Contractual breach and resolution

Written on 22 Jan 2016

The Supreme Court Judgement 4279/2015, of 15 October 2015, refers to the breach of Articles 1,258 and 1,124 of the Spanish Civil Code on the fulfillment of lease contracts in accordance with the good faith principle.

The Supreme Court Judgement 4279/2015 refers to a case where the parties had agreed that failure to pay the rent during two months would result in the termination of an industrial sublease agreement (the “Agreement“). After two months without receiving payment, the sublessor extrajudicially enforced such termination clause.

However, the Supreme Court was there to remind the parties that, pursuant to article 1,258 of the Civil Code, any rights should be exercised in accordance with good faith principles, because in the referred case, during the 13 years that the Agreement was in force, the sublessor had been writing off and waiving certain rights arising from this Agreement without admonishing the sublessee for its failure to comply. Not until negotiations were being held regarding the Agreement, did the sublessor use the two unpaid installments as an excuse to terminate the agreement in order to ignore its obligation to reinstate the employees of the sublessee. 

In view of the Supreme Court Judgement, of 28 June 2011, and bearing in mind that the conduct of the sublessee was unusual and that the amount owed was paid as soon as it was claimed, the Supreme Court understood that “said breach, or in other words the intended termination effects once analyzed as a whole, and the factual background and circumstances surrounding it, do not respect either the good faith principle […] or the required legal doctrine needed to interpret the causes behind the termination of the agreement, because this Court understands “ad quem” that the breach was not serious and that it was promptly rectified, and that it had enough legal effects to believe that it could actually frustrate the purpose of an agreement that the claimant hastily decided to terminate because his intention was to terminate it in the scope of the negotiations.

Therefore, the Supreme Court requested the parties to behave in accordance with the good faith principle and, although the effectiveness of the termination in the event of non-compliance is not being discussed here, according to article 1,124 of the Civil Code, its enforceability must be adapted addressing the circumstances of this case. Consequently, the parties may not exercise the termination clause in a situation that, under the Agreement, has always been tolerated, with the only purpose of not having to comply with an obligation included in said Agreement, as this would be considered acting in bad faith, and especially when one party has deliberately looked for a transgression by the other party in order to terminate the Agreement. 

According to the above, it can be concluded that any cause for termination set out in an agreement, may not be interpreted literally or be automatically applied, because it is essential for its effective application the existence of good faith, which means that both parties must act with honesty and loyalty.