The COVID-19 crisis and contracts

The COVID-19 health crisis places us in a contractual scenario without precedent in our country. Many companies and entrepreneurs have been forced to close their businesses by order of Royal Decree 463/2020 of 14 March, which declared the state of emergency.

Thus, Article 10 of the aforementioned Royal Decree requires the suspension of the opening to the public of any commercial establishment whose activity involves a risk of contagion for persons, with the exception of certain authorized commercial activities (food, beverages, basic goods and products, pharmaceutical and medical establishments, among others).

The duration of these measures is in principle 15 calendar days (therefore until 29 March 2020), but may be extended depending on how events unfold.

In this kind of exceptional situation, what happens to contracts and the contractual obligations they contain? Can contracts be terminated by force majeure, can contractual amendments be requested? The questions are many and there is no single answer.

This article does not intend to provide answers, since each situation and each contract must be analysed individually; it merely intends to put forward some criteria in contractual matters, based on the current regulation existing in our system and the case law to date, on the understanding that there are no precedents similar to COVID-19 in our country.

In my opinion, the COVID-19 crisis would meet the case law requirements for being classified as “force majeure” under Article 1105 of the Civil Code since (i) closure because of Covid-19 is not an event that is attributable to the employer or contractor (measures taken by the Government in the face of a health crisis); (ii) it is very likely that many companies will not be able to meet their contractual obligations or will have difficulties in doing so; (iii) it is an unforeseen and unavoidable situation; and (iv) this situation is the direct cause of non-compliance.

However, each contractual relationship must be considered on a case-by-case basis, as many contracts provide for the consequences of a force majeure event when they are concluded. In addition, the consequences of Covid-19 on contracts will not be the same for a business that must be closed under the Royal Decree declaring the state of emergency as they will for businesses that can be opened but with difficulties (either due to the illness of one or more of their workers or to any other cause directly related to Covid-19).

One possibility worth considering in this situation is to renegotiate contracts between the parties on a temporary basis, for the duration of the exceptional circumstances. This possibility would be based not only on the principle of the autonomy of the will of the parties, but also on the case law principle of “rebus sic stantibus” which was developed by our Courts after the end of the Civil War and which has been applied ever since, notably during the global financial crisis of 2013 and 2014 (although the latest case law has shown itself to be restrictive in its application, for example in the Judgment of 15 January 2019 relating to the hotel sector). This doctrine seeks to re-establish the contractual balance of benefits between the parties and is an exception to the “pacta sunt servanda” principle (what has been agreed is binding upon the parties), so that in exceptional situations one is permitted to modify the contractual obligations agreed in the initial contract.

Given the current prevailing and radically unpredictable situation, it could be understood that there has been an extraordinary alteration in the circumstances that existed at the time the contracts were concluded. Requiring full performance of the contract may in some circumstances and cases involve inordinate disproportion and an excessive burden for one of the parties, altering in any case the balance of performance. This would allow the contractual conditions to be modified, either by mutual agreement between the contracting parties or by the courts in a possible lawsuit.

Given the exceptional nature of the COVID-19 crisis and the lack of precedents in our law and case law to date, it is necessary and fundamental to analyse each contract and each contractual relationship and its circumstances in order to find the most appropriate, proportional and good-faith solution, since otherwise, once activity in the courts is normalised, a busy period of contractual litigation will ensue.