The exceptional situation caused by the COVID-19 pandemic forced the Spanish Government to declare the State of Alarm on March 14th, which will remain in force until at least March 28th 2020. This has raised concerns among legal operators and several legal questions, including the question of how the aforementioned State of Alert affects contracts in the future: is there any possibility of failing to comply with them, suspending, adapting or terminating them?
Royal Decree 8/2020 of March 17th on extraordinary emergency measures to deal with COVID-19 does not establish any measures on matters relating to continuing-performance contracts, with the exception of the payment of instalments on loans for permanent housing for disadvantaged groups.
The possible modification of the continuing-performance contracts will revolve around the exceptions admitted in our system with respect to the principle pacta sunt servanda (what has been agreed, obliges):
- The fortuitous case or force majeure and,
- The supervening alteration of the contractual circumstances or rebus sic stantibus.
Firstly, the essential requirement for the operation of the fortuitous case or force majeure implies a supervening impossibility on the part of the debtor to comply with the agreed performance (articles 1.105, 1.182 and 1.258 of the Spanish Civil Code).
- The impossibility of performance does not apply to monetary debts, as they are generic obligations; in certain cases, a temporary delay or failure to perform could be contemplated but it would not act as a cause for the extinction of the obligation.
- It applies, therefore, to obligations to give a certain thing and do it. Only in cases where the thing is lost, destroyed through no fault of the debtor, before the latter is in default, or when delivery becomes legally or physically impossible.
For the qualification of rebus sic standibus, however, the basis is the modification of the contract to compensate for the imbalance of obligations caused by the altered circumstances. In doing so, it must be analyzed whether the new circumstance alters or frustrates the primary economic purpose of the contract and, secondly, whether it constitutes an unforeseeable circumstance in the context of the contract, i.e. whether the supervened circumstance falls within the normal risk.
In order to exemplify the above, some circumstances have been repeated throughout the aforementioned situation of exceptionality:
- To comply with leases for use other than as a home, or business premises agreements. As the essential obligation is the payment of an agreed rent, it is not impossible to comply with it and, therefore, it would not be assessable as a case of force majeure. The rebus sic standibus clause could be applied in the event that the new circumstance alters the basis of the business in such a way that the primary economic purpose of the contract becomes unattainable, thus breaking the commutability of the contract.
- To comply with continuing-performance financing contracts, such as loan or credit agreements. It is not impossible to comply with these financial obligations, but the rebus sic standibus clause could be applied because unless the contract itself exempts it, the change in circumstances could lead to the concatenation of the requirements for its application.
The Supreme Court denied that an economic crisis, by itself, is a cause of contractual resolution, being evident that our case law has been leaning towards the conservation of legal acts and business, preferably applying a simple modification of them. However, the solutions will respond to the casuistry, having to prove in a clear and unequivocal way the cause or reason why the legal business cannot be faced in the same way as before the situation of exceptionality caused by the COVID-19.