Effectiveness of bank guarantees in coronavirus times
By: Maria Grazia Colombo & Pier Paolo Bianchi
Effectiveness of bank guarantees in coronavirus times
With decree no. 3071 of 2020, the Court of Venice has ruled in the last few days, in the urgent procedure pursuant to article 700 of the code of civil procedure, regarding the operability by the owner of a property of a bank guarantee, provided to secure the regular payment of rent, in the event of non-payment by the tenant. Given the urgency the decree was rendered without the other party been heard.
The exam of this decree offers important food for thought in relation to some of the most debated and controversial topics regarding rent and commercial leases during the Covid-19 pandemic, i.e. the tenant’s right to unilaterally dissolve from the lease, as a result of exceptional circumstances, and the right of the landlord to cash the bank guarantee provided by the tenant.
From what we learn from the first commentators, the dispute would have arisen with reference to a lease of commercial premises, located in the city of Venice and intended for the retail sale of leather products.
In particular, a few weeks after the conclusion of the lease, the tenant’s effective exercise of the commercial activity would have been precluded, at first, by the phenomenon of the so-called “high water of Venice”, and later by the lockdown adopted in relation to the Covid-19 pandemic.
Following these exceptional events the tenant would have decided to terminate the lease with immediate effect due to the supervening and definitive impossibility of the landlord’s performance; the tenant thus would have returned the keys to landlord who would have accepted them.
The dispute would apparently derive from the fact that the owner, deemed not legitimate to terminate with immediate effects, would have complained with the tenant not observing the 6 months’ prior notice for the early withdrawal from the lease and consequently the missing payment of the rent for such period of time. As a consequence of the missing payment, the landlord would have then tried to cash the bank guarantee to get the money corresponding to the unpaid rent.
Considering the payment not due, the tenant would have asked the Court of Venice to urgently inhibit the cashing of the guarantee on the basis of impossibility of the landlord obligation (according to article 1256 of the civil code) as well as on the basis of the excessive burden of the lease, as a consequence of extraordinary and unforeseeable events (according to article 1467 of the civil code).
Following the proceedings under article 700 of the code of civil procedure, the Court of Venice ordered the bank “not to pay the amount requested […] with reference to the bank guarantee” and “not to take action against the plaintiff” pending discussion in contradictory.
The “urgency of the discussion” in “unfavorable times”
First of all, it should be noted that, for the purposes of the decree law of 8 April 2020, no. 23, all civil proceedings are currently suspended, except in cases expressly provided for by the law, and without prejudice to proceedings “whose delayed treatment can cause serious harm to the parties“.
The suspension is, in principle, also ordered for precautionary proceedings, except for those “concerning the protection of fundamental human rights” (which do not include the case at stake).
However, the Court of Venice decided to rule on the tenant’s request because of the risk “substantial damage” for the plaintiff-tenant in case of delay in the adoption of the measure, given the “unfavorable times” from the economic point of view in which the guarantee has been activated, thereby clearly intending the judge to refer to the pandemic from Covid-19.
The latter assessment, carried out by the Court of Venice in the present case, may lead to consider, more generally, that in urgent proceedings aimed at stopping the payment of a bank guarantee, the existence of a strongly negative and uncertain economic situation, such as the current one, is in itself suitable for integrating the risk of “serious damage” which justifies the adoption of judicial measures even pending the extraordinary suspension period of the proceedings.
The fumus boni iuris
Since this is a preliminary measure, issued without the other party been heard, the decree does not focus in particular on the merits of the case at stake.
However, some aspects may be highlighted.
First of all the adoption of an urgent injunction, ordering the bank not to pay what was contractually agreed, can only have been adopted in force of a fumus of the merits of the complaints presented by the tenant to the Court; this confirms that the possibility of freeing oneself from contractual obligations – due to the occurrence of exceptional and extraordinary circumstances – is a way that can be followed by the those who are penalized by the epidemiological emergency.
In the same way, however, it is necessary not to give too much weight to this ruling which, on the one hand, is a purely provisional measure and, on the other hand, refers to a very particular concrete case, in which the lease had just started and several extraordinary events added one after the other.
Finally, it is good to underline that the judge stated that she wanted to “wait, before disposing for the continuation of the proceedings, the state of the legislation after the filing of the briefs of the respondents, since it is constantly evolving and follows the course of the epidemic “. This statement expresses the expectation, or the hope, of a possible direct intervention by the government on the subject, suitable to balance, on a general level, the opposing interests of landlords and tenants, and to end the bitter disputes which are animating this peculiar historical period.