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Schweiz
Switzerland – New law changes statute of limitations
20 November 2019
- Verträge
Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, even though it affects and produces effects in many different legal fields, does not include any reference to contracts for leases of real estate, or houses, premises or offices.
The purpose of this note is to analyze the effects of the situation of the State of Alarm regarding those leases of offices or premises that have been forced to close in application of the decree; those others that remain totally or partially open and in operation, although with a reduced or minimal activity, in principle are not subject to the conclusions reached below without prejudice to the fact that there are individualized cases to which, despite the fact that there is not a complete closure, reasonably and logically can be applied to them.
It is not excluded in any way that in the event of an extension of the validity of the State of Alarm, a regulation that affects the leasing contracts could be published, but for the moment this has not happened. If this were to happen, the content of said norm would apply.
Based on the principle of freedom of covenants enshrined in art. 1255 of the Spanish Civil Code, which allows the parties signing the contract to agree (i) what scenarios and situations should be considered as constituting cases of Force Majeure and Act of God and (ii) what the contractual consequences of such scenarios should be, the first exercise that must be done is to check if the contract includes a regulatory clause of Force Majeure and its effects; if so, such clause must be followed and its analysis is left out of this note.
In the absence of express regulation in the contract, the provisions of the Civil Code and specifically article 1105 would apply.
COVID-19 as Force Majeure
COVID-19 is an event that in principle meets the requirements of the Civil Code to be classified as an event of Force Majeure (art. 1105 Civil Code) since:
- It is a foreign act and not attributable to the contractor who is the debtor of the benefit or obligation.
- It is unpredictable, or if it were said to be „predictable“, it is certainly inevitable.
- The event in question, the pandemic, must be a cause and result in the breach of the obligation, that is, there must be a causal link.
Therefore, fulfilling the three requirements, the first conclusion that we reach is that very foreseeably, the Spanish Courts will classify as “Force Majeure” the situation caused by COVID 19 when a judicial dispute is raised in which such matter is discussed between litigants. We will now analyze the consequences of this status.
Consequences of considering COVID-19 as an event of Force Majeure
Most of the doctrine and jurisprudence understand that the effects of classifying a scenario as a case of Force Majeure in principle are:
- Total and definitive impossibility of complying; releasing the debtor from the fulfillment of the obligation.
- Partial inability to comply; the debtor is released only in the part that it is impossible to fulfill, but still bound by the part that can be carried out.
- Temporary inability to comply; the debtor is released from the responsibility for default as long as the exceptional situation persists.
Now, let us analyze how it would affect to considerate the epidemic as Force Majeure in relation to lease agreements for uses other than housing.
Regarding the payment of rent
The question to answer is if the classification of the current pandemic situation as a case of Force Majeure frees the tenant (whose premises have been forced to close by order of the government authority) from the obligation to pay the rent while said closing obligation persists, including in the concept of „release“ different alternatives: total or partial cancellation and / or total or partial postponement.
We are meeting these days with a frequent reaction among some tenants, who, unilaterally have informed their landlords that considering COVID 19 an event of force majeure and having been forced to close the premises / office, they suspend the payment of the rent while said situation remains. They do not terminate the contract, they do not hand over the possession, they remain in it (the premises remain closed and not operational) but they suspend the payment (it is not clear whether suspending in this case means liberating himself from the payment of the rent or postponing its payment for when the Force Majeure scenario ends).
Arguments against liberation
As much as this attitude can be considered “understandable” from the perspective of the lessee, not from the point of view of the lessor, said consideration runs into an obstacle: the interpretation of the Force Majeure made by the Supreme Court regarding pecuniary payment obligations, according to the Civil Sentence of May 19, 2015:
„Not being able to consider, in the case of pecuniary debts, the subjective impossibility – insolvency – nor the objective or formal imposition, the doctrine concludes that it is not possible to imagine that if the impossibility is due to a fortuitous event it could have as effect the extinction of the obligation.
The exoneration of the debtor by fortuitous event is not absolute, it has exceptions, as provided for in article 1105 CC, and one of them, by application of the „genus nunquam perit“ principle, would be in cases of obligations to deliver generic things.
In such circumstances, the pecuniary debtor is obliged to fulfill the main obligation, without the economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic such as money”.
In conclusion: it does not seem that this jurisprudential criterion allows to defend that the fulfillment of the pecuniary obligations is released, extinguished or that its breach is justified in cases of Force Majeure, therefore the pecuniary debtor, in this case the lessee, in application of this criterion and due to the generic condition of the money, would be obliged to fulfill his main obligation not being freed from it by the unforeseen economic adversities on the basis of Force Majeure.
Arguments in favor of liberation: art. 1575 of the Civil Code
Having said the foregoing, reference should be made to an article of the Civil Code that, with certainty, will be profusely cited in the upcoming judicial conflicts.
The art. 1575, dealing with the leasing of rustic estates, recognizes the lessee’s right to the reduction of rent in the event of loss of more than half of the fruits (unless otherwise agreed) in „fortuitous, extraordinary and unforeseen cases … such as fire, war, plague, unusual flood, locust, earthquake or another equally unusual that the contractors have not been able to rationally foresee ”.
Is this article, foreseen for rustic leases, applicable to urban leases?
The art. 4.1 CC allows the analogical application of the rules when (i) they do not contemplate a specific assumption and (ii) they regulate a similar situation in which “identity of reason” may be appreciated.
The Sentence of the Supreme Court from January 15, 2019, that solved a conflict of a lease of a building used as hotel, in which the tenant had sought the reduction of the rent under the clause “rebus sic stantibus” by the crisis of 2008 and had alleged in his favor the application of art. 1575, established:
„The argumentation of the appealed judgment rejecting the claim to lower the agreed price is also not contrary to the legal criterion that follows from art. 1575 CC, which is the rule that allows the reduction of income in the leasing of productive assets that do not derive from risks of the business itself, it also requires that the loss of benefits originates from extraordinary and unforeseen fortuitous cases, something that by its own rarity could not have been foreseen by the parties, and that the loss of fruits is more than half of the fruits. In this particular case, none of these circumstances concur. The decrease in rents comes from market developments, the parties anticipated the possibility that in some years the profitability of the hotel would not be positive for the lessee and the losses alleged by NH in the operation of the Almería hotel are less than fifty per hundred, without taking into account that the overall result of his activity as manager of a hotel chain is, as the Audience considers proven in view of the consolidated management report, positive”.
The Supreme Court does not admit the application of art. 1575, but not because it is considered not applicable to non-rustic leases, but because the Court concludes that the requirements are not fulfilled since the 2008 crisis was neither unpredictable and because the lessee’s losses do not exceed 50%.
But, that interpretation of the Supreme Court together with the wording of art. 4.1 CC would support the claim of the lessee who has no incomes during the State of Alarm to demand a reduction in rental fee that fits the principle of proportionality.
Regarding early termination at the request of the lessee
However, we may find situations in which the lessee considering the current situation, decides to terminate the lease in advance, delivering the premises to the lessor.
They are cases in which the early termination of the contract is intended, without respecting (i) or the mandatory term (ii) or the previous notice, in both cases under the hypothesis that they are thus regulated in the contract.
In these scenarios, we understand that it may be defendable that, due to the situation of force majeure caused by COVID 19 and in application of art. 1105 of the CC, the lessee is exempt from the obligation:
- To respect the mandatory term of the lease
- To give prior notice to the lessor in case of early termination of the contract
In both cases, the contract would be terminated with the delivery of possession of the premises, without prejudice to having to respect the other obligations set forth in the contract for termination and delivery, provided that they are not equally affected by the situation of Force Majeure.
Our opinion is that, also in application of Article 1,105 of the CC, the thesis that the lessee would be released from any obligation to compensate damages to the lessor for said advance resolution or breach of the obligatory duration of the contract could be defendable before the Courts.
Conclusion
In conclusion, when the Courts decide on the effects of the current pandemic (that they will surely classify as Force Majeure), and how this will affect the obligations of leaseholders who have been forced to close their business, our opinion is the following:
- Regarding the obligation to pay the rent, despite the contrary criterion of the sentence from May 19, 2015, we find defendable the analogue application of art. 1575 of the CC, based as well on the Supreme Court Sentence from January 15, 2019, in order to demand a proportional and equitable reduction of the rent.
- Regarding the power of the leaseholder to terminate the contract in advance, in case the leaseholder hands the possession of the property to the lessor, we find defendable to exonerate the leaseholder from complying with the advance notice or mandatory term in case provided in the contract, without the obligation to indemnify the lessor for this reason.
Application of the Rebus Sic Stantibus clause (“RSS” clause)
We will analyze below if the RSS clause can be applicable to the case that we are studying and with which consequences.
Requirements of the RSS clause (Latin aphorism that means “things thus standing”)
The principle RSS operates as an intrinsic clause (that is, implicit, without the need to expressly agree by the parties) in the contractual relationship, which means that the stipulations established in a contract are so in view of the concurrent circumstances at the time, that is, „things thus standing”, so that any substantial and unforeseen alteration of the same could lead to the modification of the contractual content.
The RSS clause is not regulated in any article in our laws; It is a doctrinal construction that the jurisprudence has traditionally admitted (examples among many other Supreme Court Sentences from June 30, 2014, February 24, 2015, January 15, 2019, July 18, 2019), with great caution, only in certain cases, and requiring the following requirements:
- That there has been an extraordinary alteration in the circumstances of the contract, at the time that it must be fulfilled, in relation to those present at the time the parties entered the contract.
- To analyze whether an incident can determine the extraordinary alteration of the circumstances that gave meaning to the contract, we must a) contrast the scope of said alteration regarding the meaning or purpose of the contract and the commutativity or performance balance thereof; and b) the „normal risk“ inherent or derived from the contract must be excluded.
- That there has been an exorbitant disproportion, out of all calculation, between the obligations of the contracting parties, causing an imbalance between them.
- That the above occurs because of radically unpredictable circumstances.
- That there is no other remedy to overcome the situation.
Historically, our courts have been very reluctant to apply RSS, although since the economic crisis of 2008-2012 there has been a certain change in criteria and greater jurisprudential receptivity.
