National and International Contracts – COVID-19 and force majeure
The key question, with respect to contract law, pertains to whether the Corona-virus can be included within the definition of a “force majeure”, as Chinese authorities have claimed in their attempts to deal with numerous delays in delivery and defaults by companies operating in the Hubei region toward their business partners.
In the wake of the recent spread of the virus throughout various regions in northern Italy, this question could be of particular importance in managing contractual relationships between businesses operating within the affected areas and their clients, suppliers, and buyers.
Force majeure and the occurrence of an excessive burden are referenced in international contracts and Italian law.
In general, it should be noted that the contractual system as outlined in the civil code does not provide a precise definition of the concept of “force majeure”; considering this, as well as the differences between national laws on the subject, it is common practice in international commerce to insert an ad hoc force majeure clause in sales contracts that precisely defines the applicable circumstances.
Generally, these clauses refer to events that are uncontrollable and unforeseen as of the signing of the agreement, including epidemics; natural disaster s such as earthquakes, floods and hurricanes; terrorist attacks; and acts of war.
Further confirmation of this can be found in the Convention on Contracts for the International Sale of Goods (CISG, or Vienna Convention), which outlines in Article 79 the concept of force majeure. It provides for the exemption from the responsibility of a party who demonstrates that a given event is outside their sphere of control, that the event was unforeseen by them at the moment of concluding the agreement, and the absolute insuperability of the impending circumstances.
Therefore, when these conditions occur, the debtor who would normally be found in breach is instead deemed to be free of any responsibility to their creditor.
The force majeure clause is related to the so-called hardship clause, also frequently found in international contracts, which applies in the case that fulfilment by one party becomes excessively burdensome (for example, due to increases in customs duties, a rise in the cost of raw materials, or, as has occurred recently, closures of connections to some areas and cancellation or postponement of flights) on account of circumstances transpiring after a contract has been entered into, creating an unjust equilibrium between service and return for service, and, consequently, a disproportionate sacrifice by one party compared to the other.
The principal rationale for the hardship clause, distinct from that of force majeure, is to allow parties to remodel, renegotiate, or redefine the obligations of the contract in order to adapt their respective performances to the new circumstances arising from the unforeseen event, thereby limiting the possibility that only one of the parties will bear the objective risk of jeopardizing the proper execution of the contract.
In any case, within the Italian legal system, the concept of force majeure can be inferred by Civil Code Article 1467, which grants the debtor the possibility to request the termination of a contract if the debtor’s fulfilment of the contract has become excessively burdensome due to extraordinary and unforeseen circumstances that are outside of the debtor’s sphere of control.
The “extraordinary” requirement, according to a copious amount of case law on the subject, is objective in nature and must refer to an anomalous event, quantifiable on the basis of objective criteria such as its severity and scope.
However, the identification of whether an event was unforeseen, which refers to the knowledge of the contracting party, has a subjective nature and must be assessed based on parameters generally defined as the behaviour of an average person under the same conditions as the debtor.
In addition to the above, it is also necessary to consider that, pursuant to Civil Code Article 1256, if a service specified in a contract becomes definitively impossible for reasons not attributable to the debtor, the liability is terminated and the debtor is released from the fulfilment of the related service.
This is of particular relevance if the fulfilment of defined obligations becomes impossible due to measures taken by public authorities (a so-called factum principis), since such intervention is completely outside of the debtor’s sphere of control.
The topic is highly salient following the issuance by the government of emergency decrees which, in some areas hit hard by the contagion, have mandated the suspension of certain activities (theatrical performances, museums, churches, sporting events, and, in general, most events in public spaces, in addition to the general suspension of in-person education), as well as the closing of businesses during determined time periods.
Final considerations
The above considerations have sought to shed light on how the border between cases of force majeure and those of hardship is not incontrovertible or clean; they instead show, in some circumstances, a substantial elision of the two concepts.
In order to correctly identify an individual instance and its possible legal implications, therefore, it is necessary to undertake a case by case analysis of each particular negotiation process.
In this context, it should be noted how the spread of the Coronavirus may, on one hand, render the fulfilment of some services definitively impossible due to objective circumstances that cannot be overcome, like, for example, the complete closure of certain areas or the precautionary suspension of production undertaken to slow the pandemic.
On the other hand, it is important to highlight how in some other cases the effects of the pandemic on international commerce do not make the provision of contractual services completely impossible, but merely very burdensome, as is the case when parties must use different means of delivery or require more time to complete production.
In any case, there is no definitive rule to follow.
Every commercial entity who has been impacted by the spread of the Coronavirus, whether supplier or purchaser, must first begin to examine the specific provisions of their contracts with the goal of establishing if there is a precise definition of the circumstances of force majeure (or hardship) and their related consequences.
Only following such an evaluation can the effects of a failure to perform certain services, as well as the actual impact of a series of events on the contractual balance, be concretely determined.
With best wishes
MM& Associati FinaRota
Contributing Advisors
