Brexit Countdown: Implications for Current and Future Commercial Contracts
In view of the next European summit set for the 15th-16th of October to discuss the EU budget 2021-2027, the spotlight has returned on the EU-UK trade agreement which has not yet been reached. The outstanding problems concern competition, the fishing market, and the exports, and even if – according to forecasts by the London School of Economics – a “no-deal” would have an impact on the British economy at least twice as much as that caused so-far by the Covid-19 pandemic, currently this possibility remains open. Companies must prepare for Brexit in advance, by identifying and addressing its risks and challenges.
Regardless of any trade agreement between the UK and the EU, next year will bring additional costs for the suppliers of goods directed from and to the UK. The commercial contracts clauses that will remain in effect beyond the Brexit transition period need to be reviewed. In addition, certain long-term contracts may no longer be adequate and will need to be amended or terminated. Especially with reference to the O.E.M. Long-Term Supply Agreement, one of the problems could concern the need for the supplier to adjust the sale price of the goods sold to an English buyer according to the higher costs that he will have to bear as a result of Brexit. For an Italian supplier, on the other hand, this cost increase could derive (i) from the need to adapt the goods to new technical standards required and (ii) from any import duties introduced following the exit of the United Kingdom from the European market. For contracts to be entered into after 31st December 2020, the allocation of costs and risks should be considered during the negotiations and subsequent drafting of the contract.
Review your contract! For existing contracts that maintain their effects even after the transition period, the exit of the United Kingdom involves changes in tariffs, additional customs procedures, the product labelling and licenses. These amendments could materially affect the commercial agreement between the parties. For example, if your UK-based company sells goods in Europe, at the end of the transition period, it will have to undergo a new labelling process. At the end of the transition period, in the absence of a different agreement, UK companies will also have to apply customs procedures and VAT at the same rates for goods traded outside the EU. Finally, as regards licensing, after the end of the transition period, the shipment of some goods between EU Member States and the UK will require new import-export licenses.
If the company is not based in the UK, but in a State of the Union, and has contractual relationships with British companies, it is advisable to review the contractual clauses before the end of the year. It is likely that the contract includes a “force majeure” clause that allows a party to not fulfil the obligations agreed following the occurrence of certain events outside its control.
Within the British legal system (unlike the Italian or French civil-law legal systems), there is no specific reference regarding force majeure, or so-called material adverse changes, that can make up for situations not provided for in the contract, therefore the identification and determination of these legal concepts is left exclusively to any negotiated arrangements contained in the contracts between the parties.
In this context, the Brexit event could be hypothesised as a force majeure event, to the extent that it is possible that its occurrence could negatively affect the ability of a party to fulfil its contractual obligations. However, it should be noted that, unless such clause did explicitly foresee the Brexit event, it is unlikely that the English courts would admit Brexit as a cause capable of impacting existing contracts.
Assess the risks. In relation to the negotiation of new contracts, parties should consider how their agreement could be affected by Brexit and to provide a contractual remedy to the fullest extent possible. For example, you could use the “Brexit clauses”, i.e. contractual provisions that provide a mechanism or procedure to deal with risks and to help the parties achieve the agreed outcome, resulting in a change in the rights and obligations of the parties following the predetermined event.
Some clauses could leave room for the subsequent negotiation and renegotiation of the contractual terms between the parties in order to solve problems that could arise following Brexit. Other clauses could consider the new duties on imports and exports and additional requirements relating to the procedures for submitting documents and obtaining licenses, providing for a renegotiation of costs.
Brexit is also likely to lead to retards in the receipt and delivery of goods between the EU and the UK, affecting the ability to comply with contractual commitments. For this reason, it is necessary to consider during the stipulation of the clauses at possible remedies for delays or defaults.
Applicable law. There is no reason to believe that, after the transition period, the choice of English law as the law applicable to the contract becomes less attractive.
English contract law derives mainly from common law and the only relevant intervention of EU law on commercial contracts was introduced by the Late Payment Directive (2011/7/EU), which replicated the existing laws in the UK. This means that English contract law will not be largely affected by the UK exit. On the contrary, the advantages of choosing English law remain and are characterised by the predictability and legal force of the judicial precedents.
Furthermore, even after the end of the transition period, the courts of the EU Member States would be required to respect the choice of contractual law pursuant to the Rome I Regulation (593/2008/EC) in relation to contractual obligations, and the Rome II Regulation (864/2007/EC) in relation to non-contractual obligations.
On the other hand, within the EU, the Brussels I Regulation allows contractual parties to choose which court will have jurisdiction, and provides for the recognition and enforcement of judgments between EU Member States. During the transition period, the Brussels I Regulation will continue to apply, but after the end of that period, the Regulation may cease to apply. In this likely scenario, although the parties remain in a position to obtain the English courts jurisdiction over the contract dispute, the enforcement of the English judgments in other EU Member States may be subject to national procedural and validation laws which could offer a treatment less favourable to the English judgements.
