Essential breach and breach with resolutory significance

Who introduces the duality in Spain: Essential Non-fulfilment and Non-fulfilment of obligations with resolutory significance?

The Supreme Court ruling of 18 November 2013 introduces these two concepts. The Magistrate Speaker, Javier Orduña, delimits and differentiates the Essential Non-compliance and the Non-compliance of obligations with resolutory significance, granting the former a subjective evaluation (degree of satisfaction). And consequently, granting the latter an objective evaluation, contrasting what happened with what was strictly provided in the contract.

This SCR has been followed by another, the SCR of 29 January 2014, which resolves a similar issue (delay in fulfilling an obligation) with the same criteria as the SCR of 18 November 2013.

Can a contract be terminated for breach of any obligation? Is it necessary to terminate a contract that the breach is serious? Is it necessary for the breach to be essential? What types of breaches are there? What are breaches of obligations with resolutory significance?

The general rule regarding the termination of reciprocal obligations is that, for a party to terminate a contract for breach of an obligation (or several), the breach must be substantial or material. The breach must prevent the buyer from receiving what it was expecting.

Commercial traffic requires the Business Preservation Principle to be imposed. And that is why the termination of the contract must be considered as something exceptional.

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Is it possible to appreciate bad faith and abuse of rights by those who seek to terminate a contract?

Undoubtedly, it is a possibility that often occurs. If a buyer gives money in exchange for an intangible right (goodwill, market position, reputation), breaking the contract for a minor, or more apparent than certain breach such as a delay, a contingency, presents an opportunity for the buyer. Why? Because the buyer must return the money received. And money is fungible. But the seller has to return intangible rights, which is always a problem, and in many cases, impossible.

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Can the validity and enforcement of contracts be left to the discretion of only one of the parties?

The validity and effectiveness of a contract cannot be left to one party alone. Often, in negotiations where there is an imbalance, one party tends to impose excessive conditions on the other. This is precisely what is to be avoided

How do you evaluate whether or not the breach is essential?

Traditionally, the concept of equivalence of benefits is used. The judge assesses whether there is a balance between what is given and what is received. If there is not, the judge may terminate the contract for fundamental breach.

In fact, the UNIDROIT Principles (Principles of European Contract Law) identify essential breaches of obligations as triggers or catalysts for contract termination.

However, despite what has been said in this section, the concept of fundamental breach has evolved with the Jurisprudence. Currently, the concept of fundamental breach refers to the degree of satisfaction of the parties when the contract was concluded.

The parties agree (expressly or tacitly) that an obligation is essential and failure to comply results in termination. But under this new prism, under this new jurisprudential evolution, the essential breach moves away from the equivalence of the services, from the graveness, from the fraud, …

Can the parties agree on which obligations are essential?

Yes, and in fact it’s common. It is usual that in contracts it is agreed which obligations are essential. In addition, these obligations are usually protected by a specific guarantee or indemnity (Specific Indemnity).

It is a pact that is usually limited to the most important. If you buy something, it is essential that the thing is owned by the seller, or that it is unencumbered, or that it is operational and is fit for the intended purpose.

In fact, what defines a fundamental obligation and therefore a fundamental breach is the reference to the specific contract. The essential breach pivots on the contract itself, on the business purpose agreed between the parties when the contract was signed. Therefore, in contracts, expressions such as frustration of the “practical purpose of the contract”, or “legitimate expectations” or substantial privation “of all that could be expected under the contract concluded” are commonly used in connection with essential character.

How do the Tribunals judge these covenants on essential obligations?

The Courts have been accepting that by virtue of the autonomy of the will, if the parties have agreed on the essential nature of the obligations, they are indeed essential and that any breach of an essential obligation enables the contract to be terminated.

What are obligations of resolving significance?

In Spain, at the moment (2020), the failure to comply with essential obligations is not the only way to terminate contracts.

We have seen that essential obligations can be agreed. And that in case of agreement, it is irrelevant whether the obligation is essential in itself. It is therefore irrelevant whether there is reciprocity or balancing of benefits. What is important is that the parties have freely agreed that the obligation is essential.

On the other hand, it was the obligations with a decisive impact that really consider the equivalence of the benefits. They are those that objectively evaluate the degree of compliance, the seriousness, the reiteration of minor breaches. In short, they are those questioning whether the thing responds to the consideration that one of the parties has provided or satisfied. They are those that analyze if the thing is suitable.

Conclusions

1. The seriousness of non-compliance and essentiality are different issues, although they can obviously coincide.
2. Accessory and non-main obligations or benefits (e.g. minor breaches) may be grounds for termination if they were agreed as essential.
3. The assessment or evaluation in the breach of an essential obligation, reaches to the verification of if benefits or results are suitable for the party that considers itself damaged. If the parties to a contract for the sale of shares agree that any slight or partial breach of the Declarations and Warranties is essential, it cannot be valued in any other way.

If this article has been of interest, we also suggest you to read the following article published on our website:

What are the options when an obligation is breached?