The Supreme Court of Spain has recognized it its Judgment dated September 5th, 2012, the lack of consent in a work contract on which one of the parties applied for the bankruptcy proceedings 10 days after such contract was entered by both parties.

The parties entered into a contract for execution of work by virtue of which the company that few days later applied for the insolvency proceedings, was committed to carry out the works of a building under construction.

Once the bankruptcy proceeding was started, each party issued a claim within the insolvency proceeding.

The insolvent company applied for the termination of the contract and claimed damages because once the other party knew about the application of bankruptcy proceedings, such party informed the decision to terminate the contract and prevented the insolvent company to fulfill the terms of the contract by preventing its workers to entering the working site.

That party argues the breach of Section 61.3 of the Bankruptcy Act which prevents the termination of the contract by mere insolvency by the other party.

Against this reasoning, the other party in turn, submitted a separate incident requesting the annulment of the contract due to lack of consent given that if this party had known the insolvency situation by the other party, then, they would never have hired them.

Alternatively it requested termination of the contract and in both cases the damages that were calculated taking into account the time elapsed between the date on which the bankrupt should have started the work and the date on which they hired another company to run work, and the fee of € 900 per day for compensation as damages.

Both the First Instance Court and the Regional Court, admitted the claim for the insolvent and dismissed the one filed by the party seeking the annulment of the contract for lack of consent, agreeing in both instances to terminate the contract and upholding in full the request for compensation of damages at first instance, that was moderately reduced on appeal.

Against that decision, the other party appealed to the Supreme Court based on Sections 1269, 1270, 1300, 1124 and 1101 of the Civil Code, and the case law that applies in those cases.

It is argued that a building company that is immerse in financial difficulties does not have enough warranties to fulfill the conditions agreed in the contract and the fact that the Judgment appealed includes the statement that having known that the company would applied for the insolvency after 10 days, probes the error made and the purpose and machination of the constructor as he did not provided such information.

It also considers that there is fraud and bad faith in the negotiation of the contract which implies a lack of consent with sufficient authority to make the contract null pursuant to the aforementioned Sections.

After considering that Section 1270 of the Civil Code which requires that the fraud on the contract must be severe, as it shall be determining when entering the agreement, in order for the contract to be declared null, the Supreme Court states that this is a matter of both fact and law. The Chamber estimated

the claim partially, considering that there are evidences that if the appellant had known of the economic situation in which the defendant was immerse in, they would not have contracted him for the execution of the building works.

It was also established that the constructor did not send workers to the building site where he had to perform the work until 2 days after he should have started the work and only sent a couple who simply carried out cleaning, and completely abandoned few days later.

While the Regional Court found that there was not bad faith on the constructor who did not inform the other party of its intention to apply for the bankruptcy proceedings, the Supreme Court states that what he actually hid was his financial difficulties that made impossible for him to comply with the provisions on the terms agreed.

Consequently the Supreme Court considers relevant the facts for the purposes of Sections 1269 and 1300 of the Civil Code and considers the first ground of appeal and thus the claim deducted on annulment of the contract.

However, in regards to the claim for damages, it states that it is unnecessary because the claim is based on a clause in the contract that has been canceled and there is no evidence that the delay in the beginning of the construction is not also attributable to negligence of the appellant itself.

Finally and with respect to the cancellation of the contract, it would not result in a violation of Section 61.3 of the Bankruptcy Act, as no agreement is terminated for being the other party in insolvency but the contract is cancelled by a lack of consent, as the economic difficulties that makes impossible for one party to perform the contract, had been hidden.