The Complex Commercial Litigation Law Review: Spain
The commercial litigation landscape in Spain has recently been characterised by two main factors: the critical role of the case law of the Supreme Court and the increase in the number of complex contractual (including liability for negotiations) cases.
The role of case law is of utmost importance in this area. The basic private law provisions under Spanish law (basically, the Civil Code of 1889) have not been modernised, but the Supreme Court has substantially modified the interpretation of those provisions. The modern configuration of the remedies arising out of breach of contract (see Section V) is a very clear example of this trend. In this judicial modernisation, the Supreme Court has used some of the European private soft law tools (namely, the Principles of European Contract Law and the Draft Common Frame of Reference).
Another trend, as mentioned, is the increasing number of complex contractual cases, such as securities and M&A litigation, liability for breach of negotiations related to potentially relevant transactions or the possible application of the rebus principle (or hardship or force majeure) owing to the adverse effects of the covid-19 pandemic.
i Essential terms of contracts
According to the Civil Code, three requirements must be met for a contract to be in existence, valid and enforceable: the contracting parties' valid consent, subject matter and the cause of the obligation established.
First, the valid consent of the parties is manifested through the reciprocal expression of the offer and the acceptance over the subject matter and cause expressed in the contract. Consent exists from the moment the offeror is aware of the other party's acceptance or when the acceptance cannot be ignored in accordance with good faith. Consent given owing to error, duress, intimidation or fraudulent misrepresentation is null and void.
Second, the subject matter of a contract can be all things that are not beyond the bounds of commerce between parties (including future things) and all services that are not contrary to the law or good customs.
Third, the cause (purpose) of the contract must be lawful (i.e., not contrary to the law or good morals); otherwise, the contract shall not come into effect.
ii Form of contracts
The general rule under Spanish law is freedom of form, so contracts are binding, regardless of the form in which they have been entered into (orally or in writing), provided that they meet the essential conditions for their validity.
However, in practice, most contracts in commercial transactions are entered into in writing so that it is easier to prove their existence and specific terms. Furthermore, in cases where the transaction has a significant economic value, contracts are often formalised in public deeds before a notary (even if doing so is not mandatory). In the latter cases, although notarisation is not required in every contract, it is advisable for evidential purposes as deeds before notaries are considered stronger evidence than a mere written contract.
The form of contracts is an important issue in potential proceedings. Although the courts may be satisfied that an oral contract has been entered into in light of the evidence provided in the proceedings (and, therefore, oral contracts may be enforceable), it is easier for the parties to prove their existence if the contracts are in writing, namely in a public deed. It is more difficult to bring a claim against a non-performing party if the contract is oral owing to the lack of written evidence.
There are also specific contracts that must be executed in writing and formalised in a public deed. The formalities to execute those contracts mainly depend on either the subject matter or the type of contract to be executed. For instance, contracts regarding real estate, land or purchases or sales of shares must be in written form and recorded in a public instrument document.
Certain contracts must be set out in a public instrument for evidential purposes (ad probationem): contracts for the creation, amendment, transfer or extinction of rights in rem; contracts for leasing real-estate property for a period of over six months; and the assignment of actions or rights arising from an act that is provided for in a public deed.
iii Implied terms of contracts
The contracting parties are not only bound by specific terms set out in the contract but also by the obligations arising out of good faith rules, such as the abuse of rights. Parties are always obliged to take reasonable and normal steps when exercising their rights.
In this regard, it is not uncommon to see courts read terms into a contract by reference to good faith or trade usage. For instance, the Supreme Court case law requires a notice period for a party to terminate a distribution agreement (otherwise, the breaching party would be held liable for damages).2
On the basis of good faith, the Supreme Court has adopted the rule of the notice fixing additional period of performance (the 'Nachfrist' mechanism), by which the aggrieved party may acquire a right to terminate the contract, although the non-performance of the contractual obligation is to be initially considered non-fundamental.3
The more issues that are addressed in the contract, the less likely it is that the above would be the case since good faith rules often arise when the contract does not set out a relevant aspect.
iv Third parties' rights under the contract
Under Spanish law, third parties (i.e., parties other than the contracting parties) are not usually affected by contracts since the contractual effects are limited to the contracting parties or their heirs; however, it is possible for a contract to include a stipulation granting rights to a third party who, to acquire those rights, must make its acceptance known to the obligor before the stipulation is revoked. Obligations can only be imposed when they are accepted by the third party.
