The sudden and unexpected outbreak of the COVID-19 Pandemic all over Europe and the World has brought about a disturbance that few would have the capacity to imagine only three months ago.
From the imposition of social distancing measures, the closure of public services or the sharp reduction in services provided to the minimum necessary, to the more or less widespread suspension of international flights (or the imposition of quarantine periods that make travel excessively burdensome), the business world is faced with a dark and frightening halt, which threatens to throw chaos over the predictability of legal business.
The globalization of society and the economy was, by allowing the rapid circulation of the aggressor virus, a vehicle that decisively contributed to the rapid destabilization of the world. And this destabilization has seriously hurt this same globalization, breaking the instruments that allowed it.
Portugal has benefited greatly from this economic globalization in recent years, seeing a large influx of foreign capital, directed to the acquisition of real estate, for investment purposes or for residence permits.
To that end, a large number of promissory contracts were executed, with a view to formalizing deeds, with delivery of big deposits, with the firm and understandable certainty that coming times would bring nothing more and nothing less than business as usual.
The unexpected pandemic, however, caught many promissory-buyers in their countries of origin, unable to move out-of-borders and sometimes with difficulties at home in conducting business and perform deeds there, where they are. And here, it must be said, the measures enacted for prophylactic contention have resulted in a visible reduction in the responsiveness of banks, which despite the paths taken in the informatization of services, remain still very conservative in many of their processes (even more conservative with the increasing measures to combat money laundering).
And so, suddenly, the expectation of a serene and unhindered acquisition was frustrated and replaced by the involuntary non-compliance.
The problem is all the more serious since it is known that many promissory contracts are concluded in a chained manner, that is, the promissory-seller of one contract is in turn the promissory-buyer of another and needs the liquidity resulting from the sale that he would hope to finance the acquisition he had promised. Or simply relied on this liquidity for some immediate need.
Although in many cases the exceptional circumstances we are experiencing has led to spontaneous renegotiation and the extension of deadlines, there are many situations in which the actual impossibility of presence in the promised deed is faced with intransigence by the sellers, who, in view of the deadline non-compliance, trigger notifications, aimed at terminating contracts and withholding the deposits.
This option, which may be strengthened by the fact of "having the money in hand", forcing the buyer's initiative to recover such amounts, is, in the current framework, a bold solution with unexpected results.
Indeed, our Civil Code, in line with most continental laws, provides for the resolution or modification of contract due to the unexpected change in circumstances. And even where it is concluded that all the legal conditions were not met, the promissory-seller who withholds the deposit with the argument of non-compliance in the context of a state of exception may still be faced with repayment obligations based on unjustified enrichment.
Art. 437 of the Civil Code states that , "if the circumstances on which the parties founded the decision to hire have undergone an abnormal change, the injured party has the right to terminate the contract, or to modify it according to fairness judgments, provided that the fulfillment of the obligations by it seriously affects the principles of good faith and is not covered by the risks of the contract", although "in face of the termination, the opposing party may oppose the request, declaring to accept the modification of the contract in accordance with the preceding paragraph".
As OLIVEIRA ASCENSÃO wrote, "It is assumed that the disproportion between advantages and sacrifices was freely desired, within the normal exercise of private autonomy. But it is this voluntary balance that can be called into question by abnormal change; it is in this case that the basis of the business is broken. (...) The economic equation must be put to safety. If extraordinary circumstances disfigure it, the institute works, whether the contract is onerous or free."
The Civil Code had in mind situations of abnormal change in the assumptions, the severity of which are far below the current status quo and which would include situations as common place as the change in the course of a procession (classic case and study of the institute), or the registration of the unexpected establishment of a claim action on the building promised to sell (on which the Lisbon Relationship was concerned, in judgment of 20.09.2016).