Consequences of the application of RSS
The doctrine establishes that the application of the RSS does not have in principle terminating effects on the contract, but only modifying effects, aimed at compensating the imbalance of obligations between the parties; the doctrine establishes that this only applies to long-term contracts or successive contracts with deferred execution.
In application of the good faith principle, the reaction to an event of fortuitous event, force majeure or, in general, an event that generates a disproportion between the parties, such as that regulated by the RSS clause, should be the amendment of the contract to rebalance the obligations between the parties, and only in the event of material impossibility to comply with the obligations, the resolution of the obligation, in both cases without compensation for non-compliance.
For this reason, in relation to leasing contracts and in case of closure of the premises by mandatory mandate, we understand that the RSS clause may be:
- alleged by the leaseholder to request or urge the lessor to downsize or postpone payment.
- estimated by the judges, when these assumptions are debated before the Courts, when accepting such contractual amendment as equitable and legitimate in order to compensate the imbalance generated by the effects of COVID 19.
To summarize, the RSS clause can be a tool for the leaseholder that has had to close its premises during the State of Alarm, when negotiating with the lessor an amendment of the contract, trying to postpone the rent while the State of Alarm or negotiating a discount.
We should bear in mind:
- That the RSS clause is unavoidably applicable on a casuistic basis, there are no generalizations and it will be necessary to take into account the effect caused by COVID 19 in each specific contractual relationship (Supreme Court Sentence from June 30, 2014 and February 24, 2015) and the real imbalance of benefits produced, and
- That, as we have said, the Courts are generally reluctant to apply this clause, that they only apply in the absence of any other legal tool and in situations in which the maintenance of the contractual status quo reveals a manifest “injustice ”and a evident and resounding imbalance between the performance of the parties.
Does this mean that the leaseholder may impose on the lessor a modification of the economic conditions of the contract under the RSS clause (postponement or total or partial cancellation of the payment)?
We cannot assure this, what we think is that the application of this RSS clause should:
- Justify a reasonable request from the leaseholder to temporarily change the conditions of the contract (postponement or cancellation, total or partially) that the lessor must reasonably meet.
- In case of unreasonable refusal of the lessor, we recommend to document as much as possible leaseholder´s request and the possible negotiations or refusal, in order to substantiate a suspension of the payment of the rent, total or partial, during the State of Alarm aimed, not to extinguish his obligation, but to postpone it.
We will have to wait for the reaction of the Courts when they judge these conflicts, but if we dare to anticipate that it is quite possible that the judicial tendency will be to grant protection to the leaseholder with support in the RSS clause and the principle of business preservation, when it comes to validating certain modifying effects regarding the payment obligations of the leaseholder (total or partial remission of the rent payment during the pandemic crisis, postponement, or partial postponement).
In any case, it will be essential to prove, that the behavior of the leaseholder seeking protection in the RSS clause to amend the contract, has been strictly adjusted to the principle of good faith (Supreme Court Sentence from April 30, 2015).
It will also be important to analyze case by case why the displacement of the risk derived from the “exceptional and unforeseen event” from one contractor to the other is justified (Supreme Court Sentence from January 15, 2015) and could well be defended (Supreme Court Sentence from July 18, 2019) that both contracting parties must divide and assume the consequences between the two of them. The judicial decisions will vary in each specific case.
Conclusions and Recommendations
In conclusion, it seems that the leaseholder would have two instruments in order to try to successfully suspend or postpone the payment of the rents, the RSS clause and the principle of Force Majeure.
In our view, the replacement of the contractual balance altered by the exceptional event, may consist of either an extension of the lease payment terms or the application of a total, or partial cancellation of the rental payment obligation while it lasts the State of Alarm, but we understand that it will be defendable that the delay in the payment may not give rise neither to the termination of the contract under art. 1124 Cc nor to the requirement of damages art. 1105 Cc, therefore, will not empower the lessor to urge eviction.
Therefore, the steps to be followed in each case would be:
- Carry out an examination of the contract to check whether force majeure and acts of God are regulated and if the current situation is in accordance with the contract provisions.
- Should nothing be set forth at the contract, and in case the leaseholder has had to close the premises or office, notify the other party of this circumstance and try to negotiate a novation of the lease requesting:
- Waiver of the payment obligation during the Alarm State.
- The application of a discount on the payment obligations with both parties sharing the effects of the pandemic, in a proportion to be agreed.
- Postponement of payment obligations until the premises or office can be reopened with a payment plan for the deferred debt.
If it is not possible to reach an agreement, it is advisable to try to maintain evidence that the parties have acted in good faith trying to reach a negotiated solution and at the extreme (from the leaseholder´s point of view) announce, without waiting to receive a communication or claim from the Lessor, the suspension of the rental fee payment until reopening of the premises/offices, justifying the same in the Alarm State.
QUICK SUMMARY: Contract negotiations do not take place in a legal vacuum. A party who negotiates contrary to the principle of good faith and then breaks off negotiations may become liable to the other party. However, the requirements for such liability are high and the enforcement of damage claims is cumbersome. At the end of the post I will share some practical tips for contract negotiations in Switzerland.
Under Swiss law, the principle of freedom of contract is of fundamental importance. It follows from the freedom of contract that, in principle, everyone is free to enter into contract negotiations and to terminate them again without incurring any liability. A termination of contract negotiations does not have to be justified either.
However, the freedom of contract is limited by the obligation to act in good faith (cf. article 2 para. 1 of the Swiss Civil Code), which is of equal fundamental importance. From the moment when parties enter into contract negotiations, they are in a special legal relationship with each other. That pre-contractual relationship involves certain reciprocal obligations. In particular, the parties must negotiate in a serious manner and in accordance with their actual intentions.
Negotiating parties must not stir up the hope of the other party, contrary to their actual intentions, that a contract will actually be concluded. Put differently, a party’s willingness to conclude a contract must not be expressed more strongly than it actually is. If a party realizes that the other party wrongly beliefs that a contract would certainly be concluded, such illusion should be dispelled in due course.
A negotiating party that terminates contract negotiations in violation of these principles, whether maliciously or negligently, may become liable to the other party based on the culpa in contrahendo doctrine. However, such liability exists in exceptional cases only.
- The fact that contract negotiations took a long time is not sufficient for incurring such liability. The duration of negotiations is, in itself, not decisive.
- It is not possible to derive liability from pre-existing contractual relationships between the negotiation parties, as for example in cases where parties negotiate a „mere“ prolongation of an existing agreement. The decisive factor is not whether parties were already contractually bound before, but only whether the party that terminated the contract negotiations made the other party believe that a new agreement would certainly be concluded.
- It is not decisive whether the party who terminates contract negotiations knows that the other party has already made costly investments in view of the prospective contract. In principle, anyone who makes investments already prior to the actual conclusion of a contract does so at its own risk. Even where a party to contract negotiations knows that the other party has already made (substantial) investments in the prospective agreement, a termination of the contract negotiations will, in itself, not be considered as an act of bad faith.
What does a liability for breaking off negotiations include?
If a party violates the aforementioned pre-contractual obligations, the other party may be entitled to compensation for the so-called negative interest. This means that the other party must be put in the position it would have been if the negotiations had not taken place. Damages may include, e.g., expenses in connection with the negotiation of the contract (travel costs, legal fees etc.), but also a loss of income in cases where a party was not able to do business with third parties because of the contract negotiations. However, the other party has no right to be treated as if the contract had been concluded (so-called positive interest).
Having said that, it must be kept in mind that the requirements set by Swiss court for the substantiation of damages are rather high, so that the enforcement of a liability for breaking off negotiations will often be a cumbersome process. Therefore pursuing damage claims with relatively low amounts in dispute might often require a disproportionate effort.
Practical tips – Do’s and don’ts when negotiating contracts
- Do not overstate your willingness to conclude a contract. Be frank with your counterparty. Make it clear from the beginning of the negotiations what clauses are important to you.
- Do not tell the other party that you are willing to sign a contract, if you still have doubts or you are even unwilling to do so. Confirm that you will sign only if you are convinced to do so.
- Do not allow someone else (e.g., a representative, employee, branch office etc.) to negotiate on your behalf if you are not willing to enter into an agreement anyway. Keep an eye on how the negotiations are going on and intervene if necessary.
- Do not make costly investments before a legally binding agreement is concluded. If, for time or other reasons, such investments are necessary already before the conclusion of an agreement, insist on the conclusion of an interim contract governing such investments for the event that the envisaged agreement is not concluded finally.
In 2020, an important revision of the Swiss statute of limitations enters into force. The new law provides for longer limitation periods in cases of personal injury and extends the relative limitation periods in tort and unjust enrichment law from one to three years.
Background of the revision
In June 2018, the Swiss parliament adopted an amendment to the Swiss Code of Obligations (“CO”) pertaining to a revision of the statute of limitations. In November 2018, the Swiss government decided that the revised statute of limitations shall enter into force on 1 January 2020.
The revision was significantly influenced by asbestos cases. Under the current law, damage claims of asbestos victims were time-barred in some cases even before asbestos-related diseases could be diagnosed. In March 2014, the European Court of Human Rights held in Howald Moor and others v. Switzerland that the Swiss statute of limitations amounts in such cases to a violation of article 6 paragraph 1 of the European Convention on Human Rights (right of access to a court).
Having said that, the revision does not only concern cases of personal injury, but also includes numerous other important changes as described in the following.
Key changes regarding limitation periods
A. Tort law
In tort law, the new relative limitation period amounts to three years from the date on which the injured party became aware of the damage and of the identity of the person liable (revised Art. 60 para. 1 CO). Under the current law, the relative limitation period amounts to one year only.
With the exception of cases of personal injury, the absolute limitation period remains ten years as from the date when the conduct that caused the damages occurred or ended (revised Art. 60 para. 1 CO).
In cases of personal injury, the new relative limitation period amounts to three years from the date on which the injured party became aware of the damage and of the identity of the person liable. Currently the relative limitation period amounts to one year only.
