By: ALBA COMPAIRÉ FALGÀS (1)
(1). Alba Compairé Falgàs, esq. LL.M. Translated to English by Arnau Murià Tuñón, esq. LL.M.
Rebus sic stantibus, is a general legal principle stablishing that the circumstances under which an obligation is accrued, and that are determining for the expectations of the future development of their performance, have to remain the same in order to this obligation continue to be enforceable. Indeed, rebus sic stantibus in Latin means “as long the circumstances remain the same”.
Mainly focused on contracts law, is the norm by virtue of which a significant and unforeseeable change of the existing circumstances at the execution of a contract entailing a dramatical decrease of profit or the deprival of the advantage expected by one of the parties may provide for a relief to the injured party availing the possibility of asking for either a modification of the contract in its favor or to terminate it without indemnity to the other party.
In Spanish Law, as opposed to International and Comparative Law, there is not a provision expressly written in the Civil Code, therefore for determining its content it must be extracted from case law of the courts. which contains language mentioning the following elements of the same:
1) Event, after the execution of the contract, of unforeseeable circumstances a the moment of the execution and alien to the parties.
2) As consequence of the occurrence of such new circumstances, even if indeed the party in debt may be able to comply, the debtor shall see a significant part of the net profit to be obtained from the contract.
3) reasonably enter in the contract.
Although, the case law has held, that the rebus sic stantibus rule only applies in extremely special cases, however; for a short period of time, this restrictiveness was held to be applicable in contracts disrupted by the economic crisis of 2008.
For its application in the context of the economic failure due to COVID-19, it will be necessary to proof the strict compliance of such requirements in the specific case, being preposterous to mention the general economic crisis; and to observe whether the courts had been more prone to apply the rule as they have been sporadically during the last economic crisis. Finally, its necessary to note that there are other rules that may be applied instead of rebus sic stantibus to work out contractual difficulties caused by such a situation (unexpected impossibility, force majeure) and the pragmatic option of negotiating in good faith among the parties is advisable.
There is direct language in Spanish legislation regarding the situation where alien and unforeseeable circumstances make performance impossible to the obliged party (the consequences of such overcoming impossibility and loss of the good are provided for in articles 1.182 of the Spanish Civil Code and subsequent and force majeure is approached itself by article 1,105).
Notwithstanding, it is questioned what happens when, due to equally alien and unforeseeable, circumstances, the performance of the obliged party does not become physically nor legally impossible but extremely expensive or deprived from the economic sense that it had at the moment of the acquisition of the obligation.
This is what is regulated by means of the rebus sic stantibus rule, by which a radical change of the circumstances at the signature of the contract, that is as consequence an unforeseen onerous condition for one of the parties o that provokes the lost of the economic meaning of the contract, will give rise to a partial relief (contract modification) or definitive relief (contract extinction) of the affected obligation for such a change of circumstances.
In this paper we briefly lay down the foundations and nature of the rule, which are its legislative referents in comparative law and how it is structured in Spanish Law, in order to finally analyze with regards to its possible future application to the change of the circumstances generated by the COVID-19 pandemic and the insolvency law.
The foundations of such a remedy may be found in the principle of the so called commutative principle of contracts, by virtue of which in onerous contracts there is a generic equivalence or ideal between the obligation and its consideration; and the requirement of a cause to enter into contracts, by virtue of which the parties expect to obtain from the contract is relevant to the point of becoming of the essence of the consent in order to form the contract, understanding that the foreseeable circumstances of the contractual performance are inherent to the given consent; in the need for legal certainty; in the principle of good faith and finally, why not accept it, just for equity.
Regarding its nature, it is a rule disregarding the fact that is usually denominated “implied clause” in order to emphasize its contractual origins. Such a rule is applied disregarding the lack of prevision of the parties applies whether or not contained in the contract, as it happens with the rest of the rules governing contracts. Therefore, Rebus Sic Stantibus is as valid as an implied clause as the recision of a contract due to its breach or as the need of performing obligations in good faith. Therefore, rebus sic stantibus, with its limited reach that followingly will be outlined and disregarding its discretionary or mandating, is a rule in contract law that gets along with the rest of the contractual rules in Spanish Law.
