The impact of COVID-19 on litigation across Europe

Dentons

COVID-19 has had a significant impact on litigation across Europe. The pandemic has disrupted the management of judicial activities, as well as most contractual relationships. As a result, since the beginning of 2020, national governments and courts have had to find creative solutions to contain the spread of the disease and avoid a devastating failure of the economic and judicial system.

1. Emergency provisions for the safeguard of contractual relationships

To counteract the effects of the pandemic on contractual relationships, on March 17, 2020, the Italian government adopted the Law Decree no. 18/2020, which, in Article 91, provides that:  “Compliance with the containment measures referred to in this decree is always assessed for the purposes of excluding, pursuant to and for the purposes of articles 1218 and 1223 of the Civil Code, the debtor's liability, including in relation to the application of any forfeiture or penalties connected with delayed or omitted performance.”

According to the leading interpretation of the above law, Article 91 only provides for an easing of the burden of proof on the party attempting to claim the impossibility of performance and suggests the possibility of considering COVID-19 as an event impeding such performance, therefore not imposing any mandatory solutions on courts. Nevertheless, it offers reasonable grounds for parties facing COVID-related issues to argue their cases.

Like many other countries, Italy tried to deal with issues caused by COVID-19 through new ad hoc regulations. Since the beginning of the pandemic, several European states have adopted laws in order to protect parties facing difficulties. There has been a particular focus on safeguarding consumer, small and medium enterprises and tenants in lease contracts, especially through public financial aids. Moreover, there has been a trend of issuing new regulations aimed at safeguarding weaker contractual parties that are failing to perform their obligations.

  1. In Germany, according to a new law that entered into force on April 1, 2020, any lessee’s failure to pay rent due for April, May and June 2020 does not entitle lessors to terminate lease agreements until June 30, 2022, on the condition that the non-performance is due to the effects of the COVID-19 pandemic.
  2. In France, the effects of penalty clauses and periodic penalty payments, termination clauses and forfeiture clauses sanctioning non-performance, applicable before or during the period between March 12, 2020, and June 23, 2020, were deferred until after the end of that period.
  3. Russia adopted a special law to regulate the process of renegotiating real estate agreements and offer lessees a deferral on rent payments.
  4. In the Netherlands, there has been no new law relating to the effects of COVID-19 on contracts. However, several associations representing both lessors and lessees in the retail sector have agreed that lessors will grant a reduction in rent payments (for 50%, 75% or 100%, depending on the circumstances) for lessees that have seen a decrease in turnover of at least 25% over April, May and June 2020. The Dutch Ministry of Economy has approved the aforementioned agreement.
  5. In England and Wales, Parliament passed the Coronavirus Act 2020 in March 2020, which imposed a moratorium on commercial landlords' ability to evict non-paying tenants. The UK also enacted further laws that; (a) granted limited protection to companies from their creditors; (b) prohibited termination of contracts for supply of goods and services by reason of insolvency; (c) provided a new restructuring plan for companies in financial distress; and (d) temporarily removed the threat of personal liability for wrongful trading by directors. These new laws are described as temporary and were initially due to expire on 30 September 2020 but have gone through a series of extensions, which now end on 30 March 2021.

2. Case law on the impact of COVID-19 on contracts

An established body of case law regarding the consequences of COVID-19 on contractual performance and measures to count+96eract them is still not available, mainly due to the limited time afforded to courts to rule on the matter.

For the same reason, most of the currently accessible court judgments were issued during provisional procedures or first instance proceedings, while there are still no rulings of higher courts.
Nevertheless, common denominators among solutions adopted by national courts are already appearing.

2.1. Force majeure

Although some national courts recognize that in theory COVID-19 could be considered as a force majeure event, in practice most of them have been cautious in exempting non-performing parties from liability on this basis.

