Topic: Dispute

The Epidemic Act (Epidemiegesetz) has been in force in Austria since 1950 and, therefore, might not be flexible enough to deal with the COVID-19-Pandemic. Although the COVID-19 laws, which were passed in Austria in the last few days, provide for extensive aid measures with a total volume of EUR 38 billion, they do not grant entrepreneurs a legal claim to a payment for compensation resulting from the ordered shutdown against the state. This is the main difference to the Epidemic Act in force, which provides for such a legal claim for compensation.

However, the Epidemic Act is only applicable to those enterprises that have been closed down on the basis of ordinances or by decisions of the district administrative authorities. Mainly cableway infrastructure and winter tourism enterprises in Voralberg, Tyrol, Salzburg and Carinthia are closed down by such ordinances or decisions. They have a legal claim to compensation for loss of earnings resulting from the close down according to the Epidemic Act.

All other entrepreneurs who had to close down their businesses as a result of the nationwide decree of the Minister of Health are not compensated under the Epidemic Act. They are to receive benefits from the COVID-19 crisis fund or other assistance from the government’s COVID-19 aid package.

The restrictions on commercial and production activities imposed by the Italian Government and the other measures adopted could have a significant impact on pending contractual relationships.

If the parties predetermined in the contract the effects in case of exceptional, unforeseeable, unavoidable events, and/or they have expressly provided for the specific case of an epidemic, the consequences would be those determined by the parties.

On the contrary, whether the contract – and this is the most frequent case – does not provide anything in this regard, first, it should be determined whether the contract is governed by Italian law and, in such case, the following principles of Italian law apply.

The Italian law allows the parties legitimately not to fulfil and/or partially fulfil to the contractual obligations, or to delay the execution of the obligations, without incurring in negative consequences, if extraordinary circumstances and events occur.

In particular, pursuant to Article 1256 of the Italian Civil Code, the obliged party is not bound to fulfil the obligation when the latter becomes impossible for a cause not attributable to such obliged party.

In this regard, the obligation could be considered impossible in case: a) it is objectively impossible; b) it is permanent impossible, i.e. it does not permit fulfilment in any way; c) the obliged party did not cause the impossibility with its conduct. With respect to the latter requirement, causes not attributable to the obliged party are: i) the so-called factum principis, i.e. a legislative measure, or a measure of public authority, imposed for general interests, which makes impossible the performance, independently from the obliged party behaviour; ii) force majeure: an unforeseeable, unavoidable external event not attributable to the party which consists of a force to which it is not possible to oppose, whose effects cannot be removed and which prevents the technical execution of the performance, including natural events and acts of the Public Administration.  

If the impossibility is only temporary, when there is an objective situation which only temporarily prevents a party from performing, the contract cannot be terminated – except in the case the other party doesn’t have the interest to receive a late performance – and the party temporarily prevented from performing is not liable for the delay.

Likewise, if performance has become only partially impossible, the contract cannot be terminated  – except in the case the other party doesn’t have the interest to receive a partial performance – provided that it can be performed for the remaining part.

Pursuant to Article 1467 of the Italian Civil Code, in contracts with continuous, periodic or deferred performance, in case the obligation of one of the parties becomes excessively burdensome, the obliged party may request the termination of the contract, if such party proves that the excessive burdensomeness of the performance is due to: a) extraordinary and unforeseeable events which do not fall within the scope of the normal contractual risk, such as force majeure or factum principis referred to above; b) an alteration of the former conditions related to the initial relationship, determining inequality not existing at the time of the stipulation of the contract.

The other party may avoid the termination of the contract by offering to modify the terms of the contract in an equitable manner.

Having said the above, it should be noted that the recent Law Decree no. 70 of 17 March 2020 added a new paragraph 6-bis to Article 3 of Law Decree no. 6 of 23 February 2020, stating that: “compliance with the containment measures referred to in 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 debtor’s liability, also with regard to the application of any forfeiture or penalties connected with delayed or omitted performance“.

The provision, therefore, relieves the debtor who has not performed his performance due to these measures from the obligation to compensate damages caused to the creditor, to incur in any forfeiture provided for in the contract and to pay any penalties for delays in the performance.

The same provision, however, does not clarify whether it also determines the impossibility of the performance (pursuant to Article 1256 of the Italian Civil Code) with the relevant consequences mentioned above.

In conclusion, without prejudice to what is explicitly provided for by the Law Decree no. 70 of 17 March 2020, it is not certain whether the Coronavirus outbreak, or the measures implemented by the competent authorities, could be a valid reason for justifying the non-fulfilment of contractual obligations. The contracts entered into by the parties shall have to be assessed on a case-by-case basis, taking into account several factors such as, for example, the applicability of the Italian law to the contract, the delay and/or the non-fulfilment reasons, the specific impact of the same on the performance and the absence of alternative solutions for the fulfilment of the contract.

Focus: commercial lease agreements.

The Prime Minister Decree 11 March 2020 ordered the mandatory closure of a large number of activities open to the public, thus forcing a large number of service and tertiary activities to remain suddenly closed.

