THE REMOTENESS RULE IN SPANISH CIVIL LAW *
Dr. Beatriz Gregoraci
Senior Lecturer of Civil Law (Universidad Autónoma de Madrid)
The main objective of my paper is to explain some of the more relevant issues on Causation in Law in Spanish Contract Law, paying special attention to the remoteness rule.
Let’s start by looking at a case.
S and B sign a contract of sale. The thing being sold is a flat. S must deliver the flat on the 16th of April 2015. The seller breaches the contract and doesn’t deliver the flat to the buyer on time.
The creditor (in this case, the buyer) has an articulated set of remedies for breach of contract1 .
They are organized academically in two groups, depending on its application to all types of obligations or just to bilateral obligations.
The first group includes: (1) the specific performance; (the buyer claims the seller to deliver the flat); and (2) damages; (for instance, let’s imagine that the buyer had to rent a flat for the delayed period of time).
The second group, i.e. in the field of bilateral obligations (like the sale contract), the creditor also has: (1) the termination (the buyer decides to terminate the contract, which implies, among other consequences, that the seller must return the payment paid by the buyer); (2) the right to withhold performance (the buyer is not obliged to pay the price until the seller has fulfilled his obligation to deliver the flat); and (3) the right to reduce price. Let’s imagine that the good bought is defective: the buyer can decide to retain the good and pay less for it.
Each remedy has its own application requirements. Then, once the breach of contract is clear, it is necessary to analyze it in order to identify the remedies that, in this case, are available for the creditor. For example, termination of the contract requires the breach to be fundamental.
Focusing on the damages, the requirements are twofold: the imputation of the breach to the debtor (imputación subjetiva del incumplimiento al deudor); and the causation in law (imputación objetiva del daño al incumplimiento).
The imputation of the breach to the debtor is concerned with determining whether the debtor must be liable. The general rules of Spanish Civil Code (arts. 1101, 1105) include a system of imputation based on fault (fault liability) although there are important doctrinal attempts 2 to build it as a system of strict liability with causes of exoneration.
Causation in law decides, from all the losses caused, which of them must be compensated by the debtor, because they are legally attributable to breach: it is therefore a question of limitation of the extent of damages.
The provision that addresses this latter issue is the art. 1107 CC
My paper is divided into two parts.
In the first part, I will synthesize the main issues that have been raised in relation to Article 1107 CC.
For a proper understanding of the Spanish legal system I must refer to the Proposal to Modernize the Law of Obligations and Contracts, written by the First Section of the Law Commission in 2009. Then, in the second part, I will present how article 1208 PM solves these issues.
I will finish my presentation, expressing some thoughts on the corresponding article of the Civil Code of the Philippines.
Let’s start by reading article 1107 CC:
“The damages for which the debtor in good faith shall be liable are those which are foreseen or which could have been foreseen at the time of contracting the obligation and which are a necessary consequence of his breach.
In the event of wilful misconduct the debtor shall be liable for all damages which are known to have arisen from the failure to perform the obligation.”
Article 1107 CC distinguishes between the debtor in good faith and the fraudulent debtor.
Damages in case of fraudulent debtor (art. 1107 II CC)
The issues raised in the Spanish Contract Law about damages in case of fraudulent debtor are two.
The first one refers to the concept of fraudulent debtor. In other words, who can we consider a fraudulent debtor?
The second one is about the extent of damages.
I will look at each of them.
A) Concept of fraudulent debtor
The concept of fraudulent debtor is a restrictive one.
This restrictive interpretation has been defended by the most prestigious authors in this field.
The reason for such a restrictive concept of fraud is that the rule for making the fraudulent debtor liable for damages is, as we’ll see in a few minutes, extremely extensive.
The following are included in the concept of fraudulent debtor.
Dolo in contrahendo:for example, when the seller doesn’t reveal the defect of the good sold). This is a unanimous opinion 3.