Article 62 of the Vienna Convention on the Law of Treaties of 1969, which states to compile customary law, contains a complete and detailed language regulating rebus sic stantibus. Given its clarity we hereby transcribe it:
Article 62. FUNDAMENTAL CHANGE OF CIRCUMSTANCES
1. A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground for terminating or withdrawing from the treaty unless:
(a) The existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and
(b) The effect of the change is radically to transform the extent of obligations still to be performed under the treaty.
2. A fundamental change of circumstances may not be invoked as a ground for terminating or withdrawing from a treaty:
(b) If the fundamental change is the result of a breach by the party invoking it either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty.
3. If, under the foregoing paragraphs, a party may invoke a fundamental change of circumstances as a ground for terminating or withdrawing from a treaty it may also invoke the change as a ground for suspending the operation of the treaty.
The German Civil Code (BGB) contains direct and positive language on rebus sic stantibus in section 313, it reads as follows:
Section 313 Interference with the basis of the transaction (1) If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration. (2) … (3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke.
In the same order of ideas, reading the proposal stated in article 6:111 of the European Principles of Contract Law may be of interest.
Such rules may provide assistance to define the unclear scope of Rebus Sic Stantibus within Spanish Law (regarding the equivalence effect of general principles of the respective laws that give grounds to them and the common features of the equity grounds that yield upon) or, pursuant to the same rationale, attempt a future expansion, as the case may be.
There is not express language in Spanish Legislation regarding rebus sic stantibus in the Civil Code, therefore the case law infers it from different provisions or in equity(2).
Those judgements holding that it has foundations in legislation (STS 333/2014, of June and 591/2014, de October 15th both opinions drafted by justice Francisco Javier Orduña Moreno(3)), have distilled it from the following provisions: article 1.289 CC (presumption of equivalence of the considerations or of the “most reciprocity in the interest” in case of doubt in contracts for a payment) and article 1.258 CC (good contractual faith principle: integration in the contracts of both the agreed obligations and the obligations deriving from good faith).
The definition of the content and scope of the Rebus sic stantibus doctrine in Spanish law has to be determined from case law.
Spanish case law is reiterative both in the recognition of the doctrine, on the one hand, and, on the other hand, into construing it in a restrictive manner and, in most cases, do not consider it applicable to the case being tried.
Thus, the caselaw of the Supreme Court has made always an extremely restrictive interpretation of rebus sic stantibus. Before year 2014, it called it “Dangerous Clause” and required a radically extreme change of circumstances in order to award it (thus, judgements, hereinafter SSTS, of December 14th 1940, may 17th of 1941, June 5th 1945, May 17th 1957, April 23rd, 1991 and February 10th, 1997, are cited using terms as “extraordinary alteration”, “exorbitant disproportion” , “radical unforcibleness’ of the circumstances”.
Upon the economic crisis of 2008, and pursuant to the previous decisions, the firsts judgements delivered regarding contracts with circumstances disrupted by the economic change (STS 820/2013, January 17th, and STS 822/2013, January 18th) disregarding the exemption ability of the crisis (“sound and long of the economic recession, may be openly considered as a general economic phenomenon capable of provoking a grave disruption or a grave disruption of the circumstances”), along this lines, they did not considered rebus sic stantibus applicable to the adjudicated cases.
The turning point in the context of the economic crisis and the configuration of the rebus sic stantibus doctrine were STS 333/2014, of June 30th, and STS 591/2014, of October 15th, both drafted by Francisco Javier Orduña Moreno, already mentioned at the beginning of this section. dicta stating that there is a tendency in case law and in legislation towards the acceptation of the doctrine due to the necessary adjustment of Law to the social reality of the time. In addition to such language. Furthermore, the redefinition of rebus is not overtaken by a description of its elements, which provide with more concretion and continue to maintain the exceptional character held in the previous judgements, buy by a tacit manner determining that it is applicable to the cases adjudiated at hand.
