Foreward by Andrew Chilvers
The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.
During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.
As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.
Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.
Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?
The doctrine of force majeure is very common in international contracts and is commonly defined as an unforeseeable event, outside the control of the parties, which makes it impossible or too onerous for one or either party to provide the performance of the contract obligations. Compared to the Italian legal system it is therefore a mix of different concepts which are specifically and distinctively provided for by the Italian Civil Code. Indeed, the Italian Civil Code does not specifically provide for a definition or regulation of force majeure by itself. However, in relation to contracts, the Civil Code contains different and separate, albeit similar, provisions in relation to “supervening impossibility” (“impossibilità sopravvenuta” – namely articles 1218, 1256, 1463, 1464 C.C.), on the one hand, and hardship (“eccessiva onerosità sopravvenuta” – article 1467 C.C.), on the other hand. Although the notion of “supervening impossibility” is wider than the one of force majeure (as it can be inclusive, for instance, of impossibility caused by the non-defaulting party’s conduct), it is commonly established by either doctrine and case law that the doctrine of force majeure and “frustration” are comprised in it. Hardship can be based solely on unexpected events and occurrences, while impossibility doesn’t necessarily have to be as a result of an unpredictable event.
It is likely that most contracts in Italy, where there are obligations on both parties, will be affected by the COVID-19 pandemic and we are already seeing it happening. You’d have to look at all this on an individual basis, so we can’t be exact unless we look into the contracts and because of impossibility and hardship it might not be applicable in every case. It is something that you need to carefully evaluate for each contract and for each specific case. This is confirmed also in the light of the sole general provision the Italian Government has adopted in relation to contracts and COVID-19, namely article 91 D.L. 18/2020 according to which the respect of the restrictive measures providing for “lockdown” “shall always be assessed for the purposes of excluding, pursuant to and for the purposes of articles 1218 and 1223 of the Italian Civil Code, the liability of the debtor, also in relation to the application of any forfeiture or penalties related to delayed or omitted fulfilment of obligations”. On the very practical standpoint, also as a result of the lack of clarity of provisions set out by our Government, particularly when it comes to the pandemic, from our experience most parties are working responsibly to resolve issues. Everybody understands that this is a once-in-a-lifetime event. And, in my opinion, this then gives the opportunity for both parties to open the door for mediation so you do not have to go to court and hopefully find a solution that is somewhere in the middle with decent timing.
Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?
Regarding risk allocation, we are talking about a problem that is, theoretically at least, going to be over soon. Real risk assessments should have been made a few months ago, but COVID-19 was never going to be predicted like that. As far as I can see, most of the Italian enterprises are back in business now. I don’t think there is a huge risk allocation issue right now, at least in Italy, but that would still be applicable if you, say, do business with the US. We’ve been seeing huge problems in the supply chain, particularly in the automotive industry. At the height of the pandemic no one wanted to buy anything that was made in Italy – and no one could ever have predicted that.
At the start it was very difficult for businesses when all production stopped. What they are doing now is getting production going again and the government is helping to fund that growth. These problems will continue and there is no doubt that there will be a lot of insolvencies into 2021 because we had a number of corporations that were already experiencing problems. For them COVID-19 was the final nail in the coffin and no amount of risk allocation would have saved them.
The above does not consider the possible impact of a second wave that could have a big impact on enterprises and on contracts, also considering that it could hardly be considered as an unforeseeable event.
Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?
How simple is it for parties to consider the doctrine of frustration, which we’ve mentioned previously? Again, we need to refer to Civil Code and basically the concept of ‘hardship’ and ‘impossibility’ which, as mentioned before, apply also in the event a specific clause is not provided for in the contract. On this basis, the answer is quite simple – you need to prove your claims are related to force majeure in turn caused by COVID-19.