The new absolute limitation period in cases of personal injury amounts to twenty years after the date when the conduct which caused the damages occurred or ended (new Art. 60 para. 1bis CO). Under the current law, there was no special absolute limitation period for cases of personal injury, so that the ordinary 10-year period applied (Art. 60 para. 1 CO).
If conduct, which gives rise to liability under tort law, is also punishable under criminal law, the (longer) limitation period under criminal law remains applicable (cf. Art. 97 of the Swiss Criminal Code). However, where a first-instance criminal judgment is rendered before the conduct is time-barred under criminal law, the limitation periods ends not earlier than three years as from that criminal judgment (revised Art. 60 para. 2 CO). The current law does not provide for such an additional three-year limitation period.
B. Unjust enrichment law
In unjust enrichment law, the new relative limitation period amounts to three years as from the date on which the injured party knows about the claim (revised Art. 67 para. 1 CO). Under the current law, the relative limitation period amounts to one year only.
The absolute limitation period is not affected by the revision and remains ten years after the date on which the claim arises (revised Art. 67 para. 1 CO).
C. Contract law
With regard to contractual claims, the ordinary limitation period remains ten years from the due date (Art. 127 CO). Furthermore, the shorter limitation period of five years from the due date applicable to (amongst others) claims for rent, interest on capital and other periodic payments, (most) claims out of employment relationships etc. remains unchanged too (Art. 128 CO).
However, in cases of personal injury, the revised statute of limitations introduces a new relative limitation period of three years from the date on which the injured party became aware of the damage, as well as a new absolute limitation period of twenty years after the date when the conduct which caused the damages occurred or ended (new Art. 128a CO). The current law does not provide for distinct relative and absolute limitation periods for contractual claims in cases of personal injury. Instead, the ordinary ten-year limitation period (Art. 127 CO) usually applied to such cases.
D. Summary
In summary, the most important elements of the revised statute of limitations are the longer (trebled) relative limitation periods in tort and unjust enrichment law (i.e., three years instead of one year) and the new special rules for cases of personal injury, which now benefit from a 20-year absolute limitation period.
Transitional provisions / application of the revised statute of limitations to pre-existing claims
The longer limitation periods under the revised CO apply to any claims that are not yet time-barred when the revision enters into force (i.e., on 1 January 2020; revised Art. 49 para. 1, Final Title of the Swiss Civil Code). In other words, the limitation periods of any claims that do not become time-barred until 31 December 2019 at the latest will be prolonged. This is of particular relevance with regard to claims based on tort and unjust enrichment; the short one-year relative limitation periods under the current law will be extended by another two years.
In contrast, the current law remains applicable in case the revised statute of limitations provides for shorter limitation periods (revised Art. 49 para. 2, Final Title of the Swiss Civil Code). This concerns, in particular, contractual claims in cases of personal injury. The new three-year relative limitation period under the revised law might not apply to such claims, as the current statute of limitations does not provide for a relative limitation period at all.
Further changes brought by the revision
In addition to the changes of the limitation periods set out above, the revision of the statute of limitations contains numerous further modifications. Some of them are listed in the following:
- Limitation periods do not commence or are suspended in the event that a claim cannot be asserted for objective reasons before any court worldwide (revised Art. 134 para. 1 no. 6 CO). The current law provides for such non-commencement or suspension only if the claim cannot be brought before a Swiss court.
- Parties to a dispute may agree in writing that limitation periods shall be suspended during settlement discussions, mediation proceedings or other out-of-court settlement proceedings (revised Art. 134 para. 1 no. 8 CO).
- Once a limitation period has commenced to run, waivers of statute of limitation defenses are admissible, but must not exceed ten years (revised Art. 141 para. 1 CO). Any such waivers must be in writing (new Art. 141 para. 1bis CO).
- In general terms and conditions (“GTC”), statute of limitation defenses may be waived by the party who makes use of the GTCs only. In contrast, a waiver by the party on whom the GTCs are imposed (e.g., consumers) is ineffective (new Art. 141 para. 1bis CO).
- The limitation period for an actio pauliana under the Swiss Debt Enforcement and Bankruptcy Act (“DEBA”) is extended to from currently two years to three years after service of a loss certificate, the opening of bankruptcy proceedings or the confirmation of a composition agreement with an assignment of assets (whichever is applicable; revised Art. 292 DEBA).
If 2017 was the year of Initial Coin Offerings, 2018 was the year of Blockchain awareness and testing all over the world. From ICO focused guidelines and regulations respectively aimed to alarm and protect investors, we have seen the shift, especially in Europe, to distributed ledger technology (“DLT”) focused guidelines and regulations aimed at protecting citizens on one hand and promote DLT implementations on the other.
Indeed, European Union Member States and the European Parliament started looking deeper into the technology by, for instance, calling for consultations with professionals in order to understand DLT’s potentials for real-world implementations and possible risks.
In this article I am aiming to give a brief snapshot of firstly what are the most notable European initiatives and moves towards promoting Blockchain implementation and secondly current challenges faced by European law makers when dealing with the regulation of distributed ledger technologies.
Europe
Let’s start from the European Blockchain Partnership (“EBP”), a statement made by 25 EU Member States acknowledging the importance of distributed ledger technology for society, in particular when it comes to interoperability, cyber security and efficiency of digital public services. The Partnership is not only an acknowledgement, it is also a commitment from all signatory states to collaborate to build what they envision will be a distributed ledger infrastructure for the delivering of cross-border public services.
Witness of the trust given to the technology is My Health My Data, a EU-backed project that uses DLT to enable patients to efficiently control their digitally recorded health data while securing it from the threat of data breaches. Benefits the EU saw in DLT on this specific project are safety, efficiency but most notably the opportunity that DLT offers data subject to have finally control over their own data, without the need for intermediaries.
Another important initiative proving European interests in testing DLT technologies is the Horizon Prize on “Blockchains for Social Good”, a 5 million Euros worth challenge open to innovators and tech companies to develop scalable, efficient and high-impact decentralized solutions to social innovation challenges.
Moving forward, in December last year, I had the honor to be part of the “ Workshop on Blockchains & Smart Contracts Legal and Regulatory Framework” in Paris, an initiative supported by the EU Blockchain Observatory and Forum (“EUBOF”), a pilot project initiated by the European Parliament. Earlier last year other three workshops were held, the aim of each was to collect knowledge on specific topics from an audience of leading DLT legal and technical professionals. With the knowledge collected, the EUBOF followed up with reports of what was discussed during the workshop and suggest a way forward.
Although not binding, these reports give a reasonably clear guideline to the industry on how existing laws at a European level apply to the technology, or at least should be interpreted, and highlight areas where new regulation is definitely needed. As an example let’s look at the Report on Blockchain & GDPR. If you missed it, the GDPR is the Regulation that protects Europeans personal data and it’s applicable to all companies globally, which are processing data from European citizens. The “right to erasure” embedded in the GDPR, doesn’t allow personal data to be stored on an immutable database, the data subject has to be able to erase data anytime when shared with a service provider and stored somewhere on a database. In the case of Blockchain, the consensus on personal data having to be stored off-chain is therefore unanimous. Storing personal data off-chain and leaving an hash to that data on-chain, is a viable solution if certain precautions are taken in order to avoid the risks of reversibility or linkability of such hash to the personal data stored off-chain, therefore making the hash on-chain personally identifiable information.
However, not all European laws apply to Member States, therefore making it hard to give a EU-wide answer to most DLT compliance challenges in Europe. Member States freedom to legislate is indeed only limited/influenced by two main instruments, Regulations, which are automatically enforceable in each Member State and Directives binding Member States to legislate on specific topics according to a set of specific rules.
Diverging national laws have a great effect on multiple aspects of innovative technologies. Let’s look for instance at the validity of “smart contracts”. When discussing the legal power of automatically enforceable digital contracts, the lack of a European wide legislation on contracts makes it impossible to find an answer applicable to all Member States. For instance, is “offer and acceptance” enough to constitute a contract? What is considered a valid “acceptance”? What is an “obligation”? “Can a digital asset be the object of a legally binding agreement”?
If we try to give a EU-wide answer to the questions such as smart contract validity and enforceability it is apparently not possible since we will need to consider 28 different answers. I, therefore, believe that the future of innovation in Europe will highly depend on the unification of laws.
An example of a unified law that has great benefits on innovation (including DLT) is the Electronic Identification and Trust Services (eIDAS) Regulation, which governs electronic identification including electronic signatures.
The race to regulating DLT in Europe
Let’s now look briefly at a couple of Member States legislations, specifically on Blockchain and cryptocurrencies last year.
EU Member States have been quite creative I would say in regulating the new technology. Let’s start from Malta, which saw a surprising increase of important projects and companies, such as Binance, landing on the beautiful Mediterranean Island thanks to its favorable (or at least felt as such) legislations on DLT. The “Blockchain Island” passed three laws in early July to regulate and supervise Blockchain projects including ICOs, crypto exchanges and DLT, specifically: The Innovative Technology Arrangements and Services Act regulation that aims at recognizing different technology arrangements such as DAOs, smart contracts and in future probably AI machines; The Virtual Financial Assets Act for ICOs and crypto exchanges; The Malta Digital Innovation Authority establishing a new supervisory authority.
Some think the Maltese legislation lacks a comprehensive framework, one that for instance, gives legal personality to Innovative Technology Arrangements. For this reason some are therefore accusing the Maltese lawmakers of rushing into an uncompleted regulatory framework in order to attract business to the island while others seem to positively welcome the laws as a good start for a European wide regulation on DLT and crypto assets.
In December 2018, Malta also initiated a declaration that was then signed by other six Members States, calling for collaboration for the promotion and implementation of DLT on a European level.
France was one of the signatories of such declaration, and it’s worth mentioning since the French Minister for the Economy and Finance approved in September a framework for regulating ICOs and therefore protecting investors’ rights, basically giving the AMF (French Authority for Financial Market) the empowerment to give licenses to companies wanting to raise funds through Initial Coin Offerings.
