“) is leading, among other things, to the paralysis of economic activity and with it the companies or businesses are being forced to hang up the “closed by Covid-19” sign.
This is causing many headaches for our entrepreneurs in relation to, among other things, current orders or commercial agreements that are in force because the government measures that are being adopted make it impossible for them to continue to fulfill their contractual obligations normally.
This post merely highlights a series of ideas that should be taken into account in relation to contractual obligations, without prejudice to the fact that, given the variety of cases that may arise in practice, each specific case must be analysed later.
Key ideas to be taken into consideration:
1. Agreements have the force of law between the contracting parties and the principle of conservation of contracts (pacta sunt servanda) should prevail. This means that, as a general rule, contracts must be fulfilled.
2. Notwithstanding the above, there are exceptional circumstances which, because they are unforeseeable or unavoidable, although they do not totally exempt the parties from performance of the agreement, do exclude the possibility of claiming damages from the other party for non-performance and can lead to a suspension of the obligation until the exceptional circumstance disappears. Specifically, we are referring to cases of <<force majeure>>, which, unless the agreement or the law provides otherwise, are unforeseeable events, because they exceed the normal course of life, or which are foreseen as inevitable, insurmountable or irresistible, in which the debtor’s will has not intervened for them to occur and which make it impossible to perform an obligation previously contracted or prevent the birth of one that may occur. It is also necessary that there be a causal relationship between the event and the impossibility of performance.
3. In the event of force majeure, situations may arise which alter the balance of performance between the parties and affect the basis of the business and cause a sudden change in the conditions initially agreed. In order to correct such situations of imbalance due to supervening causes, case law has coined the doctrine of the so-called << rebus sic stantibus>> clause by which it is a question of solving the problems deriving from a supervening alteration of the existing situation or concurrent circumstances at the time of the conclusion of the contract – that exceeds what can be understood as a “normal” or “foreseeable” risk that, Therefore, it should not be assumed by any of the contracting parties – when the alteration is so marked that it increases extraordinarily the onerousness or cost of the services of one of the parties or ends up frustrating the purpose of the agreement.
4. The application of this doctrine entitles the parties to request modification or adaptation of the current contractual conditions affected by the alteration and even to request termination of the contract if the modification or adaptation of the contractual conditions is not sufficient to balance the benefits.
5. The recent case law of our Supreme Court extends the application of the rebus sic stantibus clause not only to continual performance agreements, such as long-term leases, construction leases, supply contracts, etc., but also to single-tract agreements, such as sales contracts, in which the obligation arises or must be fulfilled in the event of the occurrence.
The situation generated by the coronavirus (Covid-19), although it does not empower the parties to cease to comply with their contractual obligations, would empower them, taking into account the circumstances of each specific case, to suspend their compliance due to the occurrence of a force majeure cause until such time as said cause disappears; at which time the agreement should continue to be performed on its own terms, unless the occurrence of such a force majeure has led to a situation of imbalance between the parties which was not initially foreseen and which entitles the aggrieved party to request a modification of the conditions established in accordance with the doctrine of the rebus sic stantibus clause.
2020 José Luis Vecilla Camazón. All rights reserved