Covid-19: Impact on commercial contracts – Spain
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”). Under Rome I, the general rule for international B2B contracts is that parties can choose the governing law even if it has no connection with the contract. The only limits to party autonomy are Spanish overriding mandatory rules and public policy. Consumer, insurance and employment contracts are subject to further limitations.
With domestic contracts, the choice of the parties may not prejudice the application of provisions of Spanish (domestic) mandatory rules. Some examples of domestic mandatory rules under Spanish law are (i) the prohibition to waive liability for wilful misconduct and (ii) the principle that the fulfilment of contractual obligations cannot depend on the sole discretion of one of the contracting parties.
Are there any statutory provisions relating to force majeure?
Spanish law provides that no party is liable for force majeure events. Article 1105 of the Spanish Civil Code (Código Civil) states that “outside of the cases specifically mentioned in the law and those stated as such in the obligation, nobody shall be liable for those events that were not foreseeable or which, if foreseen, were inevitable”. At the same time, following the common interpretation of Articles 1182 et seqq. (related to the impossibility of performance), it is also clear that the creditor cannot ask for specific performance in case of a force majeure event.
Force majeure has been defined in case law as an extraordinary occurrence of external nature, which was unforeseeable and impossible to avoid even when using the greatest care. According to the Spanish Supreme Court (Tribunal Supremo), force majeure is largely defined by its unbearableness or inevitability, which means that it is crucial whether the debtor was able to foresee the situation and was unable to prevent neither the event itself nor its harmful consequences.
It is worth noting that Spain is a signatory state of the UN Convention of International Sales of Goods (“CISG”) which also covers force majeure (see our separate chapter on this Convention). Even in cases where the CISG does not apply, Article 79 CISG has been very influential on legal scholarship. It is now common in Spain to take into account whether a failure to perform is “due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences”.
As a consequence, the specific circumstances in each case must be considered, as well as the debtor’s resources and ability to react to something unforeseen. To that end, the whole contract and the specific attribution of risks that it entails should be considered, taking into account what is foreseeable for the parties in the specific branch of their economic activities.
Both the Spanish Supreme Court and various regional courts have considered certain epidemics as force majeure, particularly in recent judgements involving the H1N1 virus in Mexico or SARS in Toronto. These were considered as cases of exemption from liability as a result of circumstances considered to be force majeure.
Depending on the case, force majeure will exempt the debtor from liability for non-performance, release them from meeting their obligations, or suspend the performance of the obligation if the effect of the force majeure is merely temporary. Under Spanish law, it is not clear whether one party can terminate a contract in case of force majeure. Scholars and the drafts of a forthcoming Spanish Civil Code reform tend to assume that the creditor may terminate the contract in any case of fundamental non-performance, including cases of force majeure. Setting aside the possibility of an explicit clause in the contract dealing with this, scholars also admit that a temporary impossibility of performance may allow a party to terminate the contract if they are no longer interested in such contract.
The debtor bears the burden of proof regarding the circumstances that may amount to a force majeure incident. Therefore, the debtor should gather all possible evidence of circumstances preventing the performance of contractual obligations.
How are force majeure clauses in commercial contracts applied and interpreted in practice?
In case of a force majeure clause, it is essential to check whether the parties agreed on specific terms that are applicable to the scenario at hand and, if so, what they agreed to be bound by and what the contractual expectations of both parties are. However, as force majeure is already foreseen in the Spanish Civil Code, the interpretation of force majeure clauses is also guided by those general principles.
Thus, even if the force majeure clause in question might not explicitly cover pandemics, it is likely that, depending on the circumstances of the parties and the contractual setting, Spanish courts will consider that the current situation may amount to a case of force majeure. Here, it can be pointed out that not only the pandemic, but also its consequences (like a ban on importing certain raw materials from certain countries, or on overseas travel) may be taken into account. Yet, the question whether the coronavirus outbreak can be considered a case of force majeure is something that needs to be analysed on a case-by-case basis, i.e. in light of the specific nature of the binding relationship, the terms of the agreement and the specific circumstances of the case.
In general terms, the Supreme Court understands force majeure as an event that arises after the parties’ agreement, rendering useless any diligent effort to achieve the contractual aim (judgment of the Supreme Court dated 18 December 2006, no. extraordinary appeal 200/2000). In addition, it states that there must also be a total absence of fault, because fault is incompatible with force majeure and fortuitous events. Therefore, force majeure must consist of a force beyond all control and foresight, and its occurrence must be weighed against the normal and reasonable foresight that the circumstances require to be adopted in each specific case, or inevitability in a practical possibility.
When considering if the novel coronavirus outbreak can be seen as a force majeure event, there is some case law in relation to similar outbreaks that should be taken into account:
- In a ruling of 2 November 2006, the Regional Court of Madrid evaluated the SARS outbreak in Toronto, which led to a situation that was considered by both the WHO and the Spanish authorities as a global health alert, advising against travel to Toronto (appeal no. 358/2006). The court held that the situation was to be qualified as force majeure, since there was an impossibility of performance of obligations which was due to an abnormal, unforeseeable and unavoidable event, and which was not the fault of the party who invoked it. The contracting parties were thus released from their obligations to perform their services as originally planned.