In this regard, the Supreme Court, in a decision dated 8 July 2017, has established that 'the third party is entitled to demand the enforceability of the contractual clause established in his favour if he accepted it and made that acceptance known to the liable party'. The acceptance can be tacit, as interpreted by the Supreme Court in several decisions (e.g., judgment of 6 March 1989), and can be given through inaction or words. According to case law, the third party acquires the right before the acceptance requirement is fulfilled.
In some exceptional cases, a third party may be held liable for damages under the contract, as a recent Supreme Court judgment has shown: the Supreme Court held that the buyer of a car (consumer) is entitled to bring a claim seeking damages not only against the seller but also against the car manufacturer directly.4
v Cases where the formal contract has not been formed
In some cases, negotiations do not lead to a contract as the parties are not legally bound to reach an agreement. As indicated by the case law of the Supreme court, parties are free to negotiate, and they are not liable for failure to reach an agreement.5
There are certain circumstances in which parties can incur in pre-contractual liability on the basis of culpa in contrahendo (extra-contractual under Spanish law), such as when negotiations are not initiated or conducted in good faith, or when they have reached a point at which it is legitimate to expect closing (but this does not occur because of an unjustified cause).
In this regard, the courts assess the nature of the potential contract and the goods and services being traded, the circumstances of the negotiating process, the potential frustration of the parties' expectations after withdrawal from negotiations and whether there are fair grounds for ending the negotiating process. The key point, according to the case law of the Supreme Court, is to assess whether a party entered into or continued negotiations with no real intention of reaching an agreement.
Liability for culpa in contrahendo is, in principle, restricted to the reliance interest (interés contractual negativo) and does not cover the interest the party had in the performance of the contract (i.e., expectation interest).6
vi Contracts based on standard form
Contracts based on standard form (the general conditions of contract) – entering into contracts by reference to those general terms – is common in commercial transactions (not only with consumers but also with other companies in business-to-business relationships). These general terms are not individually negotiated, are imposed by one party and are intended to be incorporated into multiple contracts.
In cases where those general non-negotiable conditions of contract are incorporated into contracts entered into with consumers, they are subject to consumer legislation. On the contrary, when included in contracts entered into with sellers or suppliers (who are not regarded as consumers), some requirements must be met for the contract to be valid and enforceable:
- the other party must be aware of the conditions under which the contract is formed; and
- those conditions must be drafted in plain and intelligible language (formal transparency).
There is a noteworthy case relating to the validity of one of those general terms. Although the term was incorporated into a contract entered into with a consumer, the case had a significance impact on the financial sector as it was about the 'administration fee' that is normally charged when taking out a loan.7 In this case, the Supreme Court's decision was threefold:
- First, the Supreme Court held that the administration fee shall be deemed a contractual term related to the definition of the main subject matter of the contract; therefore, its material transparency must be assessed in terms of Article 4.2 of Directive 93/13.8
- Second, such clause is transparent on the following grounds:
- it is a fee generally used and known in the market by consumers and clients;
- the fee has an important role in the information provided to the consumer prior to the signing of the contract and in advertisements by which banks offered their loans;
- the client would be aware of the fee as it is a one-off payment and due at the moment the contract is entered into; and
- the clause is incorporated into the contract in a transparent manner since it is in plain language and has an important role in the contract.
- Third, the Supreme Court held that, in any case, the administration fee cannot be deemed unfair as it is intended to pay for the essential services rendered by banks before granting the loan (client's creditworthiness assessment, preparing and drafting documentation, necessary arrangements for clients to have the principal granted in their banking account, etc.).
Furthermore, the Supreme Court established that the adequacy of the remuneration, on the one hand, as against the services or supplies provided in exchange, on the other, cannot be assessed in this case, so the potential unfairness of the clause related to the administration fee cannot rely upon the excessive nature of the amount of the fee charged.
