What is meant by Force Majeure? FAQ COVID19 and RDL 8/2020

We live in a Force Majeure scenario. But what does Force Majeure mean? FAQ about COVID19 and RDL 8/2020 (“Real Decreto Ley 8/2020”, in English “Royal Decree Law 8/2020”). How does it affect the obligations between the contracting parties?

Brief reflections and Jurisprudence about the consideration of Force Majeure, COVID19 and RDL 8/2020.

What is intended here is to raise the possibility of using the exoneration of force majeure for contractual obligations.

The referred decree maintains that the situation originated by the COVID19 will be considered as coming from force majeure. That is to say, the loss of activity caused by the closure of premises, restriction of transport and mobility, etc., is considered force majeure.

Force majeure is a circumstance which, being unforeseeable and unavoidable, makes the performance of an obligation completely impossible.

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Force Majeure and unforeseeable and unavoidable event: Do contracts have to be performed?

As the Supreme Court says, force majeure does not only require to be due to an unforeseeable and unavoidable event. But it must have its origin in an irresistible force outside the agent’s sphere of action.

And therefore, the Supreme Court continues, it must be examined whether or not we are facing an extraordinary, unavoidable and unforeseeable situation. Or if we are in the presence of a situation foreseeable sufficiently in advance. Which would have made it possible to adopt measures to avoid the damage caused (STS October 31, 2006, No. 3952/2002).

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The application of the rebus clause was made more flexible by the Supreme Court after the economic crisis of 2008. However, to date, the High Court considers that its application is not automatic, and it must be analyzed on a case-by-case basis.

Could this situation have been avoided?

Regardless of what the Supreme Court has said about unforeseeability and whether it is present in this case. And whether the Administration could have done something else, something before or something different. Whether or not there were measures that could have been taken to avoid the situation in which we find ourselves in. We are where we are and that is what matters.

And where we are, for the purposes of RDL 8/2020, is that the situation caused by the measures against COVID19 is of force majeure. And, therefore, unforeseeable and unavoidable and making it impossible to comply with an obligation. At least in some cases.

If this is how the legislator defines it, at least for certain cases, it is worth asking:

Will companies be able to use the force majeure defence to justify the foreseeable breach of their contracts?

In other words, can I plead force majeure to avoid a contract or obligation being considered as breached?

If the government forces me to close my business, am I obliged to pay the rent for the premises? What about the perishable goods that I have not been able to sell? What about the minimums for electricity, water, telephone or other services that I am not going to use?

Or, can I stop paying them and use force majeure as a reason for non-compliance?

And, finally, what are the Courts going to say in the face of the avalanche that is coming?

It is well known that contracts are perfected by mere consent and oblige to comply with what has been agreed. And also to all the consequences that are in accordance with the good faith, the use and the Law.

This means that the contracting parties must comply with what is stipulated in the contract. And its breach, will entail the compensation of damages and damages. It is not necessary for there to be fraud or deceit or bad faith for the obligation to indemnify to exist.

Provided that there is no force majeure, in which case are we exempted from fulfilling our obligations.

Force Majeure defined as extraordinary natural events.

Typically extraordinary natural events such as catastrophic floods, earthquakes, etc. are force majeure. There is no history of force majeure being decreed for a pandemic, and we are therefore in unknown territory.

Nevertheless, we believe that existing case law could be applicable for the purposes of COVID19.

There is no force majeure when there are complementary causes or previous breaches.

STS (STS “Supreme Court Sentence”) (Contentious-Administrative Chamber. 6th Section) 24 October 1995. R.º 7026/1991.

Force majeure shall only be considered force majeure if the damages have a sole and determining cause in the original event of force majeure. It would not be force majeure if there were a cause of the damages, nor if there were previous breaches.

Applied to the case, it could limit the use of the force majeure defense to companies forced to close their businesses due to the State of Alarm. As long as they had been complying with their obligations prior to the State of Alarm. If they were already failing to comply with their obligations prior to the State of Alarm, we would be facing a cause that would eliminate the total exoneration.

Force majeure requires a direct connection.

STSJ Murcia (STSJ as Judgment of the Superior Court of Justice) (Contentious-Administrative Chamber. 2nd Section) 23 September 1998. R.º 2327/1996.

The direct and univocal connection of the damages to the alleged situation of force majeure must be proven. And it must be proven that the necessary diligence was taken to avoid the damages.

It is evident that as long as the State of Alarm remains, there is no diligence possible. If the State forces the total closure of the establishments, there is no possibility for the employer to mitigate the damages.

A sensu contrario, it must be concluded that once the state of alert has been overcome. That is, when the business is allowed to open, it must be proven that the effects of force majeure are still the sole cause of the damage.

Force majeure as absolute unpredictability and inevitability.

STSJ Castilla-La Mancha (Contentious-Administrative Chamber. 2nd Section) 15 February 2001. R.º 1149/1995.

Again, the exceptional nature of force majeure as an exonerating circumstance for non-compliance. It is necessary to consider that it is an absolute impossibility of foresight and inevitability. Not a complication resulting from the aspects to be addressed in these situations.

COVID19 State of Alarm as a cause of Force Majeure.

STS (Contentious-Administrative Chamber. 6th Section) May 11, 1999. R.º 9655/1995

As in the previous case, the unforeseeability is stressed. If the damage arises from an event that can be foreseen, it is not force majeure. Whatever the degree of foreseeability of that event, even if it is minimal, we are no longer in the presence of force majeure.

That is to say, the state of alarm and its immediate temporary consequences could be an event of force majeure. The crisis that it will entail is a foreseeable event and must be dealt with due diligence.

Therefore, non-compliance during the state of alarm could be covered by the exonerating circumstance. Non-compliance after the lifting of the State of Alarm would not be covered by the existing case law.

COVID19 is unpredictable and unavoidable. But what about consequential damages?

STSJ Madrid (Contentious-Administrative Chamber. 9th Section) September 19, 2002. R.º 1126/1997

This ruling focuses on the temporal plane and the proof of damages. And so it states that, although the damage caused by lightning can be attributed to an event of force majeure, it is also necessary to assess whether the extent of the damage caused by lightning can be attributed to an event of force majeure. It is also necessary to assess whether the extension or subsequent propagation of the damage could or could not have been avoided.

In other words, the fire in the area where the lightning struck was a force majeure event. Its propagation has to be studied if it could have been avoided. And whether due diligence was used in the avoidance of the subsequent damage.  And if the necessary measures were taken to mitigate the damages that were foreseeable.

Again, damages while the business remains compulsorily closed due to a state of alarm = force majeure.

Subsequent damages suffered by such closure = necessary proof of due diligence and absence of concurrence of another cause.

Conclusion

We are facing an unprecedented situation. It is crucial and it is in our due diligence to seek financing as soon as possible. If we fail to do so, there will be force majeure, but the damage could be considered avoidable.

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Validity of contracts in coronavirus period.