Spotlight: breach of contract claims in Spain

Bizar Male

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Breach of contract37

The basic elements of a claim for breach of contract will depend on the pleadings. First, the claimant can seek specific performance and compensation for damage. In this case, the claimant would have to prove the following facts: (1) the breach of contract, regardless of its significance; (2) the possibility of specific performance (performance in natura), if possible and suitable for satisfying the business purpose agreed in the contract and the creditor’s needs; (3) damage derived from the breach of contract and caused by the breaching party’s wilful misconduct or negligence (if the latter, the court has to be satisfied that the damage was foreseeable at the time of contracting and came as a necessary consequence of the failure to perform). If specific performance is not possible nor suitable, the aggrieved party can only claim for damages.

Second, the claimant could seek the termination of the contract and damages, provided that the following facts are proved: (1) the breach of contract, as long as it is essential and definitive (fundamental non-performance), so that said breach leads to the frustration of the contract, and (2) damages in the same terms explained above. For evidentiary purposes, parties often set out specific provisions on which terms are regarded as essential for termination purposes in case of breach. In the absence of these provisions, the essentiality of a particular term will be assessed in accordance with case law, taking into account the nature and scope of the contract.

Therefore, in general, the burden of proof of breach of contract, damage (or loss) and causation lies on the claimant. The defendant, on the other hand, would have to prove those facts which mitigate or prevent their liability from existing, such as unpredictability or inevitability of events for which the negligent breaching party cannot be held liable.

In reciprocal obligations, the defendant can also assert and prove that the claimant failed to perform or duly perform its obligation (exceptio non adimpleti contractus and exceptio non rite adimpleti contractus). In this regard, neither of the obligors will incur in default if the other does not perform its obligations.

The remedies against breach of contract will be addressed at length in Section VIII.

Defences to enforcement

There are different ways for parties to seek to avoid enforcement of contractual obligations or challenge claims of breach of contract. These legal actions can be aimed at rendering the contract null and void or excluding or mitigating the liability.

i Defences to enforcement aimed at rendering the contract null and void

Defects in the contracting party’s valid consent, the subject matter of the contract or the cause of the obligation established are the overriding grounds for seeking to establish the invalidity of a contract.

Consent given pursuant to error, duress, intimidation or fraudulent misrepresentation shall be null and void. The error must concern the substance of the subject matter of the contract, or the conditions thereof, which should have been the main reason for entering into it. Furthermore, the error would not suffice to invalidate the consent if it could have been avoided by acting with due diligence, so the personal circumstances of both parties would be taken into account to assess if an error can be regarded as a defence to enforcement of the contract. In the financial sector, there has been a significant increase in litigation against banks via actions for nullity brought by retail customers and professional non-institutional investors which relied upon error in consent at the time of contracting on the grounds that the client allegedly did not receive sufficient information to be aware of the nature and risks of the investment products. In this particular realm, the case law seems to have shifted from a traditional and exceptional concept of error to a wider and more flexible interpretation.

There is duress when an irresistible force is applied to obtain the other party’s consent, whereas intimidation entails the presence of fear caused by an exterior threat which induces a party to enter into the contract. Fraudulent misrepresentation exists where, as a result of insidious words on the part of one of the contracting parties, the other is induced into entering a contract which he or she would not have entered into otherwise.

The contracting parties can dispute the subject matter of the contract if: (1) it is impossible; (2) it is beyond the bounds of commerce between persons; or (3) it is contrary to the laws or to good customs.

The cause of the obligation established must also be considered when assessing the validity of the contract. The cause must be permissible, that is, legal and morally correct.

As these matters involve its essential elements, the contract as a whole would be rendered null and void.

ii Defences to enforcement aimed at excluding or mitigating the liability due to a breach of contract

There are different ways for the defendant to reject the claim seeking the release from liability or from performing the contract. The first refuting argument could be that the claim is time-barred.

A claim for nullity of the contract relying upon the absence of the essential terms must be brought within four years. In particular, the limitation period starts to run from the following moments depending on the case: (1) in cases of duress or intimidation, from the date on which the duress of intimidation ceased; (2) in those of error, fraudulent misrepresentation, or falseness of the cause, from the completion of the contract. However, the Supreme Court case law has conceptualised completion in claims aimed at rendering the nullity of investment contracts depending on which kind of contract is assessed: in swaps, completion takes place at the moment of the termination of the swap; in bonds, when they were purchased; for convertible bonds, the limitation period would start to run on the date of their conversion into shares; in loans, the completion comes into effect on the date the loan was taken out. When assessing complex investment products, the Supreme Court has also required, in order for the limitation period to begin to run, that the client could have been aware of the circumstances which caused the error when signing the contract (which normally happens when the client realises he could suffer financial losses). The time limit for filing those kinds of claims will not cease to run when filing of out-of-court complaints.

In general, a claim for one or more of breach of contract seeking damages, specific performance and termination of contract must be brought within 15 years of the date on which the action first could have been brought or, in any event, within five years of October 2015, if the latter occurs prior to the former. These limitation periods could cease to run due to an out-of-court complaints, so that the whole period would start to run again.

Finally, it is worth mentioning that the period between 14 March 2020 and 4 June 2020 (82 days) will not be taken into account for the calculation of limitation periods in accordance with regulations passed due to covid-19.

