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[IMPORTANT NOTE: This document is updated as at 22 April 2022; since the state of the crisis and the related consequences are constantly evolving, the contents of this memorandum may be subject to further changes]
1. Introduction
The current acute crisis ([1]) concerning commodity prices and commodity shortages, aggravated by the ongoing conflict in Ukraine ([2]), is having a remarkable impact on the performance of commercial contracts. It should also be noted that the current crisis has considerably deepened also in relation to the significant economic recovery in Italy after the collapse due to the Covid-19 pandemic ([3]).
In spite of the fact that the current economic environment is now characterised by a general economic recovery, the problems associated with contractual imbalances remain. From a legal point of view, the problem is once again being posed - which has already arisen during the Covid-19 pandemic - of identifying the legal institutions to adapt the contractual regulation to economic and legal contingencies, also taking into account recent case law developments triggered precisely by the debate that arose with the pandemic.
In particular, we witness a dual set of problems for traders: on the one hand, there is the issue of a remedy for suppliers of products and services who find it difficult to perform contracts due to the rising costs and shortages of raw materials; on the other hand, there is the need for a remedy for customers suffering from the consequent delays and cancellations of supply of products.
2. Legal framework
2.1 Legal institutions
2.1.1 Institutions of general application under the Italian Civil Code (supervening impossibility of performance and supervening hardship in performance)
The considerable increase in the prices of commodities and electricity could, in certain respects, be considered a force majeure event.
The Italian Civil Code does not provide a real definition of force majeure but it does provide for some institutions that can be applied upon the occurrence of events referrable to such concept.
In particular, for contracts subject to Italian law, without prejudice to the relevance of certain contractual clauses (see the so-called force majeure and/or hardship clauses, including the so-called material adverse changes - MAC clauses typical of international practice, sometimes transposed also in domestic practice, which will be discussed below), for the purposes hereof reference should be made to the following institutions: (i) supervening impossibility of performance for reasons not attributable to the obligor (Articles 1218, 1256 and 1463 et seq. of the Italian Civil Code); and (ii) supervening hardship in performance (Article 1467 et seq. of the Italian Civil Code).
Before commenting in detail on the aforementioned institutions, it should be noted that said remedies suffer from a significant operational limit, since they are instruments intended to cause the extinction of the contractual obligation.
The inadequacy of such type of remedies, already noted during the Covid-19 outbreak, seems even more evident in an economic context of economic recovery, such as the current one, that can hardly tolerate the termination of contracts and the consequent termination of legal relations. Precisely in view of such inadequacy, already during the Covid-19 outbreak, the Court of Cassation, in thematic report No. 56 of 8 July 2020 of Ufficio del Massimario e del Ruolo (Abstracts and Rolls Office) (the “Report”), besides providing further insights into the institutions in question, endorsed the guidance, predominantly upheld by legal theory ([4]), which maintained the existence of a real regulatory obligation to renegotiate the contract in order to revise its balance.
a) Supervening impossibility of performance
Supervening impossibility of performance (pursuant to Articles 1218, 1256 and 1463 et seq. of the Italian Civil Code) means any situation preventing performance that cannot be foreseen and cannot be overcome with the effort that may be legitimately required of the obligor.
In general terms, a default corresponds to the non-performance or improper performance of the obligation arising from the contract, a circumstance that may expose the defaulting party to contractual liability towards the other party. However, according to the general principle laid down in Article 1218 of the Italian Civil Code, if the non-performing party proves that the default was a consequence of the impossibility of performance for “reasons not attributable to such party”, the latter may be held not liable.
More specifically, while the original impossibility of performance prevents the obligation itself from arising, the impossibility occurring after the establishment of the relationship between the parties, on certain conditions, causes its extinction, with the consequent termination by law of the contractual obligation and the release of the obligor from the obligation to perform.
As the Court pointed out in its Report, the scope for termination on the ground of supervening impossibility is extremely limited, being such a remedy available only where the obligation arising from the contract has become completely and definitely impossible to perform or impracticable. This poses a number of problems in relation to monetary obligations which, as such, as highlighted by the Court itself, never become impossible ([5]), “since they are not subject to a material or legal objective impossibility, but only to a subjective unfeasibility, connected to the unavailability or scarcity of cash flows” ([6]).
Hence, a mere increased difficulty of performance or, yet, an impossibility of performance exclusively related to the obligor’s subjective sphere is not sufficient for the application of the institution in question. On the contrary, it is necessary that the contractual obligation in itself has become objectively impossible to perform and/or that the actions necessary to fulfil the obligation cannot be required of the obligor because they have become objectively too burdensome. Of course, it is imperative to verify that the situation preventing performance has not been caused by the obligor’s wilful or negligent conduct and therefore cannot be attributed to the obligor. In this respect, case law considers it sufficient to establish, on the basis of a factual assessment, that the impediment occurred for any cause that the obligor was neither obliged nor in a position to avoid.
