What is rebus sic stantibus?
Article 357 1 of the Civil Code provides that where an extraordinary change in circumstances makes performance excessively difficult or threatens one party with a severe loss not foreseen at the time of contracting, the court may, after considering the parties’ interests and in accordance with the principles of social coexistence, determine the manner of performance, adjust its amount or even terminate the contract.
For this mechanism to apply, the change in circumstances must be extraordinary compared with what the contracting parties could have foreseen. An extraordinary event alone, such as the coronavirus pandemic, is insufficient. To use the remedies in Article 357 1 of the Civil Code, we must show that the unexpected disaster fundamentally affected our ability to perform the contract.
Using this doctrine requires bringing proceedings against the other contracting party. The remedies in Article 357 1 of the Civil Code are, in principle, available to a party to any contract. The party bringing the claim must establish that rebus sic stantibus applies to its circumstances: the burden of proof rests on the claimant. Before litigating, however, examine the contract carefully to see whether the parties excluded or modified the provision, since excluding it or agreeing a mechanism different from the Code is legally permissible.
‘The party bringing proceedings must demonstrate that rebus sic stantibus can apply to its circumstances.’
Leases
Retail and services, heavily dependent on rented premises, were among the first sectors to feel the pandemic’s extraordinary effects, especially businesses renting space in shopping centres. The vast majority of shopping centre leases do not release tenants from rent when a natural disaster closes the premises. Tenants therefore cannot operate but must continue paying rent.
A court hearing a tenant’s claim, if it finds grounds to apply Article 357 1 of the Civil Code, may, for example:
- alter rent payment dates during the pandemic and even for a period afterwards;
- adjust the rent for that period;
- remove the obligation to pay rent during the pandemic and related restrictions on performance;
- terminate the lease.
Similar issues and remedies arise in short-term subletting and businesses occupying large rented offices. Each case has its own features, but the operation of rebus sic stantibus will be similar.
‘Each case has its own features, but the operation of rebus sic stantibus will be similar.’
Construction works
For construction contracts, on the claimant’s application the court may:
- change the deadlines for the parties’ performance, particularly important for the contractor;
- disapply contractual penalties for delay or for the developer’s withdrawal from the contract;
- change the scope of the contracted works;
- terminate the lease.
Court-ordered termination would be a last resort, but cannot be ruled out if the pandemic and restrictions persist. The court would also determine settlement between the parties for work already performed.
Crucially for construction contracts, the extraordinary change caused by the pandemic may affect both the contractor–developer relationship and relationships with subcontractors and further subcontractors.
Summary
These sectors are merely examples of dozens of situations in which a business may be protected from the pandemic’s consequences through rebus sic stantibus. This previously rarely used doctrine may, however, be invoked widely in the coming months. Courts will certainly approach each case cautiously and may be reluctant to vary contracts if any required element is doubtful. Such proceedings will not be a formality: we would be challenging contractual provisions we ourselves accepted. In many cases, however, this will be the only way to prevent insolvency.
We also write about other challenges posed by COVID-19:
