Spain: Effects of COVID-19 on Contractual Obligations
I.Situation generated with the declaration of the “State of Alarm”:
Royal Decree 463/2020, of March 14, establishes in its article 1, that “the state of alarm is declared in order to face the health emergency situation caused by the coronavirus COVID-19”. And, as a consequence, in art. 9 of the aforementioned Royal Decree, it is agreed to suspend “the opening of retail stores and establishments to the public” with the few exceptions that are notorious for all of us.
Yesterday, in the late afternoon, the Government of Spain approved a Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, which, although it complements This first Royal Decree 463/2020 does not significantly modify the closing obligation of most of the premises and retail establishments affected by said rule.
Said prohibition supposes, for practically all the retail businessmen that have premises or industrial units or warehouses leased to third parties, the prohibition to generate assets (with the day-to-day cash) and the obligation to bear all liabilities (payroll, contributions, taxes and, especially, the payment of the rents of its premises and / or industrial units).
Without prejudice to analyzing in other articles what labor and fiscal measures may be adopted by retail businessmen in the face of this new situation, the purpose of this is to establish what is the effect of the “State of Alarm”, with its referred effects, on private obligations.
II. The “rebus sic stantibus” clause:
By signing a private contract (of any kind), the parties agree to fulfill it on their own terms and until the end. Therefore, if a party agrees to pay a monthly rent for leasing a premises for a specified period of time, they must fulfill this obligation until the contract ends.
However, since Roman Law, there was a Latin expression to express that this obligation to fulfill the agreement is not alien to the context of the private contract. Specifically: “pacta sunt servanda, rebus sic stantibus” (covenants must be kept as long as things remain the same).
Formerly, any private contract with a reasonable negotiation technique, contained a clause that expressly established that exception to the rigor of the contract so that, if the circumstances of the agreement varied seriously, the agreement could also be modified. Thus, over the years, this specific pact was called the rebus sic stantibus clause and, over the years, it became a General Principle of Private Law that, as of today, makes it unnecessary to include expressly in each contract.
In practically all the countries in our environment, a jurisprudential line emerged, also collected by our Supreme Court, which establishes that, if the context of a contract changes to the point of making its fulfillment very burdensome for any of the parties, breaking the balance of benefits between the parties, the obligation must also be modified to reasonably adjust the balance in the contract.
In short, the so-called “clause rebus sic stantibus”, in the words of the Judgment of the Provincial Court of Barcelona (SAP of Barcelona, Sect. 4, No. 14287/2012, of October 29), “is the remedy to the imbalance property that the alteration of contractual circumstances involves in the event of an extraordinary modification of the contractual environment “
In short, when the parties stipulate a contract of a certain duration in time, it is tacitly considered that they do so taking into account the circumstances existing at the time of the stipulation or those that can normally be foreseen, this being a necessary condition for that this contract continues to exist.
III. Requirements for judicial modification of a contract:
Establishes the Judgment of the Supreme Court, Civil Chamber no. 209/1994, of March 15, which it is possible that, although exceptionally, due to the alteration that this may entail of the principle of pacta sunt servanda and that of legal certainty, the court may take into account the particular circumstances of each case specifically, to carry out a modification (not the termination or resolution) of the binding obligation due to a defect or alteration of the business basis, as the balance of benefits has been previously broken.
Jurisprudentially requires the following requirements to be met to allow “the exceptional novation of the contract” as indicated by the Supreme Court ruling of October 15th., 2014:
– That it is a totally extraordinary alteration of the circumstances at the time of signing the contract with respect to those that occur at the time of fulfilling it.
- That there is a disproportion not wanted by the parties initially, and not justifiable due to excess, between the benefits of the contracting parties; disproportion that breaks the balance between the parts and makes the provision for one of them excessively burdensome.
- That the cause of said alteration that causes that disproportion is due to radically unpredictable, irresistible and irremediable
Fulfilling these requirements, together with a repeated loss result (economic impossibility) or the complete disappearance of any profit margin (lack of the remuneration nature of the benefit), we can request the judicial modification of the contract limited to the period in which the circumstances we have previously referred to.
As a concrete example, the Supreme Court Judgment of October 15, 2014, previously alluded to, temporarily modified the rent of a hotel building lease due to the economic crisis.
Temporary modification of the contract is the preferred solution in these cases – already exceptional – given the principle of retention of contracts that governs our legal system and, therefore, only remotely it would be possible to judicially urge the resolution if it is absolutely impossible restore the balance of contract benefits. In fact, in factual cases in which the losses frustrate the very business purpose of the contract, it would be more viable to sustain said exception to compliance in accordance with the doctrine developed in art. 1,124 CC.
IV. Conclusion:
In conclusion, we consider that it is appropriate to modify the obligation to pay the rent in the event that we are obliged to close the retail premises and businesses in accordance with Royal Decree 463/2020, of March 14, declaring the alarm status for the management of the health crisis situation caused by COVID-19.
Said modifications may consist, for example, in suspension of the accrual of income for as long as we are involved in the present “Alarm State”, or in a reduction thereof during the following months in which, surely, we will attend an acute economic recession. Notwithstanding this, given that in order to make this claim viable, it is necessary to negotiate with each property how to modify the contract and the duration of such modifications, there are no general solutions for all cases of fact. The damage caused to the entrepreneur-lessor must be analyzed on a case-by-case basis, and any eventual modification must be negotiated with the Property. If this agreement is not possible, other scenarios or solutions (perhaps judicial) should be analyzed.
If you require assistance to help you with a specific case, please don’t hesitate to get back to us. Suárez de Vivero attorneys are available to assist you with these and other workplace issues. For more information, visit https://suarezdevivero.com/
For more information please contact Joseph Granato, Communications Manager at L&E Global at joseph.granato@leglobal.org.