Without prejudice to the foregoing, the concept of impossibility of performance may be further divided into the following sub-categories: (i) permanent impossibility (caused by an irreversible impediment or an impediment whose end cannot be foreseen), (ii) temporary impossibility (caused by a temporary impediment), and (iii) partial impossibility implying the extinction of the contractual obligation only for the part which has become impossible.
As to the effects, once the above conditions have been verified, the contractual obligation that has become impossible (a) is extinguished, and consequently the contract is terminated by law (in the event of total or partial impossibility), where such impossibility is absolute and final; or (b) may be lawfully suspended, where such impossibility is only temporary.
With specific reference to temporary impossibility, pursuant to the combined provisions of Articles 1256 and 1463 of the Italian Civil Code, the contract shall not be terminated but the performance of obligations may be legitimately suspended; once the reason for the temporary suspension is overcome, the contract shall become fully effective again. On the contrary, suspended obligations will be extinguished if the impossibility continues until when, having regard to the purpose of the obligation or the nature of its object, the obligor can no longer be considered liable to perform the obligation or the beneficiary is no longer interested in its performance.
In case of bilateral contracts, the extinction of any of the contractual obligations shall cause, pursuant to Article 1463 of the Italian Civil Code, the termination of the entire contractual obligation. Such termination shall occur by law, with no need for any initiative by the party or intervention by the court. However, in the event of disputes, the parties may request the court to issue a declaratory judgment stating, unequivocally, that the contract has been terminated on the ground of supervening impossibility of performance and allowing, if necessary, to claim, pursuant to Article 1463 of Italian the Civil Code, the reimbursement (according to the rules on reimbursement of undue payments laid down in Article 2033 of the Italian Civil Code) of the counter-performance, if the same has already been performed.
By contrast, in the case of multi-party contracts, the impossibility of performance of any of the parties shall not imply the termination of the contract with respect to the other parties, unless the performance being prevented is to be considered, in the case in point, essential for all the parties.
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Now that the essential traits of supervening impossibility have been outlined, albeit briefly, it is necessary to investigate its relevance in the context under consideration.
In general, it appears that the institutions in question may have a concrete scope of application primarily in the hypothesis of shortage of raw materials, while it seems not to be the appropriate remedy in cases of increased energy and commodity costs.
In any event, also in relation to cases of shortage of raw materials, it would be difficult to establish the grounds of total or partial impossibility; at most, one could assess the existence of elements justifying a suspension of the obligation, according to the temporary impossibility pattern.
b) Supervening hardship
In a scenario where the cost of commodities is rising sharply, supervening hardship seems to be, prima facie, the most appropriate legal institution.
Indeed, as said, rather than an “impossibility” of performance, the current economic dynamics seem to amount to a situation whereby the contractual terms and conditions originally agreed upon are no longer appropriate to the changed economic scenario and are unbalanced in favour of one contracting party ([7]).
The institution of supervening hardship (pursuant to Articles 1467 et seq. of the Italian Civil Code) allows for termination of contracts whose balance is altered by supervening events - extraordinary and unpredictable when the contract was entered into- which do not fall within the normal contractual risk and which make the performance of any of the obligations underlying the contract excessively onerous or objectively debased in value and/or usefulness.
The assessment of the existence of the requirements set out above must be carried out through a concrete investigation.
First of all, in order for supervening hardship to arise, there must be a tangible imbalance in the value ratio between the respective contractual obligations ([8]).
Secondly, said imbalance in the value of performances must be caused by extraordinary events (to be understood objectively, on the basis of measurable elements, such as frequency, size and intensity of the event) and unpredictable events (to be understood subjectively ([9]), in relation to the relevant obligation, i.e. going beyond fluctuations in the value of performances and normal market fluctuations).
Thirdly, it is also necessary to establish that the risk brought by the above-mentioned extraordinary and unpredictable contingencies exceeds the normal contractual risk, i.e. the margin of risk inherent in any contractual arrangement ([10]).
With regard to the remedies that may be invoked when the conditions described above are met, the legislator provided first of all that the party burdened by the increased onerousness may apply to the court for the termination of the contract.
In the event of a request for termination, the counterparty that is interested in maintaining the contractual commitment in place may offer to take the contract back to equity by bringing the imbalance in the value of the contractual performances within the limits of normal risk, thus avoiding termination.
It is evident that the remedy provided for by the rule, taken literally, has a limit consisting in the possibility for the party affected by supervening hardship to seek only the judicial termination of the contract, with the other party having only the possibility of offering to bring the contract back to equity in order to avoid its termination.
In other words, the faculty to revise the inequitable contract is reserved to the party that, in theory, is less interested in obtaining the rebalancing, which would imply a modification of the contract to its detriment and, moreover, within a considerably circumscribed scope of application, since said faculty can only be exercised to block a claim for termination; therefore, restoration of equity cannot be imposed by the plaintiff nor be triggered at the court’s own initiative.
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Excessive hardship, as outlined above, applies within extremely strict limits, namely the limits of unpredictability and extraordinariness.
