Spain, like all other European countries, is taking decisive steps to contain the coronavirus and safeguard both public health and the Spanish economy. However, the government's decisions focus largely on healthcare and public security, labor protection, and extraordinary economic measures – but they do not tackle the point of business contracts.
The Covid-19 outbreak is having a substantial impact on the economy. It is putting Spanish companies and businesses under a lot of pressure. Many of them are not capable of performing their contractual duties, or are very likely to fail on their obligations in the near future.
This places companies in front of a dilemma: on the one hand, the contractual terms agreed by the parties is their "law" and sets the foundation of each party's rights and obligations which must be observed as originally set out in the agreement; but on the other hand, surely the current extraordinary circumstances can constitute valid grounds to be exempt from complying with the agreement as originally planned – or can they not?
Many businesses are aware of legal jargon such as hardship, force majeure, "acts of God", material adverse change, unforeseen circumstances, etc. But what do these mean, in practice, for contracts governed by Spanish law, in the current crisis situation? Does Spanish law provide for a legal mechanism that allows some flexibility in light of the Covid-19 threat? Can contracts be suspended, amended or even terminated without one of the parties being "at fault"?
Unfortunately Spanish law does not have a "one-size-fits-all" approach and therefore the answer to these questions is not a simple one – and will often largely depend on the facts in each case. There is no general provision on the revision of contracts in the event of unforeseen circumstances. But the case law of the Supreme Court, in developing the underlying principles of the Spanish Civil Code, has acknowledged before that "there are, throughout the Spanish legal system, express legal provisions which take into account the change in circumstances, providing for exceptions which, for various reasons, bring flexibility to the parties' contractual duties and the liability of the debtor" and has stated that "this aims not only at overcoming the unfair consequences that the forced performance would bring to one of the parties, but also at safeguarding more generally the interests of the national economy" where a sort of "retroactive effect (on previously agreed contracts) is justified on grounds of extraordinary circumstances" (sentence 13 July 2017).
In this note, we will focus on two legal principles of Spanish law, force majeure and change-in-circumstances (also known by its Latin terminology "rebus sic stantibus"), which may – in certain cases – justify the suspension of contracts, their variation, and even their termination.
For more guidance on your contracts in Spain, please contact your Hogan Lovells contacts in Madrid (see sidebar).
Further practical information on the impact of coronavirus on international contracts can also be found here:
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