COVID -19 AND FORCE MAJEURE IN NATIONAL AND INTERNATIONAL CONTRACTS
Studio Legale Santosuosso Avvocati – Lexcom
The Covid - 19 pandemic, in addition to the health aspects, is having and will certainly have significant impacts on contractual and economic relations, which require companies to take timely action to understand how to act accordingly.
Starting from the obvious premise that, in the absence of an unforeseeable emergency situation, each contract should be fulfilled in full compliance with what has been agreed, one wonders whether the state of health emergency and the consequent almost total economic paralysis allows a justified breach or a necessary revision of the pending contractual relations.
Can a legal justification for non-performance be invoked or a forced amendment of obligations arising from lease, sales, supply, franchise or agency contracts concluded until February 2020?
Can a company not to pay the suppliers? Can it not to deliver the goods sold to third party buyers? Can it withdraw from a preliminary contract concluded before the emergency?
Both national and international law provide for the case of force majeure, which foresees the possibility that when an extraordinary and unforeseeable event happens the obligations indicated in the contract may not be fulfilled or may be modified.
This can only occur if the extraordinary and unforeseeable event has not been caused by the person who has to perform the service and the service has become impossible to perform or has become excessively burdensome (onerous) compared to the contractual economy due to the changed conditions.
If there is a specific force majeure clause in the contract governing the consequences, then that clause shall apply. However, this case is very remote since most contracts do not provide for anything in this respect.
What happens in the absence of such a clause?
If the parties to the contract are Italian or have established Italian law as applicable and have not provided for force majeure clauses, the provisions of the Italian civil code will be applicable: the impossibility to perform (art. 1256) or excessive onerousness (art. 1467).
Here there are some examples of possible situations:
1) Authority's direct order prohibiting the operation of the company
If the activity of the company has been suspended because it is excluded from Annex 1 of the DPCM 22 March 2020 or subsequent government measures, the company will be able to affirm the impossibility to carry out its service due to an order of the Authority and its failure can be considered justified under Article 1256 of the Civil Code.
This impossibility may be:
- total: the company may ask to terminate the contract without being considered liable;
- temporary: the relationship could enter into a state of “suspension” and the party will still be required to perform once the activity is resumed.
2) Legal measures justifying non-performance for certain specific contracts
Government or local measures are from time to time regulating cases in which a party's failure to perform can be justified for certain specific contracts.
For example, the "Cura Italia" Decree (DL 17/2020) has provided for the termination not attributable to the debtor of contracts of purchase of tickets for shows, museums and places of culture. In this case it is the rule itself that justifies the default.
3) Regulatory measures that have an indirect impact on business activity
It may also happen that the containment measures lead to an indirect impossibility to fulfil the performance. It may be the case of a company that has had to reduce production and activity due to the necessary conversion of some departments to smart working.
In order to assess the possibility for the company to terminate the contract (pursuant to Article 1256 of the Italian Civil Code), a case-by-case assessment must be carried out examining the actual impossibility (total or partial). Both the objective circumstances (i.e. type of contract, market, area, competing companies) and the subjective circumstances (i.e. company's choices, timing, methods, communications made) must be assessed.
In such cases, the company's decision to temporarily suspend the activity in order to prevent the risk of contagion among its employees could also justify the non-fulfilment or delayed fulfilment of the contract, thus protecting a fundamental right to workers' health (see art. 91 of “Cura Italia” Decree).
A further consideration could relate to the difficulty in maintaining continuity of supply of resources and raw materials necessary for production. In light of the above, in such cases it would be difficult to justify non-compliance such as non-payment by suppliers citing as a general reason the virus emergency without a specific reference to particular causes.
4) Performance not impossible but too expensive
It may also happen that a company, despite being able to carry out its activity, is only able to perform the service with an additional burden. For example, a company might be induced to turn to a different supplier with significantly higher costs.
In this case the service although not becoming impossible, could be considered "excessively onerous" due to an "extraordinary and unforeseeable event" (pursuant to Article 1467 of the Italian Civil Code) and lead to an unexpected imbalance between the contractors.
There are two remedies allowed in these cases:
- the right of the excessively onerous party to terminate the contract;
- the possibility for the advantaged party to modify the content of the contract bringing it back to fairness.
As in the case of the preceding paragraph, the Covid-19 event may be considered extraordinary and unforeseeable, but the content of each contract and the conduct of the parties must be taken into account when assessing the actual possibility of such remedy.
What happens when an Italian company has entered into a contract with a foreign company?
Can it invoke the restrictive measures imposed by the Italian Government as justification for its failure to fulfil its obligations or as a means of renegotiation in the event of an impossible or excessively onerous service?
The applicable law will first have to be verified on the basis of the choice made by the contracting parties or the relevant private international law.
International law recognizes the concept of force majeure as an unforeseeable event which may justify a party's failure to perform. It may be invoked by the parties:
-If they have expressly provided for it in the contract;
- if in the contact they have referred to an "ICC Force Majeure Clause 2003" drawn up by the ICC (International Chamber of Commerce) which entails termination in the event of an unforeseeable event;
-if they have included in the contract the "hardship clause" which provides for the possibility of renegotiating the content of the contract in the event of an unforeseeable event;
- if the Vienna Convention applies to their contract of sale of goods.
In the absence of express clauses, the assessment shall be made on a case-by-case basis.
Indeed, extraordinary and unpredictable events have not always been considered force majeure by the case law.
For example, the existence of force majeure has been recognized following the terrorist attacks in New York in 2001, Djerba in 2002 and Marrakech in 2003. This has led to the payment of a financial guarantee from one party to the other for the management of its hotel, given the impact of such (unforeseeable) events on local tourism.
It should also be considered that the Italian Ministry of Economic Development on 25 March 2020 allowed the Chambers of commerce to certify force majeure. This could be useful for Italian companies in order to document, through the planned certification, the conditions of force majeure in order to avoid possible penalties for delay or non-performance.
Contracts under negotiation
It does not seem possible to make predictions about the evolution of the current emergency situation. However, it is certain that the COVID-19 pandemic and the consequent containment measures have a significant impact on all national and international markets, on the company's economic initiatives and financial forecasts and can no longer be considered unpredictable for those who are going to sign a contract.
It is therefore necessary to include in future contracts express clauses which, as long as possible, foresee the consequences in the event of future containment measures or measures affecting the economy and the balance of the contract.
All indications are given for information purposes only and cannot be considered as legal assistance.
This text must be considered protected by copyright laws and/or the Industrial Property Code. Its reproduction, even partial, is prohibited without the express consent of the Law Firm.
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