Contractual breaches at the time of Covid-19

Actually, the rule contains two provisions:

• The first one concerns civil code dispositions generally applicable to liabilities and contracts.
• The second one, which is more specific, concerns public contracts and an extending obligation to pay an advance of 20% of the public contract consideration – due to the contractor within 15 days from the starting of works, as regulated under art. 32, para. 18 of Legislative Decree no. 50 dated 18 April 2016, (so-called “Code on public contracts”) – also to case of urgent delivery.

This article concerns the first part of the rule, which is always applicable to private-law relationships.

Art.91 of the decree states: “Art.3 of law decree no. 6 dated 23 February 2020, turned with amendments into law no.13 dated 5 March 2020, introduces, after para.6, following para.6-bis, providing that the observance of containment measures included in the decree is always taken into account to evaluate the possible exclusion of the debtor’s liability, pursuant to art.1218 and art.1223 of the Italian Civil Code, also with reference to the application of any limitation of actions or penalties related to delayed or omitted payments”.

Art. 91 and civil code provisions 

Art. 1218 of the Italian Civil Code regulates the liability of those debtors who do not correctly fulfil their obligations, imposing them to compensate for damages, unless the debtor proves that the breach or the delay derived from an impossibility due to causes that are not attributable to the debtor. Art. 1223 of the Italian Civil Code specifies that the damage due to total unpayment or delayed payment must cover both the emerging damage, i.e. the loss incurred by the creditor, and the lucrum cessans, i.e. the missing profit.

The impossibility to fulfil the debtor’s obligations due to causes that are independent from the debtor exclude liability.

The new regulation introduced by Cura Italia decree provides a genuine interpretation of these civil code provisions in relation to the Covid-19 containment measures that are defined as a cause that cannot be attributed to the debtor. However, this does not automatically exclude liability, because each case must be carefully examined by a court. In other terms, the debtor must prove the compliance with containment measures and that this made it impossible, either totally or partially, to fulfil the payment.

The court will have to examine and justify, for each case, the implementation of the specific containment measures under Law Decree no. 6 of 2020, analysing if these have actually made it impossible to fulfil the payment. To make a practical example, it is clear that the closure of a factory makes production and, subsequently, delivery of goods, impossible. In this case, the supplier will certainly be indemnified against any liability.

On the other hand, a more complex case arises if the factory is not closed, as it falls within those allowed activities, but it cannot procure the necessary subcontractors’ raw materials or semi-finished products.

In this latter scenario, each single case need to be evaluated by the court. It must be pointed out that the regulation under analysis seems to refer mostly to the case of delayed payment, rather than that of total and final unpayment, assuming that containment measures should be temporary. In this case, the regulation expressly provides that the creditor cannot apply for damages due to delayed payment or claim for penalties or limitation of actions, if provided. In fact, the regulation acts mostly as a justification for damages due to delayed payments, rather that total unpayment.

To this regard, a distinction must be made between definite impossibility to pay and temporary impossibility to pay. In bilateral contracts, the total impossibility to pay that is not attributable to the debtor determines the lapse of the obligation and the relief of the creditor, who cannot claim the consideration to the other party, according to the provisions under articles 1256 and 1463 of e Italian Civil Code, which however are not referred to in art. 91 of “Cura Italia” decree.

Therefore, if the producer closed the factory in compliance with containment measures and, subsequently, is not able to provide the expected product, save for any default, will be possibly relieved from the obligation, will not have any right to receive the agreed consideration, or will have to return it if this was already collected, and will not have to compensate for damage according to the provisions under art. 91, part 1, of “Cura Italia” decree.

If the impossibility is temporary -  and this will be the most frequent case – the obligation does not lapse, but the debtor will not be liable for the delay. Pursuant to art 1256, para. 2, f the Italian Civil Code, the obligation will lapse if the debtor proves that, due to the nature or subject of the obligation, a delayed fulfilment would be unreasonable or the creditor is no more interested in it.

Similarly, in case of partial impossibility to fulfil an obligation, the debtor is relieved by fulfilling the remaining possible part of such obligation, as provided under art.1258 of the Italian Civil Code, save for the reduction in the consideration or the withdrawal of the creditor if this proves to be not significantly interested in the partial payment (art.1464 of the Italian Civil Code). In all cases described above, if the impossibility to fulfil an obligation is due to the observance of containment measures, there will not be compensatory consequences due to the effects of art.91 of Cura Italia decree.

Commercial leases

Commercial leases are meant as leases of property to be used for other purposes than dwelling. Many traders, professionals and companies are claiming not to pay their lessors, either totally or partially, lease rentals related to shops, offices or businesses that cannot be used due to their closure, following the recent government provisions on public health.

Many and different opinions on this issue arose. It is reasonable to try and limit costs in order to reduce the negative economic impact caused by the impossibility to provide services and products during the closure of business activities and afterwards, due to the general recession that will derive.

In juridical terms, this problem arises only for the closure period, according to the containment measures implemented by the government, so from 12 March 2020 for commercial activities, in compliance with Presidential Decree dated 11 March 2020, and from 25 March 2020 for industrial and commercial activities, in compliance with Presidential Decree dated 22 March 2020, up to 13 April 2020 as provided by recent art 1 of Presidential decree dated 1 April 2020 and by regional orders, including that of Lombardy region dated 4 April 2020 n. 521, which extended the closure of activities up to 13 April.