In the first of the cases (STS 333/2014, June 30th), a lease contract of space for publicity in the buses of the City of Valencia, the court found that the economic crisis, in such case, disrupted the equivalence of considerations and to have a significative incidence in the transportation advertising market. Therefore, the foreseeable economic expectations of the commercialization of the publicity spots available at the moment of execution of the contract on year 2006 could not include the crisis that detonated two years later. Additionally, the continuation of the original contract would become extremely expensive for de lessee of the spots, who has shown negative balance sheets and an extraordinary drop for the billing. Therefore, it is an extraordinary and unforeseeable change of circumstances provoking a breach of the equivalence of considerations, which gives grounds, by virtue of the rebus sic stantibus doctrine, to the modification of the contractual obligations in order to restore the broken the equilibrium, specifically reducing the price to be paid by the company leasing the advertisement spots to 80% of its monthly billing. It rejects therefore the petition of the owner of the buses of the ordinary rescission of the contract due to breach, with payment of the arrears and the indemnity for damages and loss of profit.
In the second case (STS 591/2014, October 15th), a contract for lease of an hotel of year 1999 with an agreed term of 25 years, from which 10 where mandatory and the other 15 might be terminated in advance upon payment of a penalty clause, the Supreme Court found that, disregarding the drafting of the contract commercial risk felt clearly on the lessee, the economic context of the moment of execution and performance of the contract, of unusual soaring of the hotel demand, coupled, as well with a relevant urbanistic development of the zone where the hotel is placed, was part of the economic base of the bargain taken into account at the drafting of the lease contract. Theretofore, even in such a case where the lessee assumed most of the commercial risk, the imprevisibility feature of the change of circunstances of rebus sic stantibus was noted. In addition, such a change of circumstances give place to the breach of the equivalence of the considerations and an excessive expensiveness for the lessee, that has rendered experts witnesses testimony its reiterative losing results. In congruence, the Court modifies the contract reducing the annual rent to be paid by de lessee by 29% since the filing of the lawsuit, and therefore even obliging the lessor to return the rent collected in excess during the process. It rejects, then, the petition by the lessor requesting the Court to order the lessee to pay the contract or in any case to declare that the lessee waived the contract before its maturity, ordering it to pay the agreed penalty clause in full.
After 2014 and both judgements analyzed, the Supreme Court, despite continue to admit its existence, has returned to a restrictive application of rebus sic stantibus. Therefore, for example, in Judgement of January 15th (opinion by Justice María de los Ángeles Parra Lucan), the same Court makes clear such change as follows: “It must be taken into account that, notwithstanding the cases cited by the petitioner the rebus sic stantibus rule has been extensively applied, afterwards this Chamber has rejected its application when… it has been improper.” As a matter of fact, the case solved by this judgement is very similar to the one solved by Judgement 591/2014, October 15th, that have been just outlined: it is the lease of an hotel of year 2002 with a term of 18 years and with risk placed upon lessee (among others, the rent is agreed upon in a variable part and another fixed part, and sets forth the possibility of anticipated with a penalty clause). In such a case, no withstanding the Supreme Court found that the placement of the contract risk upon lessee the possibility of economic risks as the economic crisis where foreseen, specifically: “The petition by the lessee is, against what was agreed upon, to end the contract in an anticipated manner (…) or achieve a reduction of the price due to an event that may not be qualified as extraordinary nor unforeseen by the parties, since the indeed had in mind the possibility that the lessee was not interested economically in the administration of the hotel”. Therefore, it considered that the lessee must perform, or paying in full the rent agreed upon, or terminating the contract in advance with the payment, in full as well, of the penalty clause.
As we have said, although the general irregularity and restrictiveness of the case law into considering all the requirements fulfilled in the case at hand, it is true that the Supreme Court is unanimous as well into affirming the existence of rebus sic stantibus as a doctrine part of the law of contracts.
In continuation, we make an outline of the requirements and the legal consequences of the doctrine as it has been understood by the case law.
The event takes place after the execution of the contract and prior or at the same time of the enforceability of one the obligations. There is a time lapse between the execution and the enforceability of the obligation when the event takes place (Ibid requirement iii).
