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Is COVID-19 considered force majeure in Contract Law?

At the time of writing, the world is currently suffering a fast-spread pandemic due to the Coronavirus that is having devastating consequences across the world.

In light of this, many businesses and professionals in general are desperately trying to find ways to protect their jobs and assets as much as possible during these hard times, including delaying, rescinding or annulling contractual obligations.

As some of you may know, one way to do this is to trigger the force majeure clause. However there is a heavy debate at present as to whether the COVID-19 crisis is considered a force majeure event.

For those who may not have heard of this concept, force majeure is an exception from liability for non-performance of contractual obligations where such non-performance is caused by an unpredictable event, or one which was foreseeable but is inevitable.

Spain

Generally parties are free to agree what qualifies as force majeure for the purposes of a specific contract and the consequences, such as a penalty clause that are applicable to any event, even an unforeseeable one. The parties are also free to include an exhaustive list of events that, if needed, can be considered as force majeure and therefore those events not included will not qualify.

The State of Alarm triggering one of the strictest COVID-19 lockdowns in Europe was declared on 14th March 2020 through Royal Decree 463/2020 and at the time of writing is still in place, however it seems Spain has reached the peak of the outbreak and things are slowly starting to stabilize.

During quarantine, the temporary rules put in place by the Government by declaring the State of Alarm are limiting or making it impossible to fulfill certain contractual obligations that some businesses, professionals or even individuals in general may have had before the crisis.

The outbreak of the coronavirus disease has not officially been declared force majeure, so whether or not it is considered a force majeure event will likely come down to the specific situation in question and the legal interpretation of the applicable laws, such as a contractual provision or, in absence of a specific provision, the requirements established by the Spanish Supreme Court case law. For example, article 1105 of the Spanish Civil Code considers force majeure as a circumstance that liberates a party from its obligation to comply without incurring liability for damages. The requirements that may lead to contractual irresponsibility due to force majeure, unless the contract or the law establish otherwise, are the following:

a) Lack of culpability of the debtor.

b) Impossibility of fulfillment.

c) Unpredictability/ inevitability.

d) Causal relationship: The fortuitous or unavoidable event must be cause and have as consequence the breach of the obligation.

If a force majeure clause is triggered, this can give way to various consequences:

  1. A total and definitive impossibility of fulfilling the obligation, resulting in a right to terminate the contract without having to pay compensation. There is an exception to this option: that the contract is regarding a monetary debt, or a generic (not specific) obligation.
  2. A partial impossibility of fulfillment, meaning the party must carry out the obligation as much as possible but will be exempt from the impossible part.
  3. A temporary delay in fulfillment, meaning the party is bound to carry out the obligation as soon as they are able to.

Other remedies

If triggering a force majeure clause in your Spanish contract is not an option, then there are some other remedies you can consider to rescind or post-pone your contractual obligations:

  • You can give notification of termination of the contract within the legal time period established, suspend the contract or even have a third party temporarily take your place.
  • Check if your contract includes a clause enabling one or both parties to terminate the contract once a specific milestone or time period has been reached.
  • There may be a non-exclusive arrangement clause, so one party will have the option to source other clients, temporarily.
  • Impossibility of fulfillment due to need to comply with the new temporary laws, such as health and safety regulations, which will give way to the right to terminate the contract, or at least a temporary suspension.

Finally, there is the remedy of rebus sic stantibus. This is when there is an alteration in the contractual balance due to unforeseen circumstances and the parties are allowed to modify the contract, provided that: a) these new circumstances are unpredictable at the time of the formalization of the contract and, b) such circumstances lead to an imbalance between the contracting parties e.g. to a repeated loss result (economic impossibility) or to the complete disappearance of any profit margin (lack of the remuneration nature of the benefit).

If you are having contractual problems as a result of the COVID-19 crisis and need legal assistance, please feel free to contact our team at info@premierlaw.net or by calling +34 952 764 483.

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