Validity of contracts in coronavirus period

In the past, we published an article referring the “rebus sic stantibus” doctrine. This doctrine makes it possible to modify contracts when the circumstances that justified it drastically change.

The mentioned article was based around the 2007 Financial Crisis. We concluded then that this doctrine was still exceptional in terms of application. The Financial Crisis was not good enough on its own to modify the contract. It was required that it would also had to change the circumstances surrounding the contract. Or at least, the financial crisis should have caused an extraordinary or unpredictable event.

Nowadays it’s a must to analyze again this doctrine right where we left it. We are in a state of alarm due to the coronavirus pandemic. People can’t get out of their homes. All kind of shops are now closed, except for a few of them. Are there any more excepcional and able to change the effective status of a whole country circumstances than this? Should a bussiness premise tenant continue paying a 10.000 euros renting when he’s obtaining 5% of his previous earnings?

Thus, it’s necessary to rethink it again: Are the coronavirus pandemic and the effective earnings loss the unpredictable and extraordinary event this doctrine requires? Should we consider they have led to an effective change and a disproportion between the agreed terms?

Brief “Rebus Sic Stantibus” concept delimitation.

How to frame the coronavirus pandemic and the state of alarm in this doctrine.

As we know, if the requirements are complied, this doctrine allows to modify the terms of the contract. Therefore, the debtor may decrease the risks of the contract, or even exonerate himself of it.

This requirements we have mentioned are several and are stablished by the doctrine in a precise way. Thus, the recent Supreme Court Ruling (STS) 452/2019 has confirmed them again. We are going to explain them while making a comparison with the coronavirus pandemic and its consequences:

• There must be an extraordinary change. This means a mutation or modification in the terms or circumstances that allowed the contract to be made. That’s why the fact that the earnings are becoming non-existent or at least are extremely decreasing due to the coronavirus pandemic should imply that this requirement has been met.
• This change must lead to a disproportion between the terms agreed in the contract. We think that this lost earnings mentioned before makes a great disproportion in the contract. Using the same example as before, the bussiness premise tenant that started paying 10.000 euros a month for the premise shouldn’t continue paying that quantity when his earnings have decreased in such a dramatic way or are now non-existent due to the coronavirus pandemic and the state of alarm.
• This disproportion must be unpredictable and it must happen after the contract has been made. Jurisprudence in our country, when it comes to denying this doctrine application, use this requirement. The Courts normally mention the standard contract risk when it comes to denying it (STS 333/2014, June 30th, STS 64/2015, February 24th, STS 477/2017, July 20th, and the previously mentioned STS 452/2019, July 18th). Th state of alarm and the coronavirus pandemic can’t fit in the standard contract risks by any means. .
• Not having the means to solve the disproportion. This requirement will be determined depending on the debtor status.
• When this doctrine is applied, it must be done while respecting the “bona fide” criteria gathered in our Civil Code (CC). As this contract modification is being forced by the coronavirus pandemic, it’s not possible to claim that this “bona fide” criteria hasn’t been respected.

Given all that’s been said before, we have to conclude that the application of this doctrine is really exceptional. Even during the 2007 Financial Crisis, the application of the “Rebus Sic Stantibus” doctrine was uneven. This means that the Financial Crisis wasn’t considered relevant or good enough on its own to apply the doctrine more generally. Thus, the sentences diverged in this subject, but always mantained the exceptional nature of this doctrine. But, what could happen in this coronavirus pandemic and its consequences? Should it be enough by itself to allow this doctrine application more generally?

Jurisprudence análisis considering our actual scenario.

First of all, we need to mention the non-existence of actual jurisprudence relating to the coronavirus pandemic or even relating to the state of alarm situation. We know that this doctrine is applied exceptionally, but our scenario is unique and complies every exceptionality requirement needed. Our Courts are closed. Therefore, we have made our objective to analyse our recent jurisprudence while comparing it to our actual circumstances. Thus, after every explanation, we will compare it to the scenario we are currently experiencing.

STS 214/2019, de 5 de abril de 2019- STS 214/2019, April 5th.

In this ruling, our Supreme Court doesn’t agree with the appealed ruling, where this doctrine was applied. The debtor tried to be exonerated of the contract while basing his arguments on the 2007 Finantial Crisis, and his petition was granted. However, our Supreme Court dismissed the appealed ruling.

Thus, the Supreme Court refers to previous jurisprudence to prove his point: Financial Crisis was not good enough on its own to apply this doctrine. It doesn’t consider the Financial Crisis unpredictable, because of the cyclical nature of Financial Crisis. That’s why it finally states that this argument can’t be used to enable the use of this doctrine. It also adds that it’s necessary to contrast the impact of the Financial Crisis on the discussed contract.

• How can we frame the coronavirus pandemic and its consequences in this ruling?

In our current situation, the pandemic and its consequences are not cyclical or predictable. It’s a totally exceptional situation no one expected. Likewise, all shops have been closed and a massive earning reduction has happened. Those are circumstances that are totally unavoidable because of the imposed nature of the state of alarm.

That’s why the argument based on this huge decrease of benefits and its requirements compliance should be valid and the Courts should apply this doctrine.

STS 452/2019, July 18th

Here the Supreme Court unapplies this doctrina because it considers the argument used by the debtor could be framed in the standard contract risks. The debtor asked for the doctrine to be used due to a legislative change that was made after the contract was sealed. However, our Supreme Court considers such circumstance as a predictable risk. Therefore, it being predictable made it impossible to use this “Rebus Sic Stantibus”doctrine.

• How can we frame the coronavirus pandemic and its consequences in this ruling?

Due to the unpredictable nature of the coronavirus pandemic and the state of alarm, these circumstances cannot be considered standard contract risks. No one can predict this kind of events could happen, including its consequences. That’s why whe consider it wouldn’t be logical to not apply the doctrine by framing this argument under the standard contract risk category.

Conclusion

We have in mind the exceptional nature of the “Rebus Sic Stantibus” doctrine. Jurisprudence has used it a few times so far. And we’ve seen not even the 2007 Financial Crisis was enough to justify a more common use of it.

However, our current coronavirus pandemic status requires innovative answers. We consider the coronavirus pandemic and the state of alarm, when it’s justified, enough for themselves to trigger off the use of this doctrine. The massive benefit decrease is a well known consequence of the current situation, including all the losses the affected people are going to suffer. That’s why we consider that the current scenario complies with all the requeriments needed for the doctrine to be used, like we explained in the second section of this article.

However, we have to wait to see what decision our Courts make. We’ll see if they decide to continue with the excepcionality rule and the restricted use of this doctrine, or instead they decide to apply it in a more general way, admitting as a valid argument the coronavirus pandemic and its consequences. Maybe this time, our current circumstances require it.