Extraordinary and non-foreseeable with regard to the existing and reasonably foreseen conditions for the future at the moment of signature of the contract. It is necessary that the risk is not a normal risk on the contract (be it expressly foreseen o because it is an inherent risk to the obligational relation). It is usual to add that the risk is not allocated on one of the parties, be it by the contract kind itself, be it by the express clause. Nevertheless, this element, as we have seen in the caselaw, is controverted and, in fact, is one of the main points of discrepancy in the case law variations regarding rebus sic stantibus: in some cases (judgements 2014) it is considered that no allocation of risks may include unforeseen risks and therefore the applicability of the doctrine persist also in contracts that have allocated contractual risk to one of the parties; in other cases (judgement 19/2019, of January 15), it is considered that in the cases of general allocation of the risk to one of the parties it is due to include the unforeseen as well, not being possible, then, to invoke rebus sic stantibus in such hypothesis. At the end, the discussion may be hiding a debate on the mandatory or discretionary nature of the doctrine. Therefore, the concrete content of the unforeseeability requirement, and above all, the possibility that, despite the existence of unforeseeability, rebus sic stantibus does not operates when the contractual risk has been allocated on one of the parties, shall be decisive for the practical and future application of the doctrine.
Finally, the event must occur without the intervention of the parties. On the contrary, if the event takes place due to fraud or fault of one of the parties, it will be necessary to stay on the ordinary norms.
Therefore, rebus sic stantibus will have place:
A) Disproportionate expensiveness.
a) With economic feasibility of the contract. The contract generates some profit and might continue to be fulfilled by the parties, but on them earns significantly less (be it on the increase of the costs that must be assumed to perform or on the earnings) than what was expected at the execution of the contract. It is not enough a simple increase on expensiveness, this must be relevant: the cases of a mere notorious decrease of earnings have to be assumed by the harmed party.
Nevertheless, it is left to determinate the minimum test of imbalance in order to rebus sic stantibus apply: whether if it is enough a drastic reduction of the retribution obtained from the contract (i.e. an extreme fall in the billing for the contract even sustaining a net benefit) or if it is necessary that the decrease is as deep that at least gives rise to a nonexistent or quasi nonexistent benefit.
Additionally, it is precise to set out the treatment when the change of circumstances give rise to a windfall to one of the parties as a consequence of the performance received has increased its value upon the moment of execution and that, nevertheless, from the perspective of the performing party, it does not gives rise to more expensiveness in strict sense (it does not cost more to perform and does not obtain a diminished profit that the agreed), but merely hypothetic, of cost of opportunity (obtaining a minor benefit than if selling at current market prices). This situation is provided for in the STS of May 29th, 1996 on a lease contract with option to buy where the market value of the property has increased at the moment of paying the afore agreed price by the parties. The Supreme Court rejects the request of the proprietor of increasing the price to pay holding that the increase of the real estate market was not predictable, but not because it is an expensiveness issue.
b) It includes as well the economical impracticability of the continuation of the contract for one of the parties, who, although being still possible to perform the contract, sustains reiterated losses.
(The reasoning of this situation by the case law may arise from a potential difference in its treatment regarding the effects, that we shall see in the corresponding section (4.2.2). However, it is substantially the same situation: more expensiveness.)
B) Loss of purpose loss of the cause, of the motivation, for one of the parties: lack of need of the consideration. The contract may continue being performed, but it has no sense for one of the parties. In example, in the lease of a balcony to witness a show that must take place under it, if the stage is changed and will not be visible from this place.
It must be remembered that all the aforementioned cases the performance is still possible disregarding if expensive or senseless. For the cases of impossibility, rules of force majeure and unexpected impracticability, that, notwithstanding its similarities with rebus sic stantibus, are matters of a different study.
The application of rebus sic stantibus to contracts of immediate and single performance has no sense because in such cases the execution and the enforceability are a the same time, in the same manner the circumstances. It is impossible, then, that the aforementioned change take place (vid. Requisito i). Thus, in order to apply the doctrine it is necessary that the obligations are due in a time after its execution.
Although the Spanish case law held consistently that rebus sic stantibus was only applicable to successive performance contracts, in the last times its theoretical application had been imposed without restrictions to all kind of binding contracts; with a performance date after the execution. This seems reasonable: in such cases also a change of circumstances may arise between a contract execution and its maturity. In international and comparative law there are not restraints in such logic.
