France | Arbitration clauses in international contracts with consumers are not enforceable

16 2 月 2021

法国

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Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the “size of the parties”: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as “competence-competence”, Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427).

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643).

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the “weak” party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts.

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount.

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer.

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount.

The agent / distributor, the expert and the attorney should consider the following:

Check what the agent’s contribution has been

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones.

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about “clientele” if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal.

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed.

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc.

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc.

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors.

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge.

Check out the Practical Guide on International Agency Agremeents

To read more about the main features of a contract of agency in Spain, go to our Guide.

Summary

The recent post-Brexit trade deal makes no provision for jurisdiction or the enforcement of judgments.

Therefore, the UK dropped out of the jurisdiction of the Brussels (Recast) Regulation (No. 1215/2012) on 31 December 2020.

The EU has not yet approved the UK’s accession to the Lugano Convention, but may do in the future.

Unless the transitional provisions from the Withdrawal Agreement apply, jurisdiction and enforcement of judgments will be governed by the Hague Convention 2005 if there is an applicable exclusive jurisdiction clause

If the Hague Convention of 2005 does not apply, then the UK and EU courts will apply their own national rules.

Judgments will continue to be reciprocally enforceable between the UK and Norway from 1 January 2021.

On the first day of 2021 the UK left the EU regimes with which European lawyers are familiar. We appeared to enter “uncharted territory”. Not so. In fact, there are charts for this territory – or maps, to use a more modern word. You just need to know which maps.

Whether you are a lawyer or a businessperson, in whatever country, you need answers to two questions. Which laws govern jurisdiction and enforcement of judgments between EU member states and the UK; and how should businesses act as a result?

What happened?

The EU and UK reached a post-Brexit trade deal, the Trade and Cooperation Agreement (“TCA”), on Christmas Eve 2020. The provisions of the TCA became UK law as the European Union (Future Relationship) Act on 31 December 2020. The TCA made provision for judicial cooperation in criminal matters, but did not mention judicial cooperation in civil matters, or jurisdiction and enforcement of judgments in civil and commercial proceedings.

So where do we look for law on those matters?

We look at the position immediately before Brexit. As every lawyer should know the Brussels (Recast) Regulation (No. 1215/2012) governed the enforcement and recognition of judgments between EU member states.

Also, the Lugano Convention 2007 governs jurisdiction and enforcement of judgments in commercial and civil matters between EU member states and Iceland, Liechtenstein, Norway and Switzerland. It operates in substantially the same way as Brussels (Recast) does between EU member states.

The UK was party to the Convention by virtue of its EU membership. Now that the UK is not a member of the EU, the contracting parties could agree that the UK could join the Lugano Convention as an independent contracting party, and there would be little change to the position on jurisdiction and enforcement. English jurisdiction clauses would continue to be respected and English court judgments would continue to be readily enforceable throughout EU member states and EFTA countries, and vice versa.

The problem is that the EU has not agreed to the UK joining the Lugano Convention

The UK submitted its application to accede to the Lugano Convention in its own right on 8 April 2020. But accession requires the consent of all contracting parties including the EU. Iceland, Norway and Switzerland have indicated their support for the UK’s accession, but the EU’s position is still not yet clear and the TCA is silent on this matter.

While the EU still may belatedly support the UK’s accession to Lugano, it does not currently apply. In any case, a three-month time-lag applies between agreement and entry into force, unless all the contracting parties agree to waive it.

Where are we now?

If the transitional provisions provided for by the Withdrawal Agreement as explained in my previous post do not apply, the Brussels (Recast) Regulation will not apply to jurisdiction and enforcement between the EU and UK.

If they do not, then you first need to decide whether the Hague Convention on Choice of Court Agreements 2005 is applicable. The Hague Convention 2005 applies between EU Member States, Mexico, Singapore and Montenegro. The Hague Convention first came into force for the UK when the EU acceded on 1 October 2015 and the UK re-acceded after Brexit in its own right with effect from 1 January 2021.

The Hague Convention 2005 applies if:

The dispute falls within the scope of the Convention as provided for by Article 2 – e.g. the Convention does not apply to employment and consumer contracts or claims for personal injury;
There is an exclusive jurisdiction clause within the meaning of Article 3; and
The exclusive jurisdiction clause is entered into after the Convention came into force for the country whose courts are seized, and proceedings are commenced after the Convention came into force for the country whose courts are seized within the meaning of Article 16.

There is some uncertainty as to whether EU member states will treat the Hague Convention as having been in force from 1 October 2015, or only from when the UK re-accedes on 1 January 2021. The UK’s view is that the Convention will apply to the UK from 1 October 2015; the EU’s view is that it will apply to the UK from 1 January 2021. What is not in dispute is that for exclusive English jurisdiction clauses agreed on or after 1 January 2021, the contracting states will respect exclusive English jurisdiction clauses and enforce the resulting judgments.