Last but not least comes Switzerland which although it is not a EU Member State, it has great degree of influence on European and national legislators when it comes to progressive regulations. At the end of December, the Swiss Federal Council released a report on DLT and the law, making a clear statement that the existing Swiss law is sufficient to regulate most matters related to DLT and Blockchain, although some adjustments have to be made. So no new laws but few amendments here and there, which will allow the integration of the specific DLT applications with existing laws in order to ensure legal certainty on certain uncovered matters. Relevant areas of Swiss law that will be amended include the transfer of rights utilizing digital registers, Anti Money Laundering rules specifically for decentralized trading platforms and bankruptcy when that proceeding involves crypto assets.
Conclusions
To summarize, from the approach taken during the past year, it is apparent that there is great interest in Europe to understand the potentials and to soon test implementations of distributed ledger technology. Lawmakers have also an understanding that the technology is in an infant state, it might involve risks, therefore making it complex to set specific rules or to give final answers on the alignment of certain technology applications with existing European or national laws.
To achieve European wide results, however, acknowledgments, guidelines and reports are not enough. The setting of standards for lawmakers applicable to all Member States or even unification of laws in crucial sectors influencing directly or indirectly new technologies, will be the only solution for any innovative technology to be adopted at a European level.
The author of this post is Alessandro Mazzi.
“Influencer Marketing” is a very well known topic to the jurists and operators of the advertising sector dealing with commercial communication.
There is a core principle in communication law: any form of commercial communication shall be clearly recognizable as such.
Before the diffusion of digital communication and, along with it, the proliferation of the so-called „Influencer Marketing“, the issue of recognizability of commercial communication was generally discussed when evaluating whether an advertising content was clearly distinguishable from a journalistic or an informative content (such is the longstanding issue regarding the advertorial).
For a short period of time there was a debate regarding the so-called subliminal advertising, which eventually fell into oblivion.
The necessity to point out to the consumer whether the appreciation for a product or a service shown by a well-known person – precisely an “Influencer” – (i.e. the endorsement) is genuine or not has become a much encountered and controversial topic.
It shall not be considered as spontaneous when an individual receives remuneration for wearing a fashion item, for using a smartphone, or simply when he/she receives as a gift the products that he/she promotes or other valuable products.
It is clear and proven that the spontaneous choice of an “idol” by the public has a bigger impact on these same people rather than any traditional way of advertising. Hence the abuse of surreptitious advertising on the less easily monitored channel: the web, precisely.
What measures should be taken to ensure that the consumers can understand clearly whether a post is subject of a contract or not?
The answer would be very simple.
It would be enough to require the sponsored post to contain, in clearly visible characters, terms as “Advertisement”, “Sponsored by”, “Commercial agreement” or similar notices.
In Italy, in absence of a law regulating specifically the matter, both the Istituto della Pubblicità (Italy’s Advertising Self-Regulatory Institute) and the Autorità Garante della Concorrenza e del Mercato (the Competition Authority) have expressed their opinion on this subject.
In the Italian Advertising Self-Regulatory Institute’s digital chart it is written: “in order to make the promotional nature of content posted on social media and content sharing sites recognizable, celebrities/influencers/bloggers must at the top of their post state in a clearly distinguishable manner the words: “Pubblicità/Advertising”, or “Promosso da … brand/Promoted by…brand” or “Sponsorizzato da…brand/Sponsored by…brand” or “in collaborazione con …brand” or “in partnership with the …brand”; and/or within the first three hashtags (#) use one of the following terms: “#Pubblicità/#Advertising”, or “#Sponsorizzato da … brand/#Sponsored by the … brand “ or “#ad” along with “#brand”.
In a press release of 2017 the Italian Competition Authority has required the addressees the use of the following warnings to be placed below the post together with the others hashtags (#), such as “#sponsored, #advertising, #paidad”, or, in the case of products given for free to the celebrity, “#productsuppliedby”; in particular, all these wordings should be followed by the name of the specific brand being advertised.
However, browsing the Instagram’s pages of various Influencers, it is noticeable that only a few of them are actually using the indications provided by the authorities.
And when it happens to came across Instagram’s profiles that use such indications, it is noticeable that the hashtag that is most commonly used is “#ad”, whose effectiveness (especially in Italy where terms such as “advertising”, “Adv” and, even more so, “ad” are not easily decipherable by the average consumer) raises many concerns.
So far the Italian Competition Authority intervened sending moral suasion letters to some of the main influencers and companies producing the branded goods displayed in the posts, but still no self-regulatory, administrative or state measures have been taken.
The same situation of uncertainty is likely to be found in other countries (here you can find a previous Legalmondo post on this topic in Germany: https://www.legalmondo.com/2017/11/germany-product-placement-influencer-marketing/), with the consequence that international companies are operating in an unclear context, in which it is difficult to identify what are the risks arising from behaviours considered as unlawful.
I have therefore decided to write this article in order to assess the state of Influencer Marketing in Italy and in other countries and get a better understanding of the regulations in force, the measures/judgments issued by the competent Authorities, the international trends and the best practices that could be adopted by international companies.
Since I am one of the founders of the Digital Adv Lab – an interdisciplinary observatory that studies the legal implications of marketing and digital communication initiatives – I am interested in getting in touch with all the readers involved in this topic: please feel free to enter a comment and/or contact me.
The author of this post is Elena Carpani.
Poland has recently become quite famous for its skilled and resourceful IT specialists. Each year thousands of new computer engineers (programmers, developers, testers, designers etc.) enter into the market, warmly welcomed by domestic and multinational companies. A big part of these young talents open their own firm or business as free lancers developing software for clients from European countries as well as from US, Canada, Japan, China, etc.
However, companies who want to cooperate with these partners and assign software development to a Polish IT company or freelancer should be aware that the copyright law in Poland is very strict, as it mainly protects the creator and not the client. Therefore, to be on a safe side, it is better to follow these 7 basic rules:
- Never start cooperation with an IT specialist or an IT company without a formal agreement. And I mean a real agreement, in a written form, with signatures of persons who can validly contract on behalf of the companies. The form is very important because – under Polish law – copyrights transfer and exclusive license agreements not fulfilling form conditions are null and void. Moreover, if there is no agreement, Polish copyright rules will apply to all intellectual property matters.
- Please remember that software is a creation protected by copyright law. Therefore you should consider whether you want to acquire the entire intellectual property rights or you just need a license. If you need a full IP transfer, you need to put it expressly in the agreement; otherwise you will only get a non-exclusive licence. And these, in several cases, will not be useful from a business point of view. If a license is enough, it is advisable to agree if it will be exclusive or non-exclusive.
- When drafting an IP clause, be detailed and clear. If you want to be able to decompile and disassembly the binary code, specify it in the IP clause. If you want to be able to introduce modifications to the source code, specify it in the IP clause. If you want to sublicense the software, specify it in the IP clause. The IP clause shall contain the description of any way you want to use the software, whether on mobile devices or on personal computers, any other electronic device or via internet (e.g. cloud computing). And believe me, when I write „specify it in the IP clause“ it means that you really, really have to put it there. Otherwise it will be null and void and you may face a situation where your smart IT engineer, after getting paid, will sue you for the IP infringement.
- Remember that you should indicate the timeframe and the geographical scope of the license or IP transfer. If you do not specify it expressly in the agreement, you will only be entitled to a 5-year license, automatically expiring afterwards.
- Draft carefully a clause related to termination of the agreement. Under Polish law the licensor may terminate the license agreement granted for an indefinite period of time upon 1-year notice. If you do not want to find yourself in a situation where you lose the software IP rights in the middle of a big project, make sure that from the very beginning you are on a safe side.
- Make sure that your partner is obliged to transfer you upon request all software documentation and the source code.
- Make sure that you have a good indemnification clause with no limitation of liability. Often Polish IT companies subcontract some part of the development work to free lancers. You never know if they will conclude proper agreements with their subcontractors and if they will legally acquire the IP of the software that they will later sell you. There is always the risk that in the future some Polish IT engineer you never met will raise IP infringement claims against you, trying to prove that he/she actually developed the software. In such a situation an indemnification clause will help you recovering the costs from your partner.
Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.
These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.
The signature of the contract
Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.
The proper choice of contract
If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.
Monitoring of legal and business relations
If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.
Evidences about customers
In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.
Evidences on purchases and sales
Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.
Damages in case of termination of contracts
Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.
Influencer marketing is the trend in today’s world of advertising. Even though it is obvious that influencer marketing must observe the framework of applicable statutory provisions, the market has long been uncertain about how influencer posts are to be drafted in order to be legally compliant. The current decision of Celle Higher Regional Court (June 08, 2017 – Case 13 U 53/17) offers at least some clarity.
The judgment was issued in relation to an action for injunction by the German Association for Social Competition (Verband Sozialer Wettbewerb) against a German drugstore chain. A 20-year-old Instagram star with 1.3 million followers had advertised the drugstore chain in one of her posts. The post was only marked as advertisement at the bottom with the hashtag “#ad,” which additionally only came second in a list of six hashtags.
Celle Higher Regional Court adjudged that this type of marking was insufficient. The court requested that the commercial purpose of an Instagram post would have to be apparent at first sight. It did not consider use of the hashtag “#ad” in a “hashtag cloud” to be sufficient to mark the post as advertising.
The court left expressly open, however, whether the use of the hashtag “#ad” is generally suitable to mark advertising posts.
The state media authorities (Landesmedienanstalten) already reacted to the judgment, however, and revised their joint guide on advertising issues in social media. It now reads: “When marking a post as PROMOTION (Werbung) or ADVERTISING (Anzeige), you will be on the safe side – that much is certain. […] At the current time, we cannot recommend marking posts as #ad, #sponsored by, or #powered by.” In the future, Instagram itself intends to provide for more transparency on the platform by comprehensibly identifying advertising posts. It is currently testing the introduction of a branded content tool in Germany to make it easier for users to recognize posts as paid advertising.
Practical tip
Advertising posts in social media should always be marked as “promotion” or “advertising” at the beginning of the posts unless their commercial purpose arises directly from the circumstances. Advertisers are also advised to obligate influencers contractually to such legally compliant marking of posts, since the influencers’ behavior may be attributed to the company, as is clearly shown by the recent judgment of Celle Higher Regional Court against the drugstore chain.
