Exoneration of liabilities when the breach comes from an unforeseeable or unavoidable event
Updated: Apr 5, 2020
Many contracts signed between individuals or between companies and individuals before the world health crisis caused by the coronavirus have been left in a very delicate situation. In the essence of the fulfillment of contracts, such as the purchase and sale or the deposit/down payment one, the principle "pacta sunt servanda", or what is the same, "contracts must be fulfilled".
In a normal situation, in the event of non-compliance, the non-complying party will be liable and will be penalized or financially compensate the complying party. However, the Civil Code includes the exception that, in the event of non-compliance, no one will be liable for those events that could not have been foreseen or that are inevitable. And it is the case of the coronavirus pandemic. This means that the exoneration of liability is foreseen when the breach comes from an unforeseeable or unavoidable event by one of the parties. This is what is commonly called force majeure or fortuitous event, so that the contractor who has not been able to comply, if it is due to events that he could not have foreseen or that, having foreseen, could not prevent, will not have to be penalized or any compensation, unless such circumstances have been foreseen within the contract itself by virtue of the principle of freedom of agreement between the parties; therefore, each case will always have to be analyzed individually.
The current health situation, generated by the coronavirus, and the measures that have had to be adopted to safeguard public health, are framed as one of the cases of force majeure, since many people have seen their income decrease, as a consequence of the ERTE (Expediente de Regulación Temporal de Empleo, in English: Temporary Employment Regulation Measures) or layoffs, so the expectations created for the purchase of a home may have been frustrated as a consequence of these supervening and inevitable circumstances.
It is essential for the defaulting party to come out of its obligations unscathed (for example, not losing in the case of the buyer or not doubling in the case of the seller the amount delivered as down payment/deposit for the house), the supervening circumstances (in this case the coronavirus) must have been unpredictable at the time of signing the contract. In all contracts, the “rebus sic stantibus” clause is implicitly contained. These limitations to the fulfillment of the contracted obligations have also been developed jurisprudentially as the clause "rebus sic stantibus".
But, what does this clause mean?. The “rebus” clause implies that a totally unpredictable change in circumstances can lead to the modification or termination of obligations, and for it to apply, the same requirements (total unpredictability) are required as in force majeure. It must be taken into account that the effects of the fortuitous event, force majeure or rebus clause must be proportionate to the situation. As our Supreme Court points out, what is at issue is to “relax” the rule “pacta sunt servanda”, or the obligation to fulfill contracts, not necessarily to extinguish them.
Thus, the effect of this clause should be the modification of the contract to rebalance the rights and obligations of the parties. And in case of total impossibility of fulfilling the signed contract, it must be resolved without any compensation in favor of any of the parties. The effects that occur in a person who as a consequence of the health crisis has been left unemployed, and therefore in the uncertainty of their economy in the medium or long term, will not be the same as another who has been affected by an ERTE, and that it will return to the same working conditions as those it had previously, once it returns to normal.