Spanish Supreme Court validates 'events of default' agreed by parties under a financing agreement

The Spanish Supreme Court recently issued judgment no. 4203/2025, dated 30 September, clarifying the rules governing the exercise of early termination clauses in financing agreements between commercial companies.

The ruling is fundamental because it underlines the autonomy of the early termination clause under article 1,255 of the Spanish Civil Code) – which is  often referred to as an "event of default" – as distinct from the general regime of contractual termination.

Mutual breach and mortgage enforcement

The origin of the dispute lies in a loan secured by mortgage granted in 2006 in favour of several property developers. The conflict arose from a disagreement over the disbursement of capital: while the borrowers understood that the financing covered the entire property development, the financial institution limited the financing to the mortgaged properties and not to the rest of the real estate complex.

On 31 August 2008, the borrowers stopped paying the amortisation instalments of the mortgage loan, although the financial institution continued disbursing the capital and making it available to the borrowers until December of that same year. The lender declared the loan to be in early termination on 27 October 2009 and filed a claim for mortgage enforcement.

A key aspect of the case is that there was a prior declaratory proceeding where the Provincial Court had already recognised that the lender had breached its disbursement obligation. However, in that first ruling, the borrowers' claim for damages was dismissed as no causal relationship was established between the lender's breach and the alleged damages.

The borrowers challenged the subsequent mortgage enforcement, arguing that the bank could not declare early termination (resolution) of the mortgage loan having previously breached its own obligations, relying on Spanish Supreme Court case law relating to contractual termination under article 1,124 of the Spanish Civil Code.

Event of Default v article 1,124 

The Spanish Supreme Court dismissed the borrowers' appeal, establishing a doctrinal shift in financing transactions:

• The judgment emphasises that the regime of termination for breach under article 1,124 of the Spanish Civil Code (which requires judicial assessment of the seriousness and essential nature of the breach) cannot simply be transferred to freely agreed early termination clauses under a financing agreeement.
• The Spanish Supreme Court recalls that Article 1,255 of the Spanish Civil Code (freedom of contract) allows the parties to classify certain breaches - the "events of default" - as grounds for termination, regardless of their possible objective significance for termination.
• Although the contractual clause has autonomy between the parties themselves, its exercise must be subject to the general limits of law: good faith and the prohibition of abuse of rights.
• In this case, it was determined that the lender did not breach its principal obligation absolutely, but only defectively, and the exercise of early termination of the mortgage loan was not abusive.

Relevance of res judicata

A determining factor for the dismissal of the appeal was the effect of res judicata. The Spanish Supreme Court links the new claim to what had already been decided in the previous instance.

As the absence of a causal link between the lender's breach and the non-payment of instalments by the borrowers had already been firmly established, the new claim attempted to "reverse the finding" of what had already been decided.

The Spanish Supreme Court confirms that what could have given rise to compensation were the damages caused by the bank's defective performance (damages whose existence was previously rejected). However, compensation cannot be based on the legitimate use of the early termination power exercised in response to the borrowers' non-payment.

Conclusion

This ruling establishes a clear and reassuring precedent for financial institutions, based on the contractual structure of "events of default" and their transactions with commercial companies. The judgment reinforces the legal certainty of early termination clauses in financing contracts, confirming that mere breach, even when defective, by the institution does not automatically terminate its right to enforce an event of default for non-payment by the borrower, provided that there is no bad faith or abuse of rights. The ruling revalidates the power of institutions to manage the risk of their loan portfolios and mortgage security in accordance with what has been agreed. It also highlights the critical importance of proving the causal relationship in any claim for damages. The finality of a ruling on the absence of a causal link acts as an insurmountable barrier in the event of an appeal, as demonstrated by the effect of res judicata in this case.

In short, STS 4203/2025 lays the foundations for a more rigorous interpretation of commercial contractual obligations and minimises the risk that a minor breach by the creditor may be used to neutralise the legitimate exercise of an "event of default" for non-payment.