Coronavirus Contractual Obligations analyzes the Impact of the Pandemic on Commercial Agreements in Italy, learn the basics from experts.
The international health emergency caused by the COVID-19 pandemic has inevitably had negative impacts on business, both at domestic and international level. In the context of supply chain processes (such as distribution, agency, sale and purchase agreements) unforeseen events may occur (or actually occurred) which make the fulfilment of contractual obligations impossible or impracticable.
Following the recent restrictions imposed by many by Governments to contain the spread of the Coronavirus, companies may face (or have faced) serious risks of compromising the proper performance of their obligations with the other party. It is important to understand, whether and to what extent any breach or delay in fulfilling their contractual obligations could be considered justified by the circumstances and by possible Government restrictions.
The causes that can be invoked by the defaulting party include unforeseeable circumstances and force majeure (i.e. those linked to a natural fact, such as natural disasters, epidemics or the factum principis, such as government measures). These principles are universally recognized, but the requirements for being relieved from its obligations and the respective consequences may vary from one jurisdiction to another, and will eventually depend on the governing/applicable law of the contract.
Italian law, in fact, does not contemplate an express general notion of force majeure applicable to all contracts, but it does set forth mechanisms of protection (including the notions of supervening impossibility and hardship) aimed at protecting a party from supervening facts and events which affect a party’s ability or reasonable interest to perform a contract.
Statutory Liability in Italy
In Italy, according to art. 1218 of the Civil Code (C.C.) if a party does not exactly perform the obligation due or his behaviour is incompatible with the subsequent fulfilment of the same, he shall be required to pay compensation for damage, unless he proves that the non-performance or delay in performance of the obligations was caused by the impossibility resulting from a cause for which he is not responsible. In the latter case, the obligation is extinguished and the debtor is discharged pursuant to art. 1256 C.C., which also provides that in case of temporary impossibility, the debtor shall not be liable for the delay in performance, as long as the same lasts.
With regard to contracts providing mutual consideration, art. 1463 C.C. provides that when a party is released from an obligation that has become impossible such a party is not entitled to claim the performance from the other party to the relevant agreement. In this case, the termination of the contract is due to a supervening impossibility.
Contracts of a continuous or ongoing nature
Pursuant to art. 1467 C.C. in connection with agreements to be performed on a continuative or recurring basis or otherwise providing for a deferred term, if the performance of a party becomes excessively burdensome due to the occurrence of “extraordinary and unforeseeable events”, such party may claim the termination of the agreement, provided that the other party is entitled to avoid it by offering to revise the terms of the agreement to re-achieve fairness.
Express Terms relating to Force Majeure
Certain international agreements (i.e. international distribution, international supply) may contain a force majeure clause. Such type of clauses – generally accepted in most jurisdictions – usually regulate extraordinary matters described therein upon the occurrence of which the affected party may suspend performance of the agreement.
In 2020, the International Chamber of Commerce (ICC) updated and released a standard form of Force Majeure clause that could be used in commercial agreements. According to the updated ICC Force Majeure clause, “Force Majeure” means the occurrence of an event or circumstance (“Force Majeure Event”) that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment (“the Affected Party”) proves:
- That such impediment is beyond its reasonable control; and
- That it could not reasonably have been foreseen at the time of the conclusion of the contract; and
- That the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.
This clause contains three conditions, all of which must occur in order to relieve a party of its duties.
In light of the above-mentioned considerations, it is clear that potential legal and economic issues related to the propagation of the COVID-19, involving cases of supervening impossibility, hardship, force majeure and factum principis must be assessed in view of the specific circumstances of each case, probably reshaping the contractual obligations due to the conditions in place and using the necessary prudence to avoid any abusive exercise of rights or costly and time-consuming disputes.