The author of this post is Ilja Czernik.
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Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, even though it affects and produces effects in many different legal fields, does not include any reference to contracts for leases of real estate, or houses, premises or offices.
The purpose of this note is to analyze the effects of the situation of the State of Alarm regarding those leases of offices or premises that have been forced to close in application of the decree; those others that remain totally or partially open and in operation, although with a reduced or minimal activity, in principle are not subject to the conclusions reached below without prejudice to the fact that there are individualized cases to which, despite the fact that there is not a complete closure, reasonably and logically can be applied to them.
It is not excluded in any way that in the event of an extension of the validity of the State of Alarm, a regulation that affects the leasing contracts could be published, but for the moment this has not happened. If this were to happen, the content of said norm would apply.
Based on the principle of freedom of covenants enshrined in art. 1255 of the Spanish Civil Code, which allows the parties signing the contract to agree (i) what scenarios and situations should be considered as constituting cases of Force Majeure and Act of God and (ii) what the contractual consequences of such scenarios should be, the first exercise that must be done is to check if the contract includes a regulatory clause of Force Majeure and its effects; if so, such clause must be followed and its analysis is left out of this note.
In the absence of express regulation in the contract, the provisions of the Civil Code and specifically article 1105 would apply.
COVID-19 as Force Majeure
COVID-19 is an event that in principle meets the requirements of the Civil Code to be classified as an event of Force Majeure (art. 1105 Civil Code) since:
- It is a foreign act and not attributable to the contractor who is the debtor of the benefit or obligation.
- It is unpredictable, or if it were said to be „predictable“, it is certainly inevitable.
- The event in question, the pandemic, must be a cause and result in the breach of the obligation, that is, there must be a causal link.
Therefore, fulfilling the three requirements, the first conclusion that we reach is that very foreseeably, the Spanish Courts will classify as “Force Majeure” the situation caused by COVID 19 when a judicial dispute is raised in which such matter is discussed between litigants. We will now analyze the consequences of this status.
Consequences of considering COVID-19 as an event of Force Majeure
Most of the doctrine and jurisprudence understand that the effects of classifying a scenario as a case of Force Majeure in principle are:
- Total and definitive impossibility of complying; releasing the debtor from the fulfillment of the obligation.
- Partial inability to comply; the debtor is released only in the part that it is impossible to fulfill, but still bound by the part that can be carried out.
- Temporary inability to comply; the debtor is released from the responsibility for default as long as the exceptional situation persists.
Now, let us analyze how it would affect to considerate the epidemic as Force Majeure in relation to lease agreements for uses other than housing.
Regarding the payment of rent
The question to answer is if the classification of the current pandemic situation as a case of Force Majeure frees the tenant (whose premises have been forced to close by order of the government authority) from the obligation to pay the rent while said closing obligation persists, including in the concept of „release“ different alternatives: total or partial cancellation and / or total or partial postponement.
We are meeting these days with a frequent reaction among some tenants, who, unilaterally have informed their landlords that considering COVID 19 an event of force majeure and having been forced to close the premises / office, they suspend the payment of the rent while said situation remains. They do not terminate the contract, they do not hand over the possession, they remain in it (the premises remain closed and not operational) but they suspend the payment (it is not clear whether suspending in this case means liberating himself from the payment of the rent or postponing its payment for when the Force Majeure scenario ends).
Arguments against liberation
As much as this attitude can be considered “understandable” from the perspective of the lessee, not from the point of view of the lessor, said consideration runs into an obstacle: the interpretation of the Force Majeure made by the Supreme Court regarding pecuniary payment obligations, according to the Civil Sentence of May 19, 2015:
„Not being able to consider, in the case of pecuniary debts, the subjective impossibility – insolvency – nor the objective or formal imposition, the doctrine concludes that it is not possible to imagine that if the impossibility is due to a fortuitous event it could have as effect the extinction of the obligation.
The exoneration of the debtor by fortuitous event is not absolute, it has exceptions, as provided for in article 1105 CC, and one of them, by application of the „genus nunquam perit“ principle, would be in cases of obligations to deliver generic things.
In such circumstances, the pecuniary debtor is obliged to fulfill the main obligation, without the economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic such as money”.
In conclusion: it does not seem that this jurisprudential criterion allows to defend that the fulfillment of the pecuniary obligations is released, extinguished or that its breach is justified in cases of Force Majeure, therefore the pecuniary debtor, in this case the lessee, in application of this criterion and due to the generic condition of the money, would be obliged to fulfill his main obligation not being freed from it by the unforeseen economic adversities on the basis of Force Majeure.
Arguments in favor of liberation: art. 1575 of the Civil Code
Having said the foregoing, reference should be made to an article of the Civil Code that, with certainty, will be profusely cited in the upcoming judicial conflicts.
The art. 1575, dealing with the leasing of rustic estates, recognizes the lessee’s right to the reduction of rent in the event of loss of more than half of the fruits (unless otherwise agreed) in „fortuitous, extraordinary and unforeseen cases … such as fire, war, plague, unusual flood, locust, earthquake or another equally unusual that the contractors have not been able to rationally foresee ”.
Is this article, foreseen for rustic leases, applicable to urban leases?
The art. 4.1 CC allows the analogical application of the rules when (i) they do not contemplate a specific assumption and (ii) they regulate a similar situation in which “identity of reason” may be appreciated.
The Sentence of the Supreme Court from January 15, 2019, that solved a conflict of a lease of a building used as hotel, in which the tenant had sought the reduction of the rent under the clause “rebus sic stantibus” by the crisis of 2008 and had alleged in his favor the application of art. 1575, established:
„The argumentation of the appealed judgment rejecting the claim to lower the agreed price is also not contrary to the legal criterion that follows from art. 1575 CC, which is the rule that allows the reduction of income in the leasing of productive assets that do not derive from risks of the business itself, it also requires that the loss of benefits originates from extraordinary and unforeseen fortuitous cases, something that by its own rarity could not have been foreseen by the parties, and that the loss of fruits is more than half of the fruits. In this particular case, none of these circumstances concur. The decrease in rents comes from market developments, the parties anticipated the possibility that in some years the profitability of the hotel would not be positive for the lessee and the losses alleged by NH in the operation of the Almería hotel are less than fifty per hundred, without taking into account that the overall result of his activity as manager of a hotel chain is, as the Audience considers proven in view of the consolidated management report, positive”.
The Supreme Court does not admit the application of art. 1575, but not because it is considered not applicable to non-rustic leases, but because the Court concludes that the requirements are not fulfilled since the 2008 crisis was neither unpredictable and because the lessee’s losses do not exceed 50%.
But, that interpretation of the Supreme Court together with the wording of art. 4.1 CC would support the claim of the lessee who has no incomes during the State of Alarm to demand a reduction in rental fee that fits the principle of proportionality.
Regarding early termination at the request of the lessee
However, we may find situations in which the lessee considering the current situation, decides to terminate the lease in advance, delivering the premises to the lessor.
They are cases in which the early termination of the contract is intended, without respecting (i) or the mandatory term (ii) or the previous notice, in both cases under the hypothesis that they are thus regulated in the contract.
In these scenarios, we understand that it may be defendable that, due to the situation of force majeure caused by COVID 19 and in application of art. 1105 of the CC, the lessee is exempt from the obligation:
- To respect the mandatory term of the lease
- To give prior notice to the lessor in case of early termination of the contract
In both cases, the contract would be terminated with the delivery of possession of the premises, without prejudice to having to respect the other obligations set forth in the contract for termination and delivery, provided that they are not equally affected by the situation of Force Majeure.
Our opinion is that, also in application of Article 1,105 of the CC, the thesis that the lessee would be released from any obligation to compensate damages to the lessor for said advance resolution or breach of the obligatory duration of the contract could be defendable before the Courts.
Conclusion
In conclusion, when the Courts decide on the effects of the current pandemic (that they will surely classify as Force Majeure), and how this will affect the obligations of leaseholders who have been forced to close their business, our opinion is the following:
- Regarding the obligation to pay the rent, despite the contrary criterion of the sentence from May 19, 2015, we find defendable the analogue application of art. 1575 of the CC, based as well on the Supreme Court Sentence from January 15, 2019, in order to demand a proportional and equitable reduction of the rent.
- Regarding the power of the leaseholder to terminate the contract in advance, in case the leaseholder hands the possession of the property to the lessor, we find defendable to exonerate the leaseholder from complying with the advance notice or mandatory term in case provided in the contract, without the obligation to indemnify the lessor for this reason.
Application of the Rebus Sic Stantibus clause (“RSS” clause)
We will analyze below if the RSS clause can be applicable to the case that we are studying and with which consequences.
Requirements of the RSS clause (Latin aphorism that means “things thus standing”)
The principle RSS operates as an intrinsic clause (that is, implicit, without the need to expressly agree by the parties) in the contractual relationship, which means that the stipulations established in a contract are so in view of the concurrent circumstances at the time, that is, „things thus standing”, so that any substantial and unforeseen alteration of the same could lead to the modification of the contractual content.
The RSS clause is not regulated in any article in our laws; It is a doctrinal construction that the jurisprudence has traditionally admitted (examples among many other Supreme Court Sentences from June 30, 2014, February 24, 2015, January 15, 2019, July 18, 2019), with great caution, only in certain cases, and requiring the following requirements:
- That there has been an extraordinary alteration in the circumstances of the contract, at the time that it must be fulfilled, in relation to those present at the time the parties entered the contract.
- To analyze whether an incident can determine the extraordinary alteration of the circumstances that gave meaning to the contract, we must a) contrast the scope of said alteration regarding the meaning or purpose of the contract and the commutativity or performance balance thereof; and b) the „normal risk“ inherent or derived from the contract must be excluded.
- That there has been an exorbitant disproportion, out of all calculation, between the obligations of the contracting parties, causing an imbalance between them.
- That the above occurs because of radically unpredictable circumstances.
- That there is no other remedy to overcome the situation.
Historically, our courts have been very reluctant to apply RSS, although since the economic crisis of 2008-2012 there has been a certain change in criteria and greater jurisprudential receptivity.
