16 Mar The State of alarm and the breach of contracts due to force majeure.
On 14 March 2020 the Spanish government declared the state of alarm for the management of the health crisis caused by COVID-19, with drastic measures that include generalised restrictions on freedom of movement.
In view of this exceptional situation, it is obvious that in the coming months there will be massive breaches of contracts in many areas and sectors, so our companies should be prepared to avoid liability claims and penalties.
As we stated in our article last week, the exceptional situation caused by COVID-19 gives rise to many unknowns in the contractual field, which do not have a single or definitive answer.
Unlike the existing reality up to 13 March 2020, and for at least the next 15 calendar days, everything points to the fact that the parties to certain contracts will now be able to exonerate themselves from responsibility by claiming force majeure in those cases where it is the extraordinary measures imposed by the authorities which directly prevent compliance of the contract. An example of this would be an international transport agreement that cannot be carried out due to the closure of borders, etc.
It might seem obvious, but we are facing a situation both unpredictable and unavoidable that is not wanted by any of the parties to the contract.
However, not all situations are so clear, especially insofar as the Royal Decree declaring the state of alarm includes a list of activities expressly suspended, except for certain sectors that are considered essential and leaving many professionals and companies in the dark.
This circumstance, combined with the fact that the Royal Decree establishes commuting to the workplace as one of the exceptions to the limitation of freedom of movement of persons, means that the decision to continue or not with the business activity and how to carry it out often falls to the employer.
In this scenario, it is not so obvious that exemption from contractual performance on the grounds of force majeure is possible, and the extent to which exceptional circumstances have prevented compliance with the obligation assumed must be assessed on a case-by-case basis. For example, on many occasions it is possible to implement a system to work from home.
Likewise, it is more than likely that the effects of these restrictions will extend beyond the strict time frame in which they are in force, insofar as, once the activity is resumed, the companies will find themselves with orders or services pending completion and, at the same time, faced with new obligations that they cannot meet because they have work pending.
In view of this situation, and without being able to offer a single solution for all possible cases, we recommend to inform business partners, customers and suppliers as soon as possible of the suspension of contracts due to the impossibility of carrying out the activity, and to notify them of any possible effects on the fulfilment of the contracts – such as delays in delivery or lack of stock – and, where possible, to negotiate the contractual conditions to adapt them to the new situation.
If you have any doubts or need help to define your plan of action, you can contact us at email@example.com.