COVID 19 and contract changes

Application (or not) of the rebus sic stantibus clause

We all have ahead times of extraordinary social and legal complexity. Many contracts are not going to be able to be fulfilled, and others will have to adapt to a new economic reality. The courts of justice will also enter the ICU, where it was already largely. Advocacy has an extremely important duty and social responsibility: finding agreed solutions between the parties. In this exceptional moment, we the professionals must advocate for and seek doable solutions, with all we can. The solution, today less than ever, will not be in the courtrooms. If, unfortunately, there is no other choice but to go to court, the latin sentence is going to be rebus sic stantibus.

“Provided it remains the same” or “rebus sic stantibus” is a principle of law that had been used since ancient Rome to modify or terminate a contract when the circumstances under which it was signed had been substantially altered. However, despite its antiquity, today it remains in Spain a highly discussed matter and the subject of great discrepancies among jurists. We will try to break down all its elements.

The rebus sic stantibus clause is a case law (not statutory) creation that is understood to be implicit in contracts, and which allows its conditions to be resolved or modified when, as a consequence of an unforeseen circumstance, unforeseeable and alien to the parties, a serious and unpredictable event has occurred, unbalancing for one of the parties. It is a mechanism of rebalancing, which seeks to recover the economic purpose and rebalance the economic expectations of the parties. The latter is essential: there must be an exorbitant disproportion between the party’s interests, that is to say, the circumstance that has occurred must not affect both parties equally, and has to be largely onerous for this part.

From the post-war (1939) until now, the jurisprudential development of this clause has varied greatly, and much of its development has occurred after the financial crisis of 2008. Since it is an exception to fundamental principles of contract law such as are the pacta sunt servanda and the freedom of the parties to agree whatever they wish, the courts were very reluctant to accept their application. However, after the Supreme Court ruling of June 30, 2014, there is a qualitative change in the jurisprudence, and the restrictive and exceptional application of the rebus sic stantibus clause is left aside, to begin to be considered as a feasible instrument.

Given this requirement of the Courts, below, we will see the most basic requirements for a correct and fruitful application of this clause:

  1. Same as all case law construction, we should not expect the judge to apply it ex officio but must be expressly invoked by the parties.
  2. A simple invocation of the clause is not enough, but the party that invokes it must develop and prove each of its elements.
  3. As a consequence of the above, it will be much easier to apply the clause to request the revision and modification of the contractual conditions than to request the termination of the contract (principle of retention of contracts).
  4. The notorious nature of current exceptional circumstances makes it easier to prove them, but their consequences must be proven. In other words, it is not necessary to prove the existence of the health and economic crisis, but the party invoking it must prove that as a consequence of said crisis, their expectations or economic purposes have been

We must not mix up the rebus sic stantibus clause with an impossibility of performance of the contract by force majeure.

 

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