The Effectiveness of Contracts in Situations of Force Majeure and the Application of the “rebus sic stantibus” Clause – an article by Pellicer&Heredia Abogados

What is its impact on home buying?

Our doctrine defines force majeure as an extraordinary, unpredictable, and unavoidable event. According to this definition, there is no doubt that the situation created by the declaration of the State of Alarm based on the protection of Public Health against COVID 19, is a case of force majeure.

As is well known, in matters of contracts, the principle of the preservation of existing legal ties and the principle of a fair balance of benefits prevail.

Although our Civil Code in its article 1005 establishes that “Apart from the cases expressly mentioned in the law, and those in which the obligation is so declared, no one will be responsible for those events that could not have been foreseen, or – if foreseen – would be unavoidable”.

The exclusion of liability refers to the compensation for damages, but not to the duty to fulfil the obligation. This article does not state that the party whose provision is affected by such events is no longer obliged to do, if it is still possible, what it was originally obliged to, but rather that the liberating effect eliminates the possibility of claiming possible compensation for damages.

However, although civil law does not provide for any rule that allows the termination of a contract due to a sudden change in the circumstances, our reality is that the clause “rebus sic stantibus”, created by case law, provides for the possible termination of a contract due to sudden and exceptional circumstances that affect the basis of the business, leading to a sudden change in the conditions initially agreed.

The Supreme Court (SC) maintains restrictive criteria with respect to the application of the referred clause since priority is given to the modification or adaptation of the conditions that are affected by the alteration.

In order to terminate the contract, the requirements – determined by case law – that must be met are the following:

– There has been an extraordinary alteration of the circumstances that led to the conclusion of the legal transaction for both parties.

– There is an exorbitant and out-of-date disproportion of the services provided by the contracting parties that directly affects the fair balance of the services.

– All of the above is the consequence of supervening and radically unforeseeable causes.

– There is no remedy for the contractual imbalance that has occurred.

In its recent sentence (Ruling 156/2020) of 6 March 2020, the SC maintains its jurisprudence line on “rebus sic stantibus clause” and clarifies that it will only be applicable in long term contracts (1 year or more) and not in short term ones.

Understanding the current situation (COVID 19) as serious, unforeseeable, extraordinary and causing disproportion between the parties to a contract, this could be the necessary scenario to allow the termination of a contract, always taking into account the specific and concurrent circumstances in each particular case. Nevertheless, in principle the preservation of the contract should prevail over the modification of the affected conditions, provided that this allows the restoration of the equilibrium of the services in the contract.

What about possible delays in the delivery of homes purchased under construction?

The misprovision of materials or the impossibility of providing the necessary services for the completion and delivery of a new work caused by the adopted measures would justify a delay in the delivery time of the housing. However, for the delay to have the effect of terminating the contract or exercising the guarantees, it must be qualified as serious.

Ignacio Pellicer & Pedro Heredia

www.pellicerheredia.com

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