The Supreme Court was expected to issue a new ruling on the administration fee clause after the European Court of Justice Ruling of 16 July 2020, which also provided the relevant criteria for the assessment of such clauses in terms of the provisions of Directive 93/13; however, the Supreme Court has requested for a preliminary ruling from the European Court of Justice to confirm whether the relevant criteria on which the Supreme Court based its decision are consistent with the provisions of Directive 93/13.
Numerous disputes over contract interpretation come up in commercial transactions. Some are easily resolved, whereas others involve complex litigation in which the parties to the proceedings adduce oral and documentary evidence to present the real intention and will of the contracting parties when entering into the contract.
A perfect illustration of this is the case resolved by the final judgment of Commercial Court 3 of Madrid of 13 November 2019 concerning the Spanish television series Money Heist (La casa de papel). The court dismissed the breach of contract claim by which the claimant (a media producer) alleged that the real intention of the parties had been to grant option rights over the television series. On the basis of both the evidence submitted by the defendants (including witness examinations) and the 'systematic criterion' (see below), the court concluded that the parties had not agreed to any option right.
This kind of dispute normally arises when the wording of the contract is not clear enough, the contract contains contradictory terms, or an issue that was not explicitly set out in the contract arises.
In the event of a discrepancy or a dispute between the contracting parties, the Civil Code provides general rules on contract interpretation. The main purpose of those provisions on contract interpretation is to establish the real intention of the parties (beyond the precise wording of the contract);9 therefore, the courts must uncover that intention, bearing in mind circumstances such as the wording, nature and scope of the contract or clause in dispute, preliminary negotiation and subsequent conduct.
For the purposes of establishing the real and effective intention of the parties, the Civil Code provides a set of supplementary and subordinate rules on contract interpretation:
- The literal or grammatical interpretation will prevail in cases where the terms of a contract are clear and do not leave any doubt regarding the intention of the contracting parties; however, if the wording seems contrary to the intention of the contracting parties, the latter shall prevail over the former.
- To assess the intention of the parties, the main thing taken into account will be their conduct at the time of and subsequent to the contract; therefore, the courts may pay attention to the negotiation of the agreement or the actions carried out by the parties in performing the agreement.
- The rest of the contract is also a key aspect in interpretation as clauses must be interpreted in connection with each other, attributing to any doubtful clauses the meaning resulting from the whole (the systematic criterion). This criterion involves interpreting the contractual provisions jointly to investigate the spirit and purpose of the contract itself.
- The nature and uses and customs in the kind of business governed by the contract shall also be assessed to interpret any ambiguities in contracts or when clauses usually set forth therein have been omitted.
- Although the terms of the contract are general, they must not be deemed to comprise things and cases different from those in respect of which the interested parties intended to contract. In this regard, the courts normally hold that a term specifically drafted for a particular issue prevails over a general rule.
- If any clause of the contract has several meanings, it must be understood to have the meaning most suitable for it to be effective, so that the discrepancy is avoided.
There are specific rules on interpretation when the contract is based on a standard form (general contract conditions). In those cases, specific terms will prevail over general terms unless the latter are more beneficial to the buyer (i.e., the contracting party that has not drafted the wording of the contract and agrees to enter into a contract under the general terms drafted by the other contracting party, the supplier or the seller). Furthermore, in standard form contracts, clauses that have not been drafted in plain, intelligible language shall be interpreted in favour of the buyer.
In addition, owing to the influence of common law jurisdictions, and the complexity of contracts nowadays, it has become increasingly common for contracts to include an interpretation clause setting out the rules on interpretation agreed by the parties beyond the legal rules.
i Amounts in dispute
Under the Procedural Law, there is no minimum amount for the parties to commence judicial proceedings on contractual disputes; however, some procedural issues depend on the amount in dispute:
- the kind of proceedings: claims where the amount may exceed €6,000 or cannot be calculated shall be heard in ordinary proceedings and, on the contrary, those in which the amount does not exceed €6,000 must be heard in verbal proceedings, which, effectively, are summary proceedings, unless the claim deals with any of the matters that must be heard in ordinary proceedings;
- leave to appeal before the second instance courts: the first instance judgment may be appealed if the amount exceeds €3,000;
- leave to appeal before the Supreme Court: the second instance judgment may be appealed if the amount exceeds €600,000, unless the case has 'reversal interest' because the judgment contradicts Supreme Court case law or decides on issues in which there is contradictory case law from second instance courts or applies laws that have been in force for less than five years; or
- appearing in court represented by a court agent and a counsel: in claims where the amount is lower than €2,000, the parties may appear before the court on their own.
