Modification of Contracts due to Crisis. “Rebus Sic Stantibus”

Contract Modification in Crisis Situations: “Rebus sic Stantibus”.

The “Rebus Sic Stantibus” clause (also known as the “rebus” clause) is a Latin aphorism that could be translated as “while things remain thus”.

It is a legal instrument originating in ancient Rome which, although it does not appear today in the articles of any legal code, does have sufficient jurisprudential development.

It acts as a balancing mechanism between the obligation to fulfill contracts and necessary equity, prohibiting excessive onerousness under certain circumstances.

It must be noted, on the one hand, that the Civil Code makes clear that obligations arising from contracts have the force of law between the parties and, therefore, must be fulfilled. Article 1258 reinforces this line, and more specifically, Article 1256 categorically states that the validity and fulfillment of contracts cannot be left to the discretion of one of the contracting parties.

Notwithstanding the foregoing, when contracting parties formalize their agreements, they do so based on the reality of the moment in which they consent to be bound and on the expectations that may reasonably be anticipated for the future.

If an unforeseeable event occurs for the contracting parties and profoundly alters their situation… what can be done? Should obligations continue to be assumed even when they are almost impossible or excessively onerous?… or, conversely, is there a possibility of altering them?

To address such situations, the “rebus sic stantibus” clause was created.

Defining Requirements of the “Rebus Sic Stantibus” Clause.

In 1957 and 1959, the Supreme Court established in two separate judgments the requirements for its application, although in both cases it denied it. It would be in its judgments of April 19, 1985, May 9, 1983, and June 27, 1984, where it would synthesize the requirements for its application and present them in an orderly manner, these being as follows:

– An extraordinary alteration has occurred between the circumstances existing at the time of contract performance and those present at the time of its execution;

– As a consequence of said alteration, an exorbitant disproportion beyond all calculation results between the agreed performances;

– This has been produced by the occurrence of truly unforeseeable circumstances, and

– There is no other means to remedy the aforementioned patrimonial imbalance produced.

Furthermore, the Court clarifies that, through the use of this instrument, the creditor should not seek to obtain a performance greater than that agreed upon, nor should the debtor deliver less than what was agreed.

“Rebus Sic Stantibus”. Objective.

The purpose of this legal institution is generally to modulate the obligations to which the parties are subject, preventing them from becoming excessively burdensome or onerous for one of the parties.

As well as, in extreme cases, to nullify the contract on the grounds that the legal transaction that gave it cause has become impossible or at least so difficult to implement that it ceases to be in the interest of the contracting parties.

Case-by-case analysis.

Being a figure of jurisprudential development, its application is not sufficiently defined, which, combined with the fact that it is closely linked to economic activity (and this in today’s society is very diverse depending on the sector examined), means that its application does not correspond equally in all cases.

Economic sectors where fluctuation in workload, the value or quantity of assets, and other similar factors are very high do not facilitate its application on most occasions. The rationale for this is simple: rebus sic stantibus will be applied when the situation causing the imbalance between contracting parties is external and truly unforeseeable for them.

Volatility in certain sectors makes it foreseeable that alterations will occur in the daily reality of the contracting parties in the near-to-medium future. It may even be considered that these modifications do not arise from situations external to the contracting parties, as they are typical of the sector in which they are operating.

Another important aspect is the nature of the contracting parties; it will not be applied equally in B2B (business to business) contracts, in contracts between individuals, or in consumer or user contracts.

In contracts between individuals, it may be very complex to determine who is the weaker party; in B2B contracts, it may be somewhat easier by considering the size of the companies, their turnover, etc.

However, there is no doubt that in contracts between companies and consumers or users, the stronger party is normally considered to be the company, which in a large number of cases structures its contractual relationships with its clients through adhesion contracts linked to general contracting conditions, with no prior negotiation and consequently no power for the client to alter the content of the “prefabricated” contract.

From Luxembourg, the Court of Justice of the European Union has repeatedly ruled in the same direction: protection through this instrument of consumers and users as they are the most vulnerable in crisis situations.

