The Russian invasion of Ukraine: effects on global trade and remedies available under Italian law

Luciano Castelli

LCA Studio Legale, Milan

luciano.castelli@lcalex.it

Giuseppe Rizzo

LCA Studio Legale, Milan

giuseppe.rizzo@lcalex.it

Fiammetta Giuliani

LCA Studio Legale, Milan

fiammetta.giuliani@lcalex.it

Giacomo Cioccarelli

LCA Studio Legale, Milan

giacomo.cioccarelli@lcalex.it

On 24 February 2022, Russian armed forces enacted a full-fledged invasion of Ukrainian territory. War sparked on the burning coals of the conflict already ongoing in the Donetsk and Luhansk province, known as the Donbass region, and the Russian invasion of Crimea. Because of the invasion, several sanctions severely impacting the Russian economy have been issued by the international community against Russia and many of its citizens.

Given the fact that war in Ukraine and consequent sanctions are affecting Italian commercial transactions, the purpose of this article is to examine the remedies provided by Italian law to contractual parties being in an ‘emergency situation’ and to understand if such remedies are (still) applicable in the current context of the Russian-Ukrainian conflict.

Remedies

The Russian-Ukrainian war has had numerous implications such as: economic instability leading to a climate unfavourable to investment and trade; increased geopolitical risks (possibility of embargoes, sanctions or disruptions in supply chains) and a simultaneous reduction in market opportunities.

It has also increased the risks of: breach of contract (in the event of total and absolute impossibility of performing contractual obligations); delay in performance and application of penalties; and raising the cost of performance due to higher costs that the contractual parties may have to sustain.

To reduce risks of altering the contractual balance, parties may agree on specific provisions which regulate such situations. In the practice of national and international commercial agreements, three categories of contractual remedies can be usually identified:

1. Hardship clauses

Such clauses give the right to the party in breach to ask for renegotiation of the contract when, because of unforeseeable events occurring after the signing of the contract, performance has become too burdensome. If the parties fail to find an agreement through negotiation, either one may resort to the courts, and ask for termination or modification of the contractual conditions in order to restore the original balance.

2. Force majeure clauses

These clauses aim to protect the parties from liability by allowing termination of a contract when unforeseeable events beyond the parties’ control definitively or temporarily prevent performance of contractual obligations.[1]

3. ‘MAC – material adverse change’ or ‘material adverse effect’ clauses

These clauses define a series of events or conditions upon the occurrence of which one of the contractual parties has the right to terminate and/or modify the agreement. Such events must qualify as unforeseeable circumstances capable of compromising the validity or convenience of the deal.

However, if nothing has been agreed, the Italian legal system provides three outcomes to parties seeking to resolve a situation that has become unfair for either of them.

Firstly, the legal principles of the Italian system, such as good faith, nudge the parties to attempt an amicable negotiation to restore balance within the contract. Secondly, the parties may claim that the performance of the agreement has become impossible and, therefore, they may ask for its termination. Finally, the parties may argue that they are in an unfair situation and ask the court to terminate the contract or restore the balance of its terms.

Duty to negotiate

In case contractual conditions have become imbalanced as a result of the war, redetermining the contractual terms to ensure a renewed balance could result from: (1) an initiative of the advantaged party; (2) provisions aimed at protecting equity between parties contained in the law and the legal system in general (pursuant to Art 1374 of the Italian Civil code) and; (4) the obligations of interpretation and performance of the contract in good faith (pursuant to Arts 1366 and 1375 of the Italian Civil code).[2]

Many Italian Supreme Court decisions provide that the principles of good faith, social responsibility and fairness require parties to act in a way that preserves the interests of the other, irrespective of specific contractual obligations or provisions of law (see Supreme Court 26 June 2018, n 23069). This is insofar as such behaviour does not: (1) impose an excessive sacrifice upon the party not suffering from the imbalance (see Supreme Court 4 May 2009, n 10182); or (2) harm other values, such as the interest of the party not suffering from the imbalance (see Supreme Court 15 March 2004, n 5240).

