Coronavirus and the fulfilment of contracts in Spain: Force Majeure

Following the restrictive measures adopted by the Government of Spain and many autonomous regions of the state, as well as in other countries (Italy being the paradigmatic case, also the USA), questions arise regarding the possible impact of current or future measures in the fulfilment of contracts, as the need to slow the progress of the COVID-19 virus may impose new restrictions.

Our analysis will focus on contracts subject to Spanish law.

Force majeure: Unforeseen and unavoidable event

Pursuant to article 1105 of the Civil Code, "Outside of the cases expressly stated by law and in those in which the obligation so declares, no one will be liable for those events that could not have been foreseen or that, being foreseen, were unavoidable".

Before an event of the scale such as the subject of this analysis, including restrictions on the movement of persons and, eventually of goods and services, as well as other measures already taken or announced by the competent authorities for the containment of the expansion of COVID-19, or coronavirus, the first question to be posed is whether it may be considered as an event constituting force majeure.

Our understanding is that the answer must be affirmative.

As for the interpretation and application of this provision, the case-law states:

1. Two cumulative requirements must take place: unpredictability and inevitability, the proof of which falls on the party asserting the force majeure in its favour.
2. The event constituting force majeure must be subsequent to the fulfilment of the contract, and entirely unrelated to the claiming party.
3. There must be a total absence of liability from the party invoking force majeure.
4. In order to assess the concurrence or not of an event which would prompt force majeure, it will apply the normal and reasonable foresight which the circumstances will require in each specific case.
5. Finally, the party intending to apply the force majeure clause to release itself from the fulfilment of its obligations, shall act in good faith and undertake all necessary measures to mitigate the damaging effects deriving from said event.

As a consequence of the assessment of force majeure, the party invoking this provision shall not be liable for any breaches which may be incurred for the duration of the event constituting force majeure. This liability exemption and the scope of the remaining contractual obligations must be made on a case-by-case basis, as the same may be complete or only partial, and they may be final or only temporary.

The stipulations of the contract for instances of force majeure will always be of application: it may have been agreed that the contract is subscribed "in any event", or a regime may have been agreed in case of a situation of force majeure taking place: for example, the extension of the contractual relationship beyond the term provided for the time necessary to allow complete fulfilment of the respective obligations.

In other cases, the general dispositions of Article 1124 CC shall apply, the complying party being entitled to demand either fulfilment, or the termination of the obligation, with the mere difference that the counterparty, under the provisions of force majeure, shall be exempt from compensation for damages.

Thus, in the event of foreseeable non-compliance or difficulty in fulfilling the obligations assumed under a contract as a result of the coronavirus crisis, the party seeking to benefit from the force majeure clause must exercise caution and keep documentary proof or other evidence that it acted with due diligence, and that it took all measures at its disposal to prevent or mitigate the damage. It must not prove the notorious fact of the pandemic but the impact of the phenomenon on the impossible provision or fulfilment of its contractual obligation. The same will happen as for the civil liability insurance subscribed by it, before the corresponding insurance company.

The principle Pacta Sunt Servanda obliges to examine, firstly, the wording of contract clauses

Under Spanish law the principle pacta sunt servanda regulates, included, amongst others, in Articles 1091, 1255 and 1258 of the Civil Code (CC), whose wording, respectively: "The obligations arising from contracts are legally binding for the contracting parties and will be complied with in accordance with their terms”; “The contracting parties may set forth the agreements, clauses and conditions which they may deem appropriate, provided they are not contrary to the law, morals or public order"; and "Contracts are effective by means of the mere consent, moment from which they undertake not only the fulfilment of that expressly agreed, but of all consequences which, according to their nature, are in accordance with good faith, standard use and the law".

Given the absence of express contractual dispositions, the regime provided by the aforementioned Article 1105 and concordant articles of the CC shall apply to the fulfilment of any contract. However, there may be explicit contractual provisions for this type of instances, as well as those which generally regulate the allocation of legal or regulatory risk, or those called "rebus sic stantibus", as mentioned at the end of this note.

In the interpretation of contracts prevails the literal or grammatical interpretation (cf. Article 1281 CC), this criterion not excluding but integrating the remaining hermeneutic criteria of the Civil Code. Among these, of particular importance in a case such as the present one, is the teleological criterion (Article 1283 CC) and the systematic criterion (Article 1285 CC).

A force majeure clause may have been included, listing a series of events to which this nature is attributed.

The first item to review is whether the measures taken in the event of an epidemic or pandemic, such as the coronavirus or other similar, are included in said list. As this circumstance is most likely not foreseen, it should be ascertained if the list of cases covered by the contractual clause as force majeure, constitutes a closed list or numerus clausus, or whether it is a mere enumeration of examples or open (numerus apertus).

In the second case above, the teleological criterion would apply: to revise if the intention of the contracting parties, in drafting said clause, was to include an assumption that would interfere with the normal development of contractual obligations such as the examined instance, provided that the same comprises the notes of unpredictability and inevitability that we will immediately see.

In addition, this criterion must be combined with the systematic one, of interpreting the contractual provisions jointly, in order to investigate the spirit and purpose of the contract itself. In this sense, if for example, the event considered as force majeure interferes with the timely fulfilment of contractual obligations, preventing their timely performance, it must be examined whether or not the time limit is essential to the obligation.

Application of the clause Rebus Sic Stantibus

Secondarily, in particular if the contract does not allow invocation of the measures taken to stop the expansion of COVID-19 as constituting force majeure, the parties may rely on the rebus sic stantibus doctrine.

Indeed, many contracts provide for a legal or regulatory risk clause, which covers the cases where, through legislative or government measures, changes occur in the balance between the rights and the obligations of the parties pursuant to the contract.

Case-law by the Supreme Court is prudent with regard to the application of said rebus sic stantibus clause, from STS 15 October 2014 (appeal Nº 2992/2012), which, while certainly mitigating the excessive rigour with which the invocation of this file was being admitted in practice, the same was attenuated according to the circumstances of each case.

In any case, our High Court (SSTS 64/2015, 24 February, 237/2015, 30 April and 19/2019 of 15 January) requires that two budgets be provided for their application: unpredictability of risk and excessive hardship in the fulfilment of contractual obligations, which is often characterized as a breach of the relationship of equivalence in the considerations of the parties (principle of commutability of contract).

If the circumstances for the application of the rebus doctrine or clause are given, the consequences would have to be determined: whether it would result in a mere modification of the contract or in its termination. The solution in favour of the contract modification, more in line with the principle of preservation of contractual acts and businesses (favor contractus) is the preferential solution applied by the Jurisprudence, especially in the case of continuing performance or long-term contracts.

Conclusion

The coronavirus pandemic may constitute a force majeure scenario with the effects of release from compliance with obligations and of exemption from contractual liability according to our Civil Code.

In the event that the contract contains specific provisions regarding such cases, the agreed clauses shall apply, and the contract will be interpreted in accordance with the criteria of contractual hermeneutics of Spanish Civil Law, to determine which was the common will and intention of the parties: literal, systematic, teleological interpretation.

It may be considered, in the event that invoking force majeure would not apply, if the instances required for this purpose are provided, the application of the rebus sic stantibus clause, which allows as a general rule, and provided that the requirements deriving from contractual good faith are respected, to demand a modification of the contract, in order to adapt it to the new circumstances taking place.