As far as commercial leases are concerned, the restrictions on commercial activities imposed by the Italian Government if, on the one hand, they do not make it impossible for the landlord to perform its main obligation (to provide premises suitable for the agreed use), on the other side, they could make it temporarily impossible for the tenant to pursue its commercial activity in the rented premises and, consequently, cause difficulties for the payment of the relevant rent.

Notwithstanding that, in terms of strict causality, the temporary closure of the business does not necessarily make it impossible for the tenant to continue leasing the premises and paying the relevant rent even more in light of the Article 65 of Law Decree no. 17 March 2020 that provides “in order to contain the negative effects deriving from the prevention and containment measures connected with the epidemiological emergency by COVID-19, persons carrying out business activities are granted, for the year 2020, a tax credit in the amount of 60% of the amount of the rent, relating to the month of March 2020, of buildings falling under cadastral category C/1“.

In light of the above, for the time being and unless the situation of impossibility becomes permanent it might be questionable for the tenant to argue that the lease agreement could be terminated or the payment of the rent suspended, for that reasons the tenant may consider to promptly send to the landlord a request for reduction or suspension of the rent, stating the reasons why it is impossible to fulfil its contractual obligations.

The coronavirus is spreading. The number of infections is increasing rapidly and the government has announced drastic measures to control the spread of the virus. Public life has virtually come to a standstill as a result. Trade and industry are also suffering from the exceptional situation facing the Netherlands and large parts of the world. Many companies will therefore most likely be unable at some point to perform all or some of their contractual obligations. Their contracting parties will in their turn incur losses as a result.

The question presents itself whether the corona pandemic and the government measures imposed as a result justify reliance on force majeure and, if so, what consequences successful reliance on force majeure will have.

1. What is the legal definition of force majeure? 

If a debtor fails to perform an obligation, the law provides that an event of force majeure is involved if the debtor cannot be blamed for the breach. That is the case if the breach is not due to any fault of the debtor and is not at its risk under the contract or by generally accepted standards.

In practice, briefly stated, this means that the debtor cannot perform its obligation as a result of an impediment that is not attributable to the debtor. 

2. May parties contract out of the statutory force majeure regulations?

Contracting parties may opt to contract out of the statutory force majeure regulations. That is frequently done in practice. Many (Dutch and international) contracts describe what the parties regard as force majeure and what consequences they attach to it. Parties may, for instance, classify circumstances as force majeure that are not classified as such by law. Government measures and force majeure at a supplier, for instance, are regularly classified as force majeure. It is then a matter of contract interpretation whether, for instance, the obligatory closure of bars and restaurants comes under the contractual definition of force majeure. If so, that does not yet mean that reliance on force majeure will succeed. There must also be a sufficient connection between the circumstance in question (the government measure) and the impossibility to perform the obligation in question. The interpretation of the agreement and the specific situation are therefore always relevant.

Once it has been established that force majeure exists under the contract, it must be ascertained whether the consequences are regulated in the contract. The parties may opt, for instance, to limit or rather to expand the other party’s rights under the law. That may be described in general terms or in very exact terms. It may relate to (unilateral) amendment or termination of the contract, but also to the obligation to observe waiting periods or to take measures to minimise the consequences of force majeure. The contractual arrangement prevails over the law and must therefore be the first point of reference.

3. Does the statutory arrangement apply if the contract contains no provisions on force majeure?

If force majeure is not regulated in the contract, the statutory arrangement applies. It is apparent from case law that strict requirements apply to force majeure. The impossibility to perform the obligation must be such that it is practically impossible for the debtor to perform, or performance must be so disadvantageous that it cannot be required of the debtor. Force majeure must be proven by the party that relies on it. That is usually the party that is required to perform but is unable to do so, i.e. the debtor. 

4. Does the coronavirus justify reliance on force majeure?

It cannot be said beforehand whether the coronavirus or the government measures taken in response justify reliance on force majeure. It must be assessed in each individual case what exactly the obligation entails, whether performance is indeed impossible and whether the reason for that impossibility is due to the corona crisis or the measures consequently imposed. All the specific circumstances must then be taken into account. If, for instance, the obligation can be performed with the help of a government aid measure, reliance on force majeure is unlikely to succeed. If performance of the obligation would jeopardise the debtor’s health, which is possible in the case of the coronavirus, the likelihood of successful reliance on force majeure is greater. At the time of the bird flu crisis in 2005, a court assumed force majeure when the debtor was unable to take delivery of eggs from its supplier due to a transport ban imposed by the government.

5. What happens if force majeure is established?

If an event of force majeure is established, the creditor can no longer demand performance of the obligation in question. The creditor furthermore cannot claim reimbursement of loss incurred. This applies for the duration of the event of force majeure. But the creditor is not left entirely empty handed. As a rule, it may opt to dissolve (ontbinden) all or part of the agreement, so that it is released from its own obligations. It can reclaim any advance payments made after such dissolution. If the debtor benefits from its failure to perform an obligation, the creditor may, in principle, also claim that benefit. But that benefit is capped at the creditor’s loss and is awarded only insofar as that is reasonable. The specific circumstances of the case play an important role also in this respect.

No court judgments in the field of force majeure as a result of the corona outbreak have been published yet. We will therefore have to wait and see how courts deal with this issue in specific cases. We will keep you informed.