Italy’s Legal Business Concerns Surrounding COVID-19

By: Emily Seeling

Every country is facing economic hardship due to the COVID-19 pandemic. There is uncertainty on what the current and future legal implication will be for the business sector. The Italian government implemented several restrictive measures to protect the health of its citizens. In early March, the Italian government restricted movement of individuals unless it was “well-grounded work-related reasons, status of necessity or health-related reasons.”[1] In addition, the government temporary closed all retail activities except essential needs, such as groceries.[2] The government’s restrictive measures are beneficial to the safety of the country, but it will have a negative effect on the local economy. 

The COVID-19 pandemic will have an adverse effect on current contractual relationships. The business parties will want to understand the potential remedies available as well as how to mitigate the financial impact from contracts that may be breach. Under Italian law, there is no force majeure clause applicable to every existing contract.[3] However, there are other avenues for protection based on each individual contract that may protect a party who is unable to perform their contract during the pandemic.

In an existing Italian agreement, there could be a supervening impossibility (impossibilità sopravvenuta).[4] This covenant finds it power within the Italian Civil Code that provides protection against a party who is uncapable of performing their side of the contract based on a supervening impossibility.[5] There are two potential events that could trigger supervening impossibility, which are factum principis and third-party non-performance. Under the concept of factum principis, if new regulations or orders prevent a party from performing its obligations, then the party should be released from the contract.[6] Under Italian case law, as long as the event that caused the party to be released from its obligation was not foreseeable at the time of execution the party would be free of its liabilities.[7] In addition, the Italy-care decree provides protection for those abiding by the restrictive measures to eliminate liability of the obligator and to eliminate liquidated damages when the obligator’s performance is delayed or omitted because of COVID-19.[8] The provision is to protect parties who are unable to perform their obligations under the COVID-19 pandemic under the concept of supervening impossibility.

Another potential event that could initiate supervening impossibility is through a third-party non-performance. This would come into play if a party is unable to perform their obligations because of a failure by a third party. Under Italian case law, the view has been that a breach of a contract does not allow the non-breaching party an automatic release from the obligations under the contract.[9] However, based on the COVID-19 pandemic there is a chance that a third-party non-performance because of the pandemic will potentially protect the party suffering from the non-performance to be released from the contract obligations under the concept of supervening impossibility.[10]

The Italian Civil Code provides another avenue to pursue in recurrent agreements under the concept of hardship (eccessiva onerosità).[11] The principal of hardship comes into play when performance of a party becomes “excessively burdensome”[12] based on “extraordinary and unforeseeable events.”[13] The protection only comes into play when the risk is one that is not a normal risk associated by the agreement. Hardship is a remedy to terminate an agreement that was entered into before the COVID-19 pandemic.[14] The important fact to note that this remedy would only be applicable to contracts entered into before the spread of COVID-19 because contracts entered into after the outbreak would not be able to use the virus as an unforeseen circumstance. In addition, the virus itself may not be considered an extraordinary and unforeseeable event.[15] In order to terminate the agreement the party will have to prove that the outbreak caused the imbalance in the terms of the agreement and that the terms of the agreement did not include such a risk at the execution of the contract. Another option would be to change the terms of the agreement as opposed to terminating the entire agreement, if possible.

Italian business law agreements contain additional clauses that protect against material changes after execution of the contract.[16] The major clauses that may provide protection include force majeure clauses, material adverse change clauses (MAC), or material adverse effect clauses (MAE). In Italy, force majeure clauses are typically found in commercial agreements.[17] The clauses provide under extraordinary circumstances the affected party can suspend or terminate performance depending on the length of the unforeseen circumstance.[18] The complication that may arise is the type of examples provided in the agreement about what is considered an extraordinary circumstance and if COVID-19 would fall into that category.[19] If COVID-19 does fall under the extraordinary circumstances, the affected party will have a remedy available that would require less proof to achieve enforcement of the force majeure clause.

MAC and MAE clauses are used in loan agreements in the event of defaults.[20] The provisions allow the lender to suspend credit lines and terminate the agreement with acceleration of payment by the borrower.[21] The provision protects lenders against unforeseen events or circumstances that can affect the borrows condition to service the debt.[22] To determine if a MAC or MAE clause can be enforced during the COVID-19 pandemic it is important to determine any potential carve-outs contained in the agreement.[23] The main issue to note is that the clauses cannot be enforced during a general economic condition, meaning that the clauses may not be enforceable during the pandemic because the economy as a whole has crashed.[24] However, if one particular business is failing, but the rest of the businesses in the same sector are succeeding the MAC and MAE provision would still apply.[25]

One of the biggest complications of the outbreak is supporting and maintaining the economy, but Italy has shut down its entire local economy. Under Italian law, the hurdle to terminating existing contracts is not black and white. There are options that may or may not protect businesses through this pandemic. Italy’s economy was already struggling before the outbreak and it may be on its way to entire failure.

#Seeling #Italy #Economy #COVID-19 #ContractLaw #ForceMajeure

[1] Fabrizio Faina, COVID-19 – Legal (current or future) Implications on Doing Business in Italy, MWE (Mar. 18, 2020), https://www.mwe.com/insights/covid-19-legal-current-or-future-implications-on-doing-business-in-italy/#overview.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Decreto Legge 17 March 2020, n. 18.

[9] Faina, supra note 1.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Alessandro Fosco Fagotto & Franco Paolo Gialloreti, MAC/MAE Event of Default Provisions in Loan Agreements in Italy – Implications of COVID-19, Dentons (Apr. 6, 2020), https://www.dentons.com/en/insights/alerts/2020/april/6/mac-mae-clauses-in-financing-contracts-implications-of-covid-19-en.

[21] Id.

[22] Id.

[23] Faina, supra note 1.

[24] Id.

[25] Id.