Therefore, with reference to the relevance of the institutions in question in the context of the current crisis, it is necessary to ascertain whether, having regard to the reference market, the increase in commodities costs can be considered as unpredictable and extraordinary, taking into account elements such as the extent and timing of the costs increase, also in relation to the reference market trend in previous years.
Without prejudice to the above-mentioned verifications, it must be stressed once again that the party affected by the contractual imbalance caused by the increase in commodity costs would only be entitled to seek termination of the contract as a remedy for its own protection: once the termination remedy has been invoked, it is a mere faculty of the counterparty, which is taking advantage from the supervening hardship, to offer to bring the contract back to equity in order to avoid its termination.
2.1.2. Existence of a regulatory obligation to renegotiate
As pointed out in the preceding paragraphs, the remedies expressly provided for by the legislator are remedies intended to terminate and not to preserve the contract. Indeed, said remedies do not provide for the renegotiation of the contract, with the sole exception of the case of supervening hardship where, as already mentioned, the right to avoid termination is reserved to the “benefited” party and not to the party suffering hardship.
The spread of the Covid-19 pandemic has highlighted the inadequacy of such a regulatory structure (which, moreover, is not in line with other international experiences), restarting the debate of scholars and case law on the existence of the parties’ regulatory obligation, in cases such as those under consideration, to renegotiate the contract in order to revise its negotiating structure and restore the exchange balance.
On the other hand, even before the pandemic, leading legal theory ([11]) had already acknowledged a legal obligation to renegotiate, primarily based on supplementary equity (pursuant to Article 1374 of the Italian Civil Code) and on the obligations to interpret and perform the contract in good faith (pursuant to Articles 1366 and 1375 of the Italian Civil Code).
An openness in this sense was also acknowledged by case law which, although hesitant, in some judgments on the merits upheld the conclusion that such an obligation exists ([12]), even in the absence of an agreement between the parties, upon the occurrence of factual or legal contingencies.
Without claiming to be exhaustive, the guideline in question recognises that the obligation to renegotiate has a broader scope of application than that of the institution of supervening hardship, since it applies to the so-called “atypical contingencies” ([13]) which, as such, fall beyond the scope of application of the rules on supervening hardship and which relate not only to the hardship in itself, but also to the occurrence of new needs and new opportunity criteria ([14]).
According to such a reconstruction, relying on Article 1366 of the Italian Civil Code, it must be held that a long-term contract contains, as a “blank” clause ([15]), the common intention of the parties to revise, adjust or amend the contractual arrangement when the factual situation changes, if the agreed terms no longer correspond to the economic logic underlying the entering into of the contract.
The advantage of such guidance is undeniable: irrespective of the stringent requirements of extraordinariness and unpredictability referred to in Article 1467 of the Italian Civil Code, the party adversely affected by factual or legal contingencies impacting on the contractual balance (i.e. the party actually interested in achieving a rebalancing) would be entitled to initiate a procedure to renegotiate the contract in order to restore its balance; on the other hand, the other party’s refusal to renegotiate, pursuant to Article 1375 of the Italian Civil Code, shall be regarded as opportunistic behaviour and therefore not protected by the legal system, with all the unavoidable consequences, first and foremost in terms of compensation.
As already mentioned, the Supreme Court took up in the Report the approaches indicated by legal theory and case law in the sense of reaffirming the existence of an obligation to renegotiate, on the basis of the regulatory parameters already determined in the past.
First of all, the Court, taking as a starting point Article 1375 of the Italian Civil Code and the systematic scope of objective good faith in the performance of the contract, assumed renegotiation to be a necessary step in order to adapt the contract to supervening circumstances and needs, classifying the general clause of good faith, in this perspective, as a real guarantee of fair conduct in the implementation phase of the contract.
Besides that, the Court stated in the Report that, by virtue of the economic-legal assessment of the bona fides criterion and of the parties’ obligations to cooperate in the performance of the contract, the adjustment of the contract content in connection with the obligation to renegotiate is not in contrast with private autonomy, but, on the contrary, enables the accomplishment of the negotiating result envisaged from the outset by the parties, bringing the arrangement into line with the changed circumstances.
The Court further added that also the interpretation of the contract according to good faith, provided for by Article 1366 of the Italian Civil Code, can easily lead to the identification of an obligation to renegotiate, noting that, on the basis of said provision, it was “possible to assume that the parties, had they been aware thereof, would have in any case negotiated on the basis of the conditions that had arisen, since a negotiation based on a market situation not corresponding to reality would have turned out to be irrational” ([16]).
With regard to the scope of the obligation in question, it should be noted that the obligation to renegotiate only requires that new negotiations be commenced and properly conducted, and not that an agreement be reached on the various terms and conditions.
As pointed out by the Supreme Court in the Report, it follows that, in order for the party liable to renegotiate to fulfil its obligations, it is sufficient, if the conditions requiring the revision of the contract are met, that it: (i) enters into negotiations or accepts the other party’s invitation to renegotiate; and (ii) proposes re-balancing solutions that can be considered fair and acceptable in the light of the economy of the contract ([17]). On the contrary, the obliged party cannot be forced to accept tout court the requests of the disadvantaged party or to reach in any event an agreement amending the contract.
