Covid-19 and credit management (part 1): the risk of non-payment of already issued (and expired) invoices when the health emergency was declared

One of the majeure issue, when tackling the Covid-19 effects on contractual relations, regards the management of problems deriving from debtors’ request to suspend or defer payments because of the emergency.

Indeed, following the measures adopted by the italian government, the number of debtors who inform their suppliers that they cannot pay the due amount at the fixed day because of the (alleged) difficulty in collecting the credits they have with their clients and debtors, has increased exponentially.

Given the fact that today it is impossible to predict what is the time required to return to “normal” situation, the companies must find the proper instruments to reduce the risk of non-payment, also with a general analysis of different cases which allows to manage the ongoing contractual relations in a proper legal and commercial way.

The first activity to do is to study the contract’s wording (if present, both the ad hoc contract and the letter’s exchange of order confirmation) in order to verify if there is a specific clause on “force majeure” cases, or if there is a specific clause on supervening excessive onerousness of the agreement (hardship).

For additional information on content and effectiveness of clauses on force majeure or hardship, it is possible to read the articles previously published on this blog.

If there is a lack of a specific clause – and most of all if we are considering an international commercial relation – it will be necessary to find the applicable law in order to know what are the rules governing the specific case.

Once there is a clear applicable law, there is a need to verify if, in the light of this law, the debtor can or cannot be considered as (temporarily or definitively) released from the duty to pay because of the impossibility of the performance as a consequence for the Covid-19 epidemic spread.

This circumstance is verified only if:

– the debtor has notified the creditor with the information about the (alleged) force majeure impediment; and

– the debtor cannot be considered as responsible for the event which made the performance impossible; and

– the impediment actually makes the performance impossible.

Considering the events which can determine the impossibility of the performance, we can list orders or ban from the administrative authority (i.e. factum principis), but also legislative or administrative measures provided for general interest.

We can then consider all the italian Decrees recently issued (particularly 08/03/20, 09/03/20 and 11/03/20 Decrees) as Decrees adopted to tackle the issue of the coronavirus spread.

Notwithstanding, the prevailing case law (both national and international) agrees in rejecting the idea of considering the payment obligation to be an “impossible obligation”, because both force majeure and hardship, if invoked, release the debtor from the liability only if these circumstances are directly or undirectly caused by legislative or administrative emergency measures, or, in this case, if they are caused by the event of Coronavirus spread per se.

For this reason, when considering the non-payment of already issued – and expired – invoices before the 31th of January 2020 (day of declaration of health emergency from the italian government, GU (i.e. Official Journal of record of the italian government) no. 26 of 01/02/2020), it is very difficult (from a legal point of view) to justify the debtor who suspends or refuses to pay the suppliers.

Particularly, this is the case if the non-payment is justified by the debtor with the circumstance of the Covid-19 spread and the difficulty in collecting its credits, because in such cases the failure to perform is only undirectly linked to the Authority measures. In other words, both force majeure and hardship cannot be invoked.

As a consequence, it is clear that the emergency linked to the Covid-19 spread and to the Authority measures cannot be used as a valid reason to suspend or refuse the payment of regularly issued invoices, also considering that:

– in most cases, payments are made without any “phisical money exchange”, but with different existing technology tools, and

– a cash payment can never become impossible or excessively burdensome.

As an additional evidence of this, the recent italian Decree 10/04/2020, art. 2, point 12, clearly states that “for the suspended activities it is possible, upon notification to the Prefect, to allow staff or authorised third parties to enter any business premises in order to manage payments”. This provision eliminates any possibility for debtors to avoid their payment obligations.

In conclusion, considering the necessity to safeguard the commercial relation with appropriate friendly settlement of disputes strategies, creditors can procede with judicial procedures aimed at a commercial credit recovery.

Luca Davini
Avvocato in Milan and Turin

#creditmanagement #internationalcontracts #internationaldispute #forcemajeure #hardship #covid19 #creditrecovery #internationalsale #internationaldistribution #internationalbusiness

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