Businesses need to prepare for Brexit by identifying and addressing the challenges and risks in advance, and this not just for UK businesses. It is important to be prepared for new changes and to act in time.
Recent developments on usurious interests
In a nutshell, through a recent judgment (No.19597/2020), the United Sections of the Court of Cassation (Sezioni Unite della Corte di Cassazione) clarified in a “definitive” way the relevance of default interest for the calculation of the usurious rate, thus putting an end to the diversity of interpretations, even within the same Court of Cassation. Financial intermediaries are now called to reconsider their internal procedures related to interest rates, to carefully verify the financing contracts currently in progress, to amend standard clauses of new financial contracts, and to defend themselves in possible judicial claims.
This judgment is therefore relevant for all contracts (not only for financing contracts but also for commercial contracts) for which a specific default interest rate is agreed for pecuniary obligations.
The United Sections of the Court of Cassation deal with a legal case which initiated before the court of first instance in 2008 and related to a consumer credit entered into 2002 which was subject of various transfers from the creditor’s side, and in respect of which, among other things, the Court of Appeal, declared the invalidity of the clause on interest by virtue of the applicability of Law no. 108/1996 to default interest following the authentic interpretation of Articles 1815 of the Italian Civil Code and 644 of the Italian Criminal Code as a result of Law Decree no. 394/2000.
The appeal before the Supreme Court against the judgment issued by the Court of Appeal was filed by the involved parties and the case was deferred to the United Sections on the applicability of the anti-usury regulations to default interest.
This was because the applicant, inter alia, deemed that the anti-usury regulations are not applicable to default interest since they have ” the function of compensating the damage resulting from the delay in performance, they depend on the economic public order and have the role of being a deterrent against non-compliance , and are based on Article 1224 of the Italian Civil Code” and therefore are excluded from the scope of application of the anti-usury regulations (Article 1815 of the Italian Civil Code and Article 644 of the Italian Criminal Code).
In the very end, the default interests would be a penalty and not true interest.
Over time, in fact, there have been different interpretations regarding whether or not to apply the anti-usury regulations to default interests.
In particular, the restrictive interpretation is based, among other things, on both the literal meaning of the words of the law (Article 1815 of the Italian Civil Code and Article 644 of the Italian Criminal Code only refer to the interest payments) and on the different function (and legal cause of the attribution) which is remunerative for interest payments and compensatory for default interests (which compensate the creditor for the loss of money availability never accepted but only suffered).
The extensive interpretation (i.e. the one in favour of the inclusion of the default interest for the calculation of usury) is based both on the different interpretation of the words “for any reason” contained in Article 1815 Italian Civil Code, and on the finalistic interpretation of Law no. 108/1996.
The United Sections, retracing the reasons in support of both arguments, embrace the extensive theory, “so that the debtor has more complete protection” since the protection provided by art. 1384 Italian Civil Code. (i.e. reduction of the excessive penalty) would not be equivalent to the protection provided by the law for usurious interests (i.e. the nullity of the relevant clause).
This judgment requires
– reconsidering financial intermediaries’ internal procedures with regard to periodic checks on the interest rates applied and/or applicable;
– a further careful verification for financing contracts currently in progress;
– the amendment to the standard clauses used so far with reference to new contracts to be stipulated in order to control the calculation of the usury threshold.
Finally, the effects of this ruling could also be extended to those contracts already terminated and fully executed, where the debtor sees the possibility of recovering (judicially) part of the sums already collected by the bank.
Do the guidelines regarding the responsibilities of legal entities (Legislative Decree 231/2001) apply to a sole quota-holder company?
The Prosecutor had challenged the Company vis-à-vis its responsibility for fraud against the State or other public entity, a crime committed by the directors in the interest or to the advantage of the company and for not having adopted and effectively implemented, before the crime was committed, an organization and management model aimed at preventing crimes such as the one contested, which was committed on behalf and in the interest of the company.
Legislative Decree 231/2001 provides for the organization’s administrative liability for specific crimes (so-called predicate offences) that are committed in its interest or to its advantage, by directors, persons with management functions and also third parties who operate in the interest or on behalf of the company, unless (reversal of the burden of proof) the company proves :
– that it has adopted and effectively implemented – before the offence was committed – organizational and management models suitable to prevent some of the specific offences listed in the aforesaid Legislative Decree;
– that it has entrusted a supervisory body with the supervision of the model’s compliance;
– that the offence was committed by fraudulently breaching the model;
– that there was no omission or insufficient supervision by the body.
