Legal consequences of the coronavirus and the ability of COVID-19 to resolve what was agreed
Ignacio Montoro Iturbe-Ormaeche
Borja García Rato
Tribuna 31-03-2020
Days after the publication of Royal Decree 463/2020, of March 14, declaring the state of alarm for the management of the health crisis caused by COVID-19, it is clear that Spain in particular, and the world in general, is experiencing an unprecedented situation that will surely be recorded in the annals of history.
Focusing on the exceptional nature and addressing the issue from a contractual point of view, could the coronavirus break not only the peaceful coexistence of a country but also the binding force of what was agreed between the parties? At first glance, the avenues available to this unwelcome infectious agent to accomplish such a feat would be the following.
- Force majeure: activation of article 1.105 of the Civil Code:
The aforementioned provision regarding force majeure states that “(...) no one will be liable for those events that could not have been foreseen, or that, if foreseen, were inevitable.”
Jurisprudence has developed the concept of force majeure[1] as that (i) unforeseen event; (ii) external and independent of the will of the parties; (iii) that involves an alteration of the balance between the parties; and, (iv) whose imbalance is caused by the indicated event: that is, the existence of a causal link.
This definition must be read in light of what is happening today, as little has been written about the legal consequences in a scenario that resembles the well-known series "The Walking Dead."
In short, the question is whether one of the parties can unilaterally terminate a contract by claiming the existence of force majeure. And, despite some opinions, the answer seems quite unanimous: No.
What the legislator foresees by developing the concept of force majeure is that no one will be responsible for unforeseen events. That is, the obligated party is not exempt from fulfilling their obligation, but in the event of non-compliance with the cited requirements, no compensation for damages can be demanded.
Therefore, as long as the service can be provided or the good can be delivered, the obligated party must do so without being able to excuse themselves by the existence of a force majeure cause, without prejudice to the fact that their non-compliance, when there is a causal link with the occurred event, cannot give rise to any compensation.
Two examples that may help to understand what has been described:
- Mr. X buys a plane ticket to spend the weekend of March 20-22 on the island of Formentera. The airline is obligated to provide the service, but with the state of alarm declared, it is prohibited from doing so. The airline breaches the contract but, given the clear cause-effect relationship, it cannot be held liable for damages.
- Mr. X, with such bad luck in this crisis, is the owner and landlord of a house in Madrid whose lease expires on December 31, 2020. The tenant, an administrative worker at a Madrid Hospital, informs him of the termination of the lease contract due to force majeure as he lost his job because of the coronavirus crisis. In this case, the causal link is broken, since neither the state of alarm nor the situation in the capital prevents the tenant from continuing to use the house; therefore, despite the tenant's economic loss, he cannot terminate the contract citing "force majeure."
2. Rebus sic stantibus - being thus the things -:
The aphorism rebus sic stantibus literally translates to "being thus the things." Given the current situation -with coronavirus involved-, this legal instrument would allow for a balancing or restoration of the contractual obligations in the face of an unforeseen change in the circumstances that gave rise to the agreement[2].
The most recent development of this concept dates back to the economic-financial crisis from 2007 onwards. The Supreme Court itself recognizes that the economic crisis, with profound and prolonged recession effects, can be openly considered an economic phenomenon capable of generating a severe disruption or change in circumstances.
In other words, in cases that generate a significant modification of the circumstances in which the contract was initially agreed, it is possible to adapt the agreed terms to the new state of affairs.
This statement may seem contrary to the principle pacta sunt servanda - what is agreed obliges -, but the intention is to configure a mechanism that can make the continuation of the "life" and effects of the contract viable by adjusting its terms and conditions.
The clause rebus sic stantibus appears more operative than the interpretation and consideration of force majeure, as the intention is not to breach or extinguish contractual obligations but simply to adapt what was agreed upon a while ago to the current reality.
Speaking in layman's terms, it would be something like internalizing the saying Be water my friend; because in times of crisis we all must make an effort to adapt our needs and obligations.
- And what about pecuniary obligations?:
Jurisprudence[3] imposes an exception to the potential adaptation of contractual conditions due to unforeseen causes: its application to monetary debts.
That is, in a financing contract -to simplify the equation-, the debtor cannot be exempted from their payment obligation due to the sudden appearance of the coronavirus, because otherwise -the Supreme Court understands-, it would be an overly extensive interpretation to modify what was agreed between the parties.
In conclusion, the mechanism of rebus sic stantibus as a way of restoring the balance between the parties is proposed as a possible solution to the problems that will surely arise after the confinement the country is subjected to; provided they are not pecuniary debts and the principle of good faith and common sense is maintained. All of this, as a first possibility before resorting to insurance policies that may cover the obligations arising from contracts.
- Impact of COVID-19 on insurance policies
Linked to the analysis of contractual consequences, one of the most common questions these days is: Does my insurance cover the possible effects of the coronavirus?
The answer to this question will depend mainly on the type of insurance and the exclusion causes. After analyzing the terms of different types of policies on the market, one issue that stands out is that many include epidemics as an exclusion cause, but not pandemics[4]. Therefore, in the face of potential claim rejections, our courts will have to analyze whether a pandemic is included within an epidemic.
Another exclusion cause could be the willful or negligent behavior of the insured, which is commonly included in insurance terms. By now, we are well aware of the limitations imposed by Royal Decree 463/2020, so in cases of accidents caused by violating these prohibitions -traffic accidents, work accidents, professional negligence, etc.- insurers will certainly refuse coverage.
At this point, if accidents occur during the circulation restrictions we are experiencing, it will be necessary to analyze mainly whether the insured's movement was not restricted because they were going to buy food, to a healthcare center, to their workplace, etc.
Among the types of insurance that may be most affected by COVID-19 are: (i) travel assistance and cancellation insurance; (ii) health insurance; (iii) life, disability, and accident insurance; (iv) business interruption insurance with activity stoppage guarantees; and (v) event cancellation insurance.
It will be problematic to determine, for example, if the trip you want to cancel is due to the current movement restrictions or because your workplace does not grant you leave on the planned dates after the restrictions are lifted -especially likely in healthcare centers, given the ongoing need for many professionals-.
Another obstacle will arise with disability and sick leave policies when insured individuals cannot visit healthcare centers to be examined by a doctor due to the situation preventing the examination of patients without severe conditions.
Disputes will also arise with businesses that have business interruption guarantees due to damage, as insurers will argue that the business closure was not due to any incident.
Difficult answers in such a varied and little-known set of circumstances.
We hope that COVID-19 will leave us soon, although its legal consequences will linger, which is why legal professionals must focus our efforts on solving the problems faced by citizens.
[1] Among others, Supreme Court ruling Administrative Division 4339/2017 (Judge Maria del Pilar Teso Gamella, No. Rec: 2615/2015).
[2] Supreme Court ruling 333/2014, June 30 (Judge Francisco Javier Orduña Moreno, No. Rec: 2250/2012). Consolidated jurisprudence with Supreme Court rulings 591/2014 of October 15 (Judge Francisco Javier Orduña Moreno, No. Rec: 2992/2012) and 64/2015 of February 15 (Judge Francisco Javier Orduña Moreno, No. Rec: 282/2013)
[3] Supreme Court rulings 447/2017, July 13 (Judge Eduardo Baena Ruiz, No. Rec 721/2013) and 266/2015, May 19 (Judge María de los Angeles Parra Lucan, No. Rec 621/2015)
[4] We have learned these days that the main difference would lie in geography, with pandemics affecting different countries and continents.