If the 2005 Hague Convention does not apply, then the UK and EU courts will apply their own national rules to questions of jurisdiction and enforcement. In the UK, the rules will essentially be the same as the ‘common-law’ rules currently on enforcement applied to non-EU parties, for example the United States.

The Norwegian exception

The UK and Norway have reached an agreement which extends and updates an old mutual enforcement treaty, the 1961 Convention for the Reciprocal Recognition and Enforcement of Judgments in Civil Matters between the UK and Norway, which will apply if the UK does not re-accede to the Lugano Convention. The practical effect of this agreement is that judgments will continue to be reciprocally enforceable between the UK and Norway from 1 January 2021.

How should your business act now?

The applicable legal framework for each dispute will depend on the facts of each case. You should review the dispute resolution clauses in your cross-border contracts to assess how they may be affected by Brexit and to seek specialist advice where necessary. You should also seek advice on dispute resolution provisions when entering into new cross-border contracts in 2021.

This week the Interim Injunction Judge of the Netherlands Commercial Court ruled in summary proceedings, following a video hearing, in a case on a EUR 169 million transaction where the plaintiff argued that the final transaction had been concluded and the defendant should proceed with the deal.

This in an – intended – transaction where the letter of intent stipulates that a EUR 30 million break fee is due when no final agreement is signed.

In addition to ruling on this question of construction of an agreement under Dutch law, the judge also had to rule on the break fee if no agreement was concluded and whether it should be amended or reduced because of the current Coronavirus / Covid-19 crisis.

English Language proceedings in a Dutch state court, the Netherlands Commercial Court (NCC)

The case is not just interesting because of the way contract formation is construed under Dutch law and application of concepts of force majeure, unforeseen circumstances and amendment of agreements under the concepts of reasonableness and fairness as well as mitigation of contractual penalties, but also interesting because it was ruled on by a judge of the English language chamber of the Netherlands Commercial Court (NCC).

This new (2019) Dutch state court offers a relatively fast and cost-effective alternative for international commercial litigation, and in particular arbitration, in a neutral jurisdiction with professional judges selected for both their experience in international disputes and their command of English.

The dispute regarding the construction of an M&A agreement under Dutch law in an international setting

The facts are straightforward. Parties (located in New York, USA and the Netherlands) dispute whether final agreement on the EUR 169 million transaction has been reached but do agree a break fee of €30 million in case of non-signature of the final agreement was agreed. However, in addition to claiming there is no final agreement, the defendant also argues that the break fee – due when there is no final agreement – should be reduced or changed due to the coronavirus crisis.

As to contract formation it must be noted that Dutch law allows broad leeway on how to communicate what may or may not be an offer or acceptance. The standard is what a reasonable person in the same circumstances would have understood their communications to mean. Here, the critical fact is that the defendant did not sign the so-called “Transaction Agreement”. The letter of intent’s binary mechanism (either execute and deliver the paperwork for the Transaction Agreement by the agreed date or pay a EUR 30 million fee) may not have been an absolute requirement for contract formation (under Dutch law) but has significant evidentiary weight. In M&A practice – also under Dutch law – with which these parties are thoroughly familiar with, this sets a very high bar for concluding a contract was agreed other than by explicit written agreement. So, parties may generally comfortably rely on what they have agreed on in writing with the assistance of their advisors.

The communications relied on by claimant in this case did not clear the very high bar to assume that despite the mechanism of the letter of intent and the lack of a signed Transaction Agreement there still was a binding agreement. In particular attributing the other party’s advisers’ statements and/or conduct to the contracting party they represent did not work for the claimant in this case as per the verdict nothing suggested that the advisers would be handling everything, including entering into the agreement.

Court order for actual performance of a – deemed – agreement on an M&A deal?

The Interim Injunction Judge finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure ordering the defendant to actually perform its obligations under the disputed Transaction Agreement (payment of EUR 169 million and take the claimant’s 50% stake in an equestrian show-jumping business).

Enforcement of the break fee despite “Coronavirus”?

Failing the conclusion of an agreement, there was still another question to answer as the letter of intent mechanism re the break fee as such was not disputed. Should the Court enforce the full EUR 30 million fee in the current COVID-19 circumstances? Or should the fee’s effects be modified, mitigated or reduced in some way, or the fee agreement should even be dissolved?

Unforeseen circumstances, reasonableness and fairness

The Interim Injunction Judge rules that the coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that, according to standards of reasonableness and fairness, the plaintiff cannot expect the break fee obligation to remain unchanged. The purpose of the break fee is to encourage parties to enter into the transaction and attribute / share risks between them. As such the fee limits the exposure of the parties. Payment of the fee is a quick way out of the obligation to pay the purchase price of EUR 169 million and the risks of keeping the target company financially afloat. If financially the coronavirus crisis turns out less disastrous than expected, the fee of EUR 30 million may seem high, but that is what the parties already considered reasonable when they waived their right to invoke the unreasonableness of the fee. The claim for payment of the EUR 30 million break fee is therefore upheld by the Interim Injunction Judge.

