1. Introduction
There is no stopping the rise in raw material prices, which is driving price lists up to exorbitant levels. Nor does the shortage of raw materials seem to be anywhere close to resolved. The phenomenon, originally triggered by the COVID-19 pandemic, has seen its escalation exacerbated by the conflict between Russia and Ukraine.
In order to understand this phenomenon, which is heavily influenced by geopolitical factors, it is necessary to consider its impact on the distribution chain, an impact that ultimately makes businesses increasingly vulnerable. This critical situation stems, on the one hand, from more complex supply chains that involve international scenarios and, on the other, from the volatility of raw material prices and discontinuity in the supply and procurement of the same.
The industrial sectors affected are many: first and foremost, the automotive sector. As early as 2021 it had to deal with two phenomena that greatly impacted the entire industry, i.e. the “chip crisis” and the general increase in the price of raw materials, which has skyrocketed in recent months, reaching very high percentages that have halted entire vehicle production lines. In particular, in March 2022 the following figures were recorded for some key raw materials compared with the beginning of the year: aluminum (+42%), copper (+10.7%), nickel (+130.5%), lithium (+81.1%), cobalt (+13.1%), zinc (+17%), tin (+26.3%), lead (+7.9%).
This phenomenon, which exploded with the beginning of the pandemic and was amplified by the outbreak of the war in Ukraine, has also had a significant impact on the agri-food sector, with an increase over the same period in the price of fertilizers (+170%)—an immediate consequence of the increase in the price of natural gas on the international market (219, 20%)—which not only directly affected raw materials, such as maize (28.6%) and wheat (+57%), but also had a significant impact on the entire Italian agri-food chain, to the point that the economic sustainability of several manufacturing companies has been questioned (for example, the price of timber rose by +26.5%).
A further significant negative development can be seen in energy sources. In addition to natural gas, which is known to have soared, the price of coal rose by +212.1%, and oil by +62%.
Not to mention the significance of the repercussions on the procurement sector where, due to the rising prices of raw materials and the lack of price revision clauses, we are witnessing the onset of contractual imbalances that lead to increased costs and to a consequent failure to perform contractual services, due to, among other reasons, the lack of availability of materials.
2. Urgent measures approved by the Council of Ministers
In an effort to tackle and contain this exceptional crisis, the Italian government has recently taken action on several fronts. The Council of Ministers approved two decree-laws introducing urgent measures to counter, among others, the economic effects of the crisis resulting from the exceptional increases in the prices of certain construction materials, as well as fuel and energy products.
On the one hand, Decree-Law no. 17/2022 provides for a reduction in the cost of building materials, to which was added a further increase in funding for the special “Price Adjustment Fund,” which was subsidized with an additional €150 million (Article 25).
Article 25 of Decree-Law no. 17/2022 also provides—with specific reference to contracts ongoing as of the date of entry into force of the decree, and until September 30, 2022—that the prices of construction materials subject to variations greater than 8 percent must be determined by a specific decree of the Ministry of Infrastructure and Sustainable Mobility; in parallel with this a compensation system will operate for larger expenses that economic operators in the sector will incur.
On the other hand, in addition to the foregoing, Article 23 of Decree-Law no. 21/2022 provides that the Ministry of Infrastructure and Sustainable Mobility, concerning applications for access to the Price Adjustment Fund, may grant an advance equal to 50 percent of the amount requested, within the overall limit of 50 percent of the Fund’s resources and pending completion of the preliminary investigation of the compensation applications submitted.
Other measures taken to contain the increase in energy prices include:
- A reduction in the price of petrol and diesel by €0.25 per liter for a period of 30 days from the date of entry into force of the measure;
- Introducing bonuses for fuel and tax credits for businesses;
- Strengthening price-monitoring activities;
- Monitoring in the natural gas market.
Another important measure concerns the procurement sector, where it has been established that until the end of 2022 it will be possible to suspend or extend planned services in the presence of “upward variations in the prices of certain construction materials” detected by the Ministry of Infrastructure, “or exceptional increases in the prices of fuel and energy products.” Price increases may be “assessed as force majeure and give rise to suspension” or, if they do not allow the work to be completed in time, they may give rise to extensions.
3. Rising prices and shortages of raw materials: legal remedies
The effects of the crisis in the supply chain, the consequent difficulties in finding them, and the increase in the prices of raw materials, are destined to have repercussions on ongoing contractual relationships, heavily compromising their original legal-economic structure and their regular execution. The risk of so-called “contractual contingencies” can be managed conventionally and preventively or, alternatively, legally and subsequently.
Conventional risk management usually takes place at the time the contract is concluded, through the inclusion of special clauses aimed at renegotiating, rebalancing and adapting the contractual synergies to any changes in the context. The best practice in drafting business contracts therefore contemplates the insertion of: (i) “force majeure” clauses, (ii) price revision clauses, (iii) “hardship” clauses and (iv) “M.A.C.” clauses (“material adverse change clauses”).
In the absence of specific clauses agreed upon by the parties, the management of the impact of contingencies on the interests originally established by the parties may take place within the scope the laws of the legal system applicable to each individual contract. The remedies provided by the Italian legal system for this purpose are subdivided into remedies for the avoidance of defects and remedies for the preservation of rights and can differ according to the case in point.