  1. In Italy, recent case law states that in order to exempt parties from liability on such legal grounds, the parties cannot simply refer to the general existence of the pandemic, but they need to prove that the impediments caused by COVID-19 made the performance of their contractual obligations impossible [see, e.g., Court of Pisa, June 30, 2020].
  2. Courts in the Netherlands, France, and Russia have issued similar rulings, maintaining that, if COVID-19 and the regulations implemented to contain its spread are not preventing performance, parties cannot invoke force majeure. For example, French courts have mostly found that the pandemic in itself did not make obligations to pay impossible and, therefore, parties still had to fulfil them.
  3. Still, there are decisions that have interpreted impediments related to COVID-19 as leading to the impossibility of performance, mostly when the parties needed to comply with laws and government regulations. For example, the Italian Court of Verona considered performance impossible when the obligation needed to be fulfilled is in a location that the party could not reach due to movement limitations imposed by the government [see, Court of Verona, July 8, 2020]. Courts in Italy have also held that government-issued lockdowns can entail at least a partial impossibility to perform, for lessees struggling to pay rent due to the suspension of their commercial activities [see, e.g., Court of Rome, August 27, 2020, and Court of Rome, May 29, 2020]. Both the Paris Court of Appeal and the Turkish Regional Courts of Appeal have considered the aforementioned circumstances as events of force majeure. Furthermore, in Spain, there was a ruling stating that airlines failing to perform their obligations due to COVID-19 and, in particular, due to government regulations constraining their activities, were facing events of force majeure and could not be held liable [see, Juzgado de lo Mercantil N°. 1 de Tarragona, Sentencia 190/2020 de 21 Dic. 2020 (LA LEY 198697/2020)]. Some French courts applied arguments similar to the above, by stating that COVID-19 or the measures taken to limit its spread can entail force majeure. To justify such rulings, the courts required the debtor to demonstrate: (i) that the pandemic genuinely prevented performance, (ii) that they could not implement any alternative measure to perform their obligations, even if only partially, and (iii) that the consequence that followed was proportionate to the extent of the impossibility. French rulings acknowledging issues related to COVID-19 as force majeure, however, also referred to different circumstances. For example, the Colmar Court of Appeals has stated that a person that could not attend a hearing because they had contracted COVID-19 was facing an event of force majeure [see, Colmar, 6th Ch, March 12, 2020, No. 20-01098].
  4. In the England and Wales, there is no law of "force majeure" as such, but most well drafted commercial contracts will contain a force majeure clause. Even so, each clause will be considered by the Courts on a case-by-case basis to see whether the wording covers Covid-19 and the different levels of impact it had on performance before a party will be relieved from liability. It is noteworthy that most force majeure clauses drafted prior to January 2021 do not refer to epidemics or pandemics as a force majeure event and so any such clause may not be engaged.

2.2. Contract renegotiation and adaptation

What is stated above does not mean that courts have not been receptive to the impediments caused by COVID-19 in commercial relationships. On the contrary, most courts in Europe have recognized the pandemic as an unforeseen circumstance, which parties could not prevent nor overcome, and which made the performance of obligations more difficult. However, to address this situation, they have often chosen to apply measures aimed at restoring the disrupted contractual balance, while discarding those leading to contract termination, as it often would not have been in the interest of the parties.

  1. In Italy, an increasingly influential body of case law has claimed that, according to general principles of good faith and fairness inherent in all contractual relationships, there is a duty for parties to renegotiate the contract in the event of a disruption of its balance due to a significant change in circumstances. Courts have gone as far as suggesting that, when such a duty is not met, the aggrieved party has a right to appeal to a judge to adapt contractual terms accordingly [see, e.g., Court of Rome, August 27, 2020; Court of Venice, September 30, 2020; Court of Rome, October 27, 2020. See also the Supreme Court Report No. 56/2020, which displays the strong preference of the Italian Supreme Court for measures of contract renegotiation and judicial modification of contract terms during the pandemic]. For the sake of completeness, it is fair to note that there have been contrary opinions, according to which Italian law does not provide for any obligation to renegotiate contracts that have become disadvantageous, nor does it allow judges to modify contractual terms freely agreed upon by the parties [see, e.g., Court of Rome, January 15, 2021]. However, they are not in the majority.
  2. Turkish courts have issued rulings providing for the same principle of contract adaptation as a response to COVID-19 impediments, based on Article 138 of the Turkish Code of Obligations, which has always provided that judges may modify terms of an agreement in case of hardship [see, e.g., 4th Chamber of the Bursa Regional Court of Justice decision no. 2020/1103 E. 2020/1008 K., September 28, 2020].
  3. Courts in the Netherlands, Germany, and Russia have also readily adopted measures of contract adaptation in cases relating to non-performance due to COVID-19. In particular, in the Netherlands, case law displays an interesting argument to justify such a solution, i.e. the so-called “share the pain” doctrine. According to the above principle, since neither party is at fault for the issues caused by the pandemic, both parties should bear the financial burden of consequent problems relating to performance equally and contract terms should be amended to reflect this.
  4. In Spain, courts have ruled to adapt contracts affected by COVID-19 according to principles of good faith and also in order to avoid placing all the burden of the change in circumstances on any one of the parties, who are all equally blameless in respect to the pandemic [see, Audiencia Provincial de Valencia, Sección 8ª, Auto 43/2021 de 10 Feb. 2021 (LA LEY 1694/2021); Juzgado de Primera Instancia N°. 20 de Barcelona, Sentencia 1/2021 de 8 Ene. 2021 (LA LEY 3/2021): Juzgado de Primera Instancia N°. 81 de Madrid, Auto 447/2020 de 25 Sep. 2020 (LA LEY 122910/2020)].
  5. In England and Wales, the courts have so far declined to intervene in contractual renegotiations. However, we usually see a commercially sensible approach by most parties to adapt to these extraordinary times, due in part to the recent parliamentary enactments which give more latitude to suppliers and debtors. As always, English law takes a close interest in European legal developments and the new Continental doctrine of sharing the pain will undoubtedly provoke debate.

