Introduction

As a result of the rapid spread of the COVID-19 epidemic in Italy, on March 11, 2020 the President of the Council of Ministers (PCM), who is the head of the executive branch of the Italian government, issued a decree (the Coronavirus Decree) which implemented a number of aggressive and in some cases unprecedented measures intended to help manage this grave public health emergency.

Most significantly, as detailed below, the Coronavirus Decree: (1) extended throughout Italy the restrictive measures previously imposed, first, on certain heavily affected municipalities in Lombardy and Veneto (red zones) and, subsequently, on the entire region of Lombardy and 14 provinces of other Regions, pursuant to previous PCM Decrees issued on March 8 and 9, 2020; and (2) suspended all commercial activities, except for specifically enumerated “essential” activities, on a nationwide basis. In addition, all educational activities, public events, sporting competitions and religious ceremonies have been suspended nationwide and all public gatherings have been prohibited. A minimum “safety distance” of at least one meter is required to be maintained between all individuals at all times.

In particular, the Coronavirus Decree has prohibited all movements of people to, from and within Italy.  Exceptions are permitted for: (i) “well-grounded work-related reasons”; (ii) “situations of need”; (iii) “health-related reasons”; and (iv) “return to one’s domicile or residence”. The applicability of such exemptions is self-certified, with false certifications punishable under law.

Accordingly, following the enactment of the Coronavirus Decree, many businesses are finding it difficult or impossible to fully perform their existing contractual obligations while many customers of such businesses are finding it increasingly difficult to receive or make use of goods and services that they previously contracted for.

This note examines the impact of the COVID-19 emergency and the enactment of the Coronavirus Decree on existing contractual relationships under Italian law.

Actions taken to date by the Italian Government in response to the COVID-19 emergency.

The key decrees enacted to date by the Italian Government are listed below:

• Law Decree No. 6 dated February 23, 2020 (“Urgent measures to contain and manage COVID-19 epidemic emergency”);
• PCM Decree dated February 25, 2020 (“Further provisions implementing Law Decree No. 6 dated February 23, 2020, issuing urgent measures to contain and manage the COVID-19 epidemic emergency”);
• PCM Decree dated March 1, 2020 (“Further urgent measures to contain and manage the COVID-19 epidemic emergency”), now replaced by PCM Decree dated March 8, 2020 (see art. 5 par. 3);
• PCM Decree dated March 4, 2020 (“Measures to counter and contain on the whole national territory the spreading of the COVID-19 virus”), now replaced by PCM Decree dated March 8, 2020 (see art. 5 par. 3);
• PCM Decree dated March 8, 2020 (“Further provisions implementing Law Decree No. 6 dated February 23, 2020, issuing urgent measures to contain and manage the COVID-19 epidemic emergency”);
• PCM Decree dated March 9, 2020 (“Further provisions implementing Law Decree No. 6 dated February 23, 2020, issuing urgent measures to contain and manage the COVID-19 epidemic emergency, effective throughout the national territory”); and
• PCM Decree dated March 11, 2020 (“Further provisions implementing Law Decree No. 6 dated February 23, 2020, issuing urgent measures to contain and manage the COVID-19 epidemic emergency, effective throughout the national territory”) (the “Coronavirus Decree”).

Key Provisions of the Coronavirus Decree

The Coronavirus Decree reinforced previous steps taken by the Italian Government to counter the COVID-19 epidemic by implementing more aggressive restrictive measures and applying them on a nationwide basis. These measures are of two types: (i) restrictions on movement and assembly; and (ii) restrictions on commercial activity.

Restrictions on Movement and Assembly

The Coronavirus Decree has extended the restrictions on movement and assembly that were previously applicable only to specified areas of Northern Italy to the entire territory of Italy, thereby prohibiting all non-essential movements and suspending all public events and gatherings of any kind. In particular:

• All touristic, educational, cultural, sporting and religious events and gatherings are suspended and access to all enclosed spaces open to the public (such as schools, museums, theatres, health clubs, spas, swimming pools, cultural and recreational centers, betting parlors, etc.) is interdicted. All ski resorts are closed.
• All businesses permitted to stay open must ensure compliance with the one-meter safety distance. Outdoor physical and sporting activities are permitted subject to compliance with the one-meter safety distance;
• Persons unable to use transportation services or tourist packages as a result of restrictive measures taken to counter the COVID-19 epidemic are granted the right to receive reimbursement or in-kind vouchers as compensation.
• The Minister of Infrastructure and Transport, in concert with the Minister of Health, has been delegated the power to impose restrictions on long-distance public transportation services (air, sea, rail and coach) in order to balance the need to combat the COVID-19 epidemic with the need to guarantee that essential services continue to be provided. Pursuant to this delegated power, by a decree dated March 12, 2020, the Italian Minister of Infrastructure and Transport ordered the shutdown of 23 of Italy’s 41 airports until March 25, 2020.