In addition to a definite fine (which can amount to up to €2 million), the conviction can also include prohibition measures such as being banned from contracting with the public administration.
In a recent ruling dated July 2020, the Criminal Court of Milan – through the President of the Judge’s office for preliminary investigations – ruled that no action should be taken against a single-member company in liquidation due to the absence of an independent center of interest with respect to that of the offenders.
This case is unique because the alleged offenders pursuant to art. 640 of the criminal code were two brothers, directors of the Company, one of whom had served as Chairman, was the liquidator of the Company at the time of the discussion and was also the company’s sole shareholder. Moreover, also in consideration of the delays attributable to the Covid-19 emergency and given that the liquidation had been completed, the company was close to being written-off from the company register, with the consequence that the possible sanction would, have actually been charged to the sole shareholder, who was already accused with having committed the crime.
The Court considered that in this particular case there was no essential prerequisite for the application of case law regarding the company’s liability for offences, i.e. the existence of two independent and distinct centers for the imputation of legal relationships, one traceable to the entity, the single-member company, and the other to the natural person charged with the underlying offence.
According to the Court, in this situation, what is lacking is the rational of the regulation “which imagines criminally deviant behavior held by individuals in the interest of organizational structures of a certain complexity as an autonomous center for the imputation of legal relationships distinct from those who have essentially operated” and again “the legal entity, in relation to the predicate offence which is the basis of the administrative liability of the legal entity, was not really necessary and unattainable, since it is a behavior which can be peacefully attributable to individuals who could have carried it out without any corporate shield“.
Case law is not unequivocal and indeed, in similar cases, several times in recent years the judges had reaffirmed the undoubted autonomy of the natural person with respect to the legal entity and therefore the responsibility of the latter.
The impression is that the Court’s decision, was also influenced by the fact, that the company was soon going to be cancelled (written-off) from the register of enterprises with the result that the imputation to a single person would have emerged all the more as opposed to what should have been autonomous centers of interest. This said, the author deems that the application of Legislative Decree 231/2001 to a single quota-holder company cannot be excluded tout court, even if there is correspondence between the director and the quota-holder, and that instead the context and situation should be analyzed case-by-case.
If the adoption of the organization and management model is not mandatory by law, given the reversal of the burden of proof principle, it is good practice to carefully assess the situation, the risk profiles pertinent to the company’s business, and the type of relationships established with employees (whose actions could backfire on the company) before deciding to exclude the adoption of the model and the appointment of a supervisory body which, among other things, may also be monocratic and coincide with the role of the auditor.
Strengthening of the Golden Power of the Italian government in areas of strategic importance (articles 15, 16 and 17 of Law Decree 23/2020 converted by Law 40/2020).
During the conversion into law process, the Italian Legislator, with the aim of safeguarding the ownership structures of companies operating in sectors considered as strategic and of national interest strongly threatened by the spread of Covid-19, further specified the operation of the special powers that can be exercised by the Government and defined in more detail some areas to be protected.
Law Decree no. 23 of 8 April 2020 (the so-called “Decreto Liquidità”) – containing, among other things, certain provisions aimed at extending the operation of the Government’s Golden Power – was converted by Law no. 40 of 5 June 2020, published in the Official Gazette of 6 June 2020. For a first comment on the amendments introduced by the Decreto Liquidità, please refer to our article of 17 April 2020 (http://www.macchigangemi.com/en/insights/newsletter-n-1-mpa-mdr-eng/).
Article 15 of the Decreto Liquidità had already amended article 4-bis, paragraph 3, of Law Decree no. 105 of 21 September 2019, providing, pending the issuance of a Decree by the President of the Council of Ministers (“DPCM”) aimed at identifying more specifically the assets and relationships of strategic importance for the national interest, a transitional extension of the scope of application of the Golden Power discipline to the following matters indicated in article 4 (1) (c), (d) and (e) of Regulation (EU) 2019/452:
c) supply of critical inputs, including energy or raw materials, as well as food security;
d) access to sensitive information, including personal data, or the ability to control such information; or
e) the freedom and pluralism of the media,
specifying that the financial sector should include the credit and insurance sectors.
At the time of conversion into law, it was further specified that the health sector also includes the sectors related to the production, import and wholesale distribution of medical, surgical and personal protection devices (art. 15 of the Decreto Liquidità) and that, in the food and steel sectors, the application of the Golden Power regulation is aimed at pursuing the further aim of protecting the maintenance of employment levels and productivity in the national territory (art. 17 of the Decreto Liquidità).