Consequences of the application of RSS
The doctrine establishes that the application of the RSS does not have in principle terminating effects on the contract, but only modifying effects, aimed at compensating the imbalance of obligations between the parties; the doctrine establishes that this only applies to long-term contracts or successive contracts with deferred execution.
In application of the good faith principle, the reaction to an event of fortuitous event, force majeure or, in general, an event that generates a disproportion between the parties, such as that regulated by the RSS clause, should be the amendment of the contract to rebalance the obligations between the parties, and only in the event of material impossibility to comply with the obligations, the resolution of the obligation, in both cases without compensation for non-compliance.
For this reason, in relation to leasing contracts and in case of closure of the premises by mandatory mandate, we understand that the RSS clause may be:
- alleged by the leaseholder to request or urge the lessor to downsize or postpone payment.
- estimated by the judges, when these assumptions are debated before the Courts, when accepting such contractual amendment as equitable and legitimate in order to compensate the imbalance generated by the effects of COVID 19.
To summarize, the RSS clause can be a tool for the leaseholder that has had to close its premises during the State of Alarm, when negotiating with the lessor an amendment of the contract, trying to postpone the rent while the State of Alarm or negotiating a discount.
We should bear in mind:
- That the RSS clause is unavoidably applicable on a casuistic basis, there are no generalizations and it will be necessary to take into account the effect caused by COVID 19 in each specific contractual relationship (Supreme Court Sentence from June 30, 2014 and February 24, 2015) and the real imbalance of benefits produced, and
- That, as we have said, the Courts are generally reluctant to apply this clause, that they only apply in the absence of any other legal tool and in situations in which the maintenance of the contractual status quo reveals a manifest “injustice ”and a evident and resounding imbalance between the performance of the parties.
Does this mean that the leaseholder may impose on the lessor a modification of the economic conditions of the contract under the RSS clause (postponement or total or partial cancellation of the payment)?
We cannot assure this, what we think is that the application of this RSS clause should:
- Justify a reasonable request from the leaseholder to temporarily change the conditions of the contract (postponement or cancellation, total or partially) that the lessor must reasonably meet.
- In case of unreasonable refusal of the lessor, we recommend to document as much as possible leaseholder´s request and the possible negotiations or refusal, in order to substantiate a suspension of the payment of the rent, total or partial, during the State of Alarm aimed, not to extinguish his obligation, but to postpone it.
We will have to wait for the reaction of the Courts when they judge these conflicts, but if we dare to anticipate that it is quite possible that the judicial tendency will be to grant protection to the leaseholder with support in the RSS clause and the principle of business preservation, when it comes to validating certain modifying effects regarding the payment obligations of the leaseholder (total or partial remission of the rent payment during the pandemic crisis, postponement, or partial postponement).
In any case, it will be essential to prove, that the behavior of the leaseholder seeking protection in the RSS clause to amend the contract, has been strictly adjusted to the principle of good faith (Supreme Court Sentence from April 30, 2015).
It will also be important to analyze case by case why the displacement of the risk derived from the “exceptional and unforeseen event” from one contractor to the other is justified (Supreme Court Sentence from January 15, 2015) and could well be defended (Supreme Court Sentence from July 18, 2019) that both contracting parties must divide and assume the consequences between the two of them. The judicial decisions will vary in each specific case.
Conclusions and Recommendations
In conclusion, it seems that the leaseholder would have two instruments in order to try to successfully suspend or postpone the payment of the rents, the RSS clause and the principle of Force Majeure.
In our view, the replacement of the contractual balance altered by the exceptional event, may consist of either an extension of the lease payment terms or the application of a total, or partial cancellation of the rental payment obligation while it lasts the State of Alarm, but we understand that it will be defendable that the delay in the payment may not give rise neither to the termination of the contract under art. 1124 Cc nor to the requirement of damages art. 1105 Cc, therefore, will not empower the lessor to urge eviction.
Therefore, the steps to be followed in each case would be:
- Carry out an examination of the contract to check whether force majeure and acts of God are regulated and if the current situation is in accordance with the contract provisions.
- Should nothing be set forth at the contract, and in case the leaseholder has had to close the premises or office, notify the other party of this circumstance and try to negotiate a novation of the lease requesting:
- Waiver of the payment obligation during the Alarm State.
- The application of a discount on the payment obligations with both parties sharing the effects of the pandemic, in a proportion to be agreed.
- Postponement of payment obligations until the premises or office can be reopened with a payment plan for the deferred debt.
If it is not possible to reach an agreement, it is advisable to try to maintain evidence that the parties have acted in good faith trying to reach a negotiated solution and at the extreme (from the leaseholder´s point of view) announce, without waiting to receive a communication or claim from the Lessor, the suspension of the rental fee payment until reopening of the premises/offices, justifying the same in the Alarm State.
QUICK SUMMARY: Contract negotiations do not take place in a legal vacuum. A party who negotiates contrary to the principle of good faith and then breaks off negotiations may become liable to the other party. However, the requirements for such liability are high and the enforcement of damage claims is cumbersome. At the end of the post I will share some practical tips for contract negotiations in Switzerland.
Under Swiss law, the principle of freedom of contract is of fundamental importance. It follows from the freedom of contract that, in principle, everyone is free to enter into contract negotiations and to terminate them again without incurring any liability. A termination of contract negotiations does not have to be justified either.
However, the freedom of contract is limited by the obligation to act in good faith (cf. article 2 para. 1 of the Swiss Civil Code), which is of equal fundamental importance. From the moment when parties enter into contract negotiations, they are in a special legal relationship with each other. That pre-contractual relationship involves certain reciprocal obligations. In particular, the parties must negotiate in a serious manner and in accordance with their actual intentions.
Negotiating parties must not stir up the hope of the other party, contrary to their actual intentions, that a contract will actually be concluded. Put differently, a party’s willingness to conclude a contract must not be expressed more strongly than it actually is. If a party realizes that the other party wrongly beliefs that a contract would certainly be concluded, such illusion should be dispelled in due course.
A negotiating party that terminates contract negotiations in violation of these principles, whether maliciously or negligently, may become liable to the other party based on the culpa in contrahendo doctrine. However, such liability exists in exceptional cases only.
- The fact that contract negotiations took a long time is not sufficient for incurring such liability. The duration of negotiations is, in itself, not decisive.
- It is not possible to derive liability from pre-existing contractual relationships between the negotiation parties, as for example in cases where parties negotiate a „mere“ prolongation of an existing agreement. The decisive factor is not whether parties were already contractually bound before, but only whether the party that terminated the contract negotiations made the other party believe that a new agreement would certainly be concluded.
- It is not decisive whether the party who terminates contract negotiations knows that the other party has already made costly investments in view of the prospective contract. In principle, anyone who makes investments already prior to the actual conclusion of a contract does so at its own risk. Even where a party to contract negotiations knows that the other party has already made (substantial) investments in the prospective agreement, a termination of the contract negotiations will, in itself, not be considered as an act of bad faith.
What does a liability for breaking off negotiations include?
If a party violates the aforementioned pre-contractual obligations, the other party may be entitled to compensation for the so-called negative interest. This means that the other party must be put in the position it would have been if the negotiations had not taken place. Damages may include, e.g., expenses in connection with the negotiation of the contract (travel costs, legal fees etc.), but also a loss of income in cases where a party was not able to do business with third parties because of the contract negotiations. However, the other party has no right to be treated as if the contract had been concluded (so-called positive interest).
Having said that, it must be kept in mind that the requirements set by Swiss court for the substantiation of damages are rather high, so that the enforcement of a liability for breaking off negotiations will often be a cumbersome process. Therefore pursuing damage claims with relatively low amounts in dispute might often require a disproportionate effort.
Practical tips – Do’s and don’ts when negotiating contracts
- Do not overstate your willingness to conclude a contract. Be frank with your counterparty. Make it clear from the beginning of the negotiations what clauses are important to you.
- Do not tell the other party that you are willing to sign a contract, if you still have doubts or you are even unwilling to do so. Confirm that you will sign only if you are convinced to do so.
- Do not allow someone else (e.g., a representative, employee, branch office etc.) to negotiate on your behalf if you are not willing to enter into an agreement anyway. Keep an eye on how the negotiations are going on and intervene if necessary.
- Do not make costly investments before a legally binding agreement is concluded. If, for time or other reasons, such investments are necessary already before the conclusion of an agreement, insist on the conclusion of an interim contract governing such investments for the event that the envisaged agreement is not concluded finally.
In 2020, an important revision of the Swiss statute of limitations enters into force. The new law provides for longer limitation periods in cases of personal injury and extends the relative limitation periods in tort and unjust enrichment law from one to three years.
Background of the revision
In June 2018, the Swiss parliament adopted an amendment to the Swiss Code of Obligations (“CO”) pertaining to a revision of the statute of limitations. In November 2018, the Swiss government decided that the revised statute of limitations shall enter into force on 1 January 2020.
The revision was significantly influenced by asbestos cases. Under the current law, damage claims of asbestos victims were time-barred in some cases even before asbestos-related diseases could be diagnosed. In March 2014, the European Court of Human Rights held in Howald Moor and others v. Switzerland that the Swiss statute of limitations amounts in such cases to a violation of article 6 paragraph 1 of the European Convention on Human Rights (right of access to a court).
Having said that, the revision does not only concern cases of personal injury, but also includes numerous other important changes as described in the following.
Key changes regarding limitation periods
A. Tort law
In tort law, the new relative limitation period amounts to three years from the date on which the injured party became aware of the damage and of the identity of the person liable (revised Art. 60 para. 1 CO). Under the current law, the relative limitation period amounts to one year only.
With the exception of cases of personal injury, the absolute limitation period remains ten years as from the date when the conduct that caused the damages occurred or ended (revised Art. 60 para. 1 CO).
In cases of personal injury, the new relative limitation period amounts to three years from the date on which the injured party became aware of the damage and of the identity of the person liable. Currently the relative limitation period amounts to one year only.