Restrictions on Commercial Activity

The Coronavirus Decree has suspended all commercial activities except for certain specifically enumerated “essential services”. In particular:

• All retail commercial activities are suspended except for the sale of food and “essential commodities” (defined to include, inter alia, fuel, IT and telecom/telephone equipment, personal hygiene items and medical products) by neighborhood shops, retail distribution channels and shopping centers. Newsstands, tobacco shops, pharmacies and para-pharmacies may also continue to operate, subject to compliance with the one-meter safety distance in all cases.
• All food and beverage service activities such as restaurants, bars, pubs, ice-cream parlors and pastry shops are suspended, except for workplace cafeterias (subject to compliance with the one-meter safety distance) and home-delivery catering services (subject to compliance with all health regulations in respect of packaging and transport). Restaurants and bars located in rest stops along highways and within railway stations, airports, ferry stations and hospitals may continue to operate subject to compliance with the one-meter safety distance in all cases.
• All businesses related to personal services such as hairdressers, barbers and beauticians are suspended.

Businesses that may continue to operate, subject in all cases to compliance with the one-meter safety distance and all other applicable health and safety regulations, include inter alia: manufacturing, agricultural, livestock and food processing operations and their related supply chains; banking, financial and insurance services; professional services; laundries and dry cleaners; and funeral services. All such businesses and all government offices are encouraged to adopt “smart working” practices (i.e., home working) to the maximum extent possible, to promote the use of paid leave, to suspend all non-essential activities and to implement appropriate anti-contagion procedures.

The impact of the Coronavirus Decree on contract performance

Although the Coronavirus Decree does not expressly affect any contracts that are currently in force, its provisions will inevitably impact on the capacity of parties to perform or receive performance under many existing contracts – which, in some cases, may rise to the level of “impossibility of performance.” 

Under Article 1256 of the Italian Civil Code, impossibility is a valid basis for excusing contractual non-performance by a defaulting party, in accordance with the so-called “factum principis” (“act of the Prince”) doctrine, which applies to excuse contractual performance when it becomes objectively impossible as a consequence of the enactment of laws, regulations or administrative measures by a sovereign after the date of execution of the relevant contract.

The question arises whether the provisions of the Coronavirus Decree satisfy the elements for impossibility of performance under Italian law.

The enactment of the Coronavirus Decree has certainly triggered circumstances where performance under pre-existing contracts has become:

• permanently impossible;
• temporarily impossible;
• unreasonably onerous;
• impossible to be accepted; or
• unreasonably onerous to be accepted.

Each of these scenarios is discussed below.

To satisfy the elements of impossibility under Italian law, the government’s actions must: (1) be completely beyond the obligor’s will (See Civil Court of Cassation judgement no. 21973/07); and (2) not have been reasonably foreseeable after the exercise of due care at the time the obligation was undertaken (See Civil Court of Cassation judgement no. 2059/2000).

Since the Coronavirus Decree was issued by the Italian Government in response to a grave, exceptional and (subject to evaluation) unforeseeable public health emergency: (1) its adverse impact on the ability of parties to perform under pre-existing contracts is likely to be deemed to be beyond the will of such parties; and (2) persons executing contracts prior to the date of the Coronavirus Decree are likely to be deemed to be not unreasonable in failing to have foreseen its issuance.

How else might the Coronavirus emergency affect contract enforcement in Italy?

Beyond the direct impact of the Coronavirus Decree, the current public health emergency qualifies as an “epidemic” under Italian law. Under Italian jurisprudence, an epidemic is defined as a contagious disease affecting inhabitants of a city or region simultaneously and having the following specific elements: high contagiousness; rapid spread; limited duration; social alarm due to the potential danger posed to a large number of people; and wide territorial expansion. (See Court of Bolzano, March 13, 1979 and Court of Savona February 6, 2008).

Even in the absence of any specific governmental action to contain it, an epidemic can impact the enforceability of existing contracts if it makes performance thereunder either objectively impossible or unreasonably onerous (e.g., a performer falls ill and cannot be replaced or can be replaced only at unreasonable cost) or objectively impossible to be accepted by the counterparty (e.g., a person falls ill and cannot use a purchased airline ticket). Moreover, according to a recent ruling of the Court of Cassation, a person entitled to receive performance under a contract can reject it and be reimbursed for the price paid (even if it is still possible for the relevant performance to be delivered) if, due to intervening events, the purpose of the contract is irremediably frustrated. (See below.)