- In a ruling of 10 December 2013, the Regional Court of Madrid also considered a situation caused by the H1N1 virus to be force majeure (appeal no. 145/2012). The court found that the cause was unpredictable and unavoidable, and therefore could be considered as force majeure, exempting the defendants from liability.
As stated above, depending on the case, force majeure will exempt the debtor from liability for non-performance, release them from meeting their obligations, or suspend the performance of the obligation if the effect of the force majeure is merely temporary. However, the debtor can waive this protection.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
The Spanish Civil Code does not provide for a concept of hardship that enables parties – in contrast to the principle of pacta sunt servanda – to renegotiate or avoid performance of a contract which has become commercially onerous to perform (although local legislation for the region of Navarre does).
However, if the specific circumstances do not allow the event to be categorised as force majeure, the parties may assess the possibility of citing the rebus sic stantibus doctrine. Spanish courts have – on various occasions – applied the rebus sic stantibus doctrine, enabling contracts to be adapted or terminated when supervening events mean that the obligation no longer makes sense as it was contemplated between the parties at the conclusion of the contract.
In Spanish case law, the rebus sic stantibus doctrine is only applied on an exceptional basis and in a very restrictive manner. This principle may be applied when circumstances that were the basis for the contract have fundamentally changed in an extraordinary and unforeseeable way after the contract was concluded, so that a contractual obligation of a party has become excessively onerous leading to an imbalance of the contractual obligations or to the frustration of the purpose of the contract.
The Spanish Supreme Court set out the requirements for the application of the rebus sic stantibus doctrine in 2014 (judgment of the Supreme Court dated 30 June 2014, no. extraordinary appeal 2250/2012): it is necessary that (i) there is an extraordinary change in circumstances after the conclusion of the agreement; (ii) this change in circumstances defeated the basis of that agreement by annihilating the balance of the parties’ rights and obligations under it; (iii) this was unforeseeable; and (iv) that it produced an excessive disproportion between the parties’ obligations.
Spanish courts have shown a clear preference for adapting contracts as a legal remedy. Contracts are only revoked exceptionally, when adaptation to the new circumstances is impossible or inappropriate. However, it is important to note that the court can only adjust the contract if the party seeking to apply the rebus sic stantibus principle specifies in its application what must be done to restore the equilibrium of the contract.
Further information on the rebus sic stantibus doctrine and its application in Spain may be found in our cross-border guide on hardship, which includes a Spanish chapter.
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Firstly, the creditor has to bear in mind the statutory duty to mitigate damages that may be found in Art. 77 CISG. Some case law has also accepted this principle and scholars consider that the said duty may also be based on the good faith principle. Thus, the creditor should take reasonable measures to mitigate the damage. On the other hand, the debtor that invokes the force majeure defence must also be prepared to show that he has done everything he could to avoid or overcome the force majeure occurrence with respect to the specific obligation.
Secondly, it is essential to check whether the parties agreed on specific notification duties. Based on the good faith principle, parties should consider notifying the other party of any contingency related to the impossibility of fulfilling contractual obligations by reason of the novel coronavirus outbreak. On the other hand, the creditor may also take the initiative and allow an additional period for performance.
Thirdly, insurance policies should be reviewed, with attention paid to the procedures and time frames required to report potential damages and to the duties and obligations of the parties. It should be borne in mind that damage caused by epidemics and pandemics is rarely included in the coverage of policies.
Fourthly, clients in the middle of the production chain will probably be both aggrieved parties that would like to raise the force majeure defence and creditors against whom the defence is raised. As previously mentioned, both parties may be asked to comply with notification duties. For their part, the creditor may in principle withhold performance of their own obligation.
Finally, we recommend analysing any possible or foreseen disruption in the performance of contractual obligations case-by-case.
Special regulations on Covid-19
The Spanish Government declared the state of emergency through Royal Decree 463/2020 of 14 March 2020 (“RD 463/2020”) initially for 15 calendar days, until 29 March 2020. On 27 March, the Spanish Government announced its extension for a further 15 calendar days (i.e. until and including 11 April 2020), following approval from Spain’s Parliament. On 7 April, the Spanish Government announced a new extension for a further 15 calendar days (i.e. until and including 26 April 2020).
- Among the measures approved by the Government, there are specific provisions regarding actions and rights. Concretely, from 14 March 2020 until the end of the state of emergency, the statute of limitation and the expiry periods of all actions and rights will be suspended.
For example, if two years from a five-year statute of limitation had already passed at the time when RD 463/2020 came into force, when the suspension is lifted, there will still be a term of three years left to exercise the action or right. In other words, if part of any statute of limitation or expiry term has already elapsed prior to the entry into force of RD 463/2020, it will be discounted from the total term applicable to the case, when the suspension is lifted. It also means that if a statute of limitation or expiry term for an action or right had not commenced on 14 March 2020, the term will not start until the suspension is lifted.
However, this does not affect the time limits established in contracts to perform obligations, which are not suspended by RD 463/2020.
- Additionally, the Spanish Government has approved several regulations supplementing RD 463/2020 and has adopted various measures to support the sectors and people most affected, making the job market more flexible and relaxing compliance with legal obligations.
Further information about the concrete measures approved to date and their consequences in different areas may be found in our Covid-19 Guide.