ii Commercial courts
In Spain, there are specialised commercial courts that hear cases relating to insolvency law, unfair competition, industrial property, intellectual property and advertising, corporate law (particularly, claims based on the provisions of the Corporate Enterprises Act), transport matters, maritime law and collective actions on general contracting conditions. Any other matters regarding commercial transactions are heard by civil courts. This means that disputes over commercial transactions will normally be heard in civil courts (e.g., claims related to the breach of contracts under the Procedural Law).
iii Jurisdiction clauses
Clauses submitting disputes to the jurisdiction of foreign or national courts are valid and enforced by Spanish courts in any proceedings brought before them in relation to contracts, provided that the choice of jurisdiction is asserted in accordance with Spanish procedural law.
First, Spanish courts have exclusive jurisdiction in connection with, among other things, matters relating to the incorporation, validity, nullity and dissolution of companies or legal entities domiciled in Spain, as well as any decisions and resolutions of their governing bodies and the validity or nullity of any registrations with the Spanish registry.
Second, parties to the contract can submit disputes to a national court based in a specific region (e.g., the first instance court of Madrid), as long as the choice of court fulfils the mandatory provisions on territorial jurisdiction; however, there is no room for the parties to choose commercial courts to hear claims that must be heard by civil courts as the objective jurisdiction (which depends on the nature of the matter in dispute) is based on mandatory provisions.
iv Arbitration clause
Parties can establish an arbitration clause in case any disputes arise out of the contract. In Spain, arbitration must be conducted following the provisions of the Arbitration Act.10 The arbitration clause must be in writing (in the contract or in another document or communication) and is not necessarily affected by the potential nullity of the contract.
The inclusion of a clause in the corporate by-laws on submission to arbitration is subject to a two-thirds' majority of the shares into which the share capital is divided.
The contracting parties can challenge the court's jurisdiction on the grounds of an arbitration clause.
The parties are free to determine the number of arbitrators, provided that the total number is an odd number. Some of the most important arbitration centres in Spain are the Court of Arbitration of Madrid, the Spanish Court of Arbitration, the Civil and Commercial Court of Arbitration and the Barcelona Arbitration Court.
Parties are entitled to bring an application before the courts to override the award granted by the arbitrator only based on the following exceptional grounds:
- the arbitration agreement does not exist or is not valid;
- the applicant was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings;
- the award contains decisions on matters not submitted to arbitration or not apt for settlement by arbitration;
- the appointment of the arbitrators or the arbitral procedure was not in accordance with the arbitration agreement (unless the agreement was in conflict with an imperative provision); and
- the award is against public policy (in general, the set of rights and principles that must be upheld by courts in all cases, such as fundamental rights, including the right of defence).
v Mediation clause
A mediation clause can be set out in the contract, according to which the contracting parties undertake to submit to mediation a dispute that may arise in civil or commercial matters. If that is the case, a good faith attempt must be made to follow the agreed procedure before resorting to the courts or to another out-of-court solution; however, no one is obliged to remain in a mediation procedure, nor to reach an agreement, as mediation is on a voluntary basis.
Breach of contract claims
The basic elements of a claim for breach of contract depend on the pleadings. First, the claimant can seek specific performance and compensation for damage. In this case, the claimant must prove the following facts:
- the breach of contract, regardless of its significance;
- 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; and
- damage derived from the breach of contract and caused by the breaching party's wilful misconduct or negligence (if the latter, the court must 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 neither possible nor suitable, the aggrieved party can only claim for damages.
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), such that the breach leads to the frustration of the contract; and (2) damages in the same terms explained above. For evidential 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 those 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.
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, must prove the facts that 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 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 is 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 will not suffice to invalidate the consent if it could have been avoided by acting with due diligence; thus, the personal circumstances of both parties are 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 though actions for nullity brought by retail customers and professional non-institutional investors that have 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 that 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 that he or she would not have entered into otherwise.
The contracting parties can dispute the subject matter of the contract if it is impossible, it is beyond the bounds of commerce between persons, or it is contrary to the law or good customs. The cause of the obligation established must also be considered when assessing the validity of the contract. The cause must be permissible (i.e., legal and morally correct).