When does force majeure apply?

Under Italian law, there is no specific definition of force majeure. However, Italian case law has defined this concept as an objective, extraordinary and unforeseeable impediment to the performance of a specific contractual obligation that cannot be ascribed to the actions of the obligor and that cannot be overcome even with the most intense effort and diligence.

Sources of international law that can provide further guidance as to the scope of force majeure include:

• Article 79 of the 1980 Vienna Convention on the International Sale of Movable Assets identifies three main elements that must be satisfied for the concept of force majeure to be applicable: (i) the circumstance giving rise to the asserted force majeure must be totally outside the obligor’s sphere of control; (ii) the force majeure event must have been unforeseeable at the time the contract was executed; and (iii) the impediment to performance of the contractual obligation must be insurmountable. 
• The model Force Majeure Clause adopted by the International Chamber of Commerce in 2003 refers to the same three elements identified by the Vienna Convention and also provides a list of events the occurrence of which would imply the existence of force majeure. These events include wars, rebellions, acts of terrorism, sabotage, earthquakes and, notably, epidemics.

If a force majeure clause does not contain a specific reference to “epidemics”, an obligor seeking to avoid contractual performance on force majeure grounds in light of the present COVID-19 emergency would be best positioned if the relevant clause defines force majeure conceptually (without referring to any specific events) – i.e., an exceptional circumstance that (i) is beyond the parties’ control, (ii) cannot be imputed to any of the parties, (iii) could not have reasonably been foreseen prior to executing the contract, and (iv) is insurmountable.

Next best are clauses that list examples of force majeure events while also expressly stating that any such lists are not exhaustive, since this would support an inference that the parties intended for events “similar to” those specifically listed to also be included in the force majeure definition. Clauses drafted in this way would likely allow an obligor to successfully invoke force majeure in the current situation.

Finally, clauses that contain a specific list of events that are identified as “force majeure events”, but which do not expressly allow for interpretation or reasoning by analogy, would not automatically excuse an obligor from performance under the contract. Rather, in such cases, it would be necessary to assess, in light of the entire mix of facts and circumstances pertaining to the contract, whether the obligor undertook the risk to perform its obligations even in the event of an epidemic.

What are the legal consequences of permanent impossibility?

If permanent impossibility is established, then:

• the obligor is not responsible for its non-performance (Article 1218 of the Italian Civil Code);
• the obligor’s obligation ceases (Article 1256 of the Italian Civil Code); and
• the contract automatically terminates by operation of law, without any need for action by the parties or intervention by a judge (Article 1463 of the Italian Civil Code); although such intervention will be necessary in the event of any challenge.

In such a scenario, a party that has been relieved of its obligation to perform cannot demand counter-performance by the other parties to the contract, and must return the performance rendered to it by the other parties (Article 1463 of the Italian Civil Code).

In case of spontaneous non-performance, the affected party must commence a legal action to ascertain whether performance was actually impossible and to request the return of amounts paid.

Can a party delay or suspend contractual performance if required by the COVID-19 emergency?

Yes. Article 1256 of the Italian Civil Code states that an obligor is not liable for damages arising from any delay in its performance caused by temporary impossibility. However, it will not be possible to assess in the abstract whether impossibility is permanent or temporary, as any such determination must be made on a case by case basis, giving due regard to the purpose of the contract and the interests of the parties.

Consider, for example, a supplier who is late in making a delivery under a contract by reason of delays attributable to the verification procedures established by the Coronavirus Decree. Provided that the time of delivery is not an essential term of the contract and the purchaser still has an interest in receiving the delivery, the supplier can claim that his late performance was attributable to a cause that cannot be imputed to him and that, therefore, he should not bear any liability.

Consider, further, a procurement contract to be performed by a foreign contractor who is unable to enter Italy by reason of the restrictions on mobility set out in the Coronavirus Decree. This scenario should likewise not create liability for the obligor.

However, where performance has become wholly impossible due to a restrictive measure that expressly prohibits the relevant activity, the obligation ceases and the contractual duty terminates by virtue of permanent impossibility. (Articles 1526 and 1463 of the Italian Civil Code.) Consider, for example, a ski resort operator who sold season passes to third parties. By virtue of the government decree closing all ski resorts in Italy (Art. 1, para 1(f) of the PCM Decree dated March 8, 2020), the operator has been freed of his obligation to perform under these contracts.

