February 19, 2021

THE "REBUS SIC STANTIBUS" CLAUSE AND THE STATE OF ALARM TRIGGERED BY COVID-19

What is the REBUS clause?

"REBUS SIC STANTIBUS" is a Latin aphorism that could be translated as "as things stand".

Legally, it implies that contract agreements can be modified in the event of substantial changes in the circumstances that were taken into account when they were agreed.

It is a general principle of law with no legal basis, although jurisprudence has been admitting and developing the so-called "rebus" clause for some time. The courts have always applied it restrictively.

The "REBUS SIC STANTIBUS" clause is the exception to another Latin aphorism: "PACTA SUNT SERVANDA", which means that what has been agreed is there to be fulfilled. This is the principle of preservation and immutability of contracts.

The purpose of the "rebus" clause is therefore to REBALANCE THE DISPROPORTION or CORRECT THE IMBALANCE that may exist in the reciprocal performances of the parties as a result of the current circumstances.

Why has the REBUS clause become on trend with COVID-19?

The invocation of the "REBUS SIC STANTIBUS" clause has recently become on trend as a result of the state of alarm and the covid-19 pandemic, although it is a general principle of law that existed before.

At the time of contracting, the parties take into account all kinds of circumstances that exist at the time of concluding the contract whether they were economic, social or personal circumstances.

However, it may happen that as a consequence of the pandemic, the circumstances that were taken into account at the time of the contract may have changed substantially: for example, closure of premises, restrictions on opening hours, limited capacity, border closures or mobility restrictions... and this may lead to an imbalance or disproportion between the services initially established by the parties.

As a remedy, the REBUS clause is invoked, in order to rebalance the obligations in the new situation.

In what type of contracts can it be invoked?

For the application of the "REBUS" clause, the Spanish Supreme Court requires, in the first place, that the contracts are of successive duration or, at least, that the execution of the contract is separated in time from the perfection of the contract so that it can be affected by the supervening alteration of circumstances.

That is to say, the longer the duration of a contract or the more the performance is deferred with respect to the perfection of the contract, the more likely it is that circumstances will arise that significantly affect the contract and that were not taken into account at the time of contracting.

For instance: rental contracts, rental contracts in shopping centres, but also purchase contracts with delivery on time, etc.

What are the requirements?

The jurisprudence of the Spanish Supreme Court has always applied the "rebus" clause in a very restrictive manner and has maintained a very strict interpretation. However, some of the criteria have now been relaxed.

The Jurisprudence has established the following requirements:

1) Circumstances must be unforeseeable and produce a serious disruption;

2) Rupture of the balance or frustration of the purpose of the contract;

3) Economic damage.

4) The "rebus sic stantibus" clause has to be applied as a subsidiary remedy, only when there is no other legal mechanism.

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