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The supervening impossibility of the performance and the force majeure at the time of Covid-19 in the Italian legal system

Apr 14 2020

From EXP Legal Contractual Law Team.

The crisis resulting from the Covid-19 epidemic is having a strong impact on commercial and contractual relationships in general because it poses the question, currently strongly debated, of the legitimacy of a delayed or a missed fulfillment of the obligations undertaken by the parties, in the light of the institutes envisaged in the Italian legal system.

The question arises with particular regard to leasing relationships, whether commercial or for residential use, but is to be considered interpretatively and abstractly extended to any type of contract.

Of course, the problem arises in cases where the parties have not explicitly intended to regulate in the contract the occurrence of an interrupting or suspensive event regarding the obligations undertaken, and therefore in cases where no instances of supervening impossibility and/or force majeure have been typified, which may render the breach or delay in the fulfillment of one or both parties legitimate.

What does the extraordinary legislation provide for?

First of all, it is appropriate to mention the main emergency legislation to date, the so-called “Cura Italia Decree” (i.e. Law Decree no. 18, of 17 March 2020), whose Article 91 introduced at Article 3 of the Law Decree of 23 February 2020, no. 6, converted with modifications by Law 5 March 2020, no. 13, regarding urgent measures concerning the containment and management of the epidemiological emergency from COVID-19 (CORONAVIRUS), the following regulatory provision:
“6-bis. Compliance with containment measures set forth under this decree is always 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 connected with delayed or omitted fulfillments.

To understand the ratio of the extraordinary rule, it is necessary to dwell on the provisions of the Civil Code referred to therein, i.e. Articles 1218 and 1223, included in Part IV of the Italian Civil Code, which governs obligations in general (therefore not only those deriving from the contract).
Pursuant to Article 1218 of the Italian Civil Code: “The debtor who does not exactly execute the performance due is required to pay damages, if he does not prove that the failure or delay was caused by the impossibility of the performance deriving from a cause not attributable to him”.
Compensation for damage due to non-fulfillment or delayed fulfilment tends to restore the creditor from economic damage by means of a new obligation (i.e. compensation) that is a pecuniary performance. This includes, according to Article 1223 of Italian Civil Code, both the loss actually suffered (emerging damage) and the loss of earnings (loss of profit), provided that both are immediate and direct consequence of the delayed or omitted fulfillment.

From this it is deduced, therefore, that as long as the objective possibility of the performance remains, the debtor is always liable; only when the impossibility of the performance occurred, the obliged person is admitted to the release proof, consisting in the demonstration of his non-liability for the event that caused the impossibility.

The objective impossibility of the performance shall be assessed differently depending on the type of obligation deduced, but in general it can be said that the obligation of conduct presupposes the possibility of the behavior required, also in light of the general clauses of diligence and good faith; so that any difficulty in fulfilling, even if of an objective nature, is irrelevant: the debtor bears the risk of any difficulty. Among the causes that can be invoked for the purposes of the aforementioned impossibility of performance, as far as of interest, the orders or prohibitions arose from the so-called administrative authority "factum principis" are included: i.e. legislative or administrative measures, which make the performance impossible de facto.
With regard to the connected, but separate, topic of the non-liability for the impossibility of the performance, it is necessary that the impossibility is absolute, objective and unsurpassed and therefore not depending on the fault of the obliged party.
And here, the concepts of force majeure and unforeseeable circumstances appear.
It should be noted, however, that in the Italian legal system there is no specific rule that defines and governs the force majeure and unforeseeable circumstances clauses, unlike what happens in other systems such as the French, Bulgarian or common law system. Explicitly, the force majeure is referred to only in the Italian Penal Code under Article 45, which excludes the punishment of the agent for lack of fault if the offence is committed by force majeure or unforeseeable circumstances. According to the doctrinal and case law, however, it is possible to indicate, summarizing, the force majeure in an external and inevitable cause for the contracting party, while the unforeseeable circumstances in an unforeseeable event, both excluding the liability for the impossibility of the performance. Force majeure and unforeseeable circumstances do not release the contracting party from liability when the party could have taken suitable measures to avoid the negative impact on the regular execution of his performance, or if he has not experienced all the possibilities that were offered to him.

On the basis of the above-mentioned, it seems reasonable to conclude that the extraordinary and unpredictable nature of the spread of the epidemic from Covid-19 can be interpreted as a force majeure cause, like, for example, cyclones, floods, earthquakes, wars, etc., that would exclude the liability for the impossibility of the performance, and therefore, the obligation to compensate for delayed or omitted fulfillment, on the assumption that the performance has become objectively impossible due to the extraordinary legislation that imposes the containment measure (factum principis).