Applicable law and the actual practice of it by the courts

The relevant three articles are in this case articles 6:94, 6:248 and 6:258 of the Dutch Civil Code. They relate to the mitigation of contractual penalties, unforeseen circumstances and amendment of the agreement under the tenets of reasonableness and fairness. Under Dutch law the courts must with all three exercise caution. Contracts must generally be enforced as agreed. The parties’ autonomy is deemed paramount and the courts’ attitude is deferential. All three articles use language stating, essentially, that interference by the courts in the contract’s operation is allowed only to avoid an “unacceptable” impact, as assessed under standards of reasonableness and fairness.

There is at this moment of course no well- established case law on COVID-19. However, commentators have provided guidance that is very helpful to think through the issues. Recently a “share the pain” approach has been advocated by a renowned law Professor, Tjittes, who focuses on preserving the parties’ contractual equilibrium in the current circumstances. This is, in the Court’s analysis, the right way to look at the agreement here. There is no evidence in the record suggesting that the parties contemplated or discussed the full and exceptional impact of the COVID-19 crisis. The crisis may or may not be unprovided for. However, the court rules in the current case there is no need to rule on this issue. Even if the crisis is unprovided for, there is no support in the record for the proposition that the crisis makes it unacceptable for the claimant to demand strict performance by the defendant. The reasons are straightforward.

The break fee allocates risk and expresses commitment and caps exposure. The harm to the business may be substantial and structural, or it may be short-term and minimal. Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written in the letter of intent. This allocates a defined risk to one party, and actual or potential risks to the other party. Reducing the break fee in any business downturn, the fee’s express purpose – comfort and confidence to get the deal done – would not be accomplished and be derived in precisely the circumstances in which it should be robust. As a result, the Court therefore orders to pay the full EUR 30 million fee. So the break fee stipulation works under the circumstances without mitigation because of the Corona outbreak.

The Netherlands Commercial Court, continued

As already indicated above, the case is interesting because the verdict has been rendered by a Dutch state court in English and the proceedings where also in English. Not because of a special privilege granted in a specific case but based on an agreement between parties with a proper choice of forum clause for this court. In addition to the benefit to of having an English forum without mandatorily relying on either arbitration or choosing an anglophone court, it also has the benefit of it being a state court with the application of the regular Dutch civil procedure law, which is well known by it’s practitioners and reduces the risk of surprises of a procedural nature. As it is as such also a “normal” state court, there is the right to appeal and particularly effective under Dutch law access to expedited proceeding as was also the case in the example referred to above. This means a regular procedure with full application of all evidentiary rules may still follow, overturning or confirming this preliminary verdict in summary proceedings.

Novel technology in proceedings

Another first or at least a novel application is that all submissions were made in eNCC, a document upload procedure for the NCC. Where the introduction of electronic communication and litigation in the Dutch court system has failed spectacularly, the innovations are now all following in quick order and quite effective. As a consequence of the Coronavirus outbreak several steps have been quickly tried in practice and thereafter formally set up. At present this – finally – includes a secure email-correspondence system between attorneys and the courts.

And, also by special order of the Court in this present case, given the current COVID-19 restrictions the matter was dealt with at a public videoconference hearing on 22 April 2020 and the case was set for judgment on 29 April 2020 and published on 30 April 2020.

Even though it is a novel application, it is highly likely that similar arrangements will continue even after expiry of current emergency measures. In several Dutch courts videoconference hearings are applied on a voluntary basis and is expected that the arrangements will be formalized.

Eligibility of cases for the Netherlands Commercial Court

Of more general interest are the requirements for matters that may be submitted to NCC:

the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction
the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
the action is a civil or commercial matter within the parties’ autonomy
the matter concerns an international dispute.

The NCC agreement can be recorded in a clause, either before or after the dispute arises. The Court even recommends specific wording:

“All disputes arising out of or in connection with this agreement will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or “NCC District Court”), to the exclusion of the jurisdiction of any other courts. An action for interim measures, including protective measures, available under Dutch law may be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCCA”).”

The phrase “to the exclusion of the jurisdiction of any other courts” is included in light of the Hague Convention on Choice of Court Agreements. It is not mandatory to include it of course and parties may decide not to exclude the jurisdiction of other courts or make other arrangements they consider appropriate. The only requirement being that such arrangements comply with the rules of jurisdiction and contract. Please note that choice of court agreements are exclusive unless the parties have “expressly provided” or “agreed” otherwise (as per the Hague Convention and Recast Brussels I Regulation).

Parties in a pending case before another Dutch court or chamber may request that their case be referred to NCC District Court or NCC Court of Appeal. One of the requirements is to agree on a clause that takes the case to the NCC and makes English the language of the proceedings. The NCC recommends using this language:

We hereby agree that all disputes in connection with the case [name parties], which is currently pending at the *** District Court (case number ***), will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or ”NCC District Court). Any action for interim measures, including protective measures, available under Dutch law will be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCC Court of Appeal”).