The recent case at the time of drafting this piece (STS 156/2020, March 6, drafted by Justice Sancho Gargallo) holds that the doctrine is more feasible in long term contracts than in the short term ones, and in such long term contracts that the circumstance is not provided for in the contract itself. This language does not prevent – in our opinion – rebus sic stantibus in short term contracts with postponed obligations but is simply states that there is minor probability to take place in cases unforeseen enough.
Disregarding that the general crisis make evident an extraordinary and unforeseen circumstance, it is necessary to argue the impact of the case at hand “Considering, as a notorious fact, that the current economic crisis, of sound and long effects of economic recession, may be considered openly as a phaenomena of the economy able to give rise to a grave disruption or mutation of the circumstances and, therefore, to disrupt the bases over which the contract relation were settled. Nevertheless, acknowledging its relevance, rebus is not applicable automatically in a generalized way… it is necessary to analyze that the operative change entails a legal signification worth of attention in the argued cases” (STS 333/2014, June 30).
The legal consequence of rebus sic stantibus will be the right of the damaged party over the change of circumstances to the modification or the termination of the contract without the breach penalty.
There is a preference for modification over termination, in attention to the following reasons: “Indeed, the modificatory reach of the rebus sic stantibus clause has resulted in the preferential application, in general, both by this Chamber’s traditional doctrine and its recent description carried out conducted on Judgement of July 30th, 2014 (num. 333/2014). On this line it must be clear that this solution, reflects, to great extent the preservation of legal acts preservation (favor contractus), criterium that this Chamber`s most recent doctrine has held as a major legal principle in our legal system, furthermore than its traditional application as a mere hermeneutics criterium (STA January 15th, 2013, 837/2012). But in addition, and in any case the modificatory reach it also more adjusted to the nature and characteristics of the executed contract, thus, a long term lease contract.” (STS 591/2014, October 15th).
However, to determine in which case the incidental relation will apply, it is pertinent to clarify which are the minimum and maximum boundaries to the modification, not achieved or overpassed which, therefore, will give grounds to termination.
The modification shall relief by restoring the broken contract balance by a redefinition of the contractual obligations of the parties. Usually, the redefinition shall consist in a redefinition of the obligations of the debtor to whom the performance becomes extremely expensive, yet the possibilities range is wide (readjournment, split of payments). Two judgements, example of such, have been discuses in section 4.1.
Alternatively, as example in the cases that the most expansivity is determined by the increase of necessary cost to undertake the due consideration, the restoration may operate by the increase of the retribution that the creditor party has to offer, however this is more unusual. An example of this kind of modification is offered by judgement STS of December 26th,1990, that deals with an alleged and very significative increase of the price of tar in order to pave in a contract of works.
It must be noted that the modification, although is mentioned as prefernt is not necessarily the less virulent option for the party being obliged to perform the contract receiving a consideration less worthy that the agreed upon (or having to fulfill a larger consideration than the agreed upon), and without being able to opt for the termination event though it wishes to, which is totally extraordinary.
The minimum reach (which relief of the expensiveness of the damaged party has to be reached) and which maximum limit (waiver of the other party is admissible) to the adjustment are not really clear, but, it seems reasonable that the measure has to be at least enough to reach the profitability of the expensiveness affected party, but it may not make the contract of little profit for the counterparty in comparison to other options existing in the market. In this line, paragraph 313 of the aforementioned German BGB considers that the adjustment shall not take place when it is possible but not mandatory for one of the parties.
In attention to this limit, It could be concluded that the adjustment shall correspond to the cases of expensiveness of the restoration is not excesive, this is, in some cases of expensiveness with economic viability. Otherwise it seems difficult that it may suit in cases of loss of the objective, in which the decrease of the obligations of the debtor or increase of the creditor seem a priori useless to remedy the unexpected destruction of raison d’etre of the contract.
The termination by rebus sic stantibus of a contract shall consist reasonably either on its recission with restitution, as the case may be, of considerations, or its termination (in the case of continuing contracts), without damages in both cases.
