The impact of Coronavirus on international contracts
Does my contract contain a Force Majeure clause?
Most international contracts contain a so called Force Majeure clause, i.e. a clause regulating the effects of extraordinary, unpredictable and unavoidable events (like a pandemic) which may affect the fufilment of the contract.
Force Majeure clauses typically contain an exemption from liability of the party which is affected by the event and a suspension of the obligations as long as the event is producing effects. The clause may also contain obligations of the parties to notify the event and the possible duration of the hindrance, as well as the possibility to terminate the contract after a certain period of time.
Here is an example of Force Majeure clause:
None of the Parties shall be held responsible for the delay or total or partial non execution of the contractual obligations when such delay or non execution is due to any event that cannot be ascribed to the Parties and is out of their reasonable control, including, for example: environmental disasters, revolts, uprisings, actions taken by public authorities, fires, earthquakes, floods, and if produced on national scale: strikes, power blackouts or power shortage, or lack of or shortage of fuels, components or machinery. In this case, such Party shall provide a written notice to the other party, whom, if such situation of greater force persists for more than 90 consecutive or cumulative days, shall be entitled to terminate the present Contract.
Although epidemics or pandemics are not often mentioned as examples of Force Majeure events, they can certainly be included in the definition.
If your contract does not contain a Force Majeure clause, it will be necessary to understand which law is applicable to the contract.
International sales contract may be subject to the Vienna Convention of 1980 (CISG), which contains a uniform regime for international contracts for the sale of goods. It applies when the parties have their place of business in different Contracting States, by virtue of the parties’ choice or when the law of a contracting State is applicable to the contract. CISG however may be excluded by choice of the parties.
At present 93 States have ratified the Vienna Convention, including most EU Member States, USA, Russian Federation, China and Brazil. However, some important states like UK, India, Ireland, Malta and Portugal have not.
How can I prove that it was impossible to fulfil my obligations?
In order to be released from liability, the party which is in default has to prove that it was affected by a Force Majeure event.
This might be a problem in international trade, as giving such proof implies explanations on the content of different national emergency rules.
In Italy, the Chambers of Commerce may issue, upon request of Italian companies, statements on the state of emergency in Italy and on the restrictions imposed by law, together with a declaration of the company concerned on the impossibility to fulfil its contractual obligations.
Although useful in the relation with the counterparties abroad, such statements however do not represent a guarantee against possible objections on the effectiveness of the hindrance. It is therefore advisable to collect evidence that the company took all possible steps in order to avoid the impediment.
If my sale contract does not contain a Force Majeure clause, how are the effects of Covid-19 regulated under Italian law?
Covid-19 pandemic could result in non-performance of the seller (delay or failure to deliver the goods) or the purchaser (partial or total failure to pay). Moreover, the pandemic could make more difficult and/or more expensive the supply of components and raw materials or the transport costs.
The effects of such events on the contract should be carefully evaluated and may vary according to the specific case, the subject of the contract and the sector of activity.
Force Majeure is not defined by Italian civil code. However, as a general rule, parties to a contract are not liable if they can prove that performance became impossible or was delayed due to an extraordinary and unpredictable event (supervening impossibility of performance). If performance is definitively impossible, the obligation is cancelled and the other parties are also free from their counter-obligations. In case performance is only partially possible, or the hindrance continues, the other party may terminate the contract.
In case extraordinary and unpredictable events do not make the performance impossible but generate an excessive burden to one of the parties (so called Hardship), the contract may be terminated or brought to equity.
Therefore, even without a Force Majeure clause it is possible under Italian law to invoke extraordinary and unpredictable events, like the need to comply to emergency regulations due to a pandemic, in order to be released from the fulfilment of contractual obligations.
A decree of the Italian Government of 17 March 2020 states that the respect of the rules for the protection of health during Covid-19 pandemic must always be considered as a reason of exemption from liability in case of delay or failure to fulfil contractual obligations. This rule applies both to public and private contracts and in fact could make it easier to prove the existence of the impediment to performance.
What happens if my contract is subject to the Vienna Convention (CISG)?
Article 79 (1) of the CISG states that:
A party is not liable for a failure to perform any of his obligation if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
According to Article 79 (2), a party is exempt from liability if its failure is due to the failure by a third person, provided that the provisions of the first paragraph apply.
Moreover, according to Article 79 (4) the party which fails to perform has a duty to give notice to the other party of the impediment and its effect, within a reasonable time after the impediment was known. In default of the receipt of such notice, the party which fails to perform will be liable for damages.
Orders of the authorities to stop activity, non-supply by third parties or other similar hindrances can be considered valid impediments under the CISG, provided that the notification obligation is respected.
