Covid-19: Impact on commercial contracts - Italy
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”). Under Rome I, the general rule for B2B international contracts is that parties can choose the governing law even if it has no connection with the contract. The validity of choice-of-law clauses is governed by Articles 10, 11 and 13 Rome I, which set out the formal requirements for choice-of-law clauses.
The choice of law is limited to the following cases:
- Domestic contracts: If the parties choose a foreign law as applicable to the contract, whilst all of them and all other elements pertaining to the contract are located in Italy, Article 3 Rome I specifies that their choice shall not prejudice the application of those provisions of the “domestic” law which cannot be derogated from by agreement.
- Intra-EU contracts: Similarly, in contracts where all elements other than the choice of law are related to one or more EU Member States, the parties’ choice of law will not prejudice the application of provisions of EU law which cannot be derogated from by agreement.
Further restrictions apply in case of consumer, insurance and employment contracts.
In the absence of an express choice-of-law clause, Article 4 Rome I provides default rules which aim at designating the law which bears the “closest connection” to the contract at issue.
Are there any statutory provisions relating to force majeure?
How are force majeure clauses in commercial contracts applied and interpreted in practice?
As mentioned, the parties are free to regulate force majeure events in their contract.
As a general rule, Italian courts must follow specific interpretation criteria to determine the scope of a clause. Most notably, they will take the literal meaning of the clause and the common intention of the parties into account. As additional interpretative criteria, Articles 1364 and 1365 of the Italian Civil Code (“CC”) provide that: (i) general expressions do not include subject-matters other than those on which the parties agreed upon; and (ii) the examples included in a given clause are not to be read as presumptions excluding the cases not mentioned therein, to which such clause could reasonably be extended to. In addition, the interpretation shall be performed, inter alia, in good faith (Article 1366 CC), taking into consideration the general practice of the place in which the contact was concluded or in which the contracting enterprise has its registered office (Article 1368 CC), in light of the nature and the subject-matter of the contract (Article 1369 CC). Finally, under Article 1363 CC a clause shall be interpreted in light of the other clauses of the contract.
The inclusion of the current novel coronavirus outbreak into the scope of a force majeure clause may vary depending on, for example, whether (i) one or more epidemics are included in the wording of the clause; (ii) it provides for a “catch-all” wording relating to events caused by nature similar to the one at hand; and/or (iii) the situation meets the requirements defined in the clause to consider an event as force majeure.
The parties are free to determine not only the events considered as force majeure, but also the consequences of the occurrence of such events. If the relevant clause does not list such consequences, one might argue that the general principles regarding the “supervening impossibility” under Italian law may apply (as outlined in the following section), therefore the occurrence of a force majeure event could lead to:
- the release of the debtor from his/her liability, so that he/she is not obliged to pay compensation for damages deriving from his/her failure to perform the contract; and
- the termination of the agreement, the suspension of the performance of the agreement (if the force majeure event is temporary), or the creditor being entitled to withdraw from the agreement or seek a reduction of his/her counter-performance (if the force majeure event implies a mere partial impossibility).
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
In the Italian civil law system, the general concept used to describe situations like those falling within the (internationally-known) force majeure concept is the one of “impossibility of the performance resulting from a cause not attributable to the debtor”. Such “impossibility” is to be expressly found in:
- Article 1218 CC, which stipulates that a debtor who did not perform his/her obligation due to an impossibility resulting from a cause not attributable to him/her is not liable for compensation for damages;
- Article 1256 and Article 1463 CC, respectively, on the extinguishment of obligations and the unexpected contingencies, providing that if a “supervening impossibility in the performance” occurs, the debtor is released from the relevant obligation, the contract shall be considered terminated, and the debtor shall return what has already been already received as consideration.
Article 1464 CC regulates the “partial impossibility of the performance”, establishing that if the performance becomes only partially impossible, the relevant creditor has either the right to a corresponding reduction of his/her counter-performance, or the right to withdraw from the contract if he/she does not hold a material interest to the partial fulfilment of the obligation by the debtor.
In addition, according to Article 1465 CC, if the contract has the effect of transferring a specified thing or fungible goods and the transfer has already occurred (i.e., the relevant agreement was reached or, in case of fungible goods, these were identified or delivered), the risk deriving from the “supervening impossibility” to provide the thing or goods shall be considered to have passed to the relevant creditor. The latter shall thus remain obliged to provide the relevant consideration (such as the payment of the price) even in case the thing or goods have been destroyed.
It has also to be noted that if, under Article 1256 CC, the impossibility is only temporary, the debtor is not deemed liable for the delay in the performance. In such a case, the contract remains suspended as long as the performance remains impossible, or until either (i) the creditor has no longer interest in the performance, or (ii) the debtor can no longer be deemed bound under the contract.