To request a referral, a motion must be made before the other chamber or court where the action is pending, stating the request and contesting jurisdiction (if the case is not in Amsterdam) on the basis of a choice-of-court agreement (see before).

Additional arrangements in the proceedings before the Netherlands Commercial Court

Before or during the proceedings, parties can also agree special arrangements in a customized NCC clause or in another appropriate manner. Such arrangements may include matters such as the following:

the law applicable to the substantive dispute
the appointment of a court reporter for preparing records of hearings and the costs of preparing those records
an agreement on evidence that departs from the general rules
the disclosure of confidential documents
the submission of a written witness statement prior to the witness examination
the manner of taking witness testimony
the costs of the proceedings.

Visiting lawyers and typical course of the procedure

All acts of process are in principle carried out by a member of the Dutch Bar. Member of the Bar in an EU or EEA Member State or Switzerland may work in accordance with Article 16e of the Advocates Act (in conjunction with a member of the Dutch Bar). Other visiting lawyers may be allowed to speak at any hearing.

The proceedings will typically follow the below steps:

Submitting the initiating document by the plaintiff (summons or request as per Dutch law)
Assigned to three judges and a senior law clerk.
The defendant submits its defence statement.
Case management conference or motion hearing (e.g. also in respect of preliminary issues such as competence, applicable law etc.) where parties may present their arguments.
Judgment on motions: the court rules on the motions. Testimony, expert appointment, either at this stage or earlier or later.
The court may allow the parties to submit further written statements.
Hearing: the court interviews the parties and allows them to present their arguments. The court may enquire whether the dispute could be resolved amicably and, where appropriate, assist the parties in a settlement process. If appropriate, the court may discuss with the parties whether it would be advisable to submit part or all of the dispute to a mediator. At the end of the hearing, the court will discuss with the parties what the next steps should be.
Verdict: this may be a final judgment on the claims or an interim judgment ordering one or more parties to produce evidence, allowing the parties to submit written submissions on certain aspects of the case, appointing one or more experts or taking other steps.

Continuous updates, online resources Netherlands Commercial Court

As a final note the English language website of the Netherlands Commercial Court provides ample information on procedure and practical issues and is updated with a high frequence. Under current circumstance even at a higher pace. In particular for practitioners it’s recommended to regularly consult the website. https://www.rechtspraak.nl/English/NCC/Pages/default.aspx

This is a summary of the approved measures, which unfortunately for both tenants and landlords do not include any public aid or tax relief and just refer to a postponement in the payment of the rent.

Premises to which they are applied

Leased premises dedicated to activities different than residential: commercial, professional, industrial, cultural, teaching, amusement, healthcare, etc. They also apply to the lease of a whole industry (i.e. hotels, restaurants, bars, etc., which are the most usual type of businesses object of this deal).

Types of tenants

Individual entrepreneurs or self-employed persons who were registered before Social Security before the declaration of the state of alarm on March 14^th, 2020
Small and medium companies, as defined by article 257.1 of the Capital Companies Act: those who fulfil during two consecutive fiscal years these figures: assets under € 4 million, turnover under € 8 million and average staff under 50 people

Types of landlords

In order to benefit from these measures, the landlord should be a housing public entity or company or a big owner, considering as such the individuals or companies who own more than 10 urban properties (excluding parking places and storage rooms) or a built surface over 1.500 sqm.

Measures approved

The payment of the rent is postponed without interest meanwhile the state of alarm is in force, but in any case, for a maximum period of four months. Once the state of alarm is overcome, and in any case in a maximum term of four months, the postponed rents should be paid along a maximum period of two years, or the duration of the lease agreement, should it be less than two years.

For landlords different to those mentioned above

The tenant could apply before the landlord for the postponement in the payment of the rent (but the landlord is not obliged to accept it), and the parties can use the guarantee that the tenant should mandatorily have provided at the beginning of any lease agreement (usually equal to two month’s rent, but could be more if agreed by the parties), in full or in part, in order to use it to pay the rent. The tenant will have to provide again the guarantee within one year’s term, or less should the lease agreement have a shorter duration.

Activities to which it is applied

Activities which have been suspended according to the Royal Decree that declared the state of alarm, dated march, 14ht, 2020, or according to the orders issued by the authorities delegated by such Royal Decree. This should be proved through a certificated issued by the tax authorities.

If the activity has not been directly suspended by the Royal Decree, the turnover during the month prior to the postponement should be less than 75% of the average monthly turnover during the same quarter last year. This should be proved through a responsible declaration by the tenant, and the landlord is authorised check the bookkeeping records.

Term to apply and procedure

The tenant should apply for these measures before the landlord within one month’s term from the publication of the Royal Decree-law, that is, from April 22^nd, 2020, and the landlord (in case belongs to the groups mentioned in point c) is obliged to accept the tenant’s request, except if both parties have already agreed something different. The postponement would be applied to the following month.