From here, the discrepancies between the authors start.
And so, for Carrasco4 fraudulent debtor would only include the debtor who actually wants to cause losses to the creditor.
For Pantaleón 5, fraudulent debtor is the one who breaches the contract in a conscious way.
According to Morales6 , fraudulent debtor would be the debtor whose willful act of breach of contract causes damages to property or the interests of the creditor that lie beyond the interest protected by the contract; and whose intention or the illegality of the act (ie an act contrary to a rule or to the good faith) justifies making the debtor liable based on the wrongfulness of his conduct and not only on the fact of the breach.
B) Extent of damages
A literal interpretation of the sentence “all damages which are known to have arisen from the failure to perform the obligation” leads to an undesirable solution: the fraudulent debtor would be liable for all damages caused by his breach based on the conditio sine qua non.
Consequently, it would be enough that the damage was caused by the breach and that without it the damage would not have happened; even if the damage was not directly a necessary consequence of the breach.
This is why, the authors propose corrective interpretations of the rule. I’ll explain two of them.
Pantaleón7 argues that in the case of fraudulent debtor the criteria of legal causation for Tort Law 8 should be applied even in a case of Contract Law.
Morales9 agrees with this opinion. This author, from all criteria of legal causation highlights the one of adequacy. Then, the fraudulent debtor would be liable for those losses whose causation is known (or even wanted) by the fraudulent debtor at the time of executing the willful action or whose knowledge could be imputed according to knowledge of an impartial observer.
Damages in case of debtor in good faith
The issues raised in the Spanish Contract Law about damages in case of debtor in good faith are the same as for the fraudulent debtor.
The first one refers to the concept of debtor in good faith.
The second one is about the extent of damages.
A) Concept of debtor in good faith
The debtor in good faith is a not fraudulent debtor. The history of Article 1107 CC supports this opinion, which is unanimous between the authors10 .
Consequently, it includes the negligent debtor and, in general, any debtor who doesn’t act in a fraudulent way.
B) Extent of Damages
According to article 1107, the debtor in good faith is liable for damages which are: (a) “foreseen or which could have been foreseen at the time of contracting the obligation”; and (b) “which are a necessary consequence of his failure to perform”.
It’s important to explain what foreseeability means.
And the best way to do it, is by looking at the most famous case in this field in Common Law: Hadley v Baxendale 11.
The claimant’s millshaft was broken and they gave it to the defendant carriers to take to the makers as a model to make a new one.
On making the contract the defendant’s Clerk was informed that the article to be transported was the broken shaft of a mill and that the claimants were the owners of the mill.
The defendants delayed the millshaft’s delivery, and the claimants claimed to recover for the loss of profits while the mill, as a result of the delay, remained idle.
Was that damage foreseeable?
Coming back to our article 1107 CC, the questions to be asked are three.
The first one is when should the damage have been foreseen? At the time of the conclusion of the contract? Or at the time of the breach of the contract?
Literally the article establishes “at the time of contracting the obligation” which has led some authors to defend its application also to Tort Law12 .
Focused on Contract Law, it is clear that the foreseeability is referred to the time of conclusion of the contract, not to the time of the breach of the contract.
Coming back to Hadley v. Baxendale, the damage claimed should be foreseeable at the time of contracting in order to be compensated.
The second question that must be asked is the following one: is it enough to foresee the type of damage? Or, on the contrary, should the amount of the damage also be foreseen?
The Spanish Civil Code requires the foreseeability of the type of damage that the debtor must repair: no matter the amount of the loss.
Consequently, if a type of loss appears as a foresseable consequence of the breach attje time of the conclusion of the contract, it must be repaired by the debtor. Even though its amount dramatically exceeds the amount that could be reasonably foreseen at the time of conclusion of the contract.
Now, when this happens, the Court may moderate the amount under the provisions of the final sentence of Article 1103 CC13 .
