«THE CORONAVIRUS CRISIS. FORCE MAJEURE AND THE APPLICATION OF «REBUS SIC STANTIBUS» CLAUSES IN CONTRACTS.«
- – Force majeure: definition and application of the concept in the field of contracting.
1.1. – Definition: Article 1.105 Spanish Civil Code (CC) .: apart from all the cases provided for by the Law and those declared by the obligation, no one shall be liable for events which could not have been foreseen or which, if foreseen, were unavoidable.
1.2 The coronavirus crisis constitutes an event of force majeure, since it fits the definition of art. 1.105 C.C. and, the requirements demanded by the jurisprudence are fulfilled, that is: i.-) unpredictability and inevitability; ii.-) unconnected to whom it is alleged; iii.-) total absence of fault of the person who invokes it.
1.3.- Consequence of the assessment of force majeure: the general rule is that, the party invoking force majeure shall not be liable for any failure to comply during the coronavirus crisis, provided that it acts in good faith and takes the necessary measures to mitigate the harmful effects. But, in any event:
-It is necessary to analyze case by case, since the exoneration may be total or partial, and definitive or only temporary.
-The provisions of the clauses of the contract, must be complied with in the event of the occurrence of an event of force majeure: the parties may have regulated the regime of risk allocation; or a specific regime may have been provided for -thus the extension of the period fixed in the contract to allow full compliance with the obligations-, and the stipulations must be respected, taking into account firstly the literal wording of the contract, and secondly the intention of the parties, and the spirit and purpose of the contract.
2.- Applicability of the doctrine of the «rebus sic stantibus» clause to the case under analysis
If the contract does not allow the invocation of the measures adopted to stop the expansion of the COVID-19 as constituting force majeure, the parties may also be able to invoke the doctrine of «rebus sic stantibus».
2.2.- Definition of the «rebus sic stantibus» clause: legal or regulatory risk clauses, by virtue of which it is possible to temper or modulate the clauses agreed in the contract as a result of supervening circumstances (as in the case of the coronavirus crisis), which give rise to an imbalance in the services assumed by each of the parties and may lead to situations of breach of contract. For example, talking about transport or cancelation of flights
2.3.- Practical application of the «rebus» clause: According to the traditional concept, the “rebus sic stantibus” clause has a notoriously exceptional nature and its application was inspired by reasons of strict equity. However, in recent years, in line with the succession of economic events and the ravages of the crisis, the jurisprudence of the Supreme Court has been evolving towards a normalization of its validity, taking into account in any case the circumstances of each specific case.
In general, and taking into account the need to evaluate the specific case, it can be concluded that it is possible to apply the «rebus» clause to the situation of coronavirus pandemic because: 1. Is sudden and unexpected, not being a foreseeable risk, 4º. – The incidence of the effects of the virus is relevant and serious; 5º. – It manifests itself with an unusual belligerence in the impossibility of fulfilling the contract as agreed.
In any event, for the application of the clause, two additional requirements must be met: a) excessive onerousness in the performance of the contractual obligations, i.e. breach of the equivalence of the parties’ considerations, b) cause-effect relationship between the event that occurred (such as the spread of the disease) and the party’s breach of contract.
In the aforesaid circumstances, the application of the «rebus» clause may lead to a modification of the contract or its termination. The effect to be applied must in any case be proportionate to the existing situation. The solution in favor of modification of the contract, which is more in line with the principle of conservation of contractual acts and business, is the solution applied in a preferential manner by the courts, especially in the case of contracts of a successive nature or of long duration. Only in the case of impossibility (thus, because the purpose of the contract has been completely frustrated) will it be possible to terminate the contract.
Finally, it should be pointed out that the above with regard to the possible application of the «rebus» clause in contracts must leave aside those cases in which there is a legal provision that allows, enables or even guarantees the execution of the contract while the situation of force majeure derived from the coronavirus crisis is in force, which must be complied with in all cases.
April 2020
Fernando Seoane
Antón Zamorano