Application of the rebus sic stantibus clause to the work execution contract due to the increase in the price of raw materials
Since the beginning of 2022, the prices of raw materials have been in an upward period, with the construction sector being one of the most affected. This situation that is difficult to foresee has caused, among other effects, the imbalance in the obligations of many construction and real estate development contracts in which the initially agreed price does not cover the increase in costs, so that the debtor party (whether a construction company or promoter) sees its viability as an operator in the sector compromised, which can only be salvaged by applying the rebus sic stantibus clause.
General notes on the rebus sic stantibus clause
Article 1901 of the Civil Code establishes that “Obligations arising from contracts have the force of law between the contracting parties, and must be fulfilled in accordance with them”, which includes the principle pacta sunt servanda (“contracts are for enforced”), whereby the contract is binding on the parties and must be strictly enforced according to its terms.
However, this general mandate accepts exceptions when there is a sudden, extraordinary and unforeseeable change in circumstances that radically alters or directly eliminates the purpose of the contract, opening the way, for reasons of well-founded equity and objectivity, to the application of the rebus sic stantibus clause, which allows the contract to be modified or terminated in exceptional and unforeseen situations that significantly affect the basis of the business on which the contractual conditions were agreed.
Brief analysis of the jurisprudential application of the clause
The first national judgments on the rebus sic stantibus clause date back to the Spanish Civil War, after which the Supreme Court in its judgment of April 13, 1944, known as the “Carbonell lawsuit”, considered the reduction in the amount of of oil to be delivered due to the impossibility of fulfilling the contract in the initially agreed terms due to the outbreak of the war.
However, the jurisprudence in relation to the rebus sic stantibus clause had its main development in Spain as a consequence of the irruption of the Spanish economic crisis that occurred between 2008 and 2013, commonly called the “brick crisis”, from which the Judgments of the Supreme Court of January 17, 2013 and June 30, 2014, where the interpretative bases of this clause and the requirements for its application were established, such as:
- Extraordinary alteration of the circumstances at the time of fulfilling the contract in relation to the concurrent ones at the time of its execution.
- An exorbitant disproportion between the benefits of the contracting parties that generates an imbalance of benefits.
- That all this happens due to the appearance of unforeseeable circumstances.
Subsequently, the Supreme Court has qualified these requirements, which must be met jointly, resolving in its Judgment of February 24, 2015 that the outbreak of a crisis or economic recession is not sufficient per se to apply the rebus sic stantibus clause, if although its application would be desirable when extraordinary and unforeseeable circumstances cause excessive onerousness to the debtor party in such a way that the equivalence relationship of the considerations of the parties is broken (principle of commutability of the contract), especially in those cases where the economic or exploitation activity, due to the circumstantial change, entails a repeated result of losses (economic non-feasibility) or the complete disappearance of any profit margin (lack of remuneration of the benefit).
In the context of the crisis caused by COVID-19, jurisprudence has also admitted its application, especially prolific when considering that the debtor (that is, the lessee) can request a reduction in rent if the pandemic has prevented from exercising their economic activity, and all this in order to restore equity between the contractual parties.
Application of the rebus sic stantibus clause due to the increase in the price of raw materials
Taking all of the above into account, the question that arises now is the applicability of the rebus sic stantibus clause in contracts for the execution of works and/or real estate development when the increase in the cost of raw materials compromises the economic viability of the operation as long as the initially agreed price cannot cover the sudden and continued increase in production costs.
This issue has already been resolved in the public sector through the recent Royal Decree-Law 3/2022, of March 1, which authorizes the contractor to exceptionally review the price of the public works contract affected by the rise in the prices of materials. , as the Third Chamber of the Supreme Court had been recognizing in its judgments of December 12, 1979, March 9, 1999 and January 19, 1998, among others.
As far as the private sector is concerned, we do not have extensive or unanimous jurisprudence on its applicability, although the judgment of the Provincial Court of Barcelona of February 7, 2018 (no. rec. 443/2016) is revealing, in which echo of the aforementioned case law, sets a precedent when considering the application of the rebus sic stantibus clause when due to a situation of prolonged economic crisis, in which the excessive delay of the City Council in granting the Building Permit further aggravates the situation , the execution of the contract in its terms is totally unfeasible from the economic point of view for the promoter, so much so that the content of the contract must be modified or resolved without the need to resort to article 1,124 of the Civil Code because the parties have not incurred in any breach of contract.
The rebus sic stantibus clause, of jurisprudential origin, is based both on the principle of good faith, which should govern contractual relationships, and on the need to adapt legal institutions to the social reality of the moment. In the real estate sector, we already have favorable judgments on its applicability, which we must attend to in order to assess the current problem of the rise in the prices of raw materials, having to interpret them, in any case, as applied to the specific problem.
Nerea Ortiz de Zárate Beitia
Departamento de Civil y Mercantil