Such principles have also been recently recalled by local courts (see, inter alia, to Court of Ascoli Piceno 20 March 2023, n 172; Court of Rome 24 October 2022, n 15668). The duty to negotiate and integrate the contract through the general principles of the legal system is subject to some additional limitations, as judges are bound only to apply said principles by interpreting ambiguous or absent contractual terms, in this latter case by deciding according to how the parties would have wanted to address the unregulated scenario (see Court of Rome 24 October 2022, n 15668).

Supervening impossibility of performance

Supervening impossibility (impossibilità sopravvenuta) is a remedy regulated by Articles 1256, 1463 and 1464 of the Italian Civil Code. According to these rules, if due to a circumstance unforeseeable at the time of the conclusion of the contract a party is unable to perform its obligations, the following scenarios arise:[3] (1) if it is a permanent impossibility, the party is entitled to terminate the contract; (2) if it is a temporary impossibility, suspension of the contractual obligations may be requested. The suspension will last until the unforeseeable event has ended or there is no longer any interest in performance.

In case law, Italian judges have identified two elements which should coexist: performance, and absent negligence by the non-performing party.

Performance has become objectively impossible. During the Covid-19 pandemic, case law remarked that performance can only become impossible when it concerns non-replaceable goods or services, therefore excluding the possibility of invoking supervening impossibility in relation to payment obligations (see Supreme Court 22 June 2022, n 20152; Court of Florence 6 October 2023, n 1475; Court of Rome 4 August 2022, n 12319).

Absent negligence by the non-performing party, performance failure must be the consequence of an unforeseeable event. Consequently, the non-performing party may not rely on supervening impossibility if the event was easily and reasonably foreseeable with common diligence (see Supreme Court 8 June 2018, n 14915).

The foreseeability requirement has proved to be particularly strict. Indeed, even in the context of the Covid-19 pandemic, courts have denied that the nationwide lockdowns were ‘unforeseeable’, since ‘the agreement was dated 5 March 2020 [just four days before Italian lockdown] when, even though lockdown was not already decided, the worldwide diffusion of Covid-19 and its mortal effects were public and broadly known’ (see Court of Rimini 11 January 2023, n 837).

Supervening excessive onerousness

When the performance of contractual obligations becomes unreasonably onerous for one of the parties due to supervening, extraordinary and unpredictable events, the law provides for the remedy of supervening excessive onerousness (eccessiva onerosità sopravvenuta), governed by Article 1467 of Italian Civil Code.

In this case, the affected party may request the termination of the contract, whereas the other party may offer to restore the balance, thereby renegotiating its obligations.

Clearly, to invoke this remedy, the party must prove that its obligation has become too burdensome due to unforeseeable and extraordinary events. Indeed, case law has ruled that a hardship situation under Italian law may arise from major economic crises, such as that caused by the Covid-19 pandemic. In these scenarios, the parties are bound by a general duty of good faith, which obliges them to renegotiate an agreement should the conditions that led to the execution of the contract change due to external events (see Supreme Court 8 February 2024, n 2344; Court of Rome 27 August 2020).

Conclusion

After assessing all available remedies under Italian law, this analysis will lead to one of two outcomes, depending on the time at which the contract was signed.

Should the parties have entered into an agreement when the Russian-Ukrainian war had already begun, it is hard to invoke a judicial termination successfully.

In that case, any dysfunction caused by the war would be considered foreseeable.

Indeed, until a few years ago, material adverse change clauses were quite rare in domestic contracts. More recently, however, this practice has changed markedly, and now best practice suggests that contracts include clauses allowing the parties to terminate the contract upon the occurrence of certain events.

In contrast, judicial action based on hardship concerning contracts entered into before Russia’s invasion of Ukraine would have much higher chances of success.