Written by Alonso Mayordomo, Associate
The COVID-19 outbreak early this year has triggered unusual reactions by State governments, such as imposing lockdowns on the population in different areas of the globe.
Due to the current circumstances, many business activities, commercial traffic or contractual obligations have been altered or suspended, depending on the sector, with financial, legal and economic consequences.
In this context, it may be arguable whether the outbreak of the coronavirus pandemic could be invoked as a cause of force majeure to resolve a contract or to temporarily suspend the contractual relationship in private contracts, either civil or commercial.
First of all, it is necessary to analyse the applicable law of the contract, which shall indicate which law should apply in each case. This is of utmost importance since each jurisdiction has its own rules as to the applicability of the legal figure of force majeure . In this article, we will focus our analysis on Spanish law, in order to provide our readers with the necessary requirements that must be met in order to invoke and/or apply force majeure.
Force majeure is an event which prevents the fulfilment of a contract, in as far as it alters the original conditions of the contractual provisions and obligations (rebus sic stantibus doctrine) and which, therefore, waives any contractual responsibility for the invoking party.
Article 1105 of the Spanish Civil Code establishes that «Outside the cases expressly mentioned in the law, and those required by the obligation, no one shall be liable for events which cannot be foreseen or which, though foreseen, are inevitable». Its wording sets forth two requirements for the existence of force majeure to be determined and the subsequent exoneration from liability: Unpredictability and inevitability. These requirements have been further explained and developed by the courts, since the Spanish caselaw requires the following features to confirm the existence of a cause of force majeure:
It is necessary that the features of unpredictability and inevitability be cumulative. Meaning that both must concur in the events relevant to the case
The party that invokes such force majeur must hold no responsibility or legal fault in its causation;
Said party needs to act diligently in order to mitigate the effects of the situation, prior to invoking force majeure;
The argument of the invoking party should be based on good faith.
Should force majeure concur for the relevant contractual obligation, two foreseeable outcomes may be identified: (i) the resolution of the contract, or (ii) the mitigation of the duty which may be enforceable against one of the contracting parties.
Notwithstanding the above, Clause 1.105 of the Civil Code must be interpreted together with Royal Legislative Decree 8/2020, dated 17th March 2020, which deals with extraordinary measures, in addressing the social and economic impact of the COVID-19 outbreak.
Said Royal Legislative Decree lacks of generic provisions related to commercial or civil contracts. However, the Royal Legislative Decree does contemplate a moratorium of the mortgage debt and suspends the maturity date for products during the validity of the state of emergency (this last measure is found under art. 21 of the same). Activities related to these fields may invoke a force majeure event, considering the sudden legal situation arisen in Spain. Likewise, its Fourth Additional Provision affects the term of the statute of limitations and/or prescription, which are suspended, as is the activity of the Spanish administration of justice at this moment. In any event, due to the absence of direct or express provisions on private contracts in this Royal Legislative Decree, the periods of time agreed by the parties in each contract are not affected.
Finally, as an additional remedy to avoid contractual liability, we can turn to the rebus sic stantibus mechanism. Its application may be called for by the interested party, since this mechanism aims at preserving the contractual relationship between the parties. It may apply different measures, such as the suspension or revision of the contract, so that the obligations of each party may be balanced again (this is the main difference in comparison with force majeure, since this last option aims at resolving the contract).
The rebus sic stantibus mechanism pursues the persistence of the contract, thus its application may be more feasible in long term contracts, such as rental agreements. However, for rebus sic stantibus to be applicable in these agreements, a valid existence of an economic cause is required, inter alia, since housing rentals and rentals of offices with a commercial purpose may differ greatly.
To sum up regarding force majeure, should the requirements set out under Spanish caselaw be proved and the contractual obligation be severely affected by the COVID-19 outbreak, a resolution of the contract or a reduction of a party´s contractual obligations may be granted. Nevertheless, each case depends on a number of inherent facts, and those should be previously analysed to duly assess all the circumstances of the case.