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Coronavirus: fulfilment of outstanding contract obligations in light of Decree 1.3.2020 - force majeure in common law and civil law systems.

03/03/2020

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Italy

The spread of the Coronavirus in Italy over the last few weeks raises the question of its potential impact on the performance of ongoing and future contractual relationships.
Decree of the President of Council of Ministers was issued on 1 March 2020 with regard to “Further provisions to carry out law decree No. 6 of 23 February 2020 which provides for urgent measures to contain and manage epidemiologic emergency COVID-19”. The latest decree orders specific measures applicable respectively to (i) the so called “red zone”, (ii) the Emilia Romagna, Lombardy e Veneto regions and (iii) the entire Italian territory (http://www.governo.it/it/articolo/coronavirus-firmato-il-dpcm-1-marzo-2020/14210).
 
As regards the red zone, said decree imposes inter alia the “suspension of any transport of goods”, which would reasonably excuse, on grounds of just cause (art.1256 Italian civil code), an affected party’s non-performance of a contractual obligation which has been rendered impossible. The situation is less clear in the case in which the legislation is not so explicit, i.e. for zones (ii) and (iii). In any event, Italian regions could be subjected to similar measures as those of the red zone if the epidemic continues to spread.
 
A possible strategy - which would at least guide the parties in establishing a new contractual balance - could be to rely on the general obligations of good faith and fair dealing (articles 1175 and 1375 Italian civil code) in order to manage the issues, from a softer viewpoint, as “unenforceable obligations”. In such case, the affected party could seek release from its contractual liability in light of the requirement to respect the independency of the obligations and counter-obligations of contract parties having different interests.  
 
Coronavirus could also be interpreted, under article 1467 Italian civil code, as an event causing intervening hardship, which of its nature does not impede actual fulfilment of the obligation but which renders its fulfilment as unduly onerous for the affected party, thus significantly altering the balance of the interdependent  obligations to be exchanged by the parties as were originally envisaged when the contract was made.  
 
In addition to the above-mentioned general principles, the party unable to perform its contractual obligations will be significantly more protected if the contract (governed by Italian law) contains a force majeure clause (whether or not it specifically lists an epidemic crisis as a force majeure event). In any case, even if such clause is present in the contract, the party seeking to avoid performance would need, on a case-by-case basis, to scrupulously check that conduct is conformance with the principles of good faith and fair dealing to ensure that said affected party can reasonably be deemed released from potential contractual liability, having regard to all the particular circumstances.
 
Differently, as concerns contracts governed by common law, if the contract does not contain a force majeure clause, an affected party cannot use the excuse of force majeure to delay or avoid performance of its obligations. Provided that the contract does contain a force majeure clause, whether a party can invoke it to justify delay or avoidance of its contract obligations depends on the wording of the clause.
 
For example, if the clause contains a list of events considered force majeure events - and events of epidemic or health crisis are not on the list - Coronavirus may be considered beyond the remit of the clause.  On the other hand, if the clause has wide scope, e.g. it refers to “any unforeseeable events not within control of the party seeking to invoke the force majeure” the current epidemic may fall within its remit. For common law systems the party seeking to rely on the force majeure usually has the burden of demonstrating: a) precisely how the event will impede performance of its obligations; b) that it made reasonable efforts to mitigate the effects of the event.
 
Where a contract governed by the laws of a common law system does not contain a force majeure clause, a party could justify its non-performance in reliance on the doctrine of frustration. Frustration allows the parties to be released from complying with future obligations where an event: a) occurs which makes it impossible for a party to perform a fundamental obligation or transforms the obligation into a radically different obligation to that envisaged by the parties; b) is not due to fault of either contract party; c) could not have been reasonably foreseen when the contact was entered into.
 
For example, a contract could be deemed frustrated by legislation that renders unlawful an obligation that was lawful when the contract was made - such as the measures to contain Coronavirus in the above-mentioned Italian Law Decree No. 6 of 23 February 2020, providing for the suspension or closure of certain commercial activities and suspension of transport of determined goods.
 
In the event that a key group of staff with specialist skills or project knowledge were incapacitated by the Coronavirus, this might  excuse a delay in the performance or release the party from the obligation to perform if the date for performance is essential and provided that substitute skilled staff could not reasonably be sourced.
 
A party cannot invoke frustration to avoid a ‘bad bargain’. The mere fact that the impact of Coronavirus renders a party’s performance more difficult or less profitable is not sufficient to frustrate the contract.
 
Conclusion
•           Companies should evaluate the possible impact of Coronavirus on fulfilment of their contract obligations.
•           They should check whether the scope of the force majeure clause (if present) is sufficient to excuse a possible late or non-performance.
•           The applicable law clause in contracts likely to be affected by the Coronavirus should be reviewed.
•           If the contract is governed by laws of a common law country and does not contain a force majeure clause, the company should evaluate whether the circumstances would justify terminating on grounds of frustration.
•           The party not in default of its contract obligations should, likewise, review its contractual provisions ready to challenge any counterparty notice seeking to delay or avoid fulfilment of obligations due to the impact of the Coronavirus.

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