Force Majeure and Rebus Sic Stantibus Clauses in the context of the COVID-19 Crisis

Force majeure and rebus sic stantibus clauses are legal mechanisms that allow for a modification of the terms of a contract.

The current health crisis that we are experiencing on a world level because of the COVID-19 pandemic or Coronavirus is leading to a critical situation for many companies established in Spain. Among many other problems in certain situations it is being made impossible to adequately comply with the terms of their contracts, without fault on their part, and because of the restrictive measures introduced by the government to combat the virus.

In normal situations, the general rule is that contracts must fulfil all its terms and have the force of law between both parties (arts. 1091 and 1258, among others of the Civil Code).

However, given the exceptional situation we are experiencing, companies may in principle use two legal figures recognised in the Spanish legal system to:

  • Justify a breach of contract
  • Request an amendment of the contract
  • Even request the termination of the contract when completely deprived of its meaning or purpose.

We are talking about of force majeure and rebus sic stantibus clauses.

The Force Majeure Clause

Article 1.105 of the Civil Code expressly recognizes the force majeure clause as a rule that justifies contractual non-compliance in unpredictable situations, or which, even though foreseeable, were unavoidable. The force majeure clause excludes the liability of the non-compliant party in such situations.

The requirements to claim the absence of contractual liability due to force majeure (and, therefore, the non-performance of the contract) are the following:

  • Unforeseeable, unavoidable, insurmountable or irresistible events
  • Not due to the of the non-compliant party
  • The situation must make it impossible to fulfil the obligation previously undertaken
  • Existence of a sufficient link of casualty between the result and the event that produced it.

In other words and as a rule, for it to apply, the event of force majeure must make it materially impossible for the contract to be fulfilled or executed. Let us take for instance the case of an industrial factory forced to close down because of the measures decreed by the government, and that cannot, therefore, comply with the supply previously agreed with its customers.

Rebus Sic Stantibus Clause

There is also the possibility of arguing the application of the so-called rebus sic stantibus clause. Although this clause is not expressly contained in any legal provision, it has however been judicially accepted by the Supreme Court (among many others, recently in judgements 227/2015 de 30th Abril 2015; 19/2019, 5th January 2019; 214/2019, 26th March 2019; 214/2019, 26th March 2019; 455/2019 18th July 2019). This said, its application has traditionally been carried out on a restrictive basis.

The rebus sic stantibus clause consists of a sudden and extraordinary alteration of the circumstances taken into account at the time of the conclusion of a contract, provided that:

  • These new circumstances are unpredictable
  • They have caused a disproportionate and exorbitant breach of the balance between the contracting parties, making the fulfilment of the contract for one of them excessively burdensome.

The Supreme Court ultimately requires frustration or impossibility to fulfil the economic purpose of the contract. Once these requirements have been met, the amendment of the contract to re-establish the balance between both parties may then be requested and even its termination, when its continuity has lost all meaning.

Let’s take for instance a retailer forced to close its premises as a result of COVID-19, which causes an absolute halt to his business, although he is still required to continue paying the rent to the owner of the premises based on the existing lease agreement. This creates an imbalance concerning the initial situation from which both parties started their contractual relationship.

In light of the above, it is clear that the COVID-19 pandemic (as declared by the World Health Organisation), is a completely unpredictable and unavoidable event, for which the contractual parties lack any form of fault. Therefore, it cannot be understood as an inherent or specific risk to contracts, so it is feasible that in many cases companies may benefit from the clauses previously specified. If they meet their requirements, they may review the contractual terms agreed given the extraordinary circumstances we are currently experiencing.

However, to argue force majeure or rebus sic stantibus clauses, a case-by-case analysis is required. It will also depend on what is provided for in the terms of each contract. Similarly, the non-compliant party will need to duly prove for each one of these two legal figures the fulfilment of the stipulated requirements; thus, its implementation is far from automatic.

For any additional information you may require on this topic, do not hesitate to contact us.

This article is not considered as legal advice

José María Mesa

A licensed attorney with both Business Administration and Law degrees, José María Mesa is specialized in the areas of commercial contract, corporate law and mergers and acquisitions. Working languages: Spanish and English. For any query Contact José María Mesa