In any case, should the parties’ obligation to renegotiate be established, it could be assumed that failure to do so would not only entail compensation for damages but also expose the parties to specific performance pursuant to Article 2932 of the Italian Civil Code. Therefore, courts could be granted the power to act in the place of the parties by issuing a ruling that replaces the renegotiation agreement not entered into, thus causing the amendment of the original contract ([18]).
Having outlined the characteristics of the obligation to renegotiate as formulated by legal theory and part of case law, it is important to point out that, although the guidance in question was further confirmed during the pandemic by legal scholars and by the Supreme Court in its Report, it is still far from being consolidated in case law. Indeed, pending a ruling by the Supreme Court, merits courts’ case law emerged over the past two years is still uncertain ([19]).
Moreover, it is necessary to take into account that, operating as a sort of general “blank” clause ([20]), the remedy in question presupposes a wide interpretative discretion, being based on an economic and legal assessment of the good faith criterion that is founded on general criteria such as those of contractual solidarity.
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Increase in costs and shortage of commodities seem to represent an “atypical contingency” that fits well within the scope of application of the obligation to renegotiate.
Indeed, as previously noted, the obligation in question is not subject to a scrupulous verification of the existence of the stringent requirements of “extraordinariness” and “unpredictability”, since it is sufficient that the supervening factual or legal events are such as to justify - according to the good faith criterion - a revision of the contractual regulations.
On the other hand, such a remedy may not always result in the preservation of the contract: in fact, should one of the parties evade the obligation to renegotiate, a court would not always be in a position to satisfy the will of the parties, with the only consequence being the termination of the contractual relationship and the order to pay damages agaisnt the party that unjustly refused renegotiation.
2.1.3. Remedies provided for certain typical contracts. In particular: Article 1664 of the Italian Civil Code with regard to procurement contracts
A number of provisions laid down with respect to certain typical contracts can be of assistance precisely in order to overcome the interpretative uncertainties related to the obligation to renegotiate as illustrated above.
Indeed, in a nutshell, one may observe that the rules governing typical contracts contain a multiplicity of provisions whose rationale lies in the adaptation/amendment of the contractual regulations in order to allow the effects of the private transaction to be produced ([21]). Some of said provisions are mainly aimed at establishing the prerequisites and modalities to amend pre-set contractual terms and conditions, in order to enable the proper continuation of the performance of the contractual relationship, with more or less precise qualitative indications ([22]).
For the purposes hereof, we shall focus on the provision of Article 1664, first paragraph, of the Italian Civil Code, concerning procurement contracts ([23]), reported as “onerousness or difficulty of performance”.
The first paragraph of said article provides that, “if unforeseeable circumstances lead to increases or decreases in the cost of materials or labour that result in an increase or decrease of more than one-tenth of the total price agreed upon, the contractor or principal may request a revision of such price. The revision can only be granted for the difference exceeding one-tenth”.
Hence, when the conditions laid down by the rule are met, the party affected by the hardship may act, for conservation purposes, to obtain the rebalancing of the contractual structure.
As clarified by case law, the provision in question is of a special nature compared to Article 1467 of the Italian Civil Code and excludes its applicability, providing only for price revision instead of termination of the contract ([24]).
From an objective point of view, it should first of all be noted that for the provision in question to apply, it is sufficient that the elements are “unpredictable”, and not extraordinary too.
More specifically, the right to obtain a revision of the price is subject to the occurrence of a variation in the cost of commodities considered as “unpredictable”, according to the criterion of normality, in relation to the profile of the average contractor ([25]).
In addition, uncertainties of interpretation as to the existence of increased onerousness sufficient to justify the application of the remedy are mitigated by the indication of a fixed quantitative parameter (i.e. one-tenth of the total price).
Finally, also the revision of the contractual regulations is limited within a fixed threshold (i.e. the difference exceeding one-tenth).
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With respect to procurement contracts, the party disadvantaged by the current crisis could resort to the clause under consideration to obtain a revision of the economic conditions within the quantitative limits indicated by the rule.
In fact, the current economic scenario is characterised by an increase in the cost of commodities affecting the agreed prices and that, due to its magnitude and rapidity, could well be considered as “unpredictable”.
In order for the remedy at issue to apply, it is sufficient to verify that the above-mentioned quantitative parameters are met and that the circumstances giving rise to the increase in costs are unpredictable, with no further investigation being required as to the extraordinary nature of the event or the justification, in terms of good faith, of the contractual revision.
2.2 Contractual remedies. Practice in international commercial contracts and the unidroit principles
In a scenario where the regulatory framework lacks precise remedies for preservation and still has some interpretative uncertainty aspects, a desirable solution would be to directly include in contracts mechanisms enabling to cope with those circumstances whose occurrence could substantially unbalance the economic position of the parties, to the benefit of only one of them.
In this regard, national and international commercial practice has for some time now seen the development of specific contractual provisions designed to regulate during negotiations the effects of contingencies affecting the contractual balance.
