The coronavirus outbreak has had a significant impact on agreements and is requiring many businesses to act to mitigate the outbreak’s impact and, accordingly, avoid an increase in the number of civil litigations.
This phenomenon concerns not only the hotel, transport, and entertainment industries, but, more generally, all areas of international trade and commerce. In particular, the consequences of the epidemic have affected the value and availability of goods, as well as the possibility of making certain things happen, making it more burdensome, or even impossible, to fulfill related obligations. Relevant to dealing with these situations, the Italian civil code provides two main remedies: hardship (ITA: eccessiva onerosità sopravvenuta), which concerns cases where unforeseeable and extraordinary events fundamentally alter the equilibrium of a contract in such a way that performance would become excessively burdensome for one party, and force majeure (ITA: impossibilità sopravvenuta), which concerns cases where extraordinary and unforeseeable events prevent a party from fulfilling its contractual obligations. Against this backdrop, it is necessary to assess the approach to be followed by considering, on one hand, whether there is a legal basis excusing non-performance, renegotiation, or termination of contracts already executed, and, on the other hand, what the wisest approach is to be taken with regard to contracts still under negotiation (e.g., considering how to allocate the risk and consequence of non-fulfilment caused by the outbreak’s effects; assessing whether to take out civil liability insurance connected to the obligations to be fulfilled; and so on).
Below, we will first analyze the abovementioned remedies. Then we will focus on 10 practical tips for dealing with the outbreak’s effects.
Hardship
Due to the outbreak’s impact, a contractual obligation may become more burdensome than was originally assessed at the time of negotiating and signing the contract. In this case, the hardship provision may apply: as a result of an extraordinary and unforeseeable event, such as an epidemic or a natural disaster, the equilibrium of the contract is altered by an excessive and supervening burden placed on one of the parties.[1] For instance, a party may suffer hardship because their performance involves the supply or the use of specific goods for which demand and/or price has risen sharply, e.g., the manufacturer has to move part of the production to another plant outside of China, because the latter isn’t productive enough, incurring extraordinarily high costs. The Italian Civil Code entitles the disadvantaged party to terminate the contract and obtain restitution for what was already performed. On the other hand, the party against whom the resolution is sought may propose to renegotiate the contract to re-establish equity among the parties. This means that the terms of the agreement will be amended in such a way as to redistribute the risk among the contracting parties in an equitable manner. As an additional note, the hardship provision under the Italian Civil Code applies only to agreements for periodic, continuous, or deferred performance (i.e., agreements that provide for a certain amount of time to elapse between the signing of the contract and performance).
Force majeure
The consequences of the coronavirus epidemic may affect contractual obligations to such an extent that performance becomes impossible. In such a case, the party whose obligation has become impossible to fulfill is entitled to terminate the contract based on force majeure. This refers to an extraordinary and unforeseeable event beyond the control of the parties that prevents a party from fulfilling its contractual obligations. The impossibility resulting from such an event must be objective and absolute,[2] meaning that the party that is prevented should always act with due diligence, for example, by undertaking reasonable efforts to mitigate the effects of the event. As opposed to what happens in some foreign jurisdictions, in Italy termination based on force majeure applies even in the absence of a specific force majeure clause. It is indeed expressly provided under the Italian Civil Code. Nevertheless, special provisions may apply to certain specific contractual relationships pursuant to regulations such as the Italian Tourism Code (Legislative Decree No. 79 of May 23, 2011) or (EC) Regulation 261/2004 establishing common rules on compensation and assistance to passengers in the event of being denied boarding and of cancellation or long delay of flights. These may also affect the right to restitution. Other special provisions have recently been introduced by decrees specifically issued to face the coronavirus outbreak. In particular, concerning contracts of carriage and package tours, the Article 28 of the Law Decree no.9 of March 2, 2020 establishes additional specific rules on when the force majeure shall be recognized, and which procedures shall be followed to exercise the right to restitution. The Article 88 of the Law Decree no.18 of March 17, 2020, both extends these provisions to contracts of stay and regulates the force majeure and the restitution for purchase agreements of tickets for shows, museums and other cultural events.
For instance, shortly after the first coronavirus cases were discovered, the relevant authorities issued some restrictive measures to contain the spread of the illness, such as early or temporary closure of bars, theaters, and other gathering places, suspension of professional soccer games, and even the isolation of specific municipalities. These acts of government could be identified as unexpected and extraordinary events that took place after the execution of the contract and were unforeseeable at the time of the contract. Thus, the party in breach of the contract may—to the extent that there are no special provisions preventing the parties from doing so—invoke force majeure. Within this framework, particular attention should be paid to precautionary policies that imply non-performance: generally speaking, the breach would not be due to an obligation issued by the government, falling outside of the scope of force majeure. Nevertheless, under Article 91 of the Law Decree no.18 of March 17, 2020, the actions taken to comply with the containment measures adopted by the Government will entail a more tolerant approach when assessing liability for non-performance or delays due to the abovementioned actions.
Generally speaking, the party that is not in breach and has already performed the obligation has the right to obtain restitution. A different regime, however, is provided with regard to those contracts that transfer ownership of a specific good or that constitute or transfer property interests (rights in rem), e.g., in a purchase agreement, the loss of goods due to force majeure does not raise the right to restitution, even when items have not been delivered to the counterparty.
Concluding remarks and 10 practical tips
Concerning agreements under execution affected by the outbreak:
- It is necessary to assess whether the hardship or force majeure clauses may apply.
- Depending on the case, it would be appropriate to evaluate whether there are legal grounds to enforce the clause, incurring the risks of litigation, or to excuse non-performance under the Italian Civil Code.
- An assessment should be carried out as to the benefit of renegotiating the agreement. For example, the contract could be amended to include a clause that regulates risk allocation concerning these events; in fact, the provision stating the right to restitution is not a mandatory rule, and in any case a specific and in depth assessment should be carried out concerning specific regulations, such as consumer law.
- In any case, the party whose performance could be affected by the epidemic should always undertake due diligence or reasonable efforts to continue performance to avoid losing the opportunity to appeal to force majeure.
Concerning agreements still under negotiation:
- It would be advisable to draft contractual clauses using clear and comprehensive logic to handle the consequences of these events.
- The clauses should cover not only a definition of hardship or force majeure and a list of events, but also some specific obligations for the party affected by the impossibility, such as a notification duty and a period of time that shall elapse before termination becomes possible.
- Allocation of risks and consequences should be evaluated, as well as the possibility to take out civil liability insurance connected to the obligations to be fulfilled.
- When evaluating the terms and conditions of insurance coverage, it is important to take into consideration the possibility of events such as epidemics.
In both cases:
- The draft or renegotiation of the clause should determine the rights, obligations, potential remedies, and dispute resolution options left to the parties.
- Special attention should be paid to the governing law of the agreement, because it will influence the interpretation of the clause and, in general, the extent to which parties can be excused from their contractual obligations.
[1] In order to alter the equilibrium, the burden needs to exceed the risk inherent in each negotiation, relating to changes in costs and value of services (ITA: alea normale). Consequently, the hardship provision doesn’t apply to aleatory agreements whose execution or performance depends on a contingency or an uncertain (random) event beyond the control of either party. Indeed, in these agreements, the parties agree to be subject to the risk of future events (e.g., insurance agreements) and the principle of alea normale cannot apply.
[2] This means that the event made the performance not only more difficult, but definitively impossible to the extent that no one can render the performance.