Can a party refuse performance under a contract?

Yes, it is theoretically possible for a party to refuse performance under a contract and request reimbursement remedies under Article 1463 of the Italian Civil Code when it has become impossible for such party to make use of the service. Indeed, the Court of Cassation has held that impossibility of use, albeit not expressly contemplated in law, constitutes – similarly to impossibility of performance – is a valid ground for extinguishing a contractual obligation (Civil Cassation 26958/2007, 18047/2018, 8766/2019): “impossibility of performance occurs not only when it has become impossible for the supplier to perform the obligation, but also when it has become impossible for the end user to make use of the performance tendered by the counterparty such that his interest in receiving it has ceased, provided that said impossibility is not imputable to the end user. In such a case, the essential purpose of the contract has become unattainable and the obligation is consequently terminable.”

Under this legal standard, which has also been applied by trial courts (See Court of Florence, May 22, 2019 no. 1581), a contract may be terminated even when the relevant obligation is abstractly still performable, but “the possibility that it will fulfil the purpose that led the parties to execute the contract, has failed” and therefore “the contract [has failed] as well”. Having said this, following the recent application of restrictive measures on a nationwide basis, it is currently difficult to envisage a case where contractual performance would be abstractly possible.

What about “partial impossibility”?

If one party’s performance has become partially impossible, the other party has the right (i) to reduce its own performance correspondingly, or (ii) to terminate the contract if it has no significant interest in accepting partial performance.

Thus, in principle, where an external event occurs that: (i) was not foreseeable when the contract took effect; (ii) cannot be overcome through efforts that the supplier can legitimately be required to make; and (iii) causes a significant reduction in the economic and legal nature of the performance (and thus on the end user’s contractual interest), a scenario of partial impossibility arises, with the consequences mentioned above.

However, given that the restrictive measures contained in the Coronavirus Decree apply throughout Italy, it would difficult to argue that activities included in the list of suspended commercial activities could somehow be performed but only partially. It is more likely that such scenarios would give rise to termination on the grounds of total impossibility of performance.

What about contracts where performance has become “unreasonably onerous”?

If performance by one party under a contract is still possible but has become unreasonably onerous due to exceptional and unforeseeable events, the obligor can request termination of the contract, provided that such an outcome is not part of its “normal risk” (alea normale; see Article 1467(1) and (2) of the Italian Civil Code).

The concept of “unreasonable onerousness” is not defined in Italian statutory law, but it has been judicially interpreted to require strictly objective criteria that amount to more than “mere difficulty” in performance. In particular, unreasonable onerousness will be determined to exist where exceptional and unforeseeable events (such as the emergency measures adopted by the Italian government or even the COVID-19 epidemic itself) create economic burdens that exceed the normal risk of the contract (to be assessed on a case by case basis).

As an example, consider the operators of bars, restaurants and commercial establishments located in shopping centers. Pursuant to the Coronavirus Decree, all such activities have been suspended. The impact of this suspension – and the consequent fall in revenue generated by these activities – could lead such operators to request termination of their lease agreements on the grounds that they have become unreasonably onerous. However, it should not be possible to invoke a reduction in rent payments on a theory of partial impossibility to perform, due to the general and absolute nature of the suspension of such commercial activities.

Unlike impossibility, the doctrine of unreasonable onerousness notably does not trigger automatic termination of contractual obligations or releases from liability – the question as to whether the elements of the doctrine have been satisfied must be determined through the judicial process. A party who has been asked to terminate an unreasonably onerous contract can avoid such termination by making an equitable offer to amend its economic terms (Article 1467(3) of the Italian Civil Code).

Can the Italian government’s emergency measures give rise to “contractual illegality”?

Yes, if the government has expressly prohibited (or mandated) the performance of a certain activity and the contract is entered into after the enactment of such measures (Court of Cassation 4395/1978, 3690/1977).

As a general rule, under Italian law the purpose of a contract must be lawful, possible and determinate (or determinable). The purpose of a contract may be determined to be unlawful, inter alia, when its performance would violate imperative norms (i.e., mandatory rules that are intended to protect fundamental values, such as the right to health). Therefore, a contract that contains an obligation to carry out activities that are in contrast with the emergency measures recently adopted by the Italian government would be void by reason of contractual illegality. Consider, for example, ski resort concession contracts after the enactment of Article 1(1)(f) of the PCM Decree dated March 8, 2020 (extended nationwide by Article 1(1) of the PCM Decree dated March 9, 2020).