2.3. Protection of weaker parties

The tendency to protect weaker contractual parties against events relating to the pandemic emerged not only in new laws but also in court rulings. For example, many national courts have focused on adapting contractual terms for lessees struggling to pay rent due to the decrease in turnover caused by government-ordered lockdowns.

As stated above, courts have held that government-issued lockdowns can entail (at least a partial) impossibility to perform.

In France, there are a huge number of proceedings involving small and medium-sized companies that are unable to settle their payments, and courts have been reluctant to order them to fulfil their obligations.

In Italy, courts have also prevented creditors from enforcing bank guarantees issued in their favor, if the lessees failed to pay rent due to difficulties caused by COVID-19 [see, e.g., Court of Rome October 27, 2020; Court of Venice April 14, 2020]. Notably, such measures were denied in regard to independent guarantee agreements, the performance of which can be avoided only by invoking an exceptio doli, with the Court of Milan stating that: "The serious health emergency related to the spread of COVID-19 cannot lead the interpreter to destroy the distinction existing between a guarantee agreement and an independent guarantee agreement, equalizing their natures and effects, thus violating the negotiating autonomy of the parties" [see, Court of Milan, July 24, 2020].

Due to the abovementioned approach of favouring the weaker parties, while most courts have provided relief measures for them through well-reasoned arguments, there have also been occasions in which courts have been very lenient in granting applications relating to COVID-19 difficulties with little or no justification. See, by way of example, the ruling on January 28, 2021, by the Court of Rome, which suspended the enforcement of an arbitral award ordering a company to pay €152,533 by simply stating that the business was “exposed to the risk of a reduction in income in the current period considering the restrictions in place”.

3. Judicial activities

3.1. Suspension of activities and alternative hearings

From March to April-May 2020, most states in Europe provided for a suspension of judicial proceedings and/or postponement of hearings and procedural deadlines, usually with the exception of urgent proceedings.

The above measures were inevitable in order to contain the initial uncontrolled spread of the virus. However, they have caused significant delays and backlogs in judicial activities, the consequences of which have not yet been remedied.

For example, in Germany, courts are still postponing roughly 20-50% of hearings, while France estimated that the time necessary to make up for the courts’ backlog in handling proceedings will be at least 18 months. In the United Kingdom, it estimated that the litigation timeline has been delayed between 12 – 18 months due to the courts' backlog and COVID-19 restrictions.

In light of the above, following the resumption of court activities, in order to fulfill both the needs of the judicial system and the necessity to contain the spread of COVID-19, European states have mostly allowed courts to apply alternative options to hearings held in person, such as videoconference hearings or  ̶  as for Italy, Germany and the Netherlands  ̶ hearings held in writing. In the United Kingdom, parties now have the right to a remote hearing and are not be required to attend court in person unless it is necessary in the interest of justice.

Such solutions were not universally successful. In Russia and Turkey, despite the fact that remote hearings are allowed, courts still prefer to hold most hearings in person, partly due to technical difficulties.

Most European countries, however, have responded favourably to holding alternative hearings during the pandemic. For example, Germany had already introduced the possibility to hold hearings by video call in 2002; however, courts scarcely used it, whereas since the beginning of the epidemic they have employed it much more frequently. Furthermore, there are states, such as the Netherlands, which are in favour of allowing remote hearings even after the end of the pandemic.

3.2. Use of ADRs

In France, Italy, Turkey, and the Netherlands there has been an increase in the use of ADRs during the pandemic, mainly due to deliberate actions by states to facilitate their application.

In particular, in France, courts have begun to ask parties systematically to apply for mediation, while Italy adopted a law to make mediation a procedural requirement for cases involving defaults caused by the pandemic.

In the Netherlands, the Netherlands Arbitration Institute (NAI) says that the number of NAI arbitrations has increased since the end of 2020 (although it is unclear whether this is a result of the pandemic).

In the United Kingdom, the London Court of International Arbitration (LCIA) has reported a record breaking 444 cases in 2020 which is a 10% increase on the previous year. 

In Turkey, the Istanbul Arbitration Centre (ISTAC) formalized the possibility to hold hearings through telephone and videoconference and the Ministry of Justice introduced the possibility to apply for mediation procedures online.

In contrast, in Germany, Spain, and Russia, there has been no particular increase in the use of ADRs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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