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Coronavirus: What is Force Majeure?

The situation around the Coronavirus is evolving rapidly and it seems that the reflections of past week have become obsolete …

Given the advance of the virus, we have begun to see the first governmental actions in Spain imposing orders or limiting activities such as, for example, the closing of schools in Madrid, or the banning of events that concentrate more than a thousand people in Catalonia.

Such government measures raise a question: what happens to contracts pending execution, totally or partially, which are affected by said administrative orders?

To answer this question, we have had to dust off our legal textbooks and retrieve the answer to the typical exam question from Law School Faculty: “what is force majeure?”

Well, like everything in life, it depends … So, let’s see two “typical” situations that can arise and that our clients are asking us about:

• Let’s think of a party that has fulfilled its obligations under the contract and, before the contract expires, a situation of force majeure is declared by the authorities, without his customer having paid him yet. Does the declaration of force majeure exempt the customer from paying?

• Now imagine the opposite situation: the customer has paid for the service in advance, but the other party has not yet fulfilled his part of the contract at the time of the force majeure. Should he fully refund the money, or can he keep it?

Strictly speaking, under Spanish law force majeure does not release the debtor from his obligations, nor does it immediately terminate the contract. Therefore, despite the situation of force majeure, the obligations remain in force.

Spanish Law merely releases the parties to compensate the damages caused by the impossibility to perform. Now, what are “damages” and what are not?

Let’s take the case of an fair trade. The event is canceled, and attendees lose their plane ticket and hotel reservations. There is no doubt that these expenses are damages and should not be compensated. Let us also suppose that the attendees planned to sign contracts during the fair that now cannot be signed, thus missing a business opportunity. Neither should such damages be compensated. But what about the registration fees that the attendee paid to participate in the fair trade? Is this a “damage”?

The broad definition of the Spanish Civil Code seems to allow a positive answer and that, therefore, those fees should not be refunded, but this does not seem a fair remedy in all situations.

It will be necessary to be follow up on this crisis to find out how our Courts will react to it, but this will take time, and people need immediate answers.

Therefore, if you have any questions on how to react to a Force Majeure situation under your contract, please contact us.

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