As these matters involve a contract's essential elements, the contract as a whole can be rendered null and void.
ii Defences at excluding or mitigating the liability owing to breach of contract
There are different ways for the defendant to reject the claim seeking release from liability or from performing the contract. The first refuting argument may 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, in cases of:
- duress or intimidation, the limitation period starts to run from the date on which the duress or intimidation ceased;
- error, fraudulent misrepresentation or falseness of the cause, the limitation period starts to run from the completion of the contract.
The case law of the Supreme Court 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, completion takes place when they were purchased;
- for convertible bonds, the limitation period starts to run from 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, the client to have potentially been aware of the circumstances that caused the error when signing the contract (which normally happens when the client realises he or she could suffer financial losses). The time limit for filing those kinds of claims will not cease to run when filing out-of-court complaints.
In general, a claim for one or more breaches 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.11 These limitation periods may cease to run owing to out-of-court complaints, in which case the whole period restarts.
Several Spanish contract law concepts could lessen the impact of any breach of contract, in accordance with the circumstances applicable to each case. Some could be aimed at justifying a potential termination of the contract or exclusion of liability derived from its breach, whereas others seek to mitigate the potential consequences of a breach of contract. 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 those concepts is force majeure, which, according to the Civil Code, refers to events that are unforeseeable or, if foreseeable, are inevitable (effectively, force majeure is equivalent to the term 'act of God'). This is 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 justify 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; however, no general conclusions may be drawn regarding this point as it depends on the specific contract and the particular circumstances of the case.
Case law has applied such concept on an exceptional basis. For example, for force majeure to justify release from the specific performance of the contract (so that it has to be terminated), the contract performance must be proved to be physically (or legally), objectively, absolutely and definitively impossible, and in any case the impossibility must not have been caused by the breaching party. On the basis of those principles, the case law of the Supreme Court 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 common practice to set out contractual provisions to allocate risk between the contracting parties and assign liability in cases of force majeure. The 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).
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.
Rebus sic stantibus
Separately, the parties can seek modification of the terms agreed owing 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:
- the existence of an extraordinary change in circumstances when performing the contract compared to those existing when the contract was entered into;
- 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;
- 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
- 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 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.
This explains why the Supreme Court rejected the rebus sic stantibus principle in a case where the contract had a duration of one year.12 Similarly, the Supreme Court has dismissed claims that 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 that could reduce the income agreed.13
MAC and MAE
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, for example, contracts for the acquisition and financing of companies.
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; in those cases, the dispute depends on the terms agreed and other contract-related factors.
The wording of those clauses varies from case to case, although perhaps this practice is better established in financing contracts that are based on the standards of the Loan Market Association. As a general rule, the application of those 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 the provisions.
Both force majeure and rebus sic stantibus 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, especially on the performance of contracts. In particular, the rebus principle on the basis of the adverse effects arising from the pandemic has often been invoked to claim a rebalancing of the contractual performance in continuing-performance contracts. In this respect, the commercial leasing sector is a clear example of the above, where many tenants are claiming a contractual modification of their lease agreements in the form of a rent reduction.
Notwithstanding that, there is currently no Supreme Court ruling on whether the effects of the pandemic are sufficient to apply the above-mentioned Spanish contract law concepts. The impact of the pandemic can be seen in the decisions of the Spanish first and second instance courts, which seem to have opted for a broad interpretation and, consequently, a lax application of the rebus sic stantibus principle; however, the majority of rulings have been taken in the context of interim measures. The potential outcome of these claims is, therefore, still uncertain, and in any case they would be decided on a case-by-case basis.
Fraud, misrepresentation and other claims
As explained in Section VI.i, there are different ways for the contracting parties to seek the nullity of the contract. This Section addresses fraudulent representation that gives rise to a remedy to seek to rescind and avoid enforcement of the contract; fraudulent representation as a remedy to seek damages is addressed in Section VIII.
Fraudulent misrepresentation enables a person who has been induced to enter into a contract as a result of an untrue statement made dishonestly to seek the nullity of the contract. By way of this remedy, the victim of misrepresentation is entitled to recover payments made under a contract and, thus, be placed in the position in which he or she would have been in had the contract never been entered into.