However, some distinctions must be specified. First of all, under art. 65 of “Cura Italia” decree, a tax credit equal to 60% of the lease rental relevant to March 2020 is granted to those subjects carrying out business activities in leased premises falling within the C/1 category (shops and workshops). Such tax credit is not granted to activities under annexes 1 and 2 of Presidential Decree dated 11 March 2020 and can exclusively be offset, pursuant to art. 17 of legislative decree dated 9 July 1997, no. 241.

Maybe this tax credit will be granted also for April – currently concerned by containment measures up to 13 April – but certainly this provision is aimed at significantly reducing the economic – rather than financial – impact deriving from the temporary closure of commercial premises. On the other hand, the case of leases of offices and commercial or production sites that do not fall within the C/1 category but whose activities are suspended, is more complicated.

Some lessees, in order to try and not pay rentals, recurred to the (partial) impossibility to fulfil their obligations provided under articles 1256 and 1464 of the Italian Civil Code. However, the above pleaded articles, as mentioned, which are not referred to in art. 91 of “Cura Italia” decree, do not seem to legitimate the final omitted payment of rental, since the impossibility to perform the activity, which should relieve the lessee from the payment of rentals, actually does not impact the lessor, who continues carrying out its full activity.

In fact, the main activity of the lessor, as described under art. 1575 of the Italian Civil Code, is the delivery of the located good to the lessee in good conditions, maintaining it in such good conditions for the entire term of contract and in granting its pacific use. It is clear that, at the time of Coronavirus, leased real estate remain to the lessee and, therefore, the activity of the lessor is not impossible, nor defaulted.

Moreover, the suspension of the activity should have, for now, a very limited time scope compared to the term of a commercial agreement (generally, and according to law, of six-plus-six years) and, therefore, the substantial economic reason underlying the whole agreement does not fail. It must been pointed out that leased real estate does not generally have an exclusively commercial or production function, since it is also used by the entrepreneur or professional as warehouse, office, headquarter, etc.

On the other hand, the main activity of the lessee is identified under art. 1571 of the Italian Civil Code, and consists in the payment of the agreed rental, generally in cash. Such activity is never objectively impossible, since money is defined as a fungible and always available good. Therefore, there is neither impossibility in the main obligation of the lessee.

Lastly, in the specific case of professional offices, art. 1, para. 1, letter. a, of Presidential Decree dated 22 March 2020, so-called “Chiudi Italia” decree, provides that professional activities are not suspended and provisions under art. 1, para. 7 of Presidential Decree dated 11 March 2020 remain valid, providing the continuity of professional activities through smart working or by adopting specific safety protocols.

In Lombardy region, however, the Order of Regione Lombardia dated 21 March 2020 no.514 provides that activities of professional firms are suspended, except those related to services that cannot be deferred, urgent services and services that are related to terms and deadlines.

The above was specified in the Order of Regione Lombardia no.521 dated 4 April 2020, which provides, under para. 1,4, the continuity of legal, accounting, corporate and management advisory, architectural, engineering, IT and communication services through smart working, except for urgent services or those services that cannot be deferred or that are useful for the provision of urgent services.

In conclusion, the economic damage deriving from Covid-19 containment measures seem to remain a business risk for the lessee – as long as the measures are limited in time or no specific regulation or favourable case law are issued.

The only advantage for the lessee deriving from the provisions under art. 91 of “Cura Italia” decree seems to be the exemption – in case of delayed payment of rentals – from the payment of any compensations, from criminal consequences, from contractual limitations of actions, and (following an extended but reasonable interpretation of the regulation) from incurring a default eviction, provided that the delayed payment is reasonable and falls within the scope of articles 1175 and 1375 of the Italian Civil Code as concerns fairness and good faith.

The case of the termination of a contract due to excessive onerousness, provided under art. 1467 of the Italian Civil Code seems to better suit the case at issue. In fact, it allows the lessee to terminate the contract when the obligation, i.e. the payment of rentals, is too onerous due to the occurrence of extraordinary and unforeseeable events. Certainly, the current epidemic and the restrictive government provisions adopted accordingly are objectively extraordinary and unforeseeable events. However, the solution presents two important critical issues.

The first one refers to the question on whether this regulation is applicable to long-term contracts even though the excessive onerousness is temporary. The second one concerns the kind of protection granted to the party that is in difficulty, i.e. the right to terminate the contract. This protection will only benefit those entrepreneurs or professionals who intend to definitely close their activity in the leased property and who can therefore opt for this solution.

However, the right to terminate the contract is always due to the lessee pursuant to art. 27 of Law no. 392 dated 27 July 1978, which provides that, regardless of the contractual terms, the lessee can terminate the contract at any time if serious events occur. The difference consists in the fact that in case of termination due to serious events, a sixmonths’ notice is required from the lessee.

Lastly, the last paragraph of art. 1467 of the Italian Civil Code gives the lessor the right to avoid the termination of contract proposed by the counterparty by proposing to properly amend the amount of the rent.

Conclusions on commercial leases

My advice for both lessors and lessees is to contact the counterparty and decide in good faith on a temporary reduction of the rental fee and/or an extension according to a fair commercial practice that is arising in these days. This contractual option responds to solidarity principles, which should inspire us all in this historical moment that is undermining the market and everyone’s life, but also responds to the economic interest of both parties.

In fact, on the one hand, businesses and professionals are interested in reducing costs – which could be crucial for them – and, on the other hand, lessors do not want to have their properties vacant maybe for months and relocate them at a lower fee, bearing also agency costs and causing a higher damage than that derived from a small economic renunciation, i.e. an agreed discount.