Practical approach to the rebus sic stantibus clause governed by Spanish law
It is no secret that civil law jurisdictions construe agreements differently from common law. Among these differences, underlying facts, behaviors, declarations and the goodwill principle extend the terms of the agreement beyond what it is written and can have a huge impact on its execution and remedies.
What is the rebus sic stantibus clause?
One of these institutions, derived from Roman Law and almost forgotten in Spain until the 2008 economic meltdown, is the rebus sic stantibus clause. This provision, tacitly included in every single contract governed by Spanish law, means “being the situation as it is”. The practical effect of this clause is that the obligations derived from periodical contracts can be modified, suspended or rescinded in case the situation surrounding the cause of the agreement changes dramatically.
How can we apply it?
The application of this provision, as anyone can understand, crashes with one of the main principles of every jurisdictional system: legal certainty. Therefore, its enforcement has been historically restricted under Spanish law until the last economic meltdown. Some resolutions of our Supreme Court have revised this figure according to current times and stated that its application has to be analyzed according to the circumstances affecting the case, not being automatically excluded as it was almost construed in previous decades.
This journey concludes in the present moment. Two months ago, no one could expect the paralysis of the whole global economy as it is being currently developed: The confinement of all the workforce in their respective homes. Lockdown of all retail business and many other activities. A force majeure event with no precedents at all in any jurisdiction.
Apart from the concept of force majeure, applicable in Spain as well, it is important to notice the main difference between it and the rebus sic stantibus clause: whereas a force majeure event exonerates the debtor from damages and executing an obligation under an agreement, the rebus sic stantibus clause allows a party to modify, suspend or rescind such an obligation. The effects can, in some cases, be the same, but the procedure intended for them differs.
Practical tips in order to check whether the clause is applicable to the concrete case
In order to justify the application of the rebus sic stantibus clause it is needed, according to case law and doctrine:
Unpredictability:
The situation caused by the pandemic, in this case, could not be foreseen in previous months. Therefore, obligations under certain agreements might be affected. Please bear in mind that other epidemics, such as the A flu, have already occurred and been studied by Spanish Courts with several divergent criteria.
Unforeseen occurrence of extraordinary circumstances
The situation has to be extraordinary, out of the course of normal living or economic conditions.
Attribution to the parties
The situation cannot be attributable to any of the parties. It is outside their action area.
Allocation of risks under the agreement
If the agreement allocates expressly the risks regarding a situation such as the pandemic, for instance, the written provision prevails.
Substantial alteration of the economic base of the agreement
The cause of the agreement must have been altered by the pandemic in an extraordinary way, so that it is no longer interesting or economically feasible for one of the parties to carry out the obligations stated in the contract.
This as an extreme factual context that needs to be assessed in each case. For instance, the clause shall be applicable to a rent in which the tenant is not able to open its business to the public due to legal constraints. In this case, a suspension or a reduction of rent can be claimed, since in this condition the baseline of the agreement previously entered into has substantially changed (hopefully, during a concrete period of time).
This might be the case for other kind of contracts, especially those with a consecutive nature (`tracto sucesivo’). At least this is what our Supreme Court surprisingly argued in it’s last resolution in this matter (March 2020). We will see the path that this doctrine follows.
Our vision
Up to this day, our vision regarding the application of the rebus sic stantibus clause under Spanish jurisdiction is as follows:
It is feasible, not sure, to defend the argument of its application before Spanish Courts.
It is more than advisable to justify the damages suffered by this unforeseeable situation in order to apply the clause. Huge documental effort must be applied.
In case of agreements of consecutive nature, such as lease agreements, the application of the clause could cause more damages than well, since other factors can surround the agreement (such as availability, trust, business assets etc.) that could confront the short term benefits of suspending temporarily the rent or the obligation, for example.
Negotiation with the counterparty is strongly advisable, since the judicial system is prone to be collapsed in the upcoming months due to the increase of this kind of matters.
This is only an informative document, with no legal effects. No responsibility shall arise from its content or interpretation.
Ignacio López-Hermoso
M&A, Company law and corporate disputes Lawyer
Madrid Bar Association 126,778