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Supply chain disruption

During the COVID-19 outbreak many debtors have invoked the concept of ‘force majeure’ to justify failure to comply with their contractual obligations.

Under Italian law, a key provision regulating the liability of the debtor is article 1218 of the Italian Civil Code (‘ICC’), according to which the debtor who does not exactly perform its obligation shall pay damages to the other party unless it is able to prove that the lack or delayed performance is not attributable to the debtor itself.

Italian law does not expressly provide for ‘force majeure’ and ‘force majeure event’ to justify non-performance of contract. However, Italian case law and scholars recognize the ‘force majeure’ doctrine and consider a ‘force majeure event’ as an event beyond the contracting party’s reasonable control, unforeseeable and occurring after the commitment to perform an obligation but before the default, that prevents or impedes the latter from performing one or more of its contractual obligations.

The party affected by a ‘force majeure event’ is relieved from its duty to perform and may be exempted from responsibility or damages, to the extent it can prove that:

(i) such impediment is beyond its reasonable control
(ii) it could not reasonably have been foreseen at the time of the conclusion of the contract,
(iii) the effects of the impediment could not reasonably have been avoided.

According to Italian case law and scholars, the main consequence of successfully invoking ‘force majeure’ is that article 1256 ICC shall apply. Pursuant to said provision, the party affected by a temporary supervening impossibility to perform shall not be liable under the contract from the date of occurrence of the event until the entire duration of the impossibility. However, Italian Courts generally tend to exclude the applicability of article 1256 ICC, and consequently of ‘force majeure’, in relation to payment obligations.

Whether the impossibility becomes definitive the party affected by the supervening impossibility is discharged of its obligations without being liable for damages, and the contract is automatically terminated by operation of law without any need for action by the parties or intervention by a judge. In such a scenario, pursuant to article 1463 ICC 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.

A measure issued by a public authority – such as those adopted by the Italian Government to mitigate the impact of the Coronavirus – could be considered an objective impossibility to perform the contract under articles 1256-1463 ICC and is specifically referred to as “factum principis”. As a matter of fact, the Law Decree no. 18/2020, adopted in the context of the COVID-19 emergency, explicitly indicates that the fulfilment of the measures issued by the Italian Government to contain the spread of the COVID-19 epidemy shall be evaluated in order to avoid debtor liability, even in connection with terms and penalty clauses related to delays or non-performance of contract.

In case a party invokes the above mentioned provisions claiming that the failure to comply with its contractual obligations was caused to the supervening impossibility, the other party may commence a legal action before the competent Court to ascertain whether performance was actually impossible and to request the return of amounts paid. In this regard, it is necessary to point out that Law Decree no. 28/2020, lately converted into law by Law no. 70/2020, introduced mandatory mediation as a precondition to court litigation for any disputes arising from breach of contract due to compliance with the measures adopted to face the COVID-19 outbreak.

Insolvency and restructuring

Over the last few months, the Italian Government enacted several measures aimed at mitigating the risk of insolvency which many companies would otherwise face in the volatile situation resulting from the COVID-19 pandemic.

By means of the s.c. “Liquidity Decree” (Law Decree no. 23/2020, adopted on 8 April 2020 and converted into Law no. 40/2020), the entry into force of the Code of Business Crisis and Insolvency (Legislative Decree no. 14/2019), which was originally scheduled on 15 August 2020, has been postponed to 1 September 2021. This decision was taken on the grounds that, given the current distressed situation, the key drivers of the new Crisis and Insolvency Code could not properly play their role, and would consequently fail to meet their purposes which could potentially have a disruptive effect.

Furthermore, the emergency provisions are deemed inadmissible by those petitions aimed at declaring the bankruptcy, the state of insolvency within a compulsory administrative liquidation and a state of insolvency within the extraordinary administration procedure for bankruptcy filed in the period between March 9, 2020, and June 30, 2020.

In addition, the Liquidity Decree contains several measures aimed at ensuring the growing concern of those companies which, before the COVID-19 crisis, were in a good standing and had a regular growing concern perspective.

In this light, the new regulations allow:

• drafting of Financial Statements of the current year, evaluating and adapting the criteria of prudence and going concern in light of the situation emerging from the last closed financial statements
• sterilizing the causes of company dissolution due to reduction or loss of share capital provided for by the Italian Civil Code
• a temporary suspension from April 8, 2020, until December 31, 2020, of the provisions subordinating shareholders’ loans in case of bankruptcy. The purpose of disabling the subordination mechanism is to encourage shareholders to become more involved in boosting company finances.

Class actions

In Italy, class actions are not widely used as a consequence of a particularly restrictive legal framework. Very few class actions have commenced over the years, and only some of them have been considered admissible by Italian Courts. The discipline of class actions has been recently reformed. The entry into force of the new regulations, originally due in April 2020, has been postponed to November 2020. Pursuant to the new provisions, Courts will be allowed to issue injunctive reliefs.

Even though class action is slowly gaining popularity in Italy – thanks also to recent attempts by the Government to improve its effectiveness – it remains to be seen whether the COVID-19 epidemic will lead to an increase in the number of class actions.

Interestingly, one of the main Italian Consumers’ Association, Codacons, is currently verifying the feasibility of a class action against the Chinese Government in order to obtain compensation for damages caused by the spread of the COVID-19 pandemic. At the moment the Codacons is collecting the declarations of interest of Italian consumers affected by COVID-19. However, Codacons - being well aware of the obstacles related to class actions in Italy- is also assessing the opportunity to bring a lawsuit overseas, perhaps in the United States.

Litigation funding

In Italy there are no specific procedural and substantive rules governing litigation funding. However, such practice is not in conflict with any mandatory rule provided by the Italian legal system. In lack of specific regulations, third party funding agreements are considered as “atypical contracts”, permitted under Section 1322, para 2 of the Italian Civil Code. The provision at stake enables parties to enter into agreements that differ from those provided by Italian law (s.c. “typical contracts”), to the extent that such non-traditional agreements are meant to pursue interests worthy of protection under Italian law.

At present, litigation funding in Italy is still quite an uncharted territory and proceedings supported by a funder in Italy are still extremely rare. However, since 2018 the practice has been gaining an increasing amount of interest in our country.

A confirmation of the growing popularity of third-party funding can also be seen in the regulation adopted by the Milan Chambers of Arbitration. From 2019, it includes a provision dealing with third party funding, which imposes specific disclosure obligations (the existence of the third-party funding and the identity of the funder).

Common opinion among experts is that in the aftermath of the COVID-19 pandemic, litigation funding could be a key tool for clients and law firms to deal with cash shortages experienced as a result of pandemic-related issues. The current situation could be a real turning point for litigation funding in Italy. As a confirmation of this possible new trend, over the last few months, the Italian legal market registered an increasing number of contacts between litigation funders and law firms.