Termination

Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

A commercial contract will generally include some circumstances in which either party will have the right to terminate.

In addition to these contractual rights, under Spanish law, if one of the parties breaches its contractual obligations and the breach is sufficiently serious, the non-breaching party shall have the right to terminate the contract on the basis of article 1,124 of the Spanish Civil Code (this article entitles the non-breaching party to either request specific performance of the contract or terminate it, and in both cases, entitles the non-breaching party to request compensation for the losses and damages suffered due to the breach of contract). It must be a serious breach of the contract, for example, where a supplier refuses to perform its obligations and abandons the contract or a customer refuses to pay any invoices. Whether a breach is sufficiently serious to terminate a contract will be a question of fact and the relevant circumstances of the case.

It is not possible to exclude the right to terminate the contract, even if this is expressly set forth in the contract. This is because settled law has established that no contractual party can be bound indefinitely.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

If a contract does not include a notice period to terminate it (and it is not a definite-term agreement), the contract shall be deemed to be an agreement of indefinite term. According to the Spanish Supreme Court, a contractual party to an indefinite term agreement cannot be bound indefinitely; it may terminate the relationship provided it gives the counterparty a reasonable advanced termination notice. The reasonableness of the advanced termination notice will mainly depend on the circumstances of the case (how long the relationship has lasted, whether the buyer is economically dependent on the supplier, etc). Quite often, Spanish courts have held that a reasonable termination notice is equivalent to at least one month per year of term of the contract, following the same notice period as established for agency contracts in accordance with Law 12/1992.

If the customer is found to be economically dependent on the supplier and the contract does not foresee a notice to terminate, article 16.3a) of the Unfair Competition Act requires that the supplier must give at least six months’ notice to the customer.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No. Under Spanish Law, there is no right to terminate a commercial contract on the insolvency of the other party. Similarly, no person may be excused from the performance of obligations under the contract simply as a result of insolvency or financial difficulty. In fact, article 61.2 of the Spanish Insolvency Act (Law 22/2003 of 9 July) prohibits clauses entitling either party to a reciprocal agreement to terminate if the other party becomes insolvent. This type of clause is considered null and void.

Although the declaration opening the insolvency proceedings does not in itself affect the validity of contracts with reciprocal obligations pending fulfilment, if one of the parties breaches its contractual obligations, the non-breaching party may terminate the contract on the basis of article 1124 of the Civil Code (which entitles the non-breaching party to request specific performance of the contract or terminate it, and in both cases, entitles the non-breaching party to request compensation for the losses and damages suffered due to the breach of contract).

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

There are no general law restrictions on terminating a contract if the other party is in financial distress. Such situation will be governed by the provisions of the contract, and a party will be permitted to terminate for financial distress if this is provided for in the contract.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Yes, force majeure operates as a matter of law. The definition and effects are included in article 1105 of the Civil Code and are implied into any contract. Parties may expand the definition of force majeure events and widen its application in a contract.

A force majeure event releases the affected party from liability and relieves the party from the duty of partly or fully complying with its contractual obligation. It can also suspend the execution of an obligation or allow an extension of time to perform the same.

For a force majeure event to relieve a party from having to comply with its contractual obligations, the event must meet the following three criteria: externality - the situation that leads to the non-performance of the obligation must be beyond the control of the party alleging the force majeure event; unpredictability - the party must not be able to foresee the occurrence of the event (if the event is foreseeable, the party must be prepared for it); and irresistibility - the consequences of the event could not be avoided.

The burden of proof lies with the party wishing to be discharged from its contractual obligations.