It must be kept in mind that the emergency regulation provides, until 31 December 2020, the obligation to notify the Government, inter alia, of any resolution, act or transaction, purchase of shares by an enterprise, including those belonging to the European Union, which holds one or more assets in the areas identified by the new Law Decree no. 21 of 15 March, 2012, which causes a change of ownership, control or availability of such assets or a change in their use. The special powers which can be exercised in such cases by the Government include, in certain circumstances, the veto right and the possibility to impose specific conditions for the transactions in question.
The special rules will be further supplemented by the forthcoming DPCM, which is currently under examination by the competent parliamentary committees. This governmental decree will identify the assets and relationships of national strategic importance subject to the Golden Power in addition to those originally provided in the areas of defense, security, energy, transportation, telecommunications.
The DPCM will therefore strengthen and clarify the scope of Golden Power’s applicability by identifying, for each of the sectors indicated in Article 4(1) of Regulation (EU) 2019/452, the critical infrastructures, critical technologies, critical inputs, critical information and reports of strategic importance, defined, according to the current DPCM draft under examination by the Parliament, such as the technologies, goods, reports, information and economic activities essential for maintaining the vital functions of the society, health, safety and economic and social well-being of the population, as well as, in some cases, also for the technological progress.
The judgment in Schrems vs. Facebook Ireland dated July 16, 2020 (C-311/18) and the transfer of personal data from the European Union to the United States of America: have you complied with the new requirements?
On 16 July 2020, the European Court of Justice (“ECJ”) declared the “adequacy decision” as invalid regarding the level of protection in the processing of personal data when data is transferred from the European Union (“EU”) to the United States of America (“USA”), also known as the “Privacy Shield” and adopted by the European Commission in 2016.
In particular, the Court found that U.S. law does not comply with the equivalent principle of protection required by EU rules, given that public authorities in the U.S. may access the transferred personal data, without particular limitations, for reasons linked to internal security.
The Schrems II judgment now establishes that European companies that transfer personal data to the USA shall now reassess this transfer in the light of the new indications imposed by the ECJ. In particular, the validity of the standard contractual clauses has been confirmed, specifying however that a level of protection, subject to verification, has to be guaranteed that is substantially equivalent to that guaranteed in the EU by the General Data Protection Regulation 2016/679 (“GDPR”).
In other words, companies may be able to make use of the standard contractual clauses only once compliance with the GDPR’s data transfer provisions has been verified.
The European Data Protection Board (“EDPB”) has promptly developed guidelines, providing useful advice and clarifying certain parts of the judgment in question. For example, it is specified that it is possible to use the exceptions provided for in Art. 49 of the GDPR, among which the transfer based on consent or for the purpose of executing a contract.
The consequences of this ruling are of great importance. In fact, to date, any transfer to the USA is unlawful if it is not assessed in the light of the new principles expressed by the ECJ through the ruling of Schrems II.
Given the ECJ interpretation regarding data transfers to the USA, have you already verified your compliance with EU law?
The automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements: Italy implemented DAC 6 into domestic legislation.
On 11 August 2020, Legislative Decree no. 100 of 30 July 2020 (effective from 26 August 2020) has been published in the Official Gazette (the “Decree”). The Decree implemented Council Directive (EU) 2018/822 of 25 May 2018 regarding mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC 6”).
The entry into force of the Decree is the culmination of a series of international initiatives to raise the level of tax transparency, and is aimed to combat aggressing tax planning considering that tax planning structures have evolved and become particularly sophisticated making it increasingly difficult for Member States to protect themselves against domestic tax base erosion. In particular, the legislative instrument implemented by the Decree shall allow Italy to be able to report relevant information, communicated by taxpayers and intermediaries, with tax authorities of other Member States in order to examine those cross-border arrangements potentially constituting aggressive tax planning.
DAC 6 – representing the sixth modification to the applicable legislation on the automatic exchange of information – had to be initially brought into the domestic legislation of Member States by 31 December 2019 and to be fully applied from 1 July 2020.
However, as a result of the Covid-19 emergency, the Council of the EU adopted Directive (EU) 2020/876 of 24 June 2020 allowing Member States to defer by up to six months the time limits for the filing and exchange of information under the EU mandatory disclosure rules. Indeed, the severe risks to public health and other hindrances caused by the Covid-19 pandemic, as well as lockdown measures imposed by Member States to help contain the pandemic, have had a significant disruptive effect on the capacity of businesses and Member State’s tax authorities to carry out some of their obligations.
As a result of the deferral, taxpayers and intermediaries shall report cross-border arrangements implemented between 30 June and 31 December 2020 within 31 January 2021. Cross-border arrangements the first step of which was implemented from 25 June 2018 to 30 June 2020 shall be reported by 28 February 2021.
Should Member States adopt new containment measures for public health risks pending the deferral period, the Commission may further extend the deadlines for reporting and exchange of information by up to three months.
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