As the state of alarm was declared more than one month ago (March 14^th), landlords and tenants have already been reaching some agreements, for example 50% rent reduction during the state of alarm, and 50% rent postponement during the following 6 months. Tenants who do not reach an agreement with the landlord could face an eviction procedure, however court procedures are suspended during the state of alarm. We have also seen some abusive non-payment of rent by tenants.

When is becomes impossible to reach an agreement with the landlord, tenants have the legal remedy of claiming in Court for the application of the “rebus sic stantibus” principle, which was highly demanded during the 2008 financial crisis but very seldom applied by the Courts. This principle is aimed to re-balance the parties’ obligations when their situation had deeply changed because of unforeseen circumstances beyond their control. This principle is not included in the Spanish Civil Code, but the Supreme Court has accepted its application, in a very restricted way, in some occasions.

Summary – What can we learn in the time of Covid-19 that can be used in mediation? And what can we learn from mediation to be used in this crisis?

As you know, mediation is a way to solve conflicts in which the parties keep in their hands the possible solution. They do not need to come to a third party (judge or arbitrator) to impose the answer to them. Parties can imagine more freely what they need, and how to solve their differences.

Some of the elements and techniques mediators use in a mediation can also be used in and learnt from the current Time of Covid-19. And the current crisis also helps us to understand why they are so important in mediation.

Cooperation to get the solution is better than unilateral and imposed decisions

We usually tend to think that cooperation is a sign of weakness and that we recur to it only if we cannot impose or view or win our case. However, as in the time of Covid-19 where countries, scientists and people should fight together, when facing a conflict cooperation and going beyond your positions brings you the possibility to explore solutions that otherwise remain hidden.

« Now it is increasingly recognized that there are cooperative ways of negotiating our differences and that even if a “win-win” solution cannot be found, a wise agreement can still often be reached that is better for both sides than the alternative. […]

Three points about shared interests are worth remembering. First, shared interests lie latent in every negotiation. They may not be immediately obvious. Second, shared interests are opportunities, not godsends. Third, stressing your shared interests can make the negotiation smoother and more amicable. » [Fisher, Richard; Ury, William. “Getting to Yes: Negotiating an agreement without giving in”].

Listening is highly effective

In the time of Covid-19 we tend to accept better information that confirms our beliefs and we accept better indications that are in accordance with our preferences and beliefs. Nevertheless, also in this time, listening is of essential importance to understand the causes and solutions.

A mediator will always listen to the parties and will help them to do the same. Listening the other’s side arguments, its explanation of the facts, interests and needs, the reasons for its decisions… is also of utmost importance to find a joint solution.

«Whether you are a neutral third party (professional facilitator, friend, or manager) or one of the participants, as you listen to all the stories, you begin to sense the best solution. » [Levine, Stewart. “Getting to Resolution: Turning Conflict Into Collaboration.”]

A solution for me can also be a solution for you

In the time of Covid-19 it seems clear to all of us that a common solution is the only possible one. A vaccine will save the entire world. In mediation, the main benefit is to understand that, unlike a court judgement or arbitral award, a joint (not imposed) solution is possible and a benefit for me does not imply a damage or a lost for my opponent.

«A mediator works to understand each disputant’s perspective and to look for the value in it. In this role, you refrain from judging whose side is right or wrong. Instead, you try to see the merit in each side’s perspective. » [Shapiro, Daniel. “Building Agreement”].

We master the solution and we create the agreement in a safe environment

The solution to the current crisis does not only depend on the authorities and on the health professionals. A great part of the solution relies on everybody’s participation, washing our hands, respecting the social distance, staying safe at home avoiding contagion and the collapse of hospitals.

In court we leave the decision of the conflict in the hands of a third party –the judge, the arbitrator–. In a mediation, on the contrary, the solution remains in our hands. We know what our interests are, we create our agreement. Our imagination is our ally in finding the solution together with the counterparty and the assistance and experience of the mediator who does not impose it but helps the parties to find it. Quite often, what parties could get in mediation goes far beyond what a judge would’ve been able to grant. And this in a confidential environment.

«The Sage is self-effacing and scanty of words. When his task is accomplished and things have been completed, all the people say, “We ourselves have achieved it!” » [Lao Tzu]

Emotions do matter

Good and bad emotions are inevitable. Particularly in periods of uncertainty, crisis and loose of control, we all face strong emotions. This is true in situations like this Covid-19 and in all conflicts, and not only in personal ones. Egos, envies, fears, anxieties… are also part of our day-to-day life, work and business, but they are rarely considered in courts when solving your conflicts. A mediator helps you to take them into account in a safe environment and as a part of the conflict itself.

«Solving problems seems easier than talking about emotions. The problem is that when feelings are at the heart of what’s going on, they are the business at hand and ignoring them is nearly impossible. » [Stone, Douglas. “Difficult Conversations: How to Discuss What Matters Most”].

Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, even though it affects and produces effects in many different legal fields, does not include any reference to contracts for leases of real estate, or houses, premises or offices.

