March 2020 state of alarm in Spain: potential claims and the use of force majeure

On 31 January 2020, the first case of COVID-19 was confirmed in Spain. Since then, the latest figures of the global pandemic are as much unbelievable as they are devastating. More than three million diagnosed around the globe (with around 210,000 in Spain) and more than 200,000 deaths in the world (25,000 in Spain). A challenge without precedent for the entire world.

In these difficult times, the European leaders have failed to reach a prompt, joint and firm economic response. Two summits have been held on the 26 March and 7 April without agreement. The key discrepancy was the need for joint immediate action firmly requested by Italy, Spain and France, compounded by the President of the European Central Bank who requested Eurobonds and the countries´ contribution to overcome this crisis. Meanwhile, our hospitals were overstretched and health professionals were struggling to save lives. Several months have passed since the outbreak and fortunately the deaths have significantly reduced and hospitals are getting back to their regular rhythm in Spain. More than 115,000 people have recovered from COVID-19.

On 17 April 2020, the European Parliament finally acted and passed a resolution on EU coordinated action to combat the COVID-19 pandemic and its consequences (2020/2616(RSP)).

COVID-19 Emergency Decrees

Here in Spain the initial call and social movement (#stayathome) was consolidated into two initial Royal Decrees in March 2020:

• The Royal Decree 463/2020 dated 14 March, in which the government declared a state of alarm in force until 10 May 2020, meaning general lockdown for the entire country.
• The Royal Decree 10/2020 dated 29 March which increased the limitations on movements initially imposed to avoid the saturation of intensive care units.

The Royal Decree 10/2020 also identified work activity as the main reason for travel and adopted an employment measure: a paid compulsory authorisation on a recoverable basis between the 30 March and 9 April (both inclusive), for all employees carrying out non-essential activities (excluding those who can continue working remotely from home). The Decree called on all employees to stop work (to reduce travel). The employees were paid their regular salary during this period and they will need to negotiate recovery of hours of work until 31 December 2020, by agreement with their employers.

To date, more than 300,000 businesses in Spain have filed an “employment adjustment procedure”, to obtain official approval to suspend or reduce employment contracts. This stricter lockdown only applied for two weeks. Fortunately, the situation has improved and on 3 May 2020, the government approved the measures to start the “new normal” after the pandemic.

Remedies for breach/cancellation of business contracts

Due to the economical lockdown, the construction industry (the second most labour intensive sector after the agricultural sector), has estimated losses of €345 million for each day work activities are paralysed. The temporary economic halt has affected 1.77 million workers. The tourism industry, another key sector in Spain, estimates losses at about €92,000 million if the travel prohibitions continue throughout summer, increasing to €124,000 million if prohibitions prevails until the end of the year.

In light of these resultant estimated losses, the question for each individual business or company is whether they can claim damages for the losses suffered against the other contractual party for having breached or cancelled business contracts?

The Spanish Civil Code establishes an exclusion of contractual liability applicable to all contracts regardless of the sector, called “force majeure” and is described as follows:

 “events that are impossible to foresee, or that, even if they were foreseeable, are impossible to avoid.”

In other words, we are referring to unforeseeable or unavoidable events that impede the fulfilment of the contractual obligations.

The classic example is an event caused by nature, such as lightening. But what about the pandemic disaster of COVID-19? Can this be considered an unforeseeable or unavoidable event? Is this a legal ground to be exonerated from liability for contractual breach? For example, the prohibition of a certain activity or the closure of borders, may make it impossible to deliver certain services to another party.

To determine whether that certain activity is prohibited, the Royal Decree 10/2020 listed in an Annex 25 points of essential activities which were not prohibited. These can be summarised as follows:

• Supply chains, production and delivery for goods and services of basic needs from their origin to the final destination including food, health products, medicines, technology and medical material and protection.
• Healthcare services for people and animals, as well as funeral and related services. Storage and treatment of water, and cleaning, maintenance, urgent repairs and collection of waste and residues.
• Research and development centres related to COVID-19, as well as premises and suppliers for such investigations.
• Media and news agencies and their essential services, including meteorological and associated services for their correct functioning.
• Financial services companies including banking, insurance and investment for indispensable services.
• Essential services in Notary Publics and Public Registries, lawyers, court clerks, translators or psychologist essential for urgent procedural matters which are not suspended. Protection and attention for victims of domestic violence.

If the activity was not on this list, it was deemed non-essential and prohibited.

The next question to determine whether the breaching party is excluded from liability on the grounds of force majeure is how far does the COVID-19 crisis and the government measures make it impossible to fulfil the contractual duty?

There must be a direct causal link between the breach of contract and the measures. If, for example, the closure of frontiers made it impossible to deliver kiwis to a food distributor, but he could still purchase local kiwis from a Spanish farmer, he would not be able to rely on the force majeure exclusion, if faced with a claim from a grocery shop for losses as a result of not having sold the usual stock of kiwis.

Comment

Spain has been in lockdown since 14 March 2020. Although the situation has significantly improved and the government has just approved measures to start reactivating the businesses activity, the “new normal” will be a challenge.

Businesses will have to continue to estimate the costs of imposed safety measures to ensure social distancing and regular disinfection of work places. As to employment, some businesses will not be able to continue its activities due to lockdown, others will keep a reduced labour force while lockdown continues, and some others will have to reorganise and rearrange the hours that employees need to recover due to the stricter lockdown measures from 30 March to 9 April.

In addition, many contracts will be cancelled and often (although always depending on the circumstances) the parties will be able to rely successfully on the force majeure exoneration of liability, leaving the other party without possibility to recover damages.