Contractual Obligations Under Italian Law and COVID-19 Measures

With the Decree Law n. 18 of the 17 March 2020 (converted into Law n. 27 of the 24 April 2020), the Italian Government introduced a new provision intended to solve the issues raised by the lockdown measures with regard to the execution of existing contracts. Now that the lockdown measures have been lifted and (a new) normality has returned, there might be some uncertainty on the discipline applicable to the contracts concluded when the lockdown measures were in place. Additionally, although restrictions have been removed, new lockdown measures in selected areas of the country could affect new contracts.

We will explore how existing contracts have been impacted by the new legislation and what is the discipline applicable to those concluded during, and after the lockdown measures.

Existing contracts and applicable law in light of the containment measures

Following the declaration of the emergency status related to the coronavirus pandemic, the Italian Government issued the Decree Law n. 6 of the 23 February 2020 aimed at containing the spread of the virus. The lockdown enacted by the authorities deeply impacted the economy by halting most economic activities.

This created concern among businesses, many of which were unable to perform their existing contractual obligations due to these measures. In order to clarify the status of contracts that were negatively impacted by the restrictive measures, the Government issued the Decree Law 17 March 2020, n. 18, providing that

compliance with the containment measures introduced with the Decree Law n. 6 of the 23 February 2020 are always considered for the purposes of excluding the debtor’s liability, also with regard to the application of any forfeiture or penalties connected to delay or non-performance (article 3, para. 6 bis DL n.6/2020).

This provision is applicable only to those instances where delay or non-performance was strictly related to the containment measures.

These measures represent a form of force majeure known as factum principis:

an order or a prohibition deriving from a public authority which is to be regarded as a supervening event outside a party’s control, suitable to excuse its delay or non-performance of an obligation.

The above-mentioned provision expressly allows for a derogation to articles 1218 and 1223 of the Italian Civil Code which set out the framework for the debtor’s responsibility in case of delay or non-performance.

The provision of para. 6-bis does not automatically excuse the debtor as it would still have to prove that the supervening event prejudiced its ability to perform the obligation. Therefore, what is required is not a mere difficulty to perform, but an absolute and objective hindrance to perform the obligation. Additionally, if the supervening event that made the performance impossible came after the debtor was put on notice, the debtor cannot benefit from the above provision.

Compulsory mediation

If the parties do not agree on terminating the obligation or the non-defaulting party believes that the supervening event did not in any way excuse the debtor, the dispute must be brought before a judge.

Courts and the administration of justice have witnessed multiple delays. To reduce the number of disputes going to trial as a direct consequence of the containment measures, the Decree Law 30 April 2020, n. 28 (converted into Law 25 June 2020, n. 70) has added a para. 6-ter to article 3, of the DL n. 6/2020. According to this provision, disputes relating to contractual obligation in which a party calls for the applicability of para. 6-bis, the claimant must first start a mediation procedure before going to trial. If the mediation procedure is still undergoing or the claimant has not undertaken such procedure, the resistant could object to the continuation of the proceeding. The judge will then give a deadline to the claimant to start the mediation procedure. Failure to undertake the mediation within the given deadline will result in the rejection of the judicial proceeding.

Contracts concluded during the lockdown…

The above-mentioned rules explicitly indicate that they are to be applied only to those contracts concluded prior to the enactment of the lockdown measures (i.e. existing contracts). With regard to the contracts concluded during the lockdown a different set of rules will be applicable.

In accordance with the general principles, the non-performing party could not state that it was not able to perform its obligation due to the containment measures. As a matter of fact, the Italian case law is unanimous in sustaining that a debtor cannot base its non-performance on the existence of a factum principis (i.e. force majeure event) if its occurrence was reasonably and easily predictable, according to common diligence, when the party concluded the contract.

To this regard, it is possible to assume that even though the combined provision of articles 1346 and 1418 of the Italian Civil Code state that the existing impossibility of the scope of the contract makes the contract null for lack of an essential element, the debtor’s responsibility on taking the risk of not being able to perform the obligation, rules out this possibility.

…and after

At the present, the lockdown measures have been removed. It is fair to assume that most new contracts will contain a COVID-19 clause preventing the uncertainties witnessed before, if new restrictive measures were to be reimposed.

If, on the contrary, a new contract does not provide for such an event, then general principles will apply. In this case, the question is whether the imposition of a new lockdown should be regarded as a factum principis that excuses the debtor from non-performance, or not. The WHO together with the Italian Government have not ruled out that a new surge in coronavirus cases might occur (the so called second waive). These statements might lead to the conclusion that a new force majeure event is reasonably and easily predictable, according to common diligence. If this is true, even though the debtor was unable to perform its obligation due to a supervening event which was outside of its control, it would still be liable in case of non-performance.

Even though it is possible to advance an opposing interpretation, considering the unprecedented situation, it is not difficult to assume that the Government would step in again issuing a similar provision to that of article 3, para. 6-bis of DL n.6/2020.