The legal figure of Rebus Sic Stantibus or “things thus standing” (RSS) has been up until recently rarely touched upon and likewise scarcely applied by the courts, given the serious effect it has over contractual terms which have been freely agreed by the parties to the contract. The financial crisis of 2008 generated some case law aiming at a more generous application of the RSS figure, albeit within the framework of exceptionality.
With the Covid-19 Pandemic and the declaration of the state of alert, changes are coming about and the courts are starting to apply RSS with certain regularity. For example, Court Order issued by the Court of the First Instance number 60 of Madrid, dated 30th April 2020 and another Court Order, this time issued by the Court of the First Instance number 3 of Zaragoza, dated 29th April 2020. These Court Orders have accepted requests for precautionary measures based precisely on the concurrence of the RSS figure. The first dealt with proceedings regarding the foreclosing of a “Jumbo” loan whereby the creditor alleged that the debtor did not comply with determined financial ratios, and therefore called for the resolution of the contract; the judge accepted the debtor’s request, paralysing the termination, maturity and payments process while the fundamental question was being resolved. In the second case, the court of Zaragoza suspended, as a precautionary measure, the enforcement of security rights, as certain non-payments came about during the state of alert.
Both of these resolutions are significant at the moment insofar as they have been issued and that they maintain the application of RSS. In particular, the Court Order of the Court of Madrid has evaluated the suitability of overcoming the restrictive criteria with which this concept was previously analysed, noting that it is necessary to “address the specific circumstances of the case”, as a Supreme Court judgment dated 15th October 2014 had already expressed. And in the same way, it has followed the pattern of Supreme Court judgments dated 17th and 18th January 2013, as well as 25th July 2015, along the lines that there should a tendency towards a “standardised application” of the concept of RSS when an extremely important and unpredictable event is involved, which in said judgments corresponded to the serious financial crisis of 2008, which likewise could well have referred to another of equal or greater magnitude. Thus, the legal restrictions established by the Government on the development of businesses in the course of the state of alert, as a response to the Covid-19 Pandemic, have provoked among others, unpredictable economic consequences of singular importance, and as a consequence the aforementioned Courts respect in general terms the applicability of RSS. It must be pointed out that in the case of the Zaragoza Court Order it is true that there is a lack of the desired depth and detail in the argument which links the circumstance of the Pandemic with the case in question, succinctly referring to the problems derived from the restriction on movement, where the ultimate consequence is a fall in sales.
Nevertheless, the courts continue to be cautious, since they require that anyone alleging the figure of RSS should not merely invoke it generically, for example as a “financial crisis” or the “Pandemic”. The real impact of the general circumstance on the specific case must be demonstrated, that is to say, the consequences of a more onerous burden of the contract derived from the alteration of circumstances, as alleged, must be proven. A further requirement is that there must be an “extraordinary alteration of circumstances which is capable of causing an exorbitant imbalance, beyond all calculation, of the reciprocal agreements of the parties” (Judgment issued by the Provincial Court of Toledo of 24th October 2016 and the Provincial Court of Madrid of 7th November 2019).
It is worth highlighting that the aforementioned Court Order issued by the court of the first instance number 60 of Madrid, dated 30th April 2020, stated that the Covid-19 Pandemic was not foreseeable and affected the financial situation of the debtor filing for precautionary measures in an “intense” manner. The use of the term “intense” indicates that the consequences of the decrees and other legislation approved since 14th March 2020 has meant a substantial alteration to things such as the restriction on the movement of individuals or the temporary closing of companies, in such a way that one of the parties could not fulfil a substantial part of the contract, which under normal circumstances or different circumstances (although not substantially different circumstances) would have been fulfilled. The determination of the degree of “intensity” is something to be analysed on a case by case basis given that the effects of the Pandemic have not affected everyone equally, and even when it comes to force majeure, it does not necessarily have the same consequences in all contractual relations; perhaps almost all are affected in one way or another, but the impact in each case is not of the required intensity.
The referred to judgments and court orders regarding the application of RSS cover a period of some 7 years, bringing to light the tendency of the courts to consider the modification of contracts as something less exceptional to what it used to be, and something which must be analysed in light of the extraordinary change in circumstances, which is something which happens more often due to the instability that the world is experiencing in general. But such openness must lead to a certain erosion of confidence in the invariability of contractual agreements and of the principle of the freedom of the parties, as well as the doctrine of the acts themselves. It may lead to the sensation that what is agreed is not unshakeable, or almost. Therefore, perhaps we must consider the introduction of new contractual clauses which “anticipate the unforeseeable”, or, rather, the consequences of unforeseen events that are going to substantially affect the circumstances under which the contract was entered into, thus altering in an exorbitant manner the relationships between the parties.
A recent judgment of the Supreme Court dated 6th March 2020, just before the declaration of the state of alert due to the Covid-19 Pandemic, further outlines the characteristics of the supervening circumstances which allow the application of the RSS concept:
a) the alteration of the circumstances which may cause the modification and eventually the termination of the contract must be of such magnitude that the risk of frustration of the object of the contract is significantly increased.
b) the circumstance must be unpredictable, on the understanding that it is not unpredictable when the parties had assumed expressly or implicitly the risk of such a circumstance occurring, or they should have assumed it because in view of the circumstances or nature of the contract such a risk was reasonably foreseeable.
c) The supervening circumstance is likely to be the case where long-term contracts are concerned, normally of a continual performance nature, but it will not be the case for short-term contracts (for example, for a duration of one year).
Although the circumstance of the Covid-19 Pandemic may be argued in principal as grounds for justifying the modification of certain contractual agreements, the allegation shall not prospect if it is merely invoked, since the element of connection between cause and effect will be missing; the argument must come down to the specific case, establishing a relationship between the general effect of the Pandemic and the specific effects it produces on the claimant contractual party and that it may lead to the frustration of the fulfilment of contractual obligations. Secondly, we may conclude that it is recommendable to establish contractual formulas for foreseeing the consequences if such circumstances occur, whether through the establishment of partial novation mechanisms, or through solutions for early termination with reasonable compensatory resources, so that the risk of having to turn to the courts in order to find a solution is reduced.
Eduardo Vilá
Vilá Abogados
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26th June 2020