More specifically, the most recurrent and now widespread contractual remedies in commercial practice can be divided into three categories:
Such clauses, despite having different characteristics and effects, share certain features: (i) the general function of protecting the party that, due to the occurrence of an unforeseeable situation, finds itself in a position of “weakness” with respect to the proper performance of its contractual obligations; (ii) adaptability to different (domestic or international) contexts and to different contracts; (iii) the effect of re-allocating business risk ([26]).
2.2.1 Hardship and force majeure clauses
Focusing for a moment only on force majeure and hardship clauses, it should first be noted that such two clauses operate in different ways. Force majeure relates to the performance of the obligation that is prevented by the event mentioned in the contract (in more or less specific terms) and hardship relates to the aspect concerning the economic balance between performance and counter-performance. Accordingly, the resulting effects are different: (i) force majeure generally implies the suspension of the obligations of one of the parties, excusing it from the performance and, only at a later stage, the termination of the contract (if the obligation cannot be performed or the other party is no longer interested in it); (ii) hardship clauses, on the other hand, are typically intended to trigger a renegotiation aimed at reshaping the bilateral agreement to adapt it to the effects arising from the event.
At international level, hardship and force majeure are outlined in the Unidroit Principles of International Commercial Contracts ([27]) (“PICC”).
It must be pointed out that PICCs are non-binding “soft law” instruments intended to address the issue of sectoral harmonisation of international commercial law. It is customary in international commercial contracts to regulate precisely and in detail circumstances that may amount to force majeure and hardship, as well as their consequences on the validity of the contract.
In particular, according to Article 6.2.2 of the PICC hardship is a situation where the occurrence of events fundamentally alters the equilibrium of the contract, either because of an increase in the cost of performance of one of the parties, or because of a decrease in the value of the performance received by one party. In order to establish a cause of hardship, it is necessary that: (i) events occurs or becomes known to the disadvantaged party after conclusion of the contract; (ii) events could not reasonably have been taken into account by disadvantaged party at the time the contract was concluded; (iii) events are beyond the control of the disadvantaged party; (iv) the disadvantaged party had not assumed the risk of such events.
As to the effects of hardship, Article 6.2.3 provides for the right of the disadvantaged party to request renegotiation of the contract. The request for renegotiation, which in itself does not entitle the disadvantaged party to withhold performance, must be made without undue delay and must indicate the grounds on which it is based. Upon failure to reach an agreement within a reasonable time, either party may resort to the court and, if the court finds hardship, it may (i) terminate the contract, or (ii) adapt it with a view to restoring its original equilibrium.
Force majeure is regulated by Article 7.1.7 PICC, which, first of all, assumes the general principle that non-performance by a party is excused if that party proves that (i) the non-performance was due to an impediment beyond its control; and (ii) it 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.
With regard to the consequences of the occurrence of a force majeure event, when the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.
In any event, in order to invoke the exemption from liability, the non-performing party must comply with certain procedural requirements, namely it must give notice to the other party of the impediment and its effect on its ability to perform. Indeed, if the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.
Finally, it is made clear that such provision shall not prevent the parties from exercising the right to terminate the contract or to withhold performance or request interest on money due.
In accordance with the combined provisions regarding the definitions of force majeure and hardship laid down in Articles 6.2.2. and 7.1.7. PICC, there may be events falling into both categories. In such case, it is up to the obligor to decide which remedy to apply: by invoking force majeure, the obligor may seek exemption from the consequences of non-performance; by invoking hardship, the obligor may seek to renegotiate the contract in order to keep it in force although with altered terms and conditions.
Therefore, whenever there is a possibility - either based on a specific contractual clause or on a reference to a foreign law or international treaty - to invoke force majeure, there are at least three remedies that may be adopted by the party affected by the force majeure event, namely suspension of performance, renegotiation of the contract or termination of the contract.
As concerns the suspension of the contract, it should be noted that international contracts often regulate such remedy having regard to a maximum term beyond which, if the circumstance persists, the contract is terminated or its term and conditions must be renegotiated by the parties in good faith.
The remedy of contract renegotiation, which may be adopted, for example, by entering into a written agreement amending the original contract, will consist in laying down new terms and conditions concerning the performance or, in cases of greater difficulty, in establishing a new balance in the parties’ performance given the changed circumstances. As to the remedy of contract termination, the “force majeure” clause contained in the contract may rarely operate as a cause for automatic termination, although such a remedy would be unavoidable in all those cases where performance has become impossible or no longer practicable for an indefinite period of time or for a period of time frustrating the requirements set out in the contract.
2.2.2 Material adverse changes – MAC clauses
In contrast to what has been outlined with respect to hardship and force majeure clauses, there is no international definition of MAC: the content of MAC clauses is therefore entirely left to the negotiating autonomy of the parties and depends on the outcome of negotiations between them.