Finally, the third question that must be asked is the next one: is knowing about the possibility of the damage causation for being liable enough?
There are several doctrinal interpretations. Here I will refer to the one defended by Pantaleón14 .
This author notes that foreseeability of damage is the application in Contract Law of the “the scope of protection of the norm”, which is one of the criteria of Legal causation. The norm would be the contract, which is Law between the parties.
He emphasises that the decision to make a contract depends on a more or less conscious calculation of costs and benefits. Well, one of the costs to consider is the risk of losses that can be the result of any breach.
According to this idea, the debtor in good faith is not liable for damage that he, or any reasonable person in his position, has not contemplated as foreseeable at the time of contracting.
However, if the damage was due to special circumstances, the test of foreseeability is not enough. In this case, the following requirements are necessary.
Firstly, the information on the special circumstances needs to be provided precisely by the other party;
Secondly, reasonable persons of the same sector located in the place of the parties would consider that the debtor is assuming the corresponding risk of damage.
Coming back to Hadley, the Court rejected the claim on the grounds that the facts which the defendants were held to know were not sufficient to “show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carriers to the third person”.
According to Spanish Contract Law, the defendant would have been liable if the claimants had told the defendants Clerk that they hadn’t got any replacement for the millshaft, so it would have remained idle for the time of the transport. And a reasonable person from the transport sector would consider that the debtor was assuming the risk of the loss of profits in case of delay (for instance, because the carrier, after receiving the special information from the millshaft’s owners, increased the price of the transportation or contracted an insurance policy covering this specific risk).
ii) Damages which are a necessary consequence of his failure to perform
Now, let’s see the sentence: “damages which are a necessary consequence of his failure to perform”.
For some authors15 , although this sentence provides a different rule, since it appears linked to the preceding sentence by the conjunction "and", it is actually part of the same standard of foreseeability. These authors rely on the historical origin of article 1107 CC.
For others16 , however, this sentence should be understood referring to the general criteria of Legal Causation.
Second Part: Article 1208 PM
Now, let’s see very briefly, article 1208 PM, which reads as follows:
“The debtor is liable for the damages which can be objectively imputed to his breach; but if the debtor was not fraudulent, he will be liable only for the damages which were foreseen or which could have been reasonably foreseen as a likely consequence of his breach at the time of conclusion of the contract”.
Please note that:
Further reflections on the Philippines Civil Code.
The corresponding provision of our article 1107 CC is the Article 2201 of Civil Code of the Philippines, which reads as follows:
“In contracts and quasi contracts, the damages for which the obligor who acted in godd faith is liabe shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation”.
From reading it, I pose the following questions:
Article 2201 refers to "contracts" and "quasi contracts". Is the application of its rules to quasi contracts peaceful?
2) The article distinguishes between “obligor who acted in good faith” and cases of “fraud, bad faith, malice or wanton attitude”.
The question is: What does obligor who acts in good faith mean? More specifically, does it include the negligent debtor?
3)The debtor who acts in good faith is liable for damages “that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted”.
I have three questions, at least:
a) Is foreseeing the type of damage enough? Or, on the contrary, should the amount of the damage also be foreseen?
b) When the amount of a foreseeable type of damage is unforeseeable, has the article 117219 been used to moderate the amount?
c) Are the foreseeablity test and the natural and probable consequences of the breach of the obligation two different requirements?
4) In case of fraud, bad faith, malice or wanton attitude, the debtor shall be liable for “all damages which may be reasonably attributed to the non performance of the obligation”.
What is the difference between this criteria and the probable consequences of the breach?
