A broader application of rebus sic stantibus clause in Spain: the Ruling of the Supreme Court of June 30th 2014
10 Marzo, 2015
Jurisprudencia
Amongst many other consequences, the outburst of the financial crisis – especially severe in Spain – has revealed that Spanish contractual main statutes and regulations were not sufficiently updated to cope with contractual disputes where pre-crisis contracts were under discussion. As a result of the abrupt change of the economic cycle, lots of contractual covenants which had been initially conceived to rule situations with cheap credit facilities and abundance of liquidity (those executed until 2007) had to be eventually applied in an utterly different context, leading to bluntly unbalanced results between the contractual parties.
Spanish main contractual regulations are set in the Civil Code of 1889, which has been only slightly amended since it came into force almost 130 years ago. Thus, it is a common conclusion between legal experts in Spain that its regulations are clearly not adapted to the complexity of our current world, and are notoriously insufficient to provide fair solutions when the fundamentals of any given contract are deeply affected by external consequences like this enduring and deep financial crisis.
In this context, it has to be pointed out that Spanish government is in the process of drafting material amendments on general contractual rules to adapt our statutes to the current trends in Europe (according to the European Principles of Contractual Law); however, the process to pass such amendments by Spanish lawmaker has not even started.
Given such lack of valid statutes to adequately manage and settle many contractual disputes arisen over the crisis, the Spanish Supreme Court has moved forward introducing new interpretations of ancient general principles (amongst them, a renewed conception of the rebus sic stantibus clause) and importing jurisprudence of others jurisdictions (i.e. the German theory of the destruction of the contractual fundamentals due to utterly unexpected events not attributable to the parties).
To such an extent, the ruling casted by the Civil Section of the Spanish Supreme Court on June 30th 2014, was a real breakthrough, as by the very first time since the financial crisis started, the High Court admitted the consequences of the crisis were reason enough for the application of the rebus sic stantibus clase, forcing to adequate the covenants of a contract to current economic conditions. Traditionally, Spanish Courts had been very reluctant to accept pleads based on such general principle, systematically ruling that contractual and legal certainty had to prevail (pacta sunt servanda).
The aforementioned ruling has significantly broadened the requirements to accept pleads based on the rebus sic stantibus clause, accepting its application when:
- The economic fundamentals of any given contract have been materially alternated due to unexpected facts, events or circumstances beyond the control of the parties. It is abandoned the former idea by which such circumstances altering the fundamentals of the contact had to be exceptional and due to, almost, catastrophic events.
- Such unexpected alteration must not be attributable to such party pleading the application of the rebus sic stantibus clause.
- Such alteration causes an unreasonable economic burden to one of the parties.
By this broader interpretation of the rebus sic stantibus clase was introduced by the Supreme Court to settle a case raised by an advertising company who had a 4 - year term contract with the Public Transport Authority of Valencia (PTAV). As such contract was executed in 2006, the consideration to be paid by the concessionaire (a flat fee 1,7 Million Euros per year) was calculated according to the revenues which were reasonable to obtain at that time as per the nature of the activity engaged to the advertising company.
Nevertheless, the burst of the financial crisis in 2007 led to a collapse of the advertising market in Spain, causing a turnover fall of around 40%, provoking a sharp decrease of the revenues obtained by the concessionaire. As per such circumstances, the advertising company requested the PTAV to rebalance the contract by adapting it to the post – crisis economic parameters, amending the consideration initially agreed and reducing it to the 70% of the net turnover reached by the concessionaire.
Once PTAV rejected concessionaire’s initial request, the advertising company filed a Court Claim which was rejected at first instance and High Court stages, but were eventually accepted by the Supreme Court.
Thus, it seems to be that Spanish Supreme Court has overtaken lawmakers in adapting our contractual statutes to the current economic conditions. This new scenario seems to introduce to a case – by – case analysis on if rebus sic stantibus clause should be of application or not, opening huge possibilities for lawyers and companies to renegotiate covenants and agreements which have become bluntly overcome and decontextualized by the current economic environment.