For the misrepresentation to give rise to such remedy:
- the statement must be substantially incorrect to the extent that it induced a person to act differently he or she would have had the statement been true;
- the representation must be fraudulent so that the person making it knows it is untruthful or does not believe it is true; and
- the aggrieved party must have relied on the misrepresentation such that it caused the claimant to act in a manner contrary to what he or she would have done had it not been made.
If the misrepresentation does not meet those requirements, it will only give the aggrieved party the right to seek damages.
The nullity reverses the contract ab initio (retrospectively), as if it had never been entered into in the first place; therefore, all payments made and goods transferred under the contract can be recovered.
Claims seeking the nullity of the contract on the grounds of misrepresentation have been fairly common in the field of investment products. This is the case of swaps contracts, where most claims brought by retail customers and professional non-institutional investors have been upheld.14 Those claims were essentially based on a fraudulent misrepresentation concerning the nature and risks of the swap made by the bank when entering into the contract.
In those particular cases, the courts have held that, after assessing the level of information provided and the personal conditions of the client, the banks misled the client such that the client relied on an untrue statement related to the characteristics and potential risks of the product when entering into the contract.
Under the Contract Law, there are several remedies available for the parties when a contract has been breached that are not necessarily linked to a particular kind of breach. As a general rule, each party can opt for the remedy they consider to be most appropriate to protect their rights and interests as there is no legal rule on preference in remedies under Spanish law. The claimant can also bring joined actions on a subsidiary basis (e.g., the claim can rely on specific performance and, if impossible, on damages).
i Specific performance
The parties are allowed to claim specific performance of the contract. This remedy usually seeks an order from the court requiring a party to either do or refrain from doing something (e.g., the handover of the house that has been purchased through the contract signed by the parties).
The parties can seek this specific remedy as long as the performance is still possible. Following the example above, if the house had been destroyed, the only remedy available for the non-breaching party would be damages.
ii Termination of the contract
The aggrieved party is entitled to terminate the contract in the event that the breach of contract is significant and affects an essential term such that it is considered serious, absolute and definitive; therefore, the right to terminate a contract arises when there is a fundamental and essential breach of contract according to its nature and scope or when the parties have established that the potential breach of a specific term enables them to terminate the contract.
In this regard, the parties are free to stipulate the causes for the termination of an agreement. In the absence of such a provision, the courts will consider whether the breach of contract has a significant effect on the performance of the contract.
The aggrieved party can also seek termination when, after having sought specific performance, this has proved to be impossible.
In some cases, the courts have allowed for the termination of the contract when the breach, although in theory not affecting an essential term, may be damaging to the interests of the performing party. Examples of such breaches are the appearance of planning charges that were not stipulated,15 the refusal to formalise a notarial deed,16 the frustration of underlying planning motives,17 the significantly poor performance of the contract,18 the lack of works licence issued by the public administration19 and the unfair and extended delay in performing the contract.20 The anticipatory breach also allows for termination when it is proved to be certain or it has been announced by the other party.21
Finally, the Supreme Court has held that the termination of the contract cannot be relied on upon the breach of pre-contractual liability.22
iii Price reduction in some contracts
In sales and purchases or lease agreements, there is a tendency in the courts to provide a reduction in price when a breach of contract has taken place. This remedy could be awarded in cases where the goods provided do not meet the characteristics or requirements that were agreed in the contract, so the value is less than expected.
iv Liability for hidden defects
With regard to purchasing agreements, the Civil Code obliges sellers to provide a warranty for hidden defects where the defect renders the product unsuitable for its intended use or reduces its utility in a way that, had the buyer known about it, the buyer would not have acquired it or would have paid a lower price.
However, there are three circumstances in which the seller will not be liable, namely where: the defects are manifest or in plain sight; the buyer is an expert who, as a result of his or her trade or profession, should have easily been aware of them; and the parties have expressly agreed to exclude liability.
Although the Commercial Code does not explicitly regulate the existence of hidden defects, it does acknowledge the obligation of the seller to ensure the buyer is not deprived of possession of the goods purchased and to correct any defects found therein. This general approach has led the courts to apply the articles of the Civil Code relating to the correction of hidden defects by analogy.