The purpose of this note is to analyze the effects of the situation of the State of Alarm regarding those leases of offices or premises that have been forced to close in application of the decree; those others that remain totally or partially open and in operation, although with a reduced or minimal activity, in principle are not subject to the conclusions reached below without prejudice to the fact that there are individualized cases to which, despite the fact that there is not a complete closure, reasonably and logically can be applied to them.

It is not excluded in any way that in the event of an extension of the validity of the State of Alarm, a regulation that affects the leasing contracts could be published, but for the moment this has not happened. If this were to happen, the content of said norm would apply.

Based on the principle of freedom of covenants enshrined in art. 1255 of the Spanish Civil Code, which allows the parties signing the contract to agree (i) what scenarios and situations should be considered as constituting cases of Force Majeure and Act of God and (ii) what the contractual consequences of such scenarios should be, the first exercise that must be done is to check if the contract includes a regulatory clause of Force Majeure and its effects; if so, such clause must be followed and its analysis is left out of this note.

In the absence of express regulation in the contract, the provisions of the Civil Code and specifically article 1105 would apply.

COVID-19 as Force Majeure

COVID-19 is an event that in principle meets the requirements of the Civil Code to be classified as an event of Force Majeure (art. 1105 Civil Code) since:

It is a foreign act and not attributable to the contractor who is the debtor of the benefit or obligation.
It is unpredictable, or if it were said to be “predictable”, it is certainly inevitable.
The event in question, the pandemic, must be a cause and result in the breach of the obligation, that is, there must be a causal link.

Therefore, fulfilling the three requirements, the first conclusion that we reach is that very foreseeably, the Spanish Courts will classify as “Force Majeure” the situation caused by COVID 19 when a judicial dispute is raised in which such matter is discussed between litigants. We will now analyze the consequences of this status.

Consequences of considering COVID-19 as an event of Force Majeure

Most of the doctrine and jurisprudence understand that the effects of classifying a scenario as a case of Force Majeure in principle are:

Total and definitive impossibility of complying; releasing the debtor from the fulfillment of the obligation.
Partial inability to comply; the debtor is released only in the part that it is impossible to fulfill, but still bound by the part that can be carried out.
Temporary inability to comply; the debtor is released from the responsibility for default as long as the exceptional situation persists.

Now, let us analyze how it would affect to considerate the epidemic as Force Majeure in relation to lease agreements for uses other than housing.

Regarding the payment of rent

The question to answer is if the classification of the current pandemic situation as a case of Force Majeure frees the tenant (whose premises have been forced to close by order of the government authority) from the obligation to pay the rent while said closing obligation persists, including in the concept of “release” different alternatives: total or partial cancellation and / or total or partial postponement.

We are meeting these days with a frequent reaction among some tenants, who, unilaterally have informed their landlords that considering COVID 19 an event of force majeure and having been forced to close the premises / office, they suspend the payment of the rent while said situation remains. They do not terminate the contract, they do not hand over the possession, they remain in it (the premises remain closed and not operational) but they suspend the payment (it is not clear whether suspending in this case means liberating himself from the payment of the rent or postponing its payment for when the Force Majeure scenario ends).

Arguments against liberation

As much as this attitude can be considered “understandable” from the perspective of the lessee, not from the point of view of the lessor, said consideration runs into an obstacle: the interpretation of the Force Majeure made by the Supreme Court regarding pecuniary payment obligations, according to the Civil Sentence of May 19, 2015:

“Not being able to consider, in the case of pecuniary debts, the subjective impossibility – insolvency – nor the objective or formal imposition, the doctrine concludes that it is not possible to imagine that if the impossibility is due to a fortuitous event it could have as effect the extinction of the obligation.

The exoneration of the debtor by fortuitous event is not absolute, it has exceptions, as provided for in article 1105 CC, and one of them, by application of the “genus nunquam perit” principle, would be in cases of obligations to deliver generic things.

In such circumstances, the pecuniary debtor is obliged to fulfill the main obligation, without the economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic such as money”.

In conclusion: it does not seem that this jurisprudential criterion allows to defend that the fulfillment of the pecuniary obligations is released, extinguished or that its breach is justified in cases of Force Majeure, therefore the pecuniary debtor, in this case the lessee, in application of this criterion and due to the generic condition of the money, would be obliged to fulfill his main obligation not being freed from it by the unforeseen economic adversities on the basis of Force Majeure.

Arguments in favor of liberation: art. 1575 of the Civil Code

Having said the foregoing, reference should be made to an article of the Civil Code that, with certainty, will be profusely cited in the upcoming judicial conflicts.

The art. 1575, dealing with the leasing of rustic estates, recognizes the lessee’s right to the reduction of rent in the event of loss of more than half of the fruits (unless otherwise agreed) in “fortuitous, extraordinary and unforeseen cases … such as fire, war, plague, unusual flood, locust, earthquake or another equally unusual that the contractors have not been able to rationally foresee ”.

