Guidance for English parties to contracts where there is a force majeure event arising from the COVID-19 outbreak and the law of the contract is that of Italy.

The health emergency connected with the spread of COVID-19, which is affecting Italy and the UK, amongst a large number of other countries, led the Governments of the two States as well as many others to adopt a series of extraordinary and urgent measures that have shut down almost all commercial activities, except for those defined as strictly necessary and strategic.

The key question, when it comes to contract law, is to understand what are the rules that apply to the defaulting party to a contract that is not able to fulfil its obligations due to the measures mentioned above and, to this end, whether or not COVID-19 might constitute a force majeure event.

Whether this is so depends on the circumstances of the case, the legal system governing the contract and on the interpretation of the specific provisions of the contract. In fact, as will be explained later, in international contract practice, it is customary to include a force majeure clause in the contract but recognition and analysis of such clauses always needs to goes hand in hand with a knowledge of the rules applicable to the legal system governing the contract.  This article aims to provide guidance to English parties where the contact is subject to Italian Law.

Force Majeure in the Italian Legal System

It is noteworthy that the contract discipline contained in the Italian Civil Code does not include a precise definition of the concept of “force majeure”, although its definition has been developed within the framework of criminal jurisprudence (with reference to Article 45 of the Italian Criminal Code) or could be assimilated to the notion of “act of God” (“caso fortuito”), that is used by the Italian legal system in some rules relating to non-contractual liability.

Despite the absence of a precise definition of  force majeure, there are in the Italian legal system several rules (some of them created ad hoc by the legislator recently) and general principles that may apply in the event that a party to a contract is unable to fulfil its obligations due to the containment measures imposed by governments to deal with the coronavirus.

General Principles and Ad Hoc Legislation in the Italian Legal System

So far as concerns an analysis of the general principles regarding contracts, there are two groups of principles that apply, at different stages of contractual relationships. The first group is constituted of the principles of fairness and good faith and the second is the general rules relating to contractual liability.

The Italian Civil Code (“c.c.”) enshrines the principles of fairness and good faith in different stages of contractual relations and highlights its importance in several Code articles.

Among them:

1. art 1175 c.c.: “the debtor and the creditor shall behave according to rules of fairness”;
2. art. 1337 c.c.: “the parties shall behave in good faith in the phase of the negotiations and the formation of the contract”;
3. art 1366 c.c.: “contract must be interpreted in good faith”;
4. art 1375 c.c.: “contract must be performed in good faith”.

In the Italian legal system, the general principles of fairness and good faith are a key guide for the judge when deciding about the liabilities of the parties to a contract when there is a legal dispute. These principles aim to lead to a reasonable decision  that avoids unjust solutions, that might be based on a literal interpretation of the contract, and to instead stand behind the party that has acted with diligence and fairness.

A second group of rules which come into play are the rules relating to contractual liability. A general rule is contained in art 1218 c.c., which states that the defaulting party who fails to perform exactly the obligations deriving from the contract shall be liable to pay damages if it does not prove that the non-performance, or delay, was caused by the impossibility of performance deriving from a cause not attributable to it. In other words, in order to avoid the consequences of the non-performance of the obligations under the contract, the defaulting party must prove that the non-performance was caused by an impediment unforeseeable and unavoidable with ordinary diligence (Cass. Civ., Sez. III, Sent. n. 18392, 26 luglio 2017). The defaulting party released from its obligations because of the impossibility, cannot then request the other party’s performance and must return what it has already received (see the discipline of the “total impossibility” regulated by art. 1463 c.c.).

The effect of the combination of the rules relating to good faith and those relating to contractual liability, is that the defaulting party, in performing its contractual obligations, is not obliged to perform beyond the limit of the possible, but only within the limits of diligence, good faith and fairness.