The main drawback of this remedy is the short limitation period: six months from the delivery of the item sold. This is the reason why, in those cases, the aggrieved party usually also seeks other contractual remedies.
As a general rule, a breach of contract results in an obligation for the breaching party, to compensate the damage suffered by the other party owing to the failure to perform the obligations; therefore, it is a general remedy aimed at putting the claimant in the position it would have been in had the contract been properly performed. Damage is usually measured by the difference in value between the contemplated and actual performance of the contract.
When seeking performance of the obligation or its termination, the aggrieved party may claim for damages and the payment of interest.
Under Spanish law, damages include the value of the loss suffered and the gain that the creditor has failed to obtain.23 Damages must compensate for the detriment directly suffered by the creditor (restitutio in integrum). In addition, the creditor can obtain compensation for consequential and indirect damages, which cover the costs or expenses incurred by the non-defaulting party as a direct consequence of the breach. This includes profits lost as a consequence of the breach. Punitive damages are not awarded under Spanish law.
The extent of liability for damages hinges on the conduct of the breaching party. On the one hand, a good faith debtor will only be liable for damage that is (or could have been) both foreseeable at the time of entering into the obligation and a necessary consequence of his or her failure to fulfil the obligation. Spanish courts generally consider this provision to exclude liability for consequential and indirect damages.
On the other hand, when debtors engage in wilful misconduct (i.e., an intentional breach), they are liable for all damage known to have arisen from the breach, without limitation. Wilful misconduct includes not only cases of intentional breaches but also those in which the debtor is aware that his or her behaviour causes (or, in the case of gross negligence, could cause) damage, and he or she does not take the necessary steps required by good faith to prevent it.
An indemnity will be unenforceable owing to the remoteness of loss or damage if the breaching party has acted in good faith. Conversely, if the breaching party has acted in bad faith, the indemnity will be enforceable, even if the loss or damage was remote.
Parties can agree on the scope and the terms of the indemnity so it covers any loss or damage (including indirect or consequential damage), which they will ultimately have to prove in court; however, any provision waiving or limiting liability arising from wilful misconduct is null and void.
In the event of contributory negligence, the damages can be reduced in view of the role of each party and the consequences of their conduct in causing the damage. Each party has a duty to mitigate the damage derived from the breaching party's conduct, so the injured party is expected to take all reasonable steps to minimise its loss resulting from the defendant's breach of its obligations.
Spanish case law has set, in connection with specific cases, a presumption that a breach of contract causes actual damage to the aggrieved party; therefore, it is the defendant's burden to prove that the breach of contract did not result in any actual damage to the aggrieved party. This situation occurs in particular with damages that can be inferred by the very nature of the breach of contract (in re ipsa), such as the unlawful use of a naturally productive good.
The burden of proof regarding the amount of the claimed damages lies with the claimant. This calculation can be proved by means of:
- documentary evidence, namely direct damage that involves costs incurred by the aggrieved party;
- expert witness report, which is quite common in litigation involving breaches of contract to prove the amount of damages and, particularly, the loss of profits as usually the cause of the breach requires legal analysis rather than an expert opinion; or
- factual witnesses, although this evidence does not normally suffice for the purposes of calculating damages.
There is an exception to the above general rule on the burden of proof: the availability of evidence and the difficulty in producing it. This is so that it is easier for the breaching party to prove the amount of damages taking into account the evidential means at his or her disposal.
The high standard of proof on the existence and amount of damages has led to a widespread inclusion of penalty clauses (especially in commercial contracts). By means of a penalty clause, parties to a contract agree on an amount of compensation payable in the event of a default or a specific breach, so that the non-breaching party can directly claim the amount established in the penalty clause, without having to prove causation and the monetary value of the damage actually suffered.
It is not necessary to state that the sum agreed to is a genuine pre-estimate of the loss of a party. Unless agreed otherwise by the parties, the penalty will serve as a substitute for damages. This works not only as a way of liquidating damages but also as a deterrent to breaches of contracts.
The case law of the Supreme Court has held that courts cannot apply or may only partially apply penalty clauses when the breach of contract established in the clause has occurred. Only in very exceptional cases, where the defendant proves (on the basis of hardship theories) that the penalty clause significantly exceeds the actual damages suffered (such that it is disproportionate to the actual damages) can the court possibly reduce the amount of the penalty.24 In this case, the burden of proof is borne by the breaching party requesting a reduction in the liquidated damages.
