COVID-19: For contracts is the time of good faith
In these days in Italy many companies, spontaneously or by joining initiatives of various associations and groups, are sending messages of this kind to their customers and suppliers:
“Companies that have the financial capacity and/or can access liquidity through the banking system have the moral, social and economic duty not to ask for payment extensions from their suppliers, because this would mean taking advantage of the terrible moment that is putting the entire economic and social system of our country to the test.
For this reason, we also invite our customers and suppliers to do their part, PUNCTUALLY HONORING the commitments to those with whom they work. We invite you to share this fundamental principle with all those who do business with you”.
The initiative has enormous ethical and legal value, tending to avoid a domino effect whose consequences may be more serious than the crisis that was directly induced by the lockdown now underway for over a month.
In these difficult weeks, all legal professionals have received questions from their clients about the state of necessity and force majeure as a contractual waiver; in essence, under what conditions the COVID-19 crisis allows contracts unfulfillment, termination or renegotiation. This issue is very relevant not only for the emergency situation in the strict sense, but also for the long-term effects. In fact, the emergency is already causing a possible structural change in many sectors of the market. The cost of raw materials is changing or may change; the cost of logistic services is changing; the cost of labor in the various countries is suffering uneven effects depending on the availability of income integration measures in the various territories. Many commercial networks are induced to launch promotion campaigns to make products available (think about the car sector) at prices unthinkable until two to three months ago. What about contracts concluded but not yet executed or not fully executed?
There is a situation of need. There is force majeure. But in this strange time has to find a more conscious, more intelligent and more reasoned implementation than in the past also the basic principle of all contract law: GOOD FAITH.
Bona fides in Roman law
The issue is ancient and in our western world everything is born with Roman law, which indeed provided for good faith as loyal and honest behavior in the fulfillment of one's obligations. Good faith also took on the function of a criterion for evaluating behavior. Already in ancient Rome the importance of the subjective situation for assessing good faith was understood, establishing the principle that the assumption of not violating the rights of others was relevant. It is obvious in this context the wide discretion given to the judge, who had to take into account all the elements, including those of an explanatory nature, proposed by the parties. In the course of time this gave rise to typical actions (Actio bonae fidei vel bonae fidei iudicia), characterized by particularly extensive powers of the judge and the possibility of disregarding the literal application of the regulatory precepts. This concerned in particular sales contracts, lease agreements and mandate agreements, without forgetting the fundamental matter of acquisitive prescription.
The passage of time and historical events return a picture very close to the original one. The notion of good faith in European law remains, in fact, essentially the same as that of Roman law.
Good faith today
The foundation of the obligation of good faith in the Italian legal system is to be found in Article 2 of the Constitution, the text of which states: “The Republic acknowledges and guarantees the inviolable rights of man, both as an individual and in the social formations where his personality takes place, and requires the fulfilment of the mandatory duties of political, economic and social SOLIDARITY”.
It is curious that the application of this principle to contractual matters is often neglected by legal practitioners. Actually, this is an issue of great importance both legally and ethically, according to which, precisely because a general bond of solidarity is recognized, each party involved in a contract is obliged to take care of, preserve and protect together with its OWN right and interest, in a no lesser way, also the interest of the OTHER PARTY (or of the other parties in plurilateral contracts).
The constitutional provisions shed an interpretative and evolutionary light on the provisions of the Civil Code concerning good faith, which are relevant with regard to at least these aspects:
1) a distinction must be made between subjective good faith (the justified belief not to infringe the rights of others) and objective good faith (consisting in the correct fulfilment of the obligations undertaken within the framework of the applicable rules), an issue of special relevance for contractual matters;
2) good faith is a principle of integration of the contract, in the sense that in case of doubt, incompleteness, error, change of objective assumptions of the agreement, etc., disputes must be resolved by applying this principle;
3) The requirement of good faith is essential to assess whether, while formally complying with certain rules of law or contractual provisions (which also have the force of law!), a party is in fact acting with abuse of its apparent right.
The economic, social and legal circumstances of the emergency constitute an unprecedented exercise and proof of good faith in contractual matters since at least the end of the Second World War. This is not only an ethical challenge, but a challenge that will deeply affect judicial systems and the development of legal doctrine in the coming years. The practical virtue to be recommended in such a scenario, once again drawing on Roman law, is prudentia. Beautiful in this regard the definition offered by the Encyclopedia Treccani in the entry “Prudence”: “The cautious and balanced attitude of those who, sensing the presence of a danger or foreseeing the consequences of their acts, behave in such a way as not to take unnecessary risks and to avoid any possible damage to themselves and others”. Since we are legal practitioners, a further comment is necessary, considering that not all damage can unfortunately be avoided. Our commitment should therefore aim first and foremost to avoid “unjust” damage, including that resulting from a breach of good faith.