In addition to the two groups of principles referred to above, the Italian Government, in order to deal with the difficulties of citizens and economic operators due to the coronavirus emergency lock-down measures, has issued, amongst others, Decree Law of 17 March 2020 no. 181. This is referred to as “Provisions on delays or breach of contract resulting from the implementation of containment measures and anticipate the price of public contracts”. Article 91 of Decree Law n.181/2020 provides that compliance with the containment measures referred to in the decree shall always be taken into account when assessing the defaulting party’s liability for the purposes of articles 1218 (mentioned above, relating to contractual liability) and 1223 (which regulates compensation for contractual damage and loss) of the Italian Civil Code.,

Further, with regard to the application of any forfeiture or penalties connected with delayed or omitted performance, the Italian Chamber of Commerce has communicated that companies operating in international markets may ask for the issue of a certificate (so-called “force majeure” certificates) by which the Chamber of Commerce attests to have received a declaration by the company affected by the restrictions imposed for the pandemic, that the latter was unable to fulfil the contractual obligations previously assumed due to unpredictable reasons beyond the company’s will and ability.

Article 91 of Decree Law n.181/2020 mentioned above is intended to reinforce the general principles of contractual liability referred to in the opening parts of this article but it does not provide a solution in those cases in which the performance is not directly linked to a containment measure. An example is impossibility to perform due to the lock-down of a supplier on which the defaulting party relied for performing the contract. Another example is where the performance of a contract has become excessively onerous.

However, other provisions within the Italian legal system may be of assistance. Among them, art. 1256 of the Italian Civil Code, headed “definitive impossibility and temporary impossibility”, provides that the obligation is extinguished when, for a reason not attributable to the defaulting party, the performance becomes impossible. Should, however,  the impossibility be only temporary, the defaulting party, for as long as the impossibility lasts, is not responsible for the delay in performance and once the temporary impossibility has ceased, the debtor must perform its obligations.

If, on the other hand, the pandemic has made the performance of certain obligations not absolutely or temporarily impossible, but instead excessively expensive (as compared to the time when the contract was concluded), the party affected – pursuant to art. 1467 of the Italian Civil Code, relating to contracts with mutual obligations – might be entitled to apply for the termination of the contract. The party against whom the termination is sought can, however, avoid termination by offering an equal adjustment in price.

Force Majeure in International Contracts

While in the Italian system (and the English system), there is no precise definition of force majeure, in international practice it is usual to include a clause in the contract with precise provisions about force majeure, with the aim of allocating the risk of unforeseeable future events. The clause might contain an exhaustive or non-exhaustive list of events. Common provisions are, for instance, that the party who is unable to perform due to force majeure must inform the other party promptly and adequately and, where appropriate, provide certificates issued by public authorities.

Sources of international law about force majeure that parties might choose to have incorporated into their contracts include:

• Article 79 of the Convention on Contracts for the International Sale of Goods (so-called CISG or Vienna Convention) provides that a party is not liable for a failure to perform any of its obligations if it proves that:
  • the failure was due to an impediment beyond its control;
  • it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract, or
  • it could not reasonably be expected to have avoided or overcome it, or its consequences.
• The ICC Force Majeure Clause 2003 provides that when the conditions mentioned above in points (i), (ii), (iii) are proved by the party who fails to perform one or more of its contractual obligations, the same party is “relieved from its duty to perform its obligations under the contract from the time at which the impediment causes the failure to perform if notice thereof is given without delay or, if notice thereof is not given without delay, from the time at which notice thereof reaches the other party”.
• Article 8:108 of the Principles on European Contract Law and Article 7.1.7 of Unidroit Principles, which have a similar content. The latter, entitled “Force Majeure” provides that “(1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract. (3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt”.

First steps to take where the contract is made between English and Italian parties

Possible solutions should be analysed and adopted on a case-by-case basis, taking into account the specific relevant circumstances, the contractual terms and the applicable law.

• Verify whether the contract contains a specific force majeure clause, and if so, whether the pandemic might be covered.
• Once the applicability of Italian law has been ascertained, verify the applicability of one or more safeguards offered by the Italian legal system illustrated above.
• Assess what might be the consequences and risks of non-performance of the contract.
• Verify the presence of possible ways of negotiation.
• Verify the opportunity to pursue alternative solutions to litigation or arbitration for instance, mediation.