Principle of good faith and obligation to renegotiate contracts

PACTA SUNT SERVANDA AS LONG AS REBUS SIC STANTIBUS

According to the provisions of art. 1372 of the Italian Civil Code, the contract is binding between the parties. However, in case of supervening events capable of upsetting the balance of performance originally determined by the parties, can/shall the binding nature of the contract be coordinated with other principles of the legal system?

The question has come to the forefront with the outbreak of the COVID19 epidemic, which has brought undoubted and profound changes in the factual substratum considered as the basis of several contractual relationships whose original balance has consequently been undermined.

Legal practitioners had to deal with the requests of those who, strongly affected by the occurrence of the health emergency (which also brought the economic emergency with it), have asked for solutions that could overcome the unfairness of the agreements concluded before the pandemic.

Last July the Office of the Italian Supreme Court published a special report on this issue, offering important insights that should be borne in mind during the drafting of future contracts.

Specifically, the aforementioned report has offered a conservative solution to the contractual relationship, according to the need of balancing the principle of conservation of the contract with the rebus sic stantibus one, widely shown during the pandemic. This solution is based on the recognition of the obligation to renegotiate the contract, imposed on the party not disadvantaged by the supervening events.

According to the Office of the Supreme Court, this obligation has its legal basis in the fundamental principle of good faith and contractual fairness, which not only governs the behaviour of parties in the pre-contractual and contractual phase but can also be a source of integration of the contract. This means that renegotiation becomes an obligatory step to adapt contractual obligations to new circumstances and needs that have arisen from the supervening events capable of modifying the economic-legal structure agreed between the parties.

Therefore, the obligation to renegotiate the agreement is considered as a suitable remedy to restore the balance between costs and revenues originally intended, aligning the agreement regulation to the changed circumstances. Ultimately, far from constituting a manipulation of the will of the parties, the renegotiation would allow, indeed (except its express exclusion agreement), to ensure the proper implementation in light of the above conditions.

But be careful! The obligation to renegotiate does not also imply the obligation to conclude the amending contract, but only to take part in the new negotiations with seriousness and fairness, proposing, if necessary, fair and acceptable rebalancing solutions, in light of the economy of the contract. Therefore, the not disadvantaged party is not obliged to agree to any modification requested by the other party. It is true that it has to safeguard the interests of the counterparty, always in execution of the obligation to act in good faith, but to the extent that this does not involve an appreciable and unjustified sacrifice for itself.

According to the report under consideration, if this obligation to renegotiate should not be fulfilled, the disadvantaged party could request the substitute intervention of the judge. However, the judge could intervene on the relationship that has become unfair, bringing it back to the original equilibrium, only if the contractual regulations reveal the criteria for restoring this balance or the distribution of risk desired by the parties. In other words, the judge must be able to reconstruct the original, agreed, economic-legal structure of the relationship, refraining from intervening in the absence.

Some of the above principles have also been mentioned by recent case law. In view of the recurrence of the emergency, it is likely that further judges will soon be called to rule on this issue again.

In the light of all the above, the question of how to draw up contracts is of absolute importance. Legal practitioners will have to take into account the indications contained in the report of the Office of the Supreme Court. They will have to define in contract whether and how, in the event of supervening events affecting the balance of the contract and of failure by the contracting party not disadvantaged by these events to comply with its renegotiation obligation, the judge is put in the position to assess the distribution of the risk arising from the contract between the parties and, consequently, to intervene, bringing the relationship back into balance.

Therefore, "standard" contracts should be carefully scrutinized in a critical sense, taking on greater appeal contractual regulations that are appropriate to the specific case, regulating the distribution of risk, with reference also to these specific situations.