First of all, it should be noted that, in contractual practice, MAC clauses have different characteristics from force majeure and hardship clauses in terms of risk allocation: in fact, they allocate the risk of negative events to only one party to the contractual relationship (which may, therefore, merely mitigate the effects thereof through an adequate negotiation) and entitle, in such a case, the other party to seek termination of the contract. Consequently, the tenor of the clause runs counter to the principle of preservation of the contract even though some formulations contain a so-called “right to cure”, which provides the party bearing the risk of the occurrence of the event with the right to remedy its occurrence.
In addition, the operation of the clauses in question is often limited to a short period of time, and it is precisely the limitation in terms of duration that somehow protects also the position of the party bearing the risk of non-performance and of possible termination of the contract.
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With regard to the contractual imbalance resulting from the significant increase in commodities costs, it is first of all necessary to verify whether or not hardship, force majeure or MAC clauses exist and whether the circumstance in question is one of those triggering them.
With respect to current contracts - also taking into account the provisions of the PICC and without prejudice to any agreements to the contrary between the parties - it may be reasonably assumed that significant increases in commodities costs following the post-pandemic recovery may amount, at least in the most affected product sectors, to an unpredictable, extraordinary circumstance beyond the control of the relevant parties for the purposes of the most common clauses of international commercial practice.
If the foregoing clauses have not been agreed upon, the remedies provided for by the law applicable to the contract shall apply to the relationship.
Should the parties fail to expressly choose the law applicable to the contract, the same shall be determined in accordance with the rules of private international law of the country of the court having jurisdiction to settle the dispute.
3. Legal aspects of the European energy crisis
3.1. Foreword: the European energy crisis and the impact on commercial contracts
In a nutshell, the current acute commodity price crisis had its origin in the natural gas sector for reasons mainly external to Europe, and subsequently spread to the European electricity sector, amplified by several factors, among which the low production of renewables in Europe and the shutdown for maintenance of several French nuclear power plants ([28]).
To give an idea of the imbalance affecting many contractual relationships, it is worth noting that in Italy net electricity prices for industry in January were the second highest in Europe ([29]): Euro 225 per megawatt hour compared to Euro 60/MWh nine months ago. A value that is 34% higher than prices in Germany Such starting point, higher than in several European countries, was then accompanied by one of the most significant increases in Europe: indeed, it was estimated that Italian electricity prices have risen by a factor of 3.7 since March 2021. This means that the cost of energy for Italian companies could reach 37 billion Euro in 2022: almost 5 times more than in 2019, and even higher than the already exorbitant 21 billion Euro in 2021. Hence, the total costs for businesses projected for 2022 would exceed the entire amount of funds allocated by the NRRP to the Ministry of Ecological Transition (34.9 billion Euro). If prices do not fall, Italy’s GDP growth could be 0.8 per cent lower than expected in the first quarter of 2022, and almost a third of jobs in the most energy-intensive sectors (500,000) would be at risk ([30]).
The energy crisis is further exacerbated by the effects of sanctions imposed on Russia in connection with the conflict in Ukraine, Russia being the European Union’s largest energy supplier ([31]). It was calculated that since May last year, Russia has reduced its supplies to European countries by 25% with a peak of -40% in January 2022 ([32]).
On the basis of the above data, it was observed ([33]) that the current energy crisis in Europe is not only extraordinarily intense and long-lasting, but it is also characterised by an additional component, namely the presence of a “combo” price crisis, with unprecedented tensions affecting both the gas and electricity markets, moreover in an interconnected way.
As a result of such an economic situation, the repercussions on business relations are as follows: one of the two parties of the producer-consumer pair finds itself in a position of semi-permanent distress (users) while the other (producers) - due to its own resources and contracts - may even find itself in a situation of unexpected profit from its activity ([34]).
Still from a legal point of view, in general terms, in the reference market, the considerations outlined in the preceding paragraphs are of particular relevance, given the peculiar structure often adopted for energy supply contracts (in particular, natural gas); indeed, the contracts in question are often structured as long-term contracts containing so-called take-or-pay clauses, whereby the purchaser undertakes to receive a minimum quantity of raw material for each contractual period, or to pay the price for it even if it is not taken ([35]). Hence, as a result of such clauses, producers transfer the risk associated with price and demand variations to their buyers.
3.2. Conclusions: legal solutions to regulate the effects of the energy crisis on commercial contracts
As mentioned, the current energy crisis has such peculiarities that it deserves a specific examination compared to the broader case of commodity price crisis.
When investigating the legal consequences of the current energy crisis, it is first necessary to ascertain whether existing contracts contain hardship, force majeure or MAC clauses: in fact it can be presumed that should this be the case, then the current tensions in the energy market would fall within the scope of application of the clauses in question as formulated in international commercial practice, without prejudice in any case to the need for a case-by-case investigation of the contractual data.
Otherwise, in the absence of the above clauses, the only remedies available will be those provided for by the law applicable to the contract.
As regards Italian law, reference has already been made to the limited applicability of the remedy of supervening impossibility of performance in the case of mere economic difficulties connected with the procurement of raw materials.
However, such conclusion must be re-evaluated taking into account the unprecedented geopolitical situation related to reduced supplies from Russia.