In order to deem the relevant contract terminated for “supervening impossibility”, and the debtor discharged from his obligations (including compensation for damages), Italian case-law requires (i) the impossibility of the performance of the obligation (objective element); and (ii) the absence of fault on the debtor with reference to the occurrence of the event that rendered the performance impossible (subjective element). As to the objective element, the predominant case-law considers such requirement to be met in case of an absolute, unforeseeable and objective impediment relating only to the performance itself, whereas certain other case-law precedents also include circumstances in which the unforeseen impediment is such that it cannot be overcome with the diligent effort to which the debtor is bound. In particular, Italian case law found “supervening impossibility”, inter alia, in the following cases:
- events caused by nature (such as strong wind preventing a vessel from docking; earth-quakes rendering a real estate unit inhabitable; storm preventing travelling at sea);
- natural factors affecting the sphere of the debtor (such as flu of a lyric singer; old age of a farmer);
- factum principis, i.e. an official order or measure that affects the agreement (such as an annulment of a previous favourable judgment; supervening governmental regulation; outcome of a popular referendum on nuclear power).
As a general principle, the burden of proof lies with the party who wants to obtain release from his/her liability or to ascertain the termination of the contract to prove the impossibility of the performance (even if relating to the other party’s obligations) not attributable to the same.
With reference to the Covid-19 outbreak, it is worth remembering that certain areas of Northern Italy have been affected by restrictive measures imposed by the Italian government. In such case, one may reasonably argue that a situation like the one at stake could constitute a “supervening impossibility” (more specifically a factum principis), if the performance of the relevant contract would become impossible because of the imposed restrictions. Therefore, the contracts affected by said measures could be terminated or suspended (as the case may be).
On the other hand, for contracts not affected by such measures, it is dubious that a virus outbreak like the one at hand could per se constitute a “supervening impossibility”. In fact, it has to be remembered that the “impossibility” doctrine requires the supervening event to specifically affect the performance of the contract, let alone the fact that proving that the current outbreak actually constitutes an “absolute and objective impediment” to the performance of an obligation might be extremely complex.
In such respect, where a contractual obligation becomes more burdensome or difficult to perform, it seems more likely for such a situation to fall within the statutory provisions relating to hardship. In the Italian legal system, in addition to the statutory provisions relating to “supervening impossibility” and to specific contractual arrangements (such as the force majeure clauses under question 3 above), a party negatively affected by a widespread epidemic such as the novel coronavirus outbreak may seek to resort to the concept of “supervening excessive burdensomeness” of the performance (“eccessiva onerosità sopravvenuta”) under Articles 1467, 1468 and 1469 CC, which is similar to the concept of “hardship” in other jurisdictions (for details see our cross-border guide on hardship, which also includes an Italian chapter). Under these provisions, a party can bring a judicial action in order to terminate the contract in case the following conditions are met:
- there must be a long-term agreement or an agreement providing postponed obligations;
- one of the obligations becomes excessively burdensome compared to the other, or, in case of an agreement providing for an obligation of only one party, such obligation has become excessively burdensome;
- the obligation regarded as burdensome has not already been entirely performed; and
- such “excessive burdensomeness” results from an extraordinary and unpredictable event, in the sense that such event has not been foreseen by the parties or could not have been foreseen at the time the contract was concluded.
In addition, the debtor may seek to rely on the “causa in concreto” doctrine. The Supreme Court, for example, applied this doctrine in case of an epidemic of dengue haemorrhagic in Cuba, which was chosen as the destination of an “all-in-one” tourist package contract (see decision of 24 July 2007, No. 16315). In this case, the contract was considered terminated because the claimant tourist had no more interest in visiting a country affected by an epidemic which might result in a risk for his/her health, the latter being thus entitled to the restitution of all sums paid. The rationale behind this application of the “causa in concreto” doctrine lies behind the supervening impossibility, not of the performance per se, but to achieve the essential purpose of the contract that, in turn, corresponds to the “practical function” of the same.
Finally, the party which is not receiving the performance due under the contract (i.e., the aggrieved party) might be entitled to suspend his/her performance under Article 1460 CC. In such respect, it should be also noted that, according to certain case law, the aggrieved party might also be entitled to suspend the performance of other contracts, whenever such contracts are closely linked to the non-performed contract.
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Under Italian law (Articles 1175 and 1375 CC), the parties of a contract are bound to perform their respective obligations with fairness and good faith. As a consequence, one might argue that it is a specific duty of the party which is affected by an adverse effect to notify the other party of such impediments. It cannot be excluded that, in certain cases, a lack of notice of the failure or delay in performing the obligations due to force majeure/supervening impossibility causes can be interpreted as a breach of such duty of good faith.
It is also worth mentioning that, in addition to force majeure clauses, disputes may arise on the basis of so-called material adverse change/effect (“MAC”) clauses, usually included in share purchase agreements, financial documents and other business agreements. Such clauses commonly provide that any event materially adverse to the operations, assets, position (financial, trading or otherwise), profits and prospects of the business of a company may cause the termination of the contract itself, or affect its entry into force. In such respect, a specific analysis needs to be carried out in order to understand the impact of the novel coronavirus outbreak on the application of each such clause and, more in general, of the relevant contracts.
Finally, it should be noted that the situation is fast-changing and that specific measures concerning movement restrictions, the suspension of certain loan instalments and tax duties have already been taken in relation to the areas of Northern Italy affected by the outbreak. A new Decree of the President of the Council of Ministers introducing additional restrictive measures is effective as of 8 March 2020, and further measures are under discussion within the Italian authorities, so a frequent update is of the essence in order to be able to minimise the negative effects of the outbreak.