Formalized international contracts and economic relationships between companies involved in international commercial exchanges are not set in stone. Even when businesses are already operating between a foreign company and an Italian company, any international pacts and agreements signed may vary according to unexpected events. Some of those events might have to do with the increase in prices of raw materials, or with the increase in costs of the services established at the time of the contract. These are all events affecting commercial relationships and independent from the will of one or both parties.
The economic recovery in Italy and the rise in prices
Being an attractive market for foreign companies and given that according to OECD estimates, Italy has experienced a significant economic recovery with a 6.5% increase in GDP, it is easy for extraordinary events to happen after signing an international contract. The increase in production, for instance, can cause unexpected events such as shortage of raw materials and supplies and delay of merchandise delivery. This situation leads to new increases and price fluctuations not foreseen in the contract, as well as new problems connected to the economic nature of the agreements between the foreign company in Italy at the time of the contract.
What happens if after establishing your business in Italy the conditions of international contracts between companies change
Should market conditions change to the detriment of one of the parties, any contractual agreement signed will have to be renegotiated according to the increases and price changes caused by the unexpected event.
How to proceed to modifying international contracts for extraordinary and unforeseeable reasons
International commercial law uses criteria to indicate which events are considered unpredictable and extraordinary, so as to determine the price increase and modify the juridical and economic structure established in the contract. The field of international commercial law recurs to hardship clauses. Such clauses identify the circumstances able to alter the economic balance of the contract and the remedies to apply when they occur. Safeguard or hardship clauses are described by the UNIDROIT Principles of International Commercial Contracts. Specifically, articles 6.2.2 and 6.2.3 respectively govern hardship clauses and their effects on contracts.
Hardship can be expected to intervene in case of events that alter the balance of the contract, such as an increase in the costs of the performance of one of the parties or a decrease in the value of the contractual consideration. In any case, a hardship clause integrates the contract when:
- the unforeseen event entails a disadvantage for one party only, at a time following the conclusion of the contract;
- the event that occurred was not foreseeable for the disadvantaged party at the time of the conclusion of the contract;
- the event that occurred cannot be controlled by the disadvantaged party;
- the disadvantaged party did not take the risk of such events.
These conditions standing, international law provides that, thanks to safeguard clauses, the disadvantaged party can request the renegotiation of the contract. However, even when hardship clauses are in place, the disadvantaged party is not entitled to suspend the provision of the service established in the contract, without first agreeing on the renegotiation. Should the parties fail to reach an agreement within a reasonable time, the judge steps in and decides whether to resort to the hypothesis established in the hardship clauses, to terminate the contract, or to restore the original balance pursuant to the International Commercial Law Act applied by the Court of the country competent for the matter.
The role of the international chamber of commerce
Within the contract renegotiation agreements, the international reference point for companies is the International Chamber of Commerce (ICC). The ICC periodically updates the hardship clause establishing any new events not foreseen by the parties, that might result in significant changes to the balance of the contract.
Renegotiating the contract with hardship clauses in case of unexpected increases in raw materials costs
The increase in raw materials can be the cause of a contractual imbalance. In order to modify the contract, it is necessary to check whether a hardship clause is there, and whether it can be reconducted to one of the events that have arisen in the market. In case of no other agreements between the shareholders, the increase in the cost of raw materials caused by exceptional circumstances – such as the outbreak of an international crisis or a pandemic – can be considered an unpredictable event, extraordinary and beyond the control of one or of both parties, and is one of the most common hardship clauses.
What to do if the clause is not included in the contract
Hardship clauses make negotiations between the parties much easier. But what happens if no safeguard clauses are included when drafting the contract? In this case, new commercial relations between the parties must be established in accordance with the law applicable to the contract chosen at the time of signature of the commercial agreements. If none of the parties had chosen it at the time of signing, that of the private international law of the country of the judge competent to resolve the dispute will be identified and applied.
Considering what happened during the pandemic or during recent international crises that caused a steep rise in raw materials costs or in the prices of pre-established services, certain events are no longer considered completely unpredictable, and according to the current law can no longer be regulated by applying the above described solutions. The suggestion is therefore to regulate in advance the necessary measures to counteract any contractual imbalances stemming from pandemic relapses or the effects of the recovery.