Given the European market’s heavy dependence on Russian exports, it cannot be ruled out that the situation in the coming months may evolve in the sense of taking on the connotations of supervening impossibility, in the form of a temporary impossibility.
Without prejudice to the foregoing, the remedy offered by the institution of supervening hardship seems however applicable to a larger number of cases.
Indeed, it might be reasonable to argue that the conditions of extraordinariness and unpredictability required by Article 1467 of the Italian Civil Code are satisfied.
This is supported not only by the extent of the increase in costs but also by the rapidity of such an increase and the anomalies arising from the lack of Russian supplies.
In this regard, it should be stressed that the institution of hardship inevitably results in the breaking of the contract and not in its preservation. Indeed, the party burdened by the increased onerousness is entitled only to terminate the contract. The possibility to take the contract back to equity could only result from an initiative of the party taking advantage of the supervening contractual imbalance in order to avoid termination of the contract.
However, a possible request to renegotiate the contract could be based on the provisions on supplementary equity (pursuant to Article 1374 of the Italian Civil Code) and on the obligations to interpret and perform the contract in good faith (pursuant to Articles 1366 and 1375 of the Italian Civil Code).
Indeed, from this perspective, the totally extraordinary and anomalous trend of the energy market in recent months represents a contingency that may amount to a valid prerequisite for claiming, pursuant to performance and interpretation of the contract in good faith, the existence of an obligation to renegotiate the agreed contractual regulation given the presence of a significantly different economic scenario (especially in the case of long-term contracts).
Having clarified this, it should be recalled that the existence of a regulatory obligation to renegotiate has not yet been unanimously recognised by legal theory and case law.
As a matter of fact, given the reasonable existence of the requirement of unpredictability of the energy crisis as currently shaped, a price revision pursuant to Article 1664 of the Italian Civil Code might be feasible with respect to procurement contracts: where the quantitative conditions laid down by the rule are met (i.e. an increase in the cost of raw materials resulting in an increase of more than one-tenth of the price), the contracting party suffering the imbalance may avail itself of the right to obtain a revision of the price, although within the statutory limit of the mere difference exceeding one-tenth of the price.
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[1] G. Bortoni, op.cit.
[2] The first place goes to Spain with 243 €/MWh.
[3] See more extensively “Crisi energetica: l’Italia è diversa?” (Energy Crisis: is Italy different?), by ISPI Data Lab, published on 16 February 2022; for further insights into rising commodity prices see also “Petrolio e gas senza freni: gli Usa vogliono colpire l’export russo e il mercato trema” (Oil and gas without control: the US wants to hit Russian exports and the market is quaking) by Sissi Bellomo, published in Il Sole24Ore on 7 March 2022.
[4] A. Ciò, “Venti di Guerra sul fuoco della crisi energetica” (Winds of War on the fire of energy crisis), in Quotidiano Energia, 24 February 2022.
[5] ISPI Data Lab, cit
[6] G. Bortoni, op.cit.
[7] See, on this topic, G. Bortoni, op.cit.
[8] F. Macario, op.cit.
[9] In this respect, M. L. VITALI, Clausole di forza maggiore, di hardship e di assenza di effetti sfavorevoli: riflessioni ai tempi della “grande epidemia” (Force majeure, hardship and no adverse effect clauses: reflections at the time of the “great epidemic”), in Rivista di Diritto Bancario, October/December 2020.
[10] Available at: https://www.unidroit.org/wp-content/uploads/2021/06/Unidroit-Principles-2016-Italian-bl.pdf.
[11] See ex multis, F. Macario, op. cit., R. Sacco, G. De Nova, op.cit.
[12] Ex multis, see Court of Bologna, bankruptcy division, 26 April 2013, available on Pluris, where the Court acknowledged a real obligation of renegotiation, based on the general principle of good faith in the performance of the contract. Along the same lines, Court of Bari, 14 June 2011, available on Dejure.
[13] R. Sacco, De Nova op.cit., 1708 et seq..
[14] R. Sacco, De Nova op.cit., 1708 et seq.
[15] See Court of Bologna, bankruptcy division, 26 April 2013, available on Pluris.
[16] Page 24 of the Report
[17] See in this respect page 25 of the Report.
[18] In this respect, see also R. SENIGALLIA, Le attuali sopravvenienze contrattuali tra diritto vigente e diritto vivente, in Jus Civile, No. 3, 2021.
[19] See: (i) in favour of the existence of the obligation to renegotiate because of COVID-19, Court of Rome, 27 August 2020, available on DeJure, with comment by M. Di Marzio, “COVID-19: il giudice riduce il canone delle locazioni ad uso di ristorante “(COVID-19: the court has reduced the rent for restaurant leases), in Ilprocessocivile.it, 28 September 2020; (ii) in favour of the existence of the obligation to renegotiate the contract, excluding, however, that a specific form of enforcement may be requested pursuant to Article 2932 of the Italian Civil Code, Court of Rome, 26 July 2021, No. 10161, available on DeJure; (iii) in relation to a business lease contract, the court intervened directly on the contract, ruling that, taking into account the fact that the assignor’s performance that had not been performed was the one with the greatest economic significance, the rent for the lockdown period had to be reduced by 70%, Court of Rome, 29 May 2020. To the contrary, along the line that in our legal system there is no obligation to renegotiate arising from the general principle of good faith in the performance of the contract, see: (i) Court of Rome, 30 September 2021, No. 15763, available on DeJure; (ii) Court of Rome, 19 February 2021, No. 3114, available on DeJure.
