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CORONAVIRUS AND INTERNATIONAL CONTRACT MANAGEMENT: GENERAL INDICATIONS AND OPERATIONAL SUGGESTIONS

Posted by | March 13, 2020 | comments
CORONAVIRUS AND INTERNATIONAL CONTRACT MANAGEMENT: GENERAL INDICATIONS AND OPERATIONAL SUGGESTIONS

The emergency decisions of health authorities and the health conditions of many individuals in various countries, including China and Italy, are affecting the ability of companies to regularly fulfil contracts.

This is clearly the case also in the yachting.

As a consequence, there is uncertainty related, for example, to the possible cancellation of yacht charter agreements already executed, to the possible coverage of losses arising from the cancellation of charter agreements to be executed as well as to the consequences of possible delays in performing sale, shipbuilding or refit contracts.

This article intends to provide some general indications on the management of contracts regulated by Italian law and, in the conclusions, some operational suggestions.
Firstly, under Italian law, any cause not attributable to the debtor that makes performance impossible is force majeure (art. 1256, paragraph 1, Civil Code).

According to Article 79 of the Vienna Convention on the international sale of goods, force majeure is an impediment beyond the control of a party, not reasonably foreseeable at the time of signing of the contract, which is inevitable and cannot be overcome.

Epidemics, as well as natural catastrophic events, are generally referred to in international contracts as causes of force majeure, together with wars, insurrections and acts of God and public authority (e.g. embargoes).

In any case, the application of the force majeure clause requires that these events shall have a significant impact on the party's ability to perform its obligations under the contract.

In this respect, contractual clauses almost always indicate that the external event must make performance impossible (in whole or in part). Other clauses recognize the possibility for the party to invoke force majeure even when the performance becomes excessively onerous.

This exception goes under the name of hardship and is often treated differently from force majeure in the various legal systems.

In principle, however, events which only make performance more difficult do not constitute force majeure.

In international contracts - but this is also established by various national laws - it is provided that the party concerned must promptly notify the other party, together with evidence of the force majeure event.

Therefore, as long as the party does not inform the other of the existence of force majeure, it is not exempt from fulfilling the contract and it is liable for damages for the delay.

It is important that the notification of force majeure is timely and detailed; also because, in this way, the other contracting party can suspend its performance and, in general, damage can be limited.

A delay in communication is, in certain contracts, sanctioned with the loss of the right to invoke force majeure. In general, however, it is considered that the party is liable to pay damages up to the time of the late communication, unless it proves that the delay was without fault.

This principle is expressly provided for by the Vienna Convention on the International Sale of Goods which, in Art. 79 (4), expressly provides that the party who has failed to notify the other party or has unjustifiably delayed it must pay damages.

With regards to the evidence to be provided, it is hoped that the Italian authorities will be able to provide a support to companies, which are currently unable to produce or deliver the goods to their customers, to provide proof of the impossibility of default due to the coronavirus.

In conclusion, in order to rely on force majeure event, a contracting party shall verify at least the following three points:


a. whether, in the specific case, the coronavirus or rather, the restrictions adopted by the health authorities of the various countries are such as to compromise the performance of a party and to justify the exemption from liability due to force majeure, as defined by the contract or applicable law;

b. The delay (or termination) is exclusively caused by the force majeure event;

c. The notice requirements set out in the force majeure clause or in the applicable law are satisfied.

The consequences of force majeure and contract management

In the presence of a cause of force majeure, the alternatives may be:
• suspension;
• renegotiation, or
• the termination of contracts.

The termination

In international contracts, which are very often of long duration, it is not generally foreseen that force majeure will automatically terminate the contractual relationship.

However, termination of the contract is unavoidable if the other party's performance is impossible or can no longer be performed.

The liquidation following the termination of the contract - for (valid) force majeure - will follow the criteria provided for in the contract and in the applicable law, considering that damages for non-performance, including penalties, cannot be refunded.

With regards to the restitutive profiles, Italian law provides that the party totally prevented by force majeure may not request the other party to provide compensation and must return what was received. If the impossibility concerned only a part of the performance, the other party will be entitled to a corresponding reduction (articles 1463 and 1464 of the Italian Civil Code). These criteria are often found in international contracts.


The suspension

Where there is a greater interest in maintaining the relationship, the remedy for suspension is often provided and the duration of the suspension for a short time, varying from several weeks to several months, is indicated.


As regards costs during the period of suspension, in the absence of a specific agreement, each contracting party shall be deemed to bear its own costs, since it cannot charge them to the party who legitimately pleaded force majeure.


Of course, the suspension cannot be indefinitely prolonged and, in many contracts, it is stipulated that, after a certain period, the contract must be terminated or renegotiated.

Similarly, to other legal systems, if the temporary impossibility is prolonged, Italian law allows the contract to be terminated by the creditor who no longer has an interest in the performance of the other party or, in any case, if he no longer has an appreciable interest in only partial performance (art. 1256, paragraph 2 and art. 1464 of the Civil Code).


The renegotiation

In the silence of the contract and, in any case, in a situation of uncertainty as to both the duration and the extent of the impediment, renegotiation with the other party will reasonably be the preferred route.

Renegotiation can, in the simplest cases, be:


• a written agreement on the terms of suspension and/or
• a mere shared rescheduling of delivery dates, i.e.
• an agreed extension of the duration of the contract for a period equal to the period of suspension, while,
• In the most complex cases, it will be a question of rebalancing the parties' performance and adapting it to the changed situation.

In the absence of written agreement, reference shall be made to the law chosen by the parties in the contract or, in the absence of such choice, to the law applicable to the contract.


It is not possible, of course, to give an account of all the cases, but it is clear that knowing the rules of the game also from a legal point of view prevents false steps that expose the company to litigation and, above all, serves to (re)negotiate at best, when necessary.

 

For more on this please contact us at yachtingteam@pglegal.it

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