Solutions for companies that cannot meet their contractual commitments

Covid 19: Solutions for companies that cannot meet their contractual commitments

Through RD 463/2020 of March 14 the government declared a state of alarm in order to deal with the health emergency caused by the coronavirus (COVID-19), forcing confinement of citizens and the closure of establishments open to the public considered non-essential activities.

Our country will face an economic crisis caused by the reduction of industrial and productive activity, which will have serious repercussions on the business fabric. Companies cannot do without many of their fixed costs, which together with the reduction in income will generate a significant reduction in their treasury. This situation will especially affect businesses that have a high level of indebtedness due to the need for a greater injection of debt, increased financial costs or the impossibility of assuming the payment of the credits.

That is why we considered the possibility of altering the obligations agreed in different types of contract, especially the commercial obligations derived from contracts such as the franchise agreement, advertising contracts, supply contracts, commercial sales contracts, etc.

The Government has approved specific measures that allow the payment of certain benefits to be postponed or suspended, but there is no specific regulation for all the contractual casuistry of a company. There is no doubt that we are in an absolutely exceptional situation, the present situation that we are experiencing has no precedent in our recent history. It is completely new, and as such it must be evaluated in order to adopt a legal solution.

As required by art. 3 of the Civil Code (“CC”), the rules must be interpreted not only according to their proper meaning but also taking into account the social reality of the time in which they are to be applied. It is here where there is a solid point of support to assess legal solutions that restore the balance of the benefits initially agreed upon in the contract, even adapting and modifying the obligations contracted.

The health crisis constitutes a substantial change in the economic basis of many contracts, and we have precedents from our courts that have accepted the change in the benefits agreed between the parties when changes occur in the contractual framework entered into between the parties.

[fusion_highlight color=”rgba(0,144,142,0.3)” rounded=”no” class=”” id=””]You may be interested in: “LEGAL ADVICE AGAINST COVID-19”

Special consideration should be taken by the courts in cases of force majeure. There is no doubt that the situation we are going through constitutes a case of force majeure, absolutely unforeseeable at the time of entering into the contracts that entered into force previously. Therefore, it coincides with the most demanding definition of force majeure (art. 1,105 CC). As our jurisprudence has said (STS July 20, 2000) it is a force superior to all control and forecast. This has been recognized by RDL 8/2020 of March 17, on extraordinary urgent measures to deal with the economic and social impact of COVID-19 and the General Subdirectorate for Regulatory Regulation (Ministry of Labor and Social Economy) on March 12, 2020 in its internal note on suspensive files and reduction of working hours due to COVID-19.

How to operate to obtain a modification of the contracted conditions or to suspend a payment commitment?

The modification of the contractual conditions does not operate automatically. Simply stopping paying is not an advisable solution. In our opinion, it will be essential to carry out a first study of the specific case and assess the imbalance that has occurred in the benefits agreed between the parties. Once said legal study has been carried out, we recommend sending a notification to the counterparty requesting the modification that has been agreed upon in view of the study carried out.

It is advisable to send the communication by certified Burofax with acknowledgment of receipt to have proof of its sending. The wording of this statement must comply with the programmed strategy, considering the possibility that at some point it could be considered by a court. Inadequate wording can have the opposite consequence.

Depending on the reaction of the other contracting party, we can force a negotiation that modifies the agreed conditions, restoring the balance between the parties and generating a reduction in payment commitments. The modification of the contract may affect other issues not related to the payment of a product or service, but which are equally necessary or relevant to the business of the contracting party.

If, on the other hand, the other party does not agree with the notification sent, either because they reject it or because they do not reply, or agree to negotiate a modification of the contractual conditions, the effectiveness of a legal claim could be studied by requesting the Court to adapt the conditions.

You can consult more information about the means to alter the contractual terms in the following article, where we delve into the requirements and application of the theory called “rebus sic stantibus clause” applied by the courts in these cases.

Specialty in lease contracts for business premises

Multiple companies and freelancers have seen the urgent need to close their premises and cease their activity with the only exceptions detailed in its art. 10 relating to the supply of essential goods.

After the approval of RDL 15/2020 that affects, among other issues, the regulation of business leases, in our opinion the possibility for tenants to request a reduction in the amount of the rent when the opening to the public of the premises and retail establishments had been suspended.

In this case, the legislator has opted for contract compliance with simple moratoriums regulated by law in an exceptional way, which does not allow an analogical application to other different cases where our courts have ruled otherwise.

[fusion_highlight color=”rgba(0,144,142,0.3)” rounded=”no” class=”” id=””]For more information on how to request a moratorium on payment of rents, you can consult the following article: “Moratorium on rent payments for commercial premises due to COVID-19”

Unable to pay debts and continue business

A situation may also arise in which we have incurred an excessive amount of debt that prevents the continuation of the business. Legally, there is an obligation to declare the bankruptcy when the The net worth of the company falls below half the figure of the share capital, which occurs precisely because the company’s liabilities increase excessively.

The administrators of a company that is in this situation and do not agree to file a bankruptcy, may incur personal liability. Liability can operate in different orders, responding with its assets for the company’s debts, and could even incur criminal liability depending on the case.

Currently, and according to RDL 16/2020 of April 28, the obligation to apply for the contest is postponed until December 31, 2020.

It may interest you:”Obligations and contracts in times of covid-19”