Carrasco, A.: Derecho de contratos, ed. Aranzadi/Thomson Reuters, Cizur Menor, 2010. [Cit.: Carrasco, 2010]
“Comentario del artículo 1107 CC”, Comentarios al Código civil y Compilaciones Forales, dir. Manuel Albaladejo, T. XV. V. 1º, artículos 1088 al 1124 del Código civil, ed. Edersa, Madrid, 1989, pp. 709 to 752. [Cit.: Carrasco, 1989]
Comisión General de Codificación: Propuesta para la modernización del Derecho de obligaciones y contratos, ed. Ministerio de Justicia, Madrid, 2009. [Cit.: PM]
Díez-Picazo, L.: Fundamentos del Derecho civil patrimonial, v. II, ed. Thomson/Civitas, Cizur Menor, 2008. [Cit.: Díez-Picazo, 2008]
Fenoy, N.: “La Modernización del régimen del incumplimiento del contrato: propuestas de la Comisión General de Codificación. Parte Segunda: los remedios por incumplimiento”, Anuario de Derecho Civil, 2011, fascículo IV, pp. 1481 to 1684. [Cit.: Fenoy, ADC, 2011]
García-Ripoll, M.: Imputación objetiva, causa próxima y alcance de los daños indemnizables, ed. Comares, Granada, 2008. [Cit.: García-Ripoll, 2008]
Morales, A.M.: Incumplimiento del contrato y lucro cesante, Real Academia de Jurisprudencia y Legislación, Madrid, 2010. [Cit.: Morales, 2010]
Pantaleón, F.: “Causalidad e imputación objetiva. Criterios de imputación”, Centenario del Código civil, Asociación de Profesores de Derecho civil, T. II, ed. Centro de Estudios Ramón Areces, Madrid, 1990, pp. 1561 to 1591. [Cit.: Pantaleón, 1990]
“El sistema de responsabilidad contractual (Materiales para un debate”, Anuario de Derecho Civil, 1991, pp. 1019 to 1091. [Cit.: Pantaleón, 1991]
“Las nuevas bases de responsabilidad contractual”, Anuario de Dereho Civil, 1993, pp. 1719 to 1745. [Cit.: Pantaleón, 1993]
Yzquierdo, M.: “Comentario del artículo 1107 del Código Civil”, Estudios de Derecho Civil en Homenaje al profesor Dr. José Luis Lacruz Berdejo, v. I,ed. Bosch, Zaragoza, 1992, pp. 843 to 868. [Cit.: Yzquierdo, 1992]
1 Pantaleón, ADC, 1991, pp. 1059 to 1072.
2 Pantaleón, ADC, 1991, p. 1034; Morales, 2010, p. 176; Carrasco, 2010, p. 1277.
3 Carrasco, 2010, p. 1277.
4 Pantaleón, ADC, 1991, p. 1034.
5 Morales, 2010, p. 175.
6 Pantaleón, ADC, 1991, p. 1036. Díez-Picazo (2008, pp. 784 and 785) also defends the application of the criteria of legal causation in cases of Contract Law.
7 About the criteria of legal causation, see Pantaleón, 1990.
8 Morales, 2010, p. 179.
9 Carrasco, 1989, p. 724; Pantaleón, ADC, 1991, pp. 1025 and 1026; Morales, 2010, p. 157, fn. 425.
10 (1854) 9 Ex. 341. See, McGregor, 2009, pp. 200 to 202.
11 See, for instance, Yzquierdo, 1992, pp 860 to 865.
12 Pantaleón, ADC, 1991, p. 1037.
Article 1103: “Liability arising from negligence is equally enforceable in the performance of all kinds of obligations; but may be moderated by the Courts on a case-by-case basis”.
13 Pantaleón, ADC, 1991, pp. 1026 to 1032. For more information, see Fenoy, ADC, 2011, pp. 1640 to 1643.
14 García-Ripoll, 2008, p. 147. Morales, 2010, pp. 161 to 163.
15 Pantaleón, ADC, 1991, p. 1037. Carrasco, 2010, pp. 1248 and 1249.
16 Fenoy, ADC, 2011, p. 1638.
17 Fenoy, ADC, 2011, p. 1646.
18 Article 1172: “Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances”.