[20] See Court of Bologna, bankruptcy division, 26 April 2013 (decr.)
[21] In this regard, F. MACARIO, Rischio contrattuale e rapporti di durata nel nuovo diritto dei contratti: dalla presupposizione all’obbligo di rinegoziare, in Rivista di Diritto Civile, No. 1, 1 February 2002, page 10063.
[22] By way of example, the provisions aimed at regulating contingencies include Article 1623 of the Italian Civil Code on leases and Article 1710(2) of the Italian Civil Code on mandates.
[23] Pursuant to Article 1655 of the Italian Civil Code, a procurement contract is defined as “A contract whereby one party undertakes, with the organisation of the necessary means and with management at its own risk, the performance of a work or service in return for a monetary consideration”.
[24] Supreme Court, 31 December 2013, No. 28812.
[25] See Civil Cass., 11 July 1990, No. 7208.
[26] We speak of acute crises with reference to situations that are “apparently irreversible or that struggle to end, almost always caused by triggers, sometimes multiple and concomitant, having an external origin and a jurisdiction that is ill-defined in that it is very extensive or even globalised. During such crises, the game of roles comes to a sort of standstil and plastic effects of structural adjustment begin to occur. Today’s energy crisis in Europe is one of such crises, extraordinarily intense and long-lasting due to a variety of factors, but with an added complexity: we have entered into a, so to speak, combo price crisis, i.e. with unprecedented tensions in both the gas and electricity markets, which are to a great extent interconnected”. See, on this topic, G. Bortoni, Caro-energia ‘21-’22/ una crisi dagli effetti plastici (High energy prices ‘21-’22/ a crisis with plastic effects), 23 December 2021.
[27] The impact on the food industry, for example, is also affected by the increase in wheat prices, which rose by 5.7% in one day, reaching the highest value in nine years at USD 9.34 per “bushel” (international unit of measurement equal to about 35 litres, equivalent to slightly more than 27.2 kg of wheat and 24.5 kg of maize), see “La guerra in Ucraina fa balzare i prezzi di grano e mais: l’allarme del settore agroalimentare” (War in Ukraine has escalated a surge in wheat and maize prices: the alarm of the agri-food sector), article by Emiliano Sgambato, in Sole24Ore of 24 February 2022. Such a situation is likely to adversely affect the Italian agri-food market, also in view of the fact that Italy is the tenth largest purchaser with a value of 496 million and the second largest supplier of products with a 7% share amounting to 415 million, see, in this respect, “Guerra in Ucraina e alimentare: a rischio forniture di mais, frumento e olio di semi” (War in Ukraine and food: corn, wheat and seed oil supplies at risk), article published in Sole24Ore of 21 February 2022.
[28] An estimated double rebound in GDP of 6.5% realised in 2021 and an OECD estimate of 4.1% for the current year (however under revision due to the current international events related to the conflict in Ukraine), after the slump in 2020. See A. Sganzerla, Aumento del costo delle materie prime, rinegoziazione del contratto di durata e clausole di hardship (Rising commodity costs, renegotiation of fixed term contracts and hardship clauses), in Norme e Tributi, in Sole24ore, 7 February 2022.
[29] See in this regard F. Macario, Regole e prassi della rinegoziazione al tempo della crisi (Rules and practice of renegotiation in times of crisis), in Giustizia Civile, No. 3, 2014; R. SACCO, G. DE NOVA, Il contratto, Milan, 2016, p. 1710 et seq.
[30] Although the subject is not covered by this memorandum, it should be noted that the conclusions drawn on monetary obligations could be revised in the light of the effects of the sanctions approved against the Russian Federation in connection with the ongoing conflict in Ukraine.
[31] Page 2 of the Report.
[32] Also with regard to such circumstance, it should be noted that said conclusions could be reconsidered in the light of the effects of the sanctions approved against the Russian Federation in connection with the ongoing conflict in Ukraine.[33] In this regard, it should be taken into account that case law, in practice, tends to assess the excessive onerousness of the imbalance in strict terms, giving weight to (upward or downward) variations in the value of the economic elements originally underlying the contract to the extent of one half and, in any event, never less than one third. On this point, F. RUSCELLO, Istituzioni di diritto privato, Milan, 2011.
[34] See Civil Cassation No. 12235 of 25 May 2007; Civil Cassation No. 22936 of 19 October 2006.
[35] For this reason, the Italian Civil Code - in Article 1469 - provides that the institution in question shall not apply to contracts that are aleatory by their nature (e.g. insurance contracts) or that have been made such by the will of the parties.
