Supreme Court (Civil Division 1), Judgment 446/2017, 15 February

In this judgment the Supreme Court upheld the decision of the Madrid Provincial Appeal Court (Judgment 377/2014 (14 July)) which declared the validity of the purchase agreement of a future plot between the multinational company (the "Purchaser") and a property developer (the "Seller"). The future plot was for the construction of a store selling furniture and household goods in the municipality of San Fernando de Henares (Madrid).

As background to the case, the Purchaser and Seller entered into a purchase agreement of a future plot for an amount of 36 million (plus VAT) on 16 December 2006. The contract was subject to a performance and payment schedule by which the plot had to be delivered to the Purchaser before 1 December 2008 in order for the Purchaser to build the store and open it to the public before 1 February 2010.

The contract was novated by addenda dated 2 April 2008 and 13 January 2009, respectively, which amended, among other features of the contract: i) the performance and payment schedule, ii) the developable surface area of the plot and other changes thereto, iii) the minimum percentage of urbanisation building work at 1 December 2008 (20%), iv) the bank guarantees in favour of the Purchaser for the return of the ongoing payments towards the purchase price, and v) the purchase price (from 36 million to 40 million, approximately). In this respect, it is important to note that, at the time of the second novation (18 January 2009), the period for execution of the minimum urbanisation percentage (1 December 2008) and delivery of the plot to the Purchaser had expired, although a new period for the Sto carry out the work was not established in the novation.

By 22 May 2009 the Seller had not complied with the periods set down in the contract and so the Purchaser sent a Burofax terminating the contract due to breach of the contractual periods, and proceeded to execute the bank guarantees that the Seller had given in guarantee of the price already paid, which the Seller opposed. Therefore, the Purchaser issued a claim for breach of contract and sought an order for termination of contract. The Seller defended the claim and issued a counterclaim for performance of the contract and loss and damage caused by the Purchaser's breach.

The Purchaser's claim was dismissed at first instance, a decision upheld by the Madrid Provincial Appeal Court. The validity and efficacy of the purchase agreement were upheld, and the Purchaser was ordered to pay the contract price, which corresponded to the conclusion of 20% of the building work (17,956,827.59), and to return the improperly executed bank guarantees (11,577,000).

Both the first instance and provincial appeal court held that although the Seller had delayed in the periods for completion of the development work and registry procedures relating to the plot, the delay was not of sufficient magnitude for it to be considered that the termination of the contract was legitimate, nor could the periods be considered an essential obligation of the contract. Therefore, the Seller's right to compensation was recognised, although not the compensation that it had claimed as neither the trial nor provincial appeal court found that the Purchaser had acted deceitfully or in bad faith.

The Supreme Court gave its decision on the matter following appeals for cassation and procedural breach lodged by both parties. It upheld the judgments of the courts at first and second instance, and set out its reasoning along the following lines.

From among the points included in the judgment, emphasis should be given to the Court's decision in relation to the breach of the contractual periods which the Purchaser alleged, specifically the breach of the deadline set down for the execution of 20% of the urbanisation building work fixed as 1 December 2008 in the purchase agreement. In this respect, the Supreme Court confirmed that:

  • That deadline had not been expressly stipulated in the contract as an essential condition and neither could it be considered an essential term in itself given that the existence of the plot did not become impossible after the period had elapsed. Consequently, the Purchaser did not have the power to terminate the contract for breach by the Seller as it could not be found that the Seller's breach had been of an essential obligation of the contract and, therefore, sufficient to insist on its termination.
  • Although the addendum dated 13 January 2009 made no express reference to the period fixed for the performance of certain acts by the Seller, the addendum was dated subsequent to the deadline stipulated in the original contract, which entailed the cancellation of the original deadline and a new implied reasonable period would apply according to the nature and circumstance of the purchase agreement.
  • Furthermore, it could be inferred from the Purchaser's conduct that it had granted a new deadline to the Seller because it pushed for the signing of the addenda to make major changes (relating to the facade size or the number of parking spaces) and had asked the Seller for an extension of the guarantees it had given and which expired on 1 June 2010, much later than the agreed date (1 December 2008). Those requests by the Purchaser, which came about when the original period had already concluded, showed that the original period was not conclusive.
  • Pursuant to the above, the Court held that "Both parties consented to the novation of the period, it not being left to one of them to fix it," given that the contract was modified on varying its conditions, extending the agreed period that had already finished at the time of novation by the addenda.

In view of all the above, the Supreme Court found that the Purchaser's termination of contract could not be deemed lawful.

In conclusion, when considering this recent decision by the Supreme Court, it is important to be aware that the wording of contractual clauses is insufficient in itself when set against the conduct of the parties. Likewise, it must be remembered that a period set down in a contract is not necessarily an essential element of the contractual relationship. Rather, it is the particular circumstances of each case, the different agreements (express or not) and the conduct of the parties that are essential when determining the existence of a breach of contract as contentious as the one in this case.