Declaration of “State of Alarm” and suspension of contracts due to force majeure
On 11 March 2020, the World Health Organisation elevated the public health emergency caused by COVID-19 to an international pandemic.
To deal with the outbreak of the “coronavirus”, the Spanish government has approved Royal Decree 463/2020 of 14 March, declaring a state of alert for the management of the situation caused by COVID-19.
These government measures to contain the pandemic can cause major disruptions in the business operations of companies, in particular they can disrupt the supply chain and services.
In this context, it is necessary for companies to draw up and/or activate contingency plans for the “coronavirus” crisis, including a review of contracts with customers and suppliers, and in which cases the parties to a contract can invoke a “state of alert” as a cause of force majeure to exempt them from their contractual obligations.
It should be noted that every year there are epidemics or pandemics which, from a legal point of view, do not affect the contractual relationship between the parties. However, if government measures to combat the epidemic are added, as is currently the case with COVID-19, they may result in impossibility of compliance in special cases.
Force majeure does not exempt the fulfilment of payment obligations:
Case law: Where the principal performance to be paid by the debtor consists of a monetary debt, the impossibility of payment due to unforeseen circumstances or force majeure cannot be invoked as a defence
The ruling of the Supreme Court, 1st Chamber, of May 19, 2015, raises the effectiveness of the exercise of a unilateral withdrawal due to facts that cause a supervening impossibility to comply with the payment of the purchase price.
In the case under trial, since the purpose is to pay a sum of money (the purchase price), we are in the presence of a pecuniary debt. In this sense, the Court recalls that financial debts have a special physiognomy that distinguishes them from other generic obligations, to which a series of characteristics are linked, among which the “perpetuatio obligationis” in the risk system stands out. The consequence of this is that: (i) the impossibility of compliance is denied, admitting at most temporary non-compliance or delay, as well as (ii) the failure to comply with the monetary benefit entails the condemnation to the payment of the money.
In short, the High Court reports that “the monetary debtor is obliged to perform the principal performance, without his supervening economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic as is money”.
In this sense, the judgment distinguishes between cases of supervening impossibility of performance, which only affects the obligation to deliver a certain thing or to do something, and not monetary debts (as is the case in court), and cases in which performance is exorbitant or excessively onerous, which fall under the rebus sic stantibus clause, applicable regardless of the content of the agreed performance. It rejects the appeal on the ground that there is “a pecuniary debt for payment of money as a principal performance which cannot be relied upon as a defence to the impossibility of performance due to unforeseen circumstances or force majeure“.
Fulfilment of the remaining contractual obligations in the case of force majeure
Under certain circumstances, the contract and the applicable law provide for exceptions to the obligation to perform or to pay damages. The terms “force majeure” or “frustration of contract” are used in the contract terms to describe such defences, which provide for various legal consequences, including exemption from liability.
The prerequisites and their legal consequences, as well as recommendations for action in the event of delays in contracts due to coronavirus, are set out below:
- Examination of the contract
It is necessary to analyse case by case and to verify, first, whether a contract exists and, if so, how force majeure is regulated in it. In Spanish law, “no one shall be liable for events that could not have been foreseen, or which, if foreseen, were unavoidable”.
The first block of contracts to be examined is that in which the parties have configured and detailed the consequences that will result from an event of force majeure. In accordance with the principle of pacta sunt servanda, we will be at the disposal of the parties to find a solution in this regard, whether in matters of suspension or termination of the fulfilment of their respective obligations.
In these cases, when an event has occurred that constitutes force majeure, the clause describes the regime applicable to the specific case. The clause usually specifies the effects on the obligations of the parties: either release from all liability; or suspension of the performance of the obligation.
Clauses governing a situation of force majeure may also give rise to new obligations on the part of the parties, either to use possible means to remedy the impossibility of performance as soon as possible; or to notify the other party of the termination of the force majeure situation. If the situation continues beyond a certain time limit, the contract may provide for its renegotiation or termination.
The second block of contracts is those in which the parties have not set out or detailed the consequences that will result from a force majeure event. In these cases, the law must provide for the extinctive effect of the obligation (art. 1105 of the Civil Code: “Apart from the cases expressly mentioned in the law, and those in which the obligation is so declared, no one shall be liable for events that could not have been foreseen, or which, if foreseen, were unavoidable”); or specifically for certain types of contract or sectors (transport, …).
- Communication to the counterpart
Notify the other party in an irrefutable manner that the force majeure has arisen and show proof of it. We recommend that all incidents be reported in writing and documented. In this regard, companies affected by the suspension of the opening to the public under Article 10.3. of Royal Decree 463/2020, must notify this situation and collect regulations and publications from state and local authorities.
It should be made clear that it is not the same to suffer from a failure to deliver caused by a quarantine or a blockade decreed by the government as it is to suffer from the defective management of a supplier in an exceptional situation, or a business decision, in which case, force majeure cannot be invoked. It would therefore have to be analysed in the light of the facts relating to the root cause of the breach.
- Adoption of measures to mitigate damage
The contracting parties can discuss and implement measures to reduce damage and losses. All these measures should also be documented.
Finally, insurance policies should be analysed to see if they include extraordinary cover, such as in the case of a pandemic (they are often excluded). Here again, it is essential to follow the notification procedure provided for in the policy.
We remain at your disposal to clarify or extend this information.