Is this article, foreseen for rustic leases, applicable to urban leases?

The art. 4.1 CC allows the analogical application of the rules when (i) they do not contemplate a specific assumption and (ii) they regulate a similar situation in which “identity of reason” may be appreciated.

The Sentence of the Supreme Court from January 15, 2019, that solved a conflict of a lease of a building used as hotel, in which the tenant had sought the reduction of the rent under the clause “rebus sic stantibus” by the crisis of 2008 and had alleged in his favor the application of art. 1575, established:

“The argumentation of the appealed judgment rejecting the claim to lower the agreed price is also not contrary to the legal criterion that follows from art. 1575 CC, which is the rule that allows the reduction of income in the leasing of productive assets that do not derive from risks of the business itself, it also requires that the loss of benefits originates from extraordinary and unforeseen fortuitous cases, something that by its own rarity could not have been foreseen by the parties, and that the loss of fruits is more than half of the fruits. In this particular case, none of these circumstances concur. The decrease in rents comes from market developments, the parties anticipated the possibility that in some years the profitability of the hotel would not be positive for the lessee and the losses alleged by NH in the operation of the Almería hotel are less than fifty per hundred, without taking into account that the overall result of his activity as manager of a hotel chain is, as the Audience considers proven in view of the consolidated management report, positive”.

The Supreme Court does not admit the application of art. 1575, but not because it is considered not applicable to non-rustic leases, but because the Court concludes that the requirements are not fulfilled since the 2008 crisis was neither unpredictable and because the lessee’s losses do not exceed 50%.

But, that interpretation of the Supreme Court together with the wording of art. 4.1 CC would support the claim of the lessee who has no incomes during the State of Alarm to demand a reduction in rental fee that fits the principle of proportionality.

Regarding early termination at the request of the lessee

However, we may find situations in which the lessee considering the current situation, decides to terminate the lease in advance, delivering the premises to the lessor.

They are cases in which the early termination of the contract is intended, without respecting (i) or the mandatory term (ii) or the previous notice, in both cases under the hypothesis that they are thus regulated in the contract.

In these scenarios, we understand that it may be defendable that, due to the situation of force majeure caused by COVID 19 and in application of art. 1105 of the CC, the lessee is exempt from the obligation:

To respect the mandatory term of the lease
To give prior notice to the lessor in case of early termination of the contract

In both cases, the contract would be terminated with the delivery of possession of the premises, without prejudice to having to respect the other obligations set forth in the contract for termination and delivery, provided that they are not equally affected by the situation of Force Majeure.

Our opinion is that, also in application of Article 1,105 of the CC, the thesis that the lessee would be released from any obligation to compensate damages to the lessor for said advance resolution or breach of the obligatory duration of the contract could be defendable before the Courts.

Conclusion

In conclusion, when the Courts decide on the effects of the current pandemic (that they will surely classify as Force Majeure), and how this will affect the obligations of leaseholders who have been forced to close their business, our opinion is the following:

Regarding the obligation to pay the rent, despite the contrary criterion of the sentence from May 19, 2015, we find defendable the analogue application of art. 1575 of the CC, based as well on the Supreme Court Sentence from January 15, 2019, in order to demand a proportional and equitable reduction of the rent.
Regarding the power of the leaseholder to terminate the contract in advance, in case the leaseholder hands the possession of the property to the lessor, we find defendable to exonerate the leaseholder from complying with the advance notice or mandatory term in case provided in the contract, without the obligation to indemnify the lessor for this reason.

Application of the Rebus Sic Stantibus clause (“RSS” clause)

We will analyze below if the RSS clause can be applicable to the case that we are studying and with which consequences.

Requirements of the RSS clause (Latin aphorism that means “things thus standing”)

The principle RSS operates as an intrinsic clause (that is, implicit, without the need to expressly agree by the parties) in the contractual relationship, which means that the stipulations established in a contract are so in view of the concurrent circumstances at the time, that is, “things thus standing”, so that any substantial and unforeseen alteration of the same could lead to the modification of the contractual content.

The RSS clause is not regulated in any article in our laws; It is a doctrinal construction that the jurisprudence has traditionally admitted (examples among many other Supreme Court Sentences from June 30, 2014, February 24, 2015, January 15, 2019, July 18, 2019), with great caution, only in certain cases, and requiring the following requirements:

That there has been an extraordinary alteration in the circumstances of the contract, at the time that it must be fulfilled, in relation to those present at the time the parties entered the contract.
To analyze whether an incident can determine the extraordinary alteration of the circumstances that gave meaning to the contract, we must a) contrast the scope of said alteration regarding the meaning or purpose of the contract and the commutativity or performance balance thereof; and b) the “normal risk” inherent or derived from the contract must be excluded.

That there has been an exorbitant disproportion, out of all calculation, between the obligations of the contracting parties, causing an imbalance between them.
That the above occurs because of radically unpredictable circumstances.
That there is no other remedy to overcome the situation.