The new absolute limitation period in cases of personal injury amounts to twenty years after the date when the conduct which caused the damages occurred or ended (new Art. 60 para. 1bis CO). Under the current law, there was no special absolute limitation period for cases of personal injury, so that the ordinary 10-year period applied (Art. 60 para. 1 CO).
If conduct, which gives rise to liability under tort law, is also punishable under criminal law, the (longer) limitation period under criminal law remains applicable (cf. Art. 97 of the Swiss Criminal Code). However, where a first-instance criminal judgment is rendered before the conduct is time-barred under criminal law, the limitation periods ends not earlier than three years as from that criminal judgment (revised Art. 60 para. 2 CO). The current law does not provide for such an additional three-year limitation period.
B. Unjust enrichment law
In unjust enrichment law, the new relative limitation period amounts to three years as from the date on which the injured party knows about the claim (revised Art. 67 para. 1 CO). Under the current law, the relative limitation period amounts to one year only.
The absolute limitation period is not affected by the revision and remains ten years after the date on which the claim arises (revised Art. 67 para. 1 CO).
C. Contract law
With regard to contractual claims, the ordinary limitation period remains ten years from the due date (Art. 127 CO). Furthermore, the shorter limitation period of five years from the due date applicable to (amongst others) claims for rent, interest on capital and other periodic payments, (most) claims out of employment relationships etc. remains unchanged too (Art. 128 CO).
However, in cases of personal injury, the revised statute of limitations introduces a new relative limitation period of three years from the date on which the injured party became aware of the damage, as well as a new absolute limitation period of twenty years after the date when the conduct which caused the damages occurred or ended (new Art. 128a CO). The current law does not provide for distinct relative and absolute limitation periods for contractual claims in cases of personal injury. Instead, the ordinary ten-year limitation period (Art. 127 CO) usually applied to such cases.
D. Summary
In summary, the most important elements of the revised statute of limitations are the longer (trebled) relative limitation periods in tort and unjust enrichment law (i.e., three years instead of one year) and the new special rules for cases of personal injury, which now benefit from a 20-year absolute limitation period.
Transitional provisions / application of the revised statute of limitations to pre-existing claims
The longer limitation periods under the revised CO apply to any claims that are not yet time-barred when the revision enters into force (i.e., on 1 January 2020; revised Art. 49 para. 1, Final Title of the Swiss Civil Code). In other words, the limitation periods of any claims that do not become time-barred until 31 December 2019 at the latest will be prolonged. This is of particular relevance with regard to claims based on tort and unjust enrichment; the short one-year relative limitation periods under the current law will be extended by another two years.
In contrast, the current law remains applicable in case the revised statute of limitations provides for shorter limitation periods (revised Art. 49 para. 2, Final Title of the Swiss Civil Code). This concerns, in particular, contractual claims in cases of personal injury. The new three-year relative limitation period under the revised law might not apply to such claims, as the current statute of limitations does not provide for a relative limitation period at all.
Further changes brought by the revision
In addition to the changes of the limitation periods set out above, the revision of the statute of limitations contains numerous further modifications. Some of them are listed in the following:
- Limitation periods do not commence or are suspended in the event that a claim cannot be asserted for objective reasons before any court worldwide (revised Art. 134 para. 1 no. 6 CO). The current law provides for such non-commencement or suspension only if the claim cannot be brought before a Swiss court.
- Parties to a dispute may agree in writing that limitation periods shall be suspended during settlement discussions, mediation proceedings or other out-of-court settlement proceedings (revised Art. 134 para. 1 no. 8 CO).
- Once a limitation period has commenced to run, waivers of statute of limitation defenses are admissible, but must not exceed ten years (revised Art. 141 para. 1 CO). Any such waivers must be in writing (new Art. 141 para. 1bis CO).
- In general terms and conditions (“GTC”), statute of limitation defenses may be waived by the party who makes use of the GTCs only. In contrast, a waiver by the party on whom the GTCs are imposed (e.g., consumers) is ineffective (new Art. 141 para. 1bis CO).
- The limitation period for an actio pauliana under the Swiss Debt Enforcement and Bankruptcy Act (“DEBA”) is extended to from currently two years to three years after service of a loss certificate, the opening of bankruptcy proceedings or the confirmation of a composition agreement with an assignment of assets (whichever is applicable; revised Art. 292 DEBA).
If 2017 was the year of Initial Coin Offerings, 2018 was the year of Blockchain awareness and testing all over the world. From ICO focused guidelines and regulations respectively aimed to alarm and protect investors, we have seen the shift, especially in Europe, to distributed ledger technology (“DLT”) focused guidelines and regulations aimed at protecting citizens on one hand and promote DLT implementations on the other.
Indeed, European Union Member States and the European Parliament started looking deeper into the technology by, for instance, calling for consultations with professionals in order to understand DLT’s potentials for real-world implementations and possible risks.
In this article I am aiming to give a brief snapshot of firstly what are the most notable European initiatives and moves towards promoting Blockchain implementation and secondly current challenges faced by European law makers when dealing with the regulation of distributed ledger technologies.
Europe
Let’s start from the European Blockchain Partnership (“EBP”), a statement made by 25 EU Member States acknowledging the importance of distributed ledger technology for society, in particular when it comes to interoperability, cyber security and efficiency of digital public services. The Partnership is not only an acknowledgement, it is also a commitment from all signatory states to collaborate to build what they envision will be a distributed ledger infrastructure for the delivering of cross-border public services.
Witness of the trust given to the technology is My Health My Data, a EU-backed project that uses DLT to enable patients to efficiently control their digitally recorded health data while securing it from the threat of data breaches. Benefits the EU saw in DLT on this specific project are safety, efficiency but most notably the opportunity that DLT offers data subject to have finally control over their own data, without the need for intermediaries.
Another important initiative proving European interests in testing DLT technologies is the Horizon Prize on “Blockchains for Social Good”, a 5 million Euros worth challenge open to innovators and tech companies to develop scalable, efficient and high-impact decentralized solutions to social innovation challenges.
Moving forward, in December last year, I had the honor to be part of the “ Workshop on Blockchains & Smart Contracts Legal and Regulatory Framework” in Paris, an initiative supported by the EU Blockchain Observatory and Forum (“EUBOF”), a pilot project initiated by the European Parliament. Earlier last year other three workshops were held, the aim of each was to collect knowledge on specific topics from an audience of leading DLT legal and technical professionals. With the knowledge collected, the EUBOF followed up with reports of what was discussed during the workshop and suggest a way forward.
Although not binding, these reports give a reasonably clear guideline to the industry on how existing laws at a European level apply to the technology, or at least should be interpreted, and highlight areas where new regulation is definitely needed. As an example let’s look at the Report on Blockchain & GDPR. If you missed it, the GDPR is the Regulation that protects Europeans personal data and it’s applicable to all companies globally, which are processing data from European citizens. The “right to erasure” embedded in the GDPR, doesn’t allow personal data to be stored on an immutable database, the data subject has to be able to erase data anytime when shared with a service provider and stored somewhere on a database. In the case of Blockchain, the consensus on personal data having to be stored off-chain is therefore unanimous. Storing personal data off-chain and leaving an hash to that data on-chain, is a viable solution if certain precautions are taken in order to avoid the risks of reversibility or linkability of such hash to the personal data stored off-chain, therefore making the hash on-chain personally identifiable information.
However, not all European laws apply to Member States, therefore making it hard to give a EU-wide answer to most DLT compliance challenges in Europe. Member States freedom to legislate is indeed only limited/influenced by two main instruments, Regulations, which are automatically enforceable in each Member State and Directives binding Member States to legislate on specific topics according to a set of specific rules.
Diverging national laws have a great effect on multiple aspects of innovative technologies. Let’s look for instance at the validity of “smart contracts”. When discussing the legal power of automatically enforceable digital contracts, the lack of a European wide legislation on contracts makes it impossible to find an answer applicable to all Member States. For instance, is “offer and acceptance” enough to constitute a contract? What is considered a valid “acceptance”? What is an “obligation”? “Can a digital asset be the object of a legally binding agreement”?
If we try to give a EU-wide answer to the questions such as smart contract validity and enforceability it is apparently not possible since we will need to consider 28 different answers. I, therefore, believe that the future of innovation in Europe will highly depend on the unification of laws.
An example of a unified law that has great benefits on innovation (including DLT) is the Electronic Identification and Trust Services (eIDAS) Regulation, which governs electronic identification including electronic signatures.
The race to regulating DLT in Europe
Let’s now look briefly at a couple of Member States legislations, specifically on Blockchain and cryptocurrencies last year.
EU Member States have been quite creative I would say in regulating the new technology. Let’s start from Malta, which saw a surprising increase of important projects and companies, such as Binance, landing on the beautiful Mediterranean Island thanks to its favorable (or at least felt as such) legislations on DLT. The “Blockchain Island” passed three laws in early July to regulate and supervise Blockchain projects including ICOs, crypto exchanges and DLT, specifically: The Innovative Technology Arrangements and Services Act regulation that aims at recognizing different technology arrangements such as DAOs, smart contracts and in future probably AI machines; The Virtual Financial Assets Act for ICOs and crypto exchanges; The Malta Digital Innovation Authority establishing a new supervisory authority.
Some think the Maltese legislation lacks a comprehensive framework, one that for instance, gives legal personality to Innovative Technology Arrangements. For this reason some are therefore accusing the Maltese lawmakers of rushing into an uncompleted regulatory framework in order to attract business to the island while others seem to positively welcome the laws as a good start for a European wide regulation on DLT and crypto assets.
In December 2018, Malta also initiated a declaration that was then signed by other six Members States, calling for collaboration for the promotion and implementation of DLT on a European level.
France was one of the signatories of such declaration, and it’s worth mentioning since the French Minister for the Economy and Finance approved in September a framework for regulating ICOs and therefore protecting investors’ rights, basically giving the AMF (French Authority for Financial Market) the empowerment to give licenses to companies wanting to raise funds through Initial Coin Offerings.
