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No “financial crisis defense” available to avoid the fulfillment of a debtor’s obligation in Puerto Rico

 

Rebus sic stantibus1 is a legal doctrine that can be used as a defense to claim the unenforceability of a contract due to an unforeseen change in the circumstances at the time the contract was signed. The assertion of this extraordinary defense –averring the financial crisis as an unforeseen event– had been steadily emerging in court proceedings as a purported protection to justify the lack of payment of monetary commitments, such as loans and mortgages.

 

But its appearance on the pleadings will be short-lived pursuant to the Supreme Court of Puerto Rico’s recent opinion in Oriental Bank & Trust v. Perapi S.E., et al., 2014 T.S.P.R. 133, 192 D.P.R. ___. In this case, the bank filed suit against debtor Perapi S.E. and others for collection of money and execution of a pledge. The Court of First Instance summarily disposed of the suit in favor of the bank. Defendants appealed alleging that the case could not be resolved through summary judgment because they had a rebus sic stantibus defense. The Court of Appeals agreed and remanded the case to the first instance court for it to fully entertain the asserted defense over an actual trial. The financial institution resorted to the Supreme Court, which, in turn, issued this opinion stating their position on the “application of the exceptional clause of rebus sic stantibus in the context of the financial crisis that Puerto Rico has lived since the second half of 2006.” (Opinion, page 2.) (Translation supplied.)

 

The Supreme Court concluded that the current financial crisis is NOT an unforeseen circumstance capable of justifying the application of rebus sic stantibus to avoid paying the financing amounts owed. In this particular case, two circumstances weighted against the application of the defense: first, that the Supreme Court does not consider the financial crisis as an unforeseen circumstance, and second, that the loan contract was signed in 2007, when the financial crisis had already begun and, therefore, was known to the defendants. The Opinion relied heavily on the exceptional character of the clause’s application and the harmful effects that finding a financial crisis, alone, as sufficient basis to ignore the binding nature of a contractual obligation would have on market stability. In the Court’s own words, such application would make “the norm out of an exception” bringing “chaos and uncertainty to contractual relations in our jurisdiction”. (Opinion, page 24.) (Translation supplied.)

 

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1 From the Latin phrase “rebus sic stantibus et aliquo de novo non emergentibus” meaning “circumstances stay as they were and nothing new emerges”.  (Translation supplied).

 

©2014 Fiddler, González & Rodríguez, P.S.C. This Watch has been prepared by Fiddler, González & Rodríguez, P.S.C. for informational purposes only and does not constitute legal advice. This information does not create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. Fiddler, González & Rodríguez, P.S.C. and its members assume no responsibility to inform you of additional changes in law or any other legal issues related to the matters advised in this e-mail.

 

 

 

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