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Italy - The Health Emergency in the Context of Contractual Contingencies between Termination and Renegotiation

17 March 2020
The COVID-19 spread in the most industrialised area of Italy – and among the most developed areas in Europe –requires some brief considerations on the impact of the emergency measures adopted by the Italian Government for the containment of the epidemic on pending agreements.

In the context of the Coronavirus emergency, pending agreements execution could lead to several issues and, consequently, a specific strategy shall be developed in order to avoid further losses and mitigate risks.

The emergency measures for the management of the Coronavirus

Several emergency measures have been issued by the Italian Government in order to deal with the Coronavirus emergency, aimed at managing the situation. Lastly, the Italian Legislator adopted:

  • Decree dated 9 March 2020, providing, among others, for all the national territory, (i) restrictions on transfers within the national territory, exception made for "transfer motivated by proven occupation needs or situations of necessity or transfer for health reasons" as well as (ii) the suspension of "all the manifestation organised, as well as events in a public or private place";
  • Decree dated 11 March 2020, providing, inter alia, for (i) the suspension of retail activities (exception made for food and pharmaceutical retailers) as well as of restaurants and bars, and (ii) limitation to the other activities (e.g., remote working from home is recommended).

The impact on pending agreements

Although the duration of the measures mentioned above is limited to a few weeks, they could have a significant impact on economic and commercial relations between market operators and, in particular, on the performance of pending agreements.

By way of example, the suspension of public events could affect the performance of agreements related to initiatives that usually take place in the city of Milan.

Under the Italian Civil Code, the general remedy applicable in the case at stake shall be the "impossibilità sopravvenuta" (i.e., the supervening impossibility to execute the agreement). Indeed, the emergency measures adopted by the Italian Legislator could be qualified as an objective impossibility to perform the agreement. Consequently, the same agreement could be terminated and any amounts already paid shall be reimbursed. That implies, inter alia, that any costs incurred in the interim period would remain under the responsibility of the parties. Therefore, going back to the previous example, any tickets purchased for any suspended event (e.g., concerts, theatre performances) shall be reimbursed and the event promoter shall bear costs already incurred for the organisation of the event (e.g., marketing expenses).

Notwithstanding the foregoing, the measures adopted and the remedy mentioned above leave certain issues unsolved. By way of example, the possible cancellation of an event may not justify, per se, the termination due to the supervening impossibility of agreements that do not relate directly to the event (e.g., hotel reservations, as well as marketing events promoted by the participants of the event cancelled). Moreover, the supervening impossibility could hardly be invoked in order to justify the breach of an agreement due to the possible difficulties in the supply chain management, due to the general slowdown of the productive activities in the national territory, affected by the restriction to transfers. The same, from a different perspective, can apply for those companies facing a decrease in demand as a result of the reduction of consumption. Any orders (already made during the year) for the production - for example, of specific food products - could hardly be terminated by invoking the supervening impossibility due to the early closure of bars and restaurants.

Therefore, other legal institutions could be relevant, such as the "presupposizione" (i.e., when the parties, in the agreement, refer to a current or future external circumstance, which is a prerequisite of the agreement and an implicit condition for its fulfilment). However, even in this case, the consequences shall be the termination of the agreement, in terms of loss sharing.

A different approach, based on the obligation to perform the agreement "in good faith", could lead to a renegotiation of the terms and conditions of an agreement. However, regardless of the uncertain outcome of the renegotiations, a "mandatory renegotiation" of an agreement shall be provided for in the agreement itself.

Based on the above, it is clear that the spread of the virus, together with the related measures issued by the Italian Government, has - and will have - a significant impact on pending agreements. Therefore, it is appropriate to carry out a case-by-case examination of the pending agreements - taking into consideration, among others, the economic sector concerned, the specific Government measure that may have an impact on the performance of the agreement and the specific content of the agreement – in order to assess the best strategy to avoid non-fulfilment and/or to mitigate damages.

Further Reading