Contractual obligations and Covid-19: consequences of breach of contract under the Italian emergency regulations
Pavia e Ansaldo, Italy
Pavia e Ansaldo, Italy
Pavia e Ansaldo, Italy
The spread of coronavirus in the Italian territory and the adoption of urgent measures to stop it have affected, and could further affect, the normal activities of all Italian economic operators.
Because of the health emergency, individuals and companies may no longer be able to fulfil their contractual obligations or, in any case, to comply with the agreed terms and conditions. Given the unprecedented situation, this could result in general uncertainty in contractual relationships between parties, especially in relation to the consequences of a breach of contractual obligations due to the ongoing pandemic.
From a strictly legal point of view, the question that arises is whether a party may be held liable for its failure to fulfil its contractual obligations as it would in ordinary situations, or whether such liability is mitigated by the serious health emergency that the whole world is facing.
The Italian emergency regulations
Article 91 of Law Decree no. 18 of 17 March 2020 (the so-called Cura Italia Decree) specifically deals with the debtor’s liability with reference to the economic consequences of the emergency regulations issued by the Italian Government in order to prevent the spread of Covid-19.
According to the aforementioned provision, compliance with the Covid-19 preventive measures adopted by public authorities shall always be taken into account in establishing exemption from liability of the obliged party for the purposes and within the meaning of Article 1218 of the Civil Code.
According to Article 1218 of the Italian Civil Code, ‘the debtor who does not exactly perform his obligation is liable for damages, unless he proves that the non-performance or delay was due to impossibility of performance for a cause not attributable to him’.
Given the strict Covid-19 preventive measures adopted to stop the spread of the virus, Article 91 of the Cura Italia Decree asks the courts to consider the non-performance or late performance of contractual obligations as not ascribable to the debtor with consequent exemption from its liability, in a particular circumstance.
In the system defined by the emergency regulations, such circumstance is the ‘compliance with the Covid-19 preventive measures’. By Covid-19 preventive measures, Article 91 refers to the acts adopted by the government or other competent authorities to prevent the spread of coronavirus and reduce the damages caused by the disease. These include the temporary shutdown of many commercial activities and the restriction of non-essential movements and slowdown of transport. The debtor is not held liable if it fails to perform its obligations due to the need to comply with the Covid-19 preventive measures.
The special provisions of the Cura Italia Decree are connected to the general regulation of the supervening impossibility of performance of contractual obligations for cause non-imputable to the debtor referred to in Article 1256 of the Italian Civil Code.
According to the first paragraph of Article 1256 of the Italian Civil Code, ‘an obligation is extinguished when its performance becomes impossible for a cause not attributable to the obliged party’. The obliged party is exempt from liability for delay or non-performance of its obligations if it gives evidence of the impossibility of such performance and that such impossibility cannot be ascribed to it. According to the special provisions provided for in Article 91, the exemption from liability is not automatic; it has to be assessed by the court taking into account the specific features of each case.
The Italian judges shall assess on a case-by-case basis whether, despite the use of ordinary diligence, the performance of the debtor’s obligation has become impossible due to the obligation to comply with the public authority’s preventive measures. Only in such a case may the Covid-19 preventive measures be considered to exempt the debtor from its liability.
The relevant case law
Despite its recent introduction in the Italian legal system, Article 91 has already been the subject of an important ruling of the Court of Bologna. In its ruling of 4 June, the Court of Bologna recognised a general uncertainty in the scope of Article 91 and, consequently, defined the limits of interpretation of the emergency regulations.
As the Court of Bologna stated, due to the ambiguity of its formulation Article 91 may wrongly be interpreted as a general exemption from payment or performance of the obligation itself. Such an interpretation, however, cannot be accepted.
According to the Court of Bologna, Article 91 refers to the debtor's liability and to the consequences of non-performance of contractual obligations, but it does not affect the duty to perform them. In other words, the obliged party may be exempt from liability and from the obligation to compensate the creditor for the damages arising from the contractual breach, but it is not released from the obligation itself. An interpretation of Article 91 leading to the extinction or to the unenforceability of the obligation would freeze the flow of wealth and that would be harmful for the entire economic system.
The Court of Bologna also addressed the issue of what type of obligations are covered by Article 91. In particular, the Court of Bologna proposed two possible interpretations.
According to the first interpretation, Article 91 excludes the liability of the debtor in any case, so that any kind of obligation, including monetary obligations, falls within Article 91.
According to a more restrictive interpretation, Article 91 only deals with the ‘material feasibility’ of performing an obligation. Such interpretation leads to exclude the exemption of liability in case of monetary obligations, on the assumption that the payment of a sum of money shall never be considered materially impossible, unlike – for example – the obligation to supply goods, that in case of emergency restrictions or lockdown may be materially impossible to be carried out.
As the Court of Bologna stated, the first interpretation is preferable and therefore any kind of obligation falls within the application of Article 91. According to the Court, the pandemic led to a serious liquidity crisis in the economic system, which the emergency regulation aims to address. Article 91, when interpreted in accordance with its own purpose, should also apply to the non-performance of monetary obligations, otherwise it would be useless in relation to its purpose.
Article 91 introduced a mechanism in which the debtor who fails to comply with its contractual obligations may be realised from consequent liability and from the obligation to compensate damages arising from the contractual breach, if such a breach is due to an obligation to comply with the Covid-19 preventive measures.
The debtor claiming that Article 91 applies must prove that the non-performance – or late performance – of its obligations is not its fault and that such breach arises from the need to comply with public authorities’ health emergency provisions. The existence of the aforementioned requirements is assessed on a case-by-case basis by the judge.
In such a scenario, it is essential for all economic subjects – especially foreign ones – operating in the Italian territory to be able to count on the assistance of local professional figures having a particular expertise in civil and commercial litigation, given that dealing with the legal and economic consequences of the Covid-19 pandemic may lead to a local judicial determination under Article 91.