Although some judgements stringently refuse that the extinction may be consequence of the doctrine (STA February 21st 2012: SAP Tarragona(4) 819/2012 April 3rd “… in exceptional cases and with great caution because of the alteration that it may be to the pacta sunt servanda an adjustment may be reached – no termnation – of the obligation…”), the reality is that in comparative law, the writings of commentators and above all and finally other judgements of the same Supreme Court mention it as one of the possible consequences.
Regarding the abovementioned criteria, it seems rebus sic stantibus shall apply to the loss of the reason to be of the contract and the not relievable expensiveness of the modification.
The judgement of Madrid Provincial Hight Court of November 30th, 1993 (drafted by Justice Eduardo Pérez López) handles a case of termination under rebus sic stantibus, where the unilateral termination is considered suitable and without payment of penalty clause in a consulting and brokerage contract between to merchants upon death of the CEO because the contract was executed pursuant to his personal qualities, then there was a case of loss of meaning of the contract.
As a consequence of reliance on rebus sic stantibus, a part of de shortcoming sustained by one of the parties on the grounds of the unforeseen even falls over the other: in the modification of the stay in obligation in a less profitable in absolute terms; by means of a denial of indemnity of damages that have been sustained upon a termination or resolution of the contract.
Rebus sic stantibus is a doctrine of the law of contracts legislated in the comparative law and acknowledged in Spanish law through case law of a very restrictive and exceptional application, and not concrete boundaries. It provides for the contractual adjustment or termination when unexpected, alien to the parties and later to the moment of the execution that cause a drastic reduction of the net profit that one of the parties obtains of the contract relation, or a loss of the meaning that the contract had at its inception.
Its exceptional nature relies on the fact the cases that make it applicable are when the performance is still possible by the affected party, however more expensive or meaningless. It deserves to be specially noted that on of its possible legal consequences gives rise to the mandatory adjustment of the contract obliging the creditor counterparty to increase its consideration of to continue to fulfill it in exchange of lesser retribution without being able, principle, to opt alternatively for the extinction.
The unforeseeability definition, and its possible exclusion on the grounds of allocation of contractual risk on one of the parties, is specially determining among the elements required by the case law or eventually legislators. In the same manner an extremely superior precision regarding the legal consequences, particularly regarding the minimum and maximum limits of the contract adjustment.
The reach in the economy of the pandemic affecting the Spanish State from February 2020 and, in general, I the contractual circumstances, is still to be determined. No withstanding, it is pertinent to the take into account the following ideas:
i) As pointed, the existence of generalized crisis does not justify itself the application of rebus sic stantibus to the contracts, but proof of unforseeability is necessary and the impact of the event on the equivalence of considerations in the case at hand.
ii) i) No withstanding, the generality of the event provides to the change of circumstances and its unforeseeable nature of major conspicuity. Specially the exceptionality becomes evident by the big amount of the normativity by the Government and by the same declaration of the State of Alarm.
iii) The position to be awarded by the Courts regarding rebus sic stantibus and if the social pressure, larger sympathy for a generalized event or the already mentioned of adaptation of the Law to the social reality will increase again flexibility of the Law regarding current treatment of the doctrine. As well, the position over the allocation as contractual risk shall be determining.
iv) i) In any case, for the impracticability cases, is better to use legislated and consolidated remedies, as force majeure or overcoming impracticability (especially when, to great measure, the impracticability may be legally determined by the approved normativity regarding the declaration of the State of Alarm).
v) Finally, the COVID-19 crisis permits the window of opportunity as well to the contractual, modification motu proprio among the parties, during the negotiation. Furthermore, and as a matter of fact, this also seems the most suitable for the cases where the unexpected expensiveness affects both parties, and not only one of them as required by rebus sic stantibus.
Within the scope of Insolvency Law, articles 61 and following of the 22/2003 Act, set of the ability of the insolvent professional to file for the contract resolution before the judge over the bankruptcy, as well terminate the contracts of the insolvent. It is reasonable, therefore, that the insolvency professional be able equally to request a modification or a contract rescission based upon rebus sic stantibus under these articles if the compliance of the contract by the insolvent is still possible por economically impracticable.
Alba Compairé Falgàs, esq. LL.M. Translated to English by Arnau Murià Tuñón, esq. LL.M.
Barcelona, April 2020