But even if it were not the case, as OLIVEIRA ASCENSÃO also writes "On the other hand, the basis of the business being the common foundation (in the sense of it being participated by both parties) that led them to enter into contract, only an objective understanding allows finding the objective standard that limits the stage on which they are situated. Neither is sacrificed to the other. Most of the circumstances that are the basis of the business do not even come to mind. Market economy, peace situation, normal transport... And yet they constitute the objective basis of the business. Conversely, the situation can come to mind and not cease to be an abnormal circumstance (in this unpredictable sense). Those who trade in California can remember that the entire territory is subject to another devastating earthquake, given the magnitude of the seismic fault there. And even with that the earthquake is no longer an objectively unpredictable event."
Apart from the cases in which the default situation of the promissory-buyer had begun even before the outbreak (and this is both in his country of origin or in Portugal), which, of course, show a cause unrelated to the pandemic and that the Civil Code expressly excludes from the application of the institute, we have it as clear that no one as near as February could fail to consider the state in which all, on all continents, find ourselves, as an abnormal and unpredictable situation.
We believe this epidemic constitutes and will be presented as a "study case" in the teaching of institute of the change of contract conditions, which is at the level of the a world war, in the widespread spread of its effects.
The typical situation, which we have been facing, is that the deadline for scheduling the promised deed occurred already after the enactment of travel and circulation limitations. In these cases, and although it is still possible in Portugal to conclude public deeds, and it is possible to replace them with certified private documents, the promissory-buyers residing abroad cannot go to the deed and it is not always clear that they can be represented, except by irregular business management mechanisms, generating uncertainty; in addition to the abnormal delay in the release of means of payment and formal approval of bank loans.
In these cases, the aforementioned formulation of the Civil Code provides an appropriate framework for invoking an abnormal change of circumstances and, therefore, to the termination or modification of the contract at the unilateral initiative of the involuntarily defaulting promissory-buyer.
The legislator's preference for a negotiated amendment is evidenced here, allowing both parties to recalibrate the contract in the light of new expectations. But it is important not to lose sight of the possibility that, if the negotiated modification is not possible and when the contract in the exact original terms renders the same objectively useless or even harmful to the injured party that is taking such an initiative, the termination remains a clear option.
We must not forget, on the other hand, that in the context of the promissory contracts, the mere arrears does not constitute the non-defaulting selling party in the right to terminate the contract and take the deposit for herself, but it is necessary to convert such a default into definitive non-compliance, by granting a new reasonable deadline.
However, against such a procedure in the situation under consideration, Article 792 of the Civil Code states that "If the non culpable impossibility is temporary, the debtor does not answer for the arrears”. Now, if the debtor does not answer for the arrears, can arrears be converted into definitive non-compliance? We don't think so. It should also be recalled that the conversion of the arrears into default presupposes the combination with that laid down in Article 808 of the same Code: "If the creditor, as a result of the late payment, loses the interest he had in the benefit, or it is not carried out within the period reasonably fixed by the creditor, the obligation shall be considered for all purposes not fulfilled ", the loss of interest being objectively interpreted.
We also ask: is it reasonable to have any fixed deadline that does not take into account the end of containment measures and travel limitations? Again, our answer is negative.
Let us also consider that Art. 442 penalizes the failed promissory party with the loss of deposit or with its double reimbursement, only when the non-fullfilment results from "cause attributable to her".
And thus, in any case it will be impossible to terminate the contract due to the fault of the promissory-buyer or the retention of the deposit, even if the promissory-seller demonstrates the objective loss of interest in the promise contract.
Thus, we have understood that the impossibility generated by the present conjuncture imposes on the promissory parties an obligation to modify the promissory contract in order to reschedule the conclusion of the promised contract. This modification may or may not result in the negotiation of an added deposit, to the extent that in the specific case the change of circumstances also places on the promissory-seller under objective and demonstrable damage, justifying the correction of the lack of liquidity that the necessary modification will impose.
Outside the scope of a fair negotiation and thus not imposing similar duties to renegotiate will be other clauses that are not determined or affected by the current crisis, that is, the intention of one of the parties to condition the rescheduling to the elimination of any clause that was already originally disadvantageous to it and which did not worsen its effect by changing the circumstances, will not be justified.
And it will be important not to forget, as we said, that the power to terminate the contract, remains there, and can be used by the promissory-parties, who, however, cannot fail to weigh the risk and delay of the demand that the reimbursement of the deposit may require.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.