The duration clause in Spanish commercial contracts. Some tips and recommendations.
Many times, the duration clauses in contracts are overlooked, although they are among the clauses that generate the most conflicts.
The climate of negotiation
We must bear in mind that when the parties negotiate a contract, the situation is usually positive. Bridges are usually built to reach an agreement, thinking that the contractual relationship is positive for both parties and that nothing will happen. Within this climate of harmony or "desire" to reach an agreement, the duration clause of the contract is often given little attention.
In this clause, the parties determine how long they will be contractually linked. The duration of the contract represents the period of time during which the bulk of each party's obligations will be in force.
Do I really want to be bound for so long?
So far, so good.
The perfection (beginning) of contracts does not usually involve excessive risks regarding this type of clause. The problem comes with its execution. The parties begin executing the contract (fulfilling the agreed-upon obligations) and see if what was promised by the other party before starting the relationship fits reality and their expectations. If these promised performances (and expectations about them) fit reality, there is no problem. If the expectations or promised results in the contract do not materialize in reality, the harmed party will have an interest in not continuing with the contract.
And it is in this interest not to continue with the contract where we usually remember the duration clause. It is as important to start and enter into the contract when we want to as it is to get out of it in situations where we are not interested in continuing.
Minimum duration clauses can be treacherous
Sometimes, a minimum duration of the contract is agreed upon (think, for example, of lease or service contracts) that must be respected. This minimum duration represents an expectation for both parties that the economic results of that contract will have a determined temporal validity.
For example, in a service provision contract, a minimum duration of 5 years is agreed upon at a rate of 100,000 euros per year, in the event that the client wants to terminate the contract in the fourth year, the service provider's interest in the year of unfulfilled services would be frustrated. In total, the loss of profit (and therefore damage) that he could claim among other concepts would amount to the 100,000 euros he failed to earn as a result of the client's breach of the contract.
Under normal conditions and in the absence of noncompliance, the service provider would have billed those 100,000 euros that he will now not obtain as a result of the unilateral decision of the other party.
Mandatory extensions
Other times, minimum duration and successive automatic renewals of the contract are established. This means that the contract, if not denounced by either party, will be renewed with the agreed-upon periodicity. In these cases, we usually recommend thoroughly evaluating the contractual position from which we start to check what interests us the most.
The service provider, continuing with the previous example, will want the contract to have a longer duration and to be automatically extended, so that he can continue providing the services to the client for as long as possible. The client, on the other hand, will be interested in the services for the shortest possible periods of time. In this way, he can check how the quality of the services provided evolves and their adequacy with what was promised in the contract. He can also use these renewals to renegotiate elements of the contract that he considers unfavorable (price, benefits, etc.). If the provider in these cases does not agree to his demands, he may lose the contract.
In these cases of automatic renewal, we must review the necessary notice period to terminate the contract and allow it to expire. Often, long notice periods are established that catch one of the parties by surprise and artificially extend the contract for an additional year or renewal unit. In cases of automatic renewal, it is best for the party that may foresee the need to exit before the contract ends to have the shortest possible notice period (for example, one month).
Can a civil or commercial contract be indefinite? Our Civil Code prohibits perpetual obligations. However, it is not forbidden for the parties to be bound without a fixed time duration. Such stipulations mean that the contract will be in force until one of the parties unilaterally decides that it should not be (the power of unilateral resolution ad nutum).
The only requirement to be fulfilled is to give a reasonable notice period to the counterparty so that an orderly exit from the contract can take place. This period will depend in each case on the contractual relationship and its complexity. Notice periods of one or two months are usually considered reasonable in these cases.
So, can I terminate a contract before its duration ends? Not unilaterally.
The contract will fulfill its obligations during the agreed period. If this period is not fulfilled, we will be faced with a breach of the contract that will generate the usual remedies for breach in our legal system (resolution, performance, and/or damages). If you wish to disengage from the contract before the agreed time, the parties must reach an agreement on this issue. Negotiation may allow for the termination of the contract (with or without penalty) or the modification of the terms of the agreement to make them more attractive to the party wishing to end the relationship.
Often, it is not necessary to terminate contracts early, but to modify the agreed terms to adapt to the new realities that arise at the time the parties agreed to collaborate together in the past.
Ignacio López-Hermoso
Corporate M&A Lawyer
➡️For more info you can contact us on 0034 91 415 74 62 or send us an email to info@lopezhermoso-abogados.com