The Crisis, a Laboratory for Experimenting with New Rules

The Crisis, a Laboratory for Experimenting with New Rules


by Cesare Cavallini, Maurizio Del Conte, Francesco Mucciarelli, Oreste Pollicino, Pietro Sirena, Marco Ventoruzzo, Department of Legal Studies, Bocconi University

The COVID-19 pandemic has raised momentous legal issues in virtually every facet of the law. States have emerged as the first responders in a period of chaos and fear. Their proximity to local specific needs, the ability to adopt measures more precisely tailored to different situations and to enforce them has inevitably made them key actors in reacting to an unprecedented situation. International organizations, including the EU, have been somehow slower to take action, partly because of inevitable coordination problems, but also due to partially conflicting national interests. The EU, however, eventually stepped in: while it is not yet certain how effective its intervention will be, cooperation and solidarity is now more important than ever. The question whether it will emerge reinforced or weakened by the crisis is still unclear, but surely the last three months will prove a watershed for the political, social, economic and legal future of the continent.

In this article we offer a brief overview of the major issues and measures adopted in Italy, often in haste, in some key areas: public law, private law, business law (including insolvency), labor law and criminal law. Needless to say, this snapshot is partial and limited, but it illustrates the complexity of the situation and possible trends that might outlive the medical emergency.

Effects on the rule of law and representative democracy

From a constitutional law perspective, the emergency has profoundly affected consolidated constitutional safeguards. The adoption of administrative orders to restrict fundamental freedoms, precisely (but not limited to) freedom of movement, has questioned the principles of the rule of law and representative democracy, due to the marginalization of the Parliament in times of emergency. Likewise, the situation has challenged the functioning of constitutional bodies required to perform their public functions at distance as in the case of the judiciary. In addition, the pandemic season has impacted on the balancing process of conflicting fundamental rights, as, for instance, in relation to the constitutional tensions between privacy and public health. The debate has until now focused on the proportionality of privacy restrictions, whereas  the relevance of concurring constitutional rights and the necessity of the restrictions in question have been neglected. A clear example of such underestimation is emerging in the context of the contact tracing debate. If we cannot be reasonably certain that the digital tracing model, which is in compliance with European constitutional law, will be effective and, hence, necessary, then, even minimum restrictions on privacy become problematic. Otherwise, the alternative is moving from the European model of exposure notification to an Asiatic system based on digital surveillance, and consequently unforgivingly betraying the spirit of European constitutionalism.

The risk for contracts

Important problems have emerged in contract law, in light of the difficulty or impossibility to perform. In principle, the continuity of contractual relationships must be preserved and, so far as possible, the contracting parties must be entitled to render their performance at a distance as well. In case of impossibility of performance (or force majeure), or excessive onerousness, each party might terminate the contract or, when appropriate, to reduce the performance owed in exchange. Hardship might also call for a renegotiation in good faith of the contractual terms. To clearly distinguish when performance is impossible, unreasonably onerous, or has been frustrated is however difficult, also considering that courts have suspended their activity due to social distancing rules. Additionally, the outbreak of COVID-19 has urged many legislatures to provide for a moratorium on certain payments (particularly on taxes, rents, and loans).

The three answers of coporate law

In the area of corporate law and financial markets, the Italian legislature, similarly to other European policy makers, has adopted measures that can be roughly grouped along three lines: (a) facilitating corporate governance notwithstanding social distancing; (b) limiting the consequences of a hopefully temporary liquidity and earnings crisis; (c) curbing possible speculation on financial markets. In the first group we have seen great liberalization of shareholders' meetings held online, opting out of rules requiring physical presence and adopting new techniques to identify shareholders entitled to participate, something that has partially limited shareholders' voice or, better, more traditional ways to use it, but has also brought greater efficiency in holding the annual general meeting. To counter an avalanche of voluntary and involuntary liquidations, in some jurisdictions a sort of presumption of business continuity has been allowed, in order to avoid accounting losses; more commonly, rules mandating to recapitalize or liquidate a going concern in case of significant losses have been suspended. Finally, some supervisory authorities have temporarily banned short-sales (or imposed more stringent disclosures) to discourage massive sales that might drive prices of listed securities down, and State powers to block acquisitions of control, especially foreign, have been made more biting. Some of these measures are criticized because they appear to "hide the thermometer" rather than curing the underlying illness, with the consequence that, when lifted, might result in a delayed but not less severe crisis; and might hinder the common market. On the other hand, the exceptional rules also represent a unique legal experiment whose legacy might outlive the pandemic, for example concerning virtual meetings or with respect to a more flexible regime of minimum legal capital.

Bankruptcy in times of pandemic

Specific issues and measures concern insolvency law. Bracing for a steep increase in the number of insolvencies of going concerns, the Government has postponed the entry into force of the new Code of the Crisis, a statute that will profoundly modify the existing legal framework, from August 2020 to September 2021. The idea is that it would be unwise to apply new and untested rules to the contingent situation. Additionally, the already mentioned suspension of judicial activities makes it impossible to activate typical remedies available vis-à-vis insolvency. The concern is that once the doors of the courthouses reopen, an avalanche of litigation will overwhelm them.

Insolvency law also raises delicate criminal law questions. Statutory measures recently introduced led to – extraordinary and temporary – amendments to the Civil Code, and to the Italian Bankruptcy Act provisions governing arrangements with creditors impacting corporate crimes and bankruptcy offences. In particular, when public funds are granted to businesses two main issues arise: on the one hand, there is the need to criminalize embezzlement and diversion from the recovery purposes; on the other hand, in case of subsequent bankruptcy, potential criminal ramifications might involve even the bankers as accomplices.

The cure for the employment shock

In order to prevent an unemployment crisis, the Government has intervened on three main axes: prohibition of dismissals, general extension of the wage subsidy fund and home working. The prohibition to proceed with any non-conduct related dismissal would not have been sustainable by companies, already weakened by the forced closure and the lack of incomes, if it had not been accompanied by the intervention of the wage subsidy fund which has the effect of replacing wages paid by the employer with an allowance paid by the state, while keeping intact the employment contracts. In April alone, the total number of hours paid by the wage subsidy fund rose by almost 3000% compared to the same month of the previous year. Additionally, companies were allowed to require employees to work from home. This form of work organization made it possible to save most of the activities that did not require physical presence in the workplace, making home workers go from less than 600,000 in pre-COVID-19 time to about 8 million during the lockdown.

As this brief and incomplete list shows, the problems and the responses are numerous and diverse. The crisis however also represents a unique laboratory to experiment with new rules that under normal circumstances might have required years to be enacted. It will be interesting to see what remains after the emergency has abated, for example with respect to the balance between privacy and protection of health, smart-working, and corporate governance through new technologies.

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