Historically, our courts have been very reluctant to apply RSS, although since the economic crisis of 2008-2012 there has been a certain change in criteria and greater jurisprudential receptivity.

Consequences of the application of RSS

The doctrine establishes that the application of the RSS does not have in principle terminating effects on the contract, but only modifying effects, aimed at compensating the imbalance of obligations between the parties; the doctrine establishes that this only applies to long-term contracts or successive contracts with deferred execution.

In application of the good faith principle, the reaction to an event of fortuitous event, force majeure or, in general, an event that generates a disproportion between the parties, such as that regulated by the RSS clause, should be the amendment of the contract to rebalance the obligations between the parties, and only in the event of material impossibility to comply with the obligations, the resolution of the obligation, in both cases without compensation for non-compliance.

For this reason, in relation to leasing contracts and in case of closure of the premises by mandatory mandate, we understand that the RSS clause may be:

alleged by the leaseholder to request or urge the lessor to downsize or postpone payment.
estimated by the judges, when these assumptions are debated before the Courts, when accepting such contractual amendment as equitable and legitimate in order to compensate the imbalance generated by the effects of COVID 19.

To summarize, the RSS clause can be a tool for the leaseholder that has had to close its premises during the State of Alarm, when negotiating with the lessor an amendment of the contract, trying to postpone the rent while the State of Alarm or negotiating a discount.

We should bear in mind:

That the RSS clause is unavoidably applicable on a casuistic basis, there are no generalizations and it will be necessary to take into account the effect caused by COVID 19 in each specific contractual relationship (Supreme Court Sentence from June 30, 2014 and February 24, 2015) and the real imbalance of benefits produced, and
That, as we have said, the Courts are generally reluctant to apply this clause, that they only apply in the absence of any other legal tool and in situations in which the maintenance of the contractual status quo reveals a manifest “injustice ”and a evident and resounding imbalance between the performance of the parties.

Does this mean that the leaseholder may impose on the lessor a modification of the economic conditions of the contract under the RSS clause (postponement or total or partial cancellation of the payment)?

We cannot assure this, what we think is that the application of this RSS clause should:

Justify a reasonable request from the leaseholder to temporarily change the conditions of the contract (postponement or cancellation, total or partially) that the lessor must reasonably meet.
In case of unreasonable refusal of the lessor, we recommend to document as much as possible leaseholder´s request and the possible negotiations or refusal, in order to substantiate a suspension of the payment of the rent, total or partial, during the State of Alarm aimed, not to extinguish his obligation, but to postpone it.

We will have to wait for the reaction of the Courts when they judge these conflicts, but if we dare to anticipate that it is quite possible that the judicial tendency will be to grant protection to the leaseholder with support in the RSS clause and the principle of business preservation, when it comes to validating certain modifying effects regarding the payment obligations of the leaseholder (total or partial remission of the rent payment during the pandemic crisis, postponement, or partial postponement).

In any case, it will be essential to prove, that the behavior of the leaseholder seeking protection in the RSS clause to amend the contract, has been strictly adjusted to the principle of good faith (Supreme Court Sentence from April 30, 2015).

It will also be important to analyze case by case why the displacement of the risk derived from the “exceptional and unforeseen event” from one contractor to the other is justified (Supreme Court Sentence from January 15, 2015) and could well be defended (Supreme Court Sentence from July 18, 2019) that both contracting parties must divide and assume the consequences between the two of them. The judicial decisions will vary in each specific case.

Conclusions and Recommendations

In conclusion, it seems that the leaseholder would have two instruments in order to try to successfully suspend or postpone the payment of the rents, the RSS clause and the principle of Force Majeure.

In our view, the replacement of the contractual balance altered by the exceptional event, may consist of either an extension of the lease payment terms or the application of a total, or partial cancellation of the rental payment obligation while it lasts the State of Alarm, but we understand that it will be defendable that the delay in the payment may not give rise neither to the termination of the contract under art. 1124 Cc nor to the requirement of damages art. 1105 Cc, therefore, will not empower the lessor to urge eviction.

Therefore, the steps to be followed in each case would be:

Carry out an examination of the contract to check whether force majeure and acts of God are regulated and if the current situation is in accordance with the contract provisions.
Should nothing be set forth at the contract, and in case the leaseholder has had to close the premises or office, notify the other party of this circumstance and try to negotiate a novation of the lease requesting:
- Waiver of the payment obligation during the Alarm State.
- The application of a discount on the payment obligations with both parties sharing the effects of the pandemic, in a proportion to be agreed.
- Postponement of payment obligations until the premises or office can be reopened with a payment plan for the deferred debt.

If it is not possible to reach an agreement, it is advisable to try to maintain evidence that the parties have acted in good faith trying to reach a negotiated solution and at the extreme (from the leaseholder´s point of view) announce, without waiting to receive a communication or claim from the Lessor, the suspension of the rental fee payment until reopening of the premises/offices, justifying the same in the Alarm State.

Alexandre Malan

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