The assessment of the objective impossibility can only be made on a case-by-case basis, depending on the type of contract that is highlighted. For example, in leases, it is argued by many parties that the temporary closure of the business does not, in fact, make the lessee's main obligation, consisting of the payment of the rent and ancillary costs, impossible given that the obligation could also be fulfilled with reserves of money, other than the collections missed in the emergency period. Furthermore, for commercial leases, it seems appropriate to point out that Article 65 of the Cura Italia Decree provides that: "in order to contain the negative effects deriving from the prevention and containment measures connected to the COVID-19 epidemiological emergency, subjects carrying on business activities are recognized a tax credit of 60 per cent of the amount of the rent, relating to the month of March 2020, of properties falling within the cadastral category C/1".

What are the legal consequences of the supervening impossibility on the current contractual obligations?

The Cura Italia Decree does not specifically regulate this aspect, therefore having to refer to Italian Civil Code.
Article 1256 of the Italian Civil Code, entitled Final impossibility and temporary impossibility, located inside the section dedicated to ways of extinguishing the obligation other than fulfillment, establishes that: (i) if the impossibility, for a cause not attributable to the debtor (unforeseeable circumstances or force majeure), is temporary, as long as it persists, the debtor will not be responsible for the delay in performance; therefore, the debtor, once the aforementioned impossibility has ceased, shall always execute the performance, regardless of a different economic interest which may, if necessary, assert under the profile of the excessive burden that has arisen (see next paragraph); (ii) the obligation will be extinguished if, for a cause not attributable to the debtor (unforeseeable circumstances or force majeure), the performance becomes totally impossible: this means that in contracts for consideration, the obligation of the other party remains without justification and will also expire, resulting in the termination of the contract pursuant to Article 1463 of the Italian Civil Code. Furthermore, the rules of the supervening impossibility shall be coordinated with the rules of the contracts for the transferring and/or constitution of real rights, in the light of the principle of the immediate transfer efficacy of the consent: since the real effect already occurs on the basis of the consent, in the contracts that transfer the property or constitute or transfer real rights, the buyer is not released from the obligation if the good perishes for reasons not attributable to the transferor (Article 1465, paragraph 1 of the Italian Civil Code). If, however, the performance becomes only partially impossible and the debtor release himself by performing the obligation still possible pursuant to Article 1258 of the Italian Civil Code, an automatic termination is not provided but the other party has the right to a correspondent reduction of the performance due, with the possibility of withdrawing from the contract pursuant to Article 1464 of the Italian Civil Code.

Further reading of the question could be provided by valuing what has been stated several times both by case law and doctrine with reference to the category of "unusability of the performance". This expression refers to an "atypical" category as it does not exist in the positive legislation, but derives from the creative activity of the courts.
In the event that an obligation cannot be properly "exploited", the primary interest for which the contract has been executed would be unfeasible. This eventuality would have the effect of determining the disappearance of the concrete cause of the contract, i.e. the summary of the interests underlying the execution of the contract. Following this interpretation, the supervened failing of the concrete cause of the contract would reflect on the existence of the same contract, of which it is an essential element.
In short, borrowing the words of the Court of Cassation “the impossibility of the creditor to use the performance, even if not specifically provided for by law, constitutes - like the impossibility of executing the performance - (autonomous) cause of extinction of the obligation” (Court of Cassation no. 16315/2007).
The practical consequence from what has been theoretically examined so far would be, however, the dissolution of the contract and, along it, the extinction of the obligations of both contracting parties; this is would be an effect that in a situation such as today might or may not be convenient to one, both or none of the contractual parties, thus making the mechanism outlined useful to be used in relation to the forecast of future developments in the relations between the contractual partners.

If the performance is not objectively impossible, what other remedies are available to reshape the current contractual obligations?

In contracts for consideration or deferred execution, Article 1467 of the Italian Civil Code provides that "if the performance of one of the parties has become excessively burdensome due to the occurrence of extraordinary and unforeseeable events, the party who shall perform this service may request the termination of the contract [...] The resolution cannot be asked if the occurred burden falls within the normal scope of the contract. The party against whom the termination is requested can avoid it by offering to change the conditions of the contract fairly".
In contracts in which only one of the parties has taken on obligations, such a party can ask for a reduction in its performance, or a modification in the methods of execution, sufficient to bring it back to equity according to Article 1468 of the Italian Civil Code.
The sudden spread of an epidemic, such as the one from Covid-19, could be considered precisely as an unpredictable and extraordinary event (just as extraordinary is the subsequent adoption by a government of measures to contain the contagion) that entails an economic sacrifice exceeding the normal contract agreement.
The consequence, therefore, foreseen by the law in contracts for consideration or deferred execution is the termination, unless the other party offers to “fairly renegotiate” the contract conditions. Considering, therefore, that, in practice, many contracting parties would have no interest in obtaining the termination of the contract, the settlement way could be taken by leveraging on paragraph 3 of the aforementioned Article 1467 of the Italian Civil Code and, therefore, mediate and agree between the parties a reduction to fairness of the contract.

***

In conclusion, it can be affirmed that an event such as the spread of a pandemic from Covid-19 may represent a force majeure cause as an extraordinary and unpredictable event, but the legal consequences can be various depending on whether the objective impossibility of the performance occurred, and depend on the type of obligation assumed and the contract executed by the parties.

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