Damages may be a potential remedy in cases relating to breaches of representations and warranties (which are common in sale and purchase agreements, such as transactions for the purchase of companies). The potential breach of representations and warranties can give rise to liability for the truthfulness of the statements made through them.
According to case law, representations and warranties fulfil a role as a guarantee or indemnity for prior events or circumstances such that they assign contractual risks derived from a sale or purchase by extending the scope of the grantor's liability to the truthfulness of the declared circumstances and guarantee them. In this regard, representations and warranties, like information about facts or circumstances, can give rise to a contractual breach if they are inaccurate or false.
In addition, when such assets are subject to specific representations and warranties, they become facts within the scope of the contract and are presumably of an essential nature for the buyer. Owing to the nature of the representations and warranties, the duty to disclose the relevant circumstances takes on special importance under the rules of good faith.
For this reason, legal scholars have held that any breach of a specific representation and warranty is normally deemed wilful misconduct (or, at the very least, it helps to prove the fraud) as the warrantor has failed to fulfil his or her duty to disclose material aspects related to the factual situation subject to the guarantee.
In those cases, the buyer must be indemnified in an amount equal to the amount necessary to put the buyer in the position that he or she would have been in had all the representations been true; thus, the loss would be the difference between the value of the target company as warranted and its actual value.
In practice, according to some scholars, this compensation allows the creditor to obtain a possibility of reducing the purchase price with effects similar to those that it would have obtained had it exercised an action for a price reduction. For this reason, it is advisable for the valuation multiple (or, in general, the price valuation methodology) to be established in the contract or at least to be included in some communication between the contracting parties.
A clear trend in the current commercial litigation landscape in Spain is the increase in the number of complex contractual cases, such as securities and M&A litigation, liability for breach of negotiations related to potentially significant transactions and disputes related to the devastating effects of the covid-19 pandemic on the performance of certain contracts. To adapt basic Spanish private law provisions to this complex landscape, the Supreme Court is constantly 'modernising' the law, specifically in connection with remedies for breach of contract.
The areas and industry sectors affected by this trend seem to be broadening too. Apart from the tourism and real estate sectors, the media and TV sectors are now playing an increasingly important role.
1 Carles Vendrell is a partner and Miguel Ángel Cepero is a senior associate at Uría Menéndez.
2 Supreme Court Rulings dated 19 July 2016 and 15 January 2008.
3 Supreme Court Ruling dated 25 June 2016.
4 This ruling was handed down in the Dieselgate case; Supreme Court Ruling dated 11 March 2020.
5 Supreme Court Rulings dated 25 June 2013 and 3 June 1998.
6 Supreme Court Ruling dated 25 June 2013.
7 Supreme Court Ruling dated 23 January 2019.
8 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. According to Article 4.2, assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.
9 Supreme Court ruling dated 25 April 2016.
10 Law 60/2003 of 23 December on arbitration.
11 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 owing to the covid-19 pandemic.
12 Supreme Court Ruling dated 6 March 2020, which could become a landmark case as it was the last judgment prior to the outbreak of the covid-19 pandemic.
13 Supreme Court Rulings dated 15 January 2019 and 6 March 2020.
14 Supreme Court rulings dated 17 September 2019, 21 March 2019 and 24 April 2019.
15 Supreme Court Ruling dated 10 February 2012.
16 Supreme Court Ruling dated 28 February 2012.
17 Supreme Court Ruling dated 24 April 2013.
18 Supreme Court Ruling dated 5 July 2012.
19 Supreme Court Ruling dated 24 September 2013.
20 Supreme Court Rulings dated 28 June 2012, 5 November 2012, 31 January 2013, 13 November 2013, 11 December 2013, 23 January 2014, 6 February 2014 and 18 February 2014.
21 Supreme Court Rulings dated 26 February 2013, 9 July 2013, 16 July 2013 and 5 March 2014.
22 Supreme Court Ruling dated 13 July 2016.
23 Article 1106, Civil Code.
24 Supreme Court Ruling dated 13 September 2016.