COVID-19 and fulfillment of contracts

In the context of the status of alarm declared by the Spanish government last March 14th, 2020 because of the serious situation caused by COVID-19, many entrepreneurs wonder how such statement may affect the fulfillment of public and private agreements in force. The situation is particularly worrying for all such business relations that are directly affected by the restrictions imposed by Spanish Royal Decree 463/2020, of March 14th, which declares the alarm status to manage the health crisis caused by COVID-19.

 

Although the legal provisions enacted during the last days do not solve this matter, we understand that, from a legal standpoint, the COVID-19 pandemic could be considered as a force majeure cause preventing the fulfillment of contractual obligations. Our advice before such situation is that the parties try to reach agreements in good faith avoiding claims before the courts taking into account, additionally, that courts have been closed, with exceptions, and claims for breach of contracts are not admitted.

 

The concept of “force majeure” is foreseen in Article 1105 of the Spanish Civil Code, together with the one of “fortuitous case”: “Out of the cases expressly mentioned by the law, and those in which the obligation so states it, nobody will be liable for those events which could not be foreseen or that, being foreseen, could not be avoided.” Thus, force majeure is defined as an extraordinary event, unpredictable and unavoidable, that is to say, that could not be avoidable even applying the maximum diligence.

 

Therefore, a force majeure situation holds the defaulting party harmless from any liability and, consequently, no indemnification for damages may be claimed in those cases. The foregoing does not mean that the obliged party is released from its obligation, but no liability may be claimed to it as a result of such breach.

 

Notwithstanding the foregoing, the current situation implies, in our opinion and following case law approach, a material change of the initial conditions in which the agreement was executed (“rebus sic stantibus”) and, therefore, we could be in front of two scenarios: the convenience of suspending the fulfillment of those obligations that are impossible to fulfill, or else, the need to terminate the agreement where default makes impossible the feasibility of the relationship. In both cases, however, as said before, no liability for damages can be claimed to the defaulting party, save when the agreement foresees the effects of a force majeure cause, in which case the provisions of the agreement shall be considered.

 

To conclude, our advice is to review the agreements case by case, and analyze the feasibility of a negotiation in view of reaching a good faith agreement for the suspension of their enforceability so that, even though this will not avoid the economic effects, certainly negative, of COVID-19, it may give some release to the main obliged parties and may allow the continuity of the contractual relationship once normality is restored.  As an alternative, the Spanish Lawyers General Council (“Consejo General de la Abogacía de España”) recommends going to mediation as a means of conflict resolution.

 

RSM Alert

 

For more information contact us: ready@rsm.es