DISTRIBUTION AND AGENCY CONTRACTS
FOCUS ON ITALIAN-GERMAN RELATIONS
I am a German producer, my Italian distributor cancelled all orders as they were obliged to close the resale shops due to Italian rules concerning Covid-19 pandemic. May I keep the down payments or claim a compensation?
As from 11 March 2020 the Italian Government has forbidden the retail activity, except for food and other essential goods; many shops therefore were obliged to close. The measure will be in force until 3 April 2020 and is likely to be further extended.
If the contractual relation is subject to Italian law, and there is no specific contractual discipline, the case could be considered a supervening impossibility of performance: if for a certain period the distributor, due to an unpredictable event which goes beyond his will, cannot resell the goods, he can be considered relieved from the purchase duties contained in the distribution agreement. According to the circumstances, this could also justify the cancellation of orders. In such cases, the sales contract will be terminated and the supplier will be obliged to return the down payments, with no chance to claim damages.
In case the contractual relation is subject to German law, and there is no specific regulation in the contract, as long as the distributor is obliged to keep the shops closed he may refuse to fulfil his purchase obligations, arguing that fulfilment requires an effort which is not proportionate to the interest of the principal. The principal may terminate the existing purchase contracts and will have to return down payments. No compensation for damages can be claimed as the distributor is not liable for the failure to perform.
In both cases, the sale contracts may be subject to the Vienna Convention (CISG) (see above).
I am a German commercial agent, my Italian principal informed all customers that they were obliged to stop production in order to respect rules on protection of health imposed by Italian Government due to Codid-19 pandemic. Therefore there will be delays in delivery as long as the emergency goes on. Will my commissions be paid?
According to the rules in force in Italy at the moment, some industrial and commercial activities had to stop. Others can continue but they must respect the rules imposed to protect the health of workers. Some companies therefore have decided to close on a voluntary basis.
According to Italian law, if there is no specific discipline in the contract, if the supplier proves that he was obliged to stop production for a certain period for an unpredictable and unavoidable event, he will not be liable for penalties or damages in case of delays in deliveries. In this case commissions will be paid.
However, if the delay lasts too long, the customers may lose the interest in the purchase and cancel the orders.
Unless the agency contract contains a different regulation, if the orders are not fulfilled for reasons for which the principal is not to blame, the agent does not have a right to the commission.
If the relation between the agent and the principal is subject to German law, the legal framework is the same as both German and Italian agency laws implement common EU rules.
I am an Italian distributor, my German principal – which according to the contract should deliver the goods to my premises – informed me that he cannot deliver the ordered goods, which are in large part pre-ordered by my customers. The reason is apparently that the carrier does not deliver in Italy to the Codiv-19 emergency. May I claim a compensation for my loss of profit?
At present the transport of goods is not forbidden in Italy. However, may carriers for caution or for protection of their drivers refuse to deliver in the countries which are more hit by pandemic, including Italy.
Of course, in order to reply to the question it is necessary to verify the content of the distribution contract and the applicable law.
If the contractual relation is subject to Italian law, and there is no specific discipline in the contract, the supplier which refuses delivery for causes of force majeure must prove that he did his best to avoid impediment. For example, it will not be sufficient to prove that the usual transport company does not effect deliveries in Italy, but it will be necessary to prove that other transport companies were contacted and all refused the delivery. If this happens, the supplier will be released by the delivery obligation, he will not be entitled to receive the price and will be obliged to pay back down payments. He will not be obliged to compensate damages to the distributor. In turn, the distributor will be released by his obligations towards his customers proving that he did not receive the goods.
If the contract is subject to German law, and it does not contain a specific regulation, the same principle applies: the supplier must prove that, notwithstanding all efforts to find a solution for transport, it was not possible to organize delivery. He will not be entitled to refuse a transport due to a higher price, but according to the circumstances he could ask an adjustment of the price agreed in the contract.
In both cases, the sales contracts may be subject to the Vienna Convention (CISG) (see above).
I am an Italian agent. My German principal cancelled my orders because he did not receive components from his suppliers due to Covid-19 emergency. May I claim commissions?
According to Italian law, if the contract does not contain a different regulation, in order to invoke supervening impossibility of performance the supplier will have to prove that he could not avoid the impediment. Therefore, he will have to prove that he looked for alternative suppliers with no results. In such cases, the customers will not be obliged to pay the price and down payments will be returned.
Unless the agency contract contains a different regulation, if the orders are not fulfilled for reasons for which the principal is not to blame, the agent is not entitled to the commission.
If the relation between the agent and the principal is subject to German law, the legal framework is the same, as both German and Italian agency laws implement common EU rules.