The increase in the prices of raw materials and consequent increase in production costs for the contracting companies is attributable to the supervening excessive onerousness of the performance, in turn caused by extraordinary and unforeseeable events and, therefore, it does not fall within the scope of normal contractual contingencies (Article 1467 of the Italian Civil Code). Regarding contracts for pecuniary consideration, for continuous or periodic performance or for deferred performance, the law offers the contractor whose performance has become more burdensome the possibility of avoiding fulfilment of the contract by applying for its judicial termination (Article 1467(2) of the Italian Civil Code). As an alternative to the general remedy of termination, resulting in the definitive loss of the commercial relationship between the parties, the legislature gives the aggrieved party of the contractual fulfilment, which has become excessively burdensome, the possibility of maintaining the contract, by offering the aggrieved party the possibility to fairly modify the terms of the contract so as to bring it within the bounds of normal risk (Article 1467(3) of the Italian Civil Code).
In order to preserve ongoing contractual relationships and in compliance with the general principle of contract preservation under Article 1367 of the Italian Civil Code, both jurisprudence and doctrine have then identified in Articles 1175 and 1375 of the Italian Civil Code the legal basis of a general obligation of the contracting parties to renegotiate and/or revise the contract, with the requirement to conduct themselves in good faith and fairness in the execution of the contract, in cases of significant alteration of the contractual balances originated by unforeseeable and sudden external causes. In particular, in Thematic Report no. 56 of July 8, 2020, the Supreme Court—starting from the pandemic that had occupied legal experts with finding solutions with respect to the contractual imbalances connected to COVID-19—observed that the contracting party that refuses to renegotiate the contractual terms may commit a breach of contractual balance, stigmatizable in terms of penalties. The solution suggested by the Supreme Court for this purpose is recourse to the judge to request specific fulfilment of an obligation, provided for by Article 2932 of the Italian Civil Code, in addition to the general request for damages for failure to respect contractual good faith. However, the jurisprudence on the merits, which has subsequently dealt with the matter, has not always given unequivocal or consistent solutions regarding this principle.
With respect to private contracts and similar atypical contracts, Italian legislation offers a special remedy provided for by Article 1664 of the Italian Civil Code which recognizes in the contractor—if during the performance of the contract, unforeseeable circumstances occurred which have led to an increase (or decrease) in the costs of labor and/or materials—the right to request a revision of the prices in the event that the increase in the price of raw materials is such as to lead to an increase of more than 10 percent in the agreed price for the contracted work.
In a hypothetical shortage of the raw materials necessary to ensure fulfilment of the obligations contractually undertaken, the concept of the supervening impossibility of fulfilment (Article 1218 of the Italian Civil Code) comes into play, centered on the concept of “force majeure,” which, although it has never been expressly defined by Italian legislation, is generally attributed to any “cause not attributable to the debtor” which makes performance impossible and, therefore, rises to the level of a cause of exclusion of liability.
The Italian legal system regulates four distinct hypotheses of impossibility of performance, which give rise to different consequences:
- Partial impossibility (Articles 1258 and 1464 of the Italian Civil Code), resulting in (i) the obligation of the debtor to perform the service that remains possible and (ii) the right of the aggrieved party to request a corresponding reduction of the service due, or to withdraw from the contract;
- Total impossibility (Article 1463 of the Italian Civil Code), which determines (i) the extinction of the debtor’s obligation and the immediate termination of the contract and (ii) the right of the aggrieved party to obtain restitution of any counter-performance;
- Final impossibility (Article 1256(1) of the Italian Civil Code), which entails the extinction of the debtor’s obligation and the immediate termination of the contract;
- Temporary impossibility (Article 1256(2) of the Italian Civil Code), which leads to the suspension of the contract and, as long as it lasts, exempts the debtor from liability for damages and/or for default.
The problem of the consequences of the occurrence of exceptional and unforeseeable events capable of significantly altering the contractual balance is also particularly felt in negotiations at the international level.
One need only think of Article 79 of the 1980 Vienna Convention on the International Sale of Goods (CISG) which expressly regulates the hypothesis of a non-performance which is justified and not attributable to the debtor, providing for the exemption of the non-performing debtor from liability to the creditor. Not to be forgotten are Articles 7.1.7 and 6.2.2 of the UNIDROIT Principles of International Commercial Contracts which, in the event of an alteration of the contractual balance, grant the disadvantaged party the right to request a renegotiation of the contract and, in the event of non-fulfilment due to an impediment attributable to unforeseeable circumstances beyond the non-fulfilling party’s control, exempt the latter from liability. Finally, the so-called PECL (Principles of European Contract Law), which provide, in addition to the obligation to renegotiate, for the power of the court to order the party who refuses to do so or does so in contempt of fairness and good faith, to pay damages, are also particularly relevant.
4. Conclusions
As the recent evolution of events has shown, the geopolitical situation is constantly evolving and is bound to have a very strong impact on the economic and legal frameworks of contractual relationships, including and especially international ones.
Unfortunately, legislative measures in this area so far have not proved sufficient to tackle the problems posed by the crisis in the distribution chain.
In the light of the above considerations, it is therefore recommended that the risk of contractual contingencies be conventionally managed by including specific and detailed clauses in contracts which may avoid or at least reduce conflicts between the parties.
In the absence of specific contractual provisions, it is advisable to inform the other party promptly of any problems or impossibility to perform the agreed services in order to be able to initiate, in compliance with the principle of good faith, a renegotiation of the contractual clauses and thus safeguard the existing commercial relationship. If this is not the case, as has been said, recourse may be had to the remedies available under the legal system.