Evolution and case law in the Supreme Court Jurisprudence.

Within the rulings on the “rebus sic stantibus” clause, and from an evolutionary perspective, we could refer to the following:

1.- The Supreme Court had for many years systematically prevented the application of this instrument to level performances; the High Court said of this clause in STS of May 17, 1957, that “it is dangerous and must be admitted with caution,” as it may attack the principle pacta sunt servanda and the always desired legal certainty.

2.- The Supreme Court showed some openness in 2013, where in two judgments very close in time, dated January 17 for the first and 18 for the second, numbered 820 and 822 respectively, the High Court declared that “deep and prolonged effects of economic recession can be openly considered as an economic phenomenon capable of generating a serious disruption or mutation of circumstances”.

3.- In this regard, in Judgment No. 333 dated June 30, 2014, an appeal was upheld by the Supreme Court based on the application of this clause.

4.- Notwithstanding the foregoing, eight days before the State of Alarm was declared, all commerce in Spain was halted, and with confinement imminent, the Supreme Court ruled in Judgment No. 156/2020 of March 6, stating in its second legal ground what is transcribed below: “A change of these characteristics that, under the premises established by jurisprudence, could generate a case for application of the rebus sic stantibus rule is more likely to occur in a long-term contract, ordinarily of successive performance. But not in a case, such as the present one, of a short-term contract, in which something extraordinary that affects the basis of the contract and is not covered within the inherent risk of that contract can hardly occur.”

Contract Modification in Crisis Situations. Expectations regarding the “Rebus” clause in the Covid-19 crisis.

Although, evidently, the Supreme Court has not yet ruled on its application or otherwise in the context of the current health crisis, in the opinion of the author of this article, it may—in certain cases—be applicable.

Indeed, it must be noted that the exceptional nature of the situation is recognized in the Royal Decrees regulating the State of Alarm itself, and intrinsically in its declaration.

Unlike the 2008 economic crisis, in which the various economic-productive sectors suffered a slowdown, in this health crisis there has been an almost total and absolute paralysis of all sectors.

In contrast to economic cycles, where more or less reliable analyses and predictions can be made and measures can be taken to adapt contractual relationships and obligations to be adopted, in this case, no one could foresee in any way the arrival of this crisis.

Finally, and in particular relation to consumers, we understand that the superior value of the legal system, which is Justice, provided for in Article 1, as well as the constitutionally enshrined rights that are the foundation of social peace, will transversally integrate the rulings that are issued in the future.

Regarding contracting between companies, notwithstanding the foregoing, and in the opinion of the Director of the Commercial Contracting Area of IN DIEM, attorney Ángel José Del Pino Ibáñez, the situation will require more analysis and finesse in the decision-making process, as it is undeniable that both parties will be affected by the Covid-19 crisis.

This will mean that the commercial relationship established between companies, in addition to requiring a specific analysis of its clauses and the context of its execution, will be subject to the severe consequences and losses derived from the current crisis (both at the productive and financial levels, among other aspects) for all intervening parties.

In this regard, it will not be surprising, as attorney Ángel José Del Pino Ibáñez warns, that both parties may request the adaptation of the contractual relationship in opposite directions.

Furthermore, he continues to point out that under no circumstances should the crisis serve as justification or excuse to improve the conditions of one of the parties (normally, the stronger one) to obtain a better position, without taking into consideration the effects on the legal relationship globally and inclusively for all parties to the contractual relationship.

Probably, and to conclude, he infers that in situations of conflict over commercial contractual relationships between companies, “open books” negotiation mechanisms will have to be managed or, alternatively, alternative dispute resolution systems that level—if possible—the restructuring of contractual obligations, based on the dual impact, and avoiding —to the extent possible— the submission of differences to the courts.

Author: Francisco Javier Paredes.

Specialist lawyers in Commercial Contracting | IN DIEM: Málaga, Seville, Madrid, Las Palmas de Gran Canaria, Almería, Huelva…

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