Last but not least comes Switzerland which although it is not a EU Member State, it has great degree of influence on European and national legislators when it comes to progressive regulations. At the end of December, the Swiss Federal Council released a report on DLT and the law, making a clear statement that the existing Swiss law is sufficient to regulate most matters related to DLT and Blockchain, although some adjustments have to be made. So no new laws but few amendments here and there, which will allow the integration of the specific DLT applications with existing laws in order to ensure legal certainty on certain uncovered matters. Relevant areas of Swiss law that will be amended include the transfer of rights utilizing digital registers, Anti Money Laundering rules specifically for decentralized trading platforms and bankruptcy when that proceeding involves crypto assets.
Conclusions
To summarize, from the approach taken during the past year, it is apparent that there is great interest in Europe to understand the potentials and to soon test implementations of distributed ledger technology. Lawmakers have also an understanding that the technology is in an infant state, it might involve risks, therefore making it complex to set specific rules or to give final answers on the alignment of certain technology applications with existing European or national laws.
To achieve European wide results, however, acknowledgments, guidelines and reports are not enough. The setting of standards for lawmakers applicable to all Member States or even unification of laws in crucial sectors influencing directly or indirectly new technologies, will be the only solution for any innovative technology to be adopted at a European level.
The author of this post is Alessandro Mazzi.
“Influencer Marketing” is a very well known topic to the jurists and operators of the advertising sector dealing with commercial communication.
There is a core principle in communication law: any form of commercial communication shall be clearly recognizable as such.
Before the diffusion of digital communication and, along with it, the proliferation of the so-called „Influencer Marketing“, the issue of recognizability of commercial communication was generally discussed when evaluating whether an advertising content was clearly distinguishable from a journalistic or an informative content (such is the longstanding issue regarding the advertorial).
For a short period of time there was a debate regarding the so-called subliminal advertising, which eventually fell into oblivion.
The necessity to point out to the consumer whether the appreciation for a product or a service shown by a well-known person – precisely an “Influencer” – (i.e. the endorsement) is genuine or not has become a much encountered and controversial topic.
It shall not be considered as spontaneous when an individual receives remuneration for wearing a fashion item, for using a smartphone, or simply when he/she receives as a gift the products that he/she promotes or other valuable products.
It is clear and proven that the spontaneous choice of an “idol” by the public has a bigger impact on these same people rather than any traditional way of advertising. Hence the abuse of surreptitious advertising on the less easily monitored channel: the web, precisely.
What measures should be taken to ensure that the consumers can understand clearly whether a post is subject of a contract or not?
The answer would be very simple.
It would be enough to require the sponsored post to contain, in clearly visible characters, terms as “Advertisement”, “Sponsored by”, “Commercial agreement” or similar notices.
In Italy, in absence of a law regulating specifically the matter, both the Istituto della Pubblicità (Italy’s Advertising Self-Regulatory Institute) and the Autorità Garante della Concorrenza e del Mercato (the Competition Authority) have expressed their opinion on this subject.
In the Italian Advertising Self-Regulatory Institute’s digital chart it is written: “in order to make the promotional nature of content posted on social media and content sharing sites recognizable, celebrities/influencers/bloggers must at the top of their post state in a clearly distinguishable manner the words: “Pubblicità/Advertising”, or “Promosso da … brand/Promoted by…brand” or “Sponsorizzato da…brand/Sponsored by…brand” or “in collaborazione con …brand” or “in partnership with the …brand”; and/or within the first three hashtags (#) use one of the following terms: “#Pubblicità/#Advertising”, or “#Sponsorizzato da … brand/#Sponsored by the … brand “ or “#ad” along with “#brand”.
In a press release of 2017 the Italian Competition Authority has required the addressees the use of the following warnings to be placed below the post together with the others hashtags (#), such as “#sponsored, #advertising, #paidad”, or, in the case of products given for free to the celebrity, “#productsuppliedby”; in particular, all these wordings should be followed by the name of the specific brand being advertised.
However, browsing the Instagram’s pages of various Influencers, it is noticeable that only a few of them are actually using the indications provided by the authorities.
And when it happens to came across Instagram’s profiles that use such indications, it is noticeable that the hashtag that is most commonly used is “#ad”, whose effectiveness (especially in Italy where terms such as “advertising”, “Adv” and, even more so, “ad” are not easily decipherable by the average consumer) raises many concerns.
So far the Italian Competition Authority intervened sending moral suasion letters to some of the main influencers and companies producing the branded goods displayed in the posts, but still no self-regulatory, administrative or state measures have been taken.
The same situation of uncertainty is likely to be found in other countries (here you can find a previous Legalmondo post on this topic in Germany: https://www.legalmondo.com/2017/11/germany-product-placement-influencer-marketing/), with the consequence that international companies are operating in an unclear context, in which it is difficult to identify what are the risks arising from behaviours considered as unlawful.
I have therefore decided to write this article in order to assess the state of Influencer Marketing in Italy and in other countries and get a better understanding of the regulations in force, the measures/judgments issued by the competent Authorities, the international trends and the best practices that could be adopted by international companies.
Since I am one of the founders of the Digital Adv Lab – an interdisciplinary observatory that studies the legal implications of marketing and digital communication initiatives – I am interested in getting in touch with all the readers involved in this topic: please feel free to enter a comment and/or contact me.
The author of this post is Elena Carpani.
Poland has recently become quite famous for its skilled and resourceful IT specialists. Each year thousands of new computer engineers (programmers, developers, testers, designers etc.) enter into the market, warmly welcomed by domestic and multinational companies. A big part of these young talents open their own firm or business as free lancers developing software for clients from European countries as well as from US, Canada, Japan, China, etc.
However, companies who want to cooperate with these partners and assign software development to a Polish IT company or freelancer should be aware that the copyright law in Poland is very strict, as it mainly protects the creator and not the client. Therefore, to be on a safe side, it is better to follow these 7 basic rules:
- Never start cooperation with an IT specialist or an IT company without a formal agreement. And I mean a real agreement, in a written form, with signatures of persons who can validly contract on behalf of the companies. The form is very important because – under Polish law – copyrights transfer and exclusive license agreements not fulfilling form conditions are null and void. Moreover, if there is no agreement, Polish copyright rules will apply to all intellectual property matters.
- Please remember that software is a creation protected by copyright law. Therefore you should consider whether you want to acquire the entire intellectual property rights or you just need a license. If you need a full IP transfer, you need to put it expressly in the agreement; otherwise you will only get a non-exclusive licence. And these, in several cases, will not be useful from a business point of view. If a license is enough, it is advisable to agree if it will be exclusive or non-exclusive.
- When drafting an IP clause, be detailed and clear. If you want to be able to decompile and disassembly the binary code, specify it in the IP clause. If you want to be able to introduce modifications to the source code, specify it in the IP clause. If you want to sublicense the software, specify it in the IP clause. The IP clause shall contain the description of any way you want to use the software, whether on mobile devices or on personal computers, any other electronic device or via internet (e.g. cloud computing). And believe me, when I write „specify it in the IP clause“ it means that you really, really have to put it there. Otherwise it will be null and void and you may face a situation where your smart IT engineer, after getting paid, will sue you for the IP infringement.
- Remember that you should indicate the timeframe and the geographical scope of the license or IP transfer. If you do not specify it expressly in the agreement, you will only be entitled to a 5-year license, automatically expiring afterwards.
- Draft carefully a clause related to termination of the agreement. Under Polish law the licensor may terminate the license agreement granted for an indefinite period of time upon 1-year notice. If you do not want to find yourself in a situation where you lose the software IP rights in the middle of a big project, make sure that from the very beginning you are on a safe side.
- Make sure that your partner is obliged to transfer you upon request all software documentation and the source code.
- Make sure that you have a good indemnification clause with no limitation of liability. Often Polish IT companies subcontract some part of the development work to free lancers. You never know if they will conclude proper agreements with their subcontractors and if they will legally acquire the IP of the software that they will later sell you. There is always the risk that in the future some Polish IT engineer you never met will raise IP infringement claims against you, trying to prove that he/she actually developed the software. In such a situation an indemnification clause will help you recovering the costs from your partner.
Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.
These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.
The signature of the contract
Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.
The proper choice of contract
If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.
Monitoring of legal and business relations
If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.
Evidences about customers
In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.
Evidences on purchases and sales
Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.
Damages in case of termination of contracts
Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.
Influencer marketing is the trend in today’s world of advertising. Even though it is obvious that influencer marketing must observe the framework of applicable statutory provisions, the market has long been uncertain about how influencer posts are to be drafted in order to be legally compliant. The current decision of Celle Higher Regional Court (June 08, 2017 – Case 13 U 53/17) offers at least some clarity.
The judgment was issued in relation to an action for injunction by the German Association for Social Competition (Verband Sozialer Wettbewerb) against a German drugstore chain. A 20-year-old Instagram star with 1.3 million followers had advertised the drugstore chain in one of her posts. The post was only marked as advertisement at the bottom with the hashtag “#ad,” which additionally only came second in a list of six hashtags.
Celle Higher Regional Court adjudged that this type of marking was insufficient. The court requested that the commercial purpose of an Instagram post would have to be apparent at first sight. It did not consider use of the hashtag “#ad” in a “hashtag cloud” to be sufficient to mark the post as advertising.
The court left expressly open, however, whether the use of the hashtag “#ad” is generally suitable to mark advertising posts.
The state media authorities (Landesmedienanstalten) already reacted to the judgment, however, and revised their joint guide on advertising issues in social media. It now reads: “When marking a post as PROMOTION (Werbung) or ADVERTISING (Anzeige), you will be on the safe side – that much is certain. […] At the current time, we cannot recommend marking posts as #ad, #sponsored by, or #powered by.” In the future, Instagram itself intends to provide for more transparency on the platform by comprehensibly identifying advertising posts. It is currently testing the introduction of a branded content tool in Germany to make it easier for users to recognize posts as paid advertising.
Practical tip
Advertising posts in social media should always be marked as “promotion” or “advertising” at the beginning of the posts unless their commercial purpose arises directly from the circumstances. Advertisers are also advised to obligate influencers contractually to such legally compliant marking of posts, since the influencers’ behavior may be attributed to the company, as is clearly shown by the recent judgment of Celle Higher Regional Court against the drugstore chain.
The author of this post is Ilja Czernik.