Furthermore, several Spanish contract law concepts could lessen the impact of any breach of contract, in accordance with the circumstances applicable to each case. Some of them could be aimed at justifying a potential termination of the contract or exclusion of liability derived from its breach and others seek to mitigate the potential consequences of a breach of contract. However, the legal regime will only apply where the parties have not agreed to exclude it (either expressly or by agreeing upon a different regulation). Therefore, the starting point for determining the possible legal consequences of this situation must always focus on the contract signed by the parties.

One of these concepts is force majeure which, according to the Spanish Civil Code, refers to those events that are unforeseeable or, if foreseeable, are inevitable (effectively, force majeure is equivalent to the term ‘act of God’). This is necessarily a case-based concept, based on the existing case law, according to which force majeure is generally reserved for extraordinary events that are beyond the control and organisational reach of the contracting party that intends to rely on it.

The effects of force majeure on contractual obligations are not specific but may relate to different aspects of the contract with differing conditions and scope. Thus, force majeure may lead to or indeed justify the release from an obligation to compensate the counterparty for damage when relevant goods or services have not been provided (and it is no longer possible for the breaching party to provide them), or a potential modification, cancellation or termination of a contract when the agreed benefit is no longer possible or feasible, thus thwarting the original purpose of the transaction. Yet, no general conclusions may be drawn regarding this point as this will depend on the specific contract and the particular circumstances of the case.

Furthermore, the case law has applied such concept on an exceptional basis. For example, for the force majeure to justify the release from the specific performance of the contract (so it has to be terminated), the contract performance has to be proved physically (or legally), objectively, absolutely and definitively impossible and, in any case, said impossibility cannot been caused by the breaching party. On the basis of such principles, the Supreme Court case law has highlighted that force majeure cannot be relied upon when the obligation in dispute is purely monetary, as there is no proper and factual impossibility for the parties to obtain funds to fulfil their pecuniary obligation.

It is also worth mentioning that it is common practice to set out contractual provisions in order to allocate risk between the contracting parties and assign liability in cases of force majeure. Said clauses are generally deemed valid given the primacy of the parties’ intention, with no other limitations other than those generally imposed by the criteria of incorporation and content of contractual clauses. In deferred-performance contracts, it is advisable to include force majeure clauses aimed at determining, modifying and adapting the legal concept to the specific contractual relationship (especially if the contract has an international aspect).

However, in contracts entered into with consumers, any term by which the supplier releases itself from liability in the event of force majeure is an unfair term pursuant to the Consumer Act.

Separately, the parties can seek modification of the terms agreed due to an extraordinary and unforeseeable change in circumstances by means of another contract law principle: rebus sic stantibus.

In short, the elements required to date by case law as the basis for an action based on this principle are as follows: (1) the existence of an extraordinary change in the circumstances when performing the contract compared to those existing when the contract was entered into; (2) excessive hardship of the obligation in light of the unforeseeable events, which shall be deemed to exist in essence, when there is imbalance or disproportion between the obligations of the parties to the contract; (3) unforeseeability and, in particular, a failure to include the unforeseeable event in the contract, excluding the normal risk inherent to or arising from the contract or risks assumed explicitly or tacitly by a contracting party; and (4) the ongoing (i.e., not merely episodic or transitory) nature of the change in circumstances, such that the balance of obligations may be reasonably expected to be disrupted for a long period of time.

The rebus principle has usually been applied to continuing-performance contracts, because the performance of one-off contracts generally renders unforeseeable events unable to cause an imbalance of obligations. Likewise, its application has normally been limited to long-term contracts, since, in short term contracts, it is more difficult to assert that a specific event is unforeseeable. That is why the Supreme Court rejected the rebus sic stantibus principle in a case where the contract had a duration of one year. Similarly, the Supreme Court has also dismissed those claims relied upon the principle of rebus sic stantibus when the parties had agreed a minimum guarantee income in the contract, as, in doing so, the parties previously envisaged the potential effects of events which could reduce the income agreed.

With regard to this matter, to the best of our knowledge, there is no Spanish case law on the application and interpretation of material adverse change (MAC) clauses and material adverse effect (MAE) clauses. They are less frequently used than in common law based systems, although they are not uncommon in contracts for the acquisition and financing of companies, for example. Nevertheless, to a large extent, there is some common ground between the qualifying cases and effects that other legal systems afford this type of clause and those attributed under Spanish law to force majeure and the rebus principle. Therefore, in such cases, the dispute would depend on the terms agreed and other contract-related factors. The wording of these clauses varies from case to case, although perhaps this practice is better established in financing contracts that are based on Loan Market Association standards. As a general rule, the application of these clauses should be limited to cases in which MAC or MAE deal solely with matters relating to the specific business or sector in which the company with the obligation (or the target in an M&A contract) operates, provided that general, systemic or macroeconomic circumstances are excluded from these provisions.

Finally, it is noteworthy that both force majeure and rebus sic stantibus would pave the way for claimants to bring proceedings on contractual disputes on the grounds of the devastating effects caused by the covid-19 pandemic on the economy and namely on the performance of contracts. Notwithstanding that, the potential outcome of these claims is still uncertain and, in any case, they would be decided on a case-by-case basis.

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