Contract Law 27. March 2020

Spain: Main recommendations about contract matters

27. March 2020
act legal Spain

Contracts that are currently in force

A procedure needs to be established to review these contracts, prioritizing those that are more financially significant or are strategically important.

Parties to contracts that present detailed regulations and provisions regarding inevitable or unforeseeable events (such as natural disasters or epidemics) must accept the consequences set forth at the beginning of the contractual relationship.

If the potential scenarios under the contract do not cover procedures or consequences linked to inevitable or unforeseeable events, the parties must refer to the applicable legislation. In this case, the Spanish legal framework allows parties to waive (totally or partially) their contractual obligations under force majeure or fortuitous events. A more detailed definition of these scenarios can be found in article 1105 of the Spanish Civil Code.

We must also mention that force majeure events can also exempt parties from extra-contractual obligations deriving from business relationships.

It is important to note that employers must meet the contractual obligations they have assumed using any means at their disposal (both ordinary, i.e., those used under normal circumstances, and extraordinary) and exercise the due diligence they are legally obliged to provide.

If the contract concluded does not mention any procedures or consequences linked to a force majeure event that greatly impacts the obligations assumed and agreed upon, we recommend signing an annex that is legally rigorous and details how to proceed in such circumstances.

Contracts that haven’t been signed yet

All contracts to be signed in the following days must contain a clause that expressly refers to force majeure events as situations in which parties cannot be considered liable for unfulfilled obligations. Moreover, force majeure events must be considered a valid reason to call off penalties, delays, etc. This clause will be adapted depending on the sector for which it is intended.

It is of the outmost importance to include COVID 19, or coronavirus, among these force majeure events (together with any mutations the virus may have).

International contracts

The legislation that is applicable to these contracts must be reviewed, since the definition of force majeure varies from country to country and the legal consequences foreseen by our legislation (or the guidelines set by the Spanish authorities) may not necessarily apply to contracts that are not subject to our legal framework.

Public procurement

Article 34 of Royal Decree-Law 8/2020 establishes a series of singular provisions related to the execution of public contracts. The legal solution offered varies depending on the type of contract, but will not be applicable in any of the following cases:

  • Sanitary supply or care provision contracts, be them pharmaceutical or not, related to the health crisis caused by COVID-19.
  • Contracts related to security and cleaning services, as well as the maintenance of IT systems.
  • Supply or service agreements that are necessary to guarantee the mobility and safety of transport services and infrastructures.
  • Contracts granted by public entities listed in official stock markets that do not derive earnings from the General State Budget.

As for all other contracts, some of the novelties introduced are detailed below.

A. The suspension of service and supply agreements that are impossible to execute is agreed upon, granting the contractor the right to claim the following damages from the Administration:

  • The salary costs effectively paid by the contractor, during the suspension period, to the staff that, on 14 March 2020, was employed to perform the contract.
  • The costs of maintaining a definite guarantee during the suspension period.
  • The rental or maintenance costs of machinery, facilities, and equipment during the suspension period, provided they were needed in order to execute the contract and the contractor can prove they were not used for any other purposes during the suspension period.
  • Costs corresponding to the insurance policies set forth in the specifications and linked to the purpose of the contract, provided they were taken out by the contractor and remained in force when the contract was suspended.

Once the impossibility to execute the contract is ascertained, the Administration shall have five natural days to quickly process the contractor’s request. If, during that period, no relevant notice is received, the request shall be deemed dismissed.

B. When it comes to public service and supply agreements that are different from the ones mentioned in the previous section, the execution period is extended (without any penalties for the contractor or the option to terminate the contract). To meet this extension, the contractor shall be entitled to receive any additional salary costs.

C. In the case of works contracts in force that, according to the «development and works plan», were meant to be completed between 14 March (first day) and the end of the state of alarm but that, given the COVID-19 situation or the measures adopted by the Spanish government, may not be delivered, the contractor can ask the contract to be suspended from the moment obligations could not be met because of the situation until works can be resumed. It is noted that the provisions set forth in section 2.a) of article 208 and under article 239 of the Spanish Public Sector Contracts Act (LCSP) will not be applicable to these suspensions.

D. When it comes to the granting of works and services through arrangements that were in force at the time this royal decree-law entered into force, the contractor shall be entitled to restore the contract’s financial balance by (as appropriate) extending its initial duration up to 15% or amending the financial clauses in the contract. However, in order to do so, the contracting body must be certain contract execution is impossible.

Litigation scenarios

Given the foreseeable avalanche of contractual non-compliances, jurisdiction-related clauses need to be revised. At the moment, relying on alternative conflict resolution methods (mediation or arbitration) seems more desirable as they are quicker and more efficient at solving trade disputes.

In any case, all potential evidence should be collected and every attempt to reach an agreement should be well-documented. The same applies to acts of good faith when exercising rights and showing the outmost due diligence when meeting obligations. All of this shall be incredibly valuable in the event arbitral or judicial proceedings are lodged against a counterparty.

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