Spanish Supreme Court upholds contractually agreed events of default in financing agreements

Background

Under Spanish law, the right to terminate a contract (including the possibility to early terminate a financing agreement) has traditionally been subject to a materiality threshold. Case law has cast significant doubt on whether contractually agreed early termination clauses could operate independently of this requirement, meaning that a lender invoking such a clause risked having its enforcement challenged on the basis that the underlying breach lacked sufficient relevance. This created a structural mismatch with the English market standard, where events of default operate as contractually defined triggers entitling the lender to early terminate the relevant financing agreement, regardless of the materiality of the underlying breach.

Ruling 4203/2025 of the Spanish Supreme Court

The case arose from a mortgage loan originally granted by Caixa d'Estalvis de Sabadell (currently BBVA) (the "Lender") to a group of property developers (the "Borrowers") to finance the construction of a real estate complex. While litigation between the parties was ongoing, the Lender early terminated the loan pursuant to the provisions included in the facility agreement through which the mortgage loan was documented and initiated foreclosure proceedings. The Borrowers filed a claim for damages asserting that early termination and foreclosure were wrongful, which was dismissed at first instance and subsequently on appeal. The Borrowers then brought a final appeal (recurso de casación) before the Spanish Supreme Court (the "SSC"), which issued ruling 4203/2025 on 30 September 2025 (the "Ruling").

The Ruling concluded that the Lender validly exercised its right to declare early termination following Borrowers' non-payment of principal and interest, in accordance with the provisions of the facility agreement and, therefore, the SSC dismissed the appeal, confirming the following key principles:

1. The statutory default regime does not override express contractual early termination provisions. The fallback regime of resolution of reciprocal obligations under the Spanish Civil Code ("CC") is not directly applicable to situations where early termination is specifically governed by contractual provisions.
2. The CC validates contractually defined events of default, regardless of the materiality of the breach. The parties may designate specific breaches as events of default under the relevant financing agreement regardless of whether they may be considered material.
3. A breach by a lender does not automatically invalidate its right to early terminate. The right to declare early termination must be exercised in accordance with good faith and subject to the limitation on abuse of rights. Therefore, when the exercise of such right is covered by contractual provisions and meets these standards, it will remain valid. Any damages caused by a breach by the lender would be subject to separate compensation, if any, but this does not preclude the exercise of early termination rights.

A major step towards English law-type events of default

The Ruling represents a substantial development since events of default set out in the relevant financing agreement are elevated to the category of condiciones resolutorias explícitas for Spanish law purposes. This entails formal recognition under Spanish law of events of default in the same manner as under English law financing agreements. The SSC reaffirms that the CC allows the parties to designate specific breaches as events of default which can lead to early termination without requiring those breaches to be material, and that fallback legal provisions cannot be applied to situations where early termination pursuant to the occurrence of designated events of default is agreed by the parties and expressly regulated in a financing agreement.

A word of caution

Under Spanish law, legally binding case law (jurisprudencia) requires a consistent and repeated line of SSC decisions. The Ruling is a single decision and cannot yet be treated as settled law. That said, the SSC expressly builds on its previous case law, and the trend seems to be clear and deliberate.

Why this makes Spanish law increasingly attractive for financing agreements

The Ruling competitively positions Spanish law as an increasingly viable governing law option for financing agreements for the following reasons: (i) it provides certainty on enforcement upon the occurrence of events of default; (ii) it aligns Spanish law with market standards in other jurisdictions, allowing formal recognition of events of default as in financing agreements subject to English law; and (iii) it reduces litigation risk for lenders, which no longer need to argue for the relevance of the breach since a well-drafted clause will be upheld regardless of the materiality of such breach.

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