Construction Insights January 2025: France & Italy

Premises 

In Italy as in France, the complex economic and geopolitical context of the last five years, along with the difficulty to manage unforeseen events jeopardising the economic balance of contracts (notably, the sudden increase in raw material and electricity costs), has triggered the necessity to identify a new equilibrium point between (i) the need to contain the contractor’s risk within normal limits; and (ii) the need to ensure that the execution of the works (or of the services) is not interrupted. 

Moreover, this profile is also relevant in international contracting, where clauses aimed at rebalancing the positions, known as “hardship” clauses, have long been utilised. 

In the Italian legal system, the concept of excessive onerousness is present: the contractor is allowed to terminate the contract in case exceptional and unpredictable events occur after the signing of the contract, if the client does not propose equitable modifications to the contractual terms. The Corte di Cassazione 1 (Italian Supreme Court) has recently recognised the existence of the obligation, on the parties, to restore the economic balance in public contracts, inferring such obligation from the general principle of good faith. 

In this context, the Italian legislator has intervened in the public contracts sector, initially with special compensation mechanisms during the execution phase aimed at mitigating the negative effects of price increases (D.L. No. 73 of 2021, known as “Sostegni-bis”; D.L. No. 4 of 2022, known as “Sostegni-ter”; and D.L. No. 50 of 2022, known as “Decreto Aiuti”) and subsequently in a comprehensive manner, with the new Public Contracts Code, D.Lgs. 36 of 2023 (the “Contracts Code”). 

Faced with the current inflationary shock, a legal debate about possible solutions has also developed in France to ensure the economic balance of public contracts. In this context, an opinion (avis) issued by the Conseil d'Etat (French administrative supreme court) on September 15, 2022 (No. 405540) and a circular of the French Prime Minister dated September 29, 2022 (No 63/74/SG), have provided important guidance. These documents clarify both the possibility of amending ongoing contracts to address inflation risks and the conditions for applying the unforeseeability theory (théorie de l'imprévision) as established in administrative case law.   

Addressing the inflation issue in the ongoing reform of Italian public contract law  

The Italian Public Contracts Code: Regulatory framework  

The principle of maintaining contractual balance is now a general principle of the Contracts Code. 

Article 9 of the Contracts Code states: “If extraordinary and unpredictable circumstances arise, which are extraneous to normal risk, ordinary economic fluctuations and market risk, and which significantly alter the original balance of the contract, the disadvantaged party, who has not voluntarily assumed the related risk, has the right to renegotiate the contractual terms in good faith.” 

This principle is concretely applied in Article 60 of the Contracts Code, which states that the inclusion of price revision clauses in contractual documents is mandatory 2. These price revision clauses activate, pursuant to the aforementioned Article 60, “… upon the occurrence of specific objective conditions that result in a variation in the cost of the work, supply, or service, …” provided that their application does not alter the nature and specific characteristics of the contract.  

To emphasise the importance of continuation of the contractual relationship, Article 120, paragraph 8, of the Contracts Code now provides that even if price revision clauses are not included, the contractor is not entitled to suspend the execution of the contract but may instead submit a request for renegotiation. 

Innovations of the corrective decree and the operation of price revision clauses  

On October 22, 2024, the Italian Council of Ministers approved, in preliminary form 3, new supplementary and corrective provisions to the Contracts Code (the “Corrective Decree”), containing significant innovations regarding the application of price revision clauses.  

The revision mechanism operates, both in increase and decrease, exclusively for variations exceeding 5% of the total contract amount and at a rate of 80% of the value exceeding this 5% threshold 4. In this way, the normal risk that remains with the contractor is established.  

The determination of price variations is made on the basis of specific indices developed by ISTAT (Italian Institute of Statistics), which must be periodically monitored by the client during the execution of the contract. 

One of the most important innovations of the Corrective Decree is found in the new Annex II.2-bis of the Contracts Code: price revision clauses must be applied automatically by the client, without the need for a specific request from the contractor, if the variation in the utilized ISTAT index exceeds 5% of the contractual amount, whether in increase or decrease. 

To coordinate the principle of maintaining contractual balance with the concept of excessive onerousness, as mentioned in the Premise, Annex II.2-bis provides that if “the application of price revision clauses does not ensure the principle of maintaining contractual balance, the client or the contractor may invoke the resolution for excessive onerousness of the contract, as per Article 12, paragraph 1, letter b)”. 

Ensuring the economic balance of French public contracts through price revision clauses 

The French Public Procurement Code: Regulatory framework 

The risk of price variation is theoretically covered by price revision clauses. It should not be necessary to modify the contract by means of an amendment.  

In the field of public procurement, the French Public Procurement Code requires price revisions for contracts exposed to major contingencies during the performance period (Public Procurement Code, article R. 2112-13). Special rules apply to contracts requiring the use of supplies (e.g. raw materials) affected by fluctuations in world prices (Public Procurement Code, article R. 2112-14).  

Concession contracts must provide for changes in tariffs paid by users in line with economic conditions (Public Procurement Code, article L. 3114-6). 

Useful clarifications from the Conseil d'Etat on the legal framework in an exceptional context of rising prices 

The recent inflationary crisis has prompted a rethink of this legal framework. Many contracting authorities and contractors have been wondering how best to counter this price risk in contracts. 

In its opinion of September 15, 2022, the Conseil d'Etat accepted that the financial clauses of a contract or concession (prices, tariffs, revision clauses) may be modified to address unforeseeable circumstances. However, such modifications must comply with certain conditions (Public Procurement Code, article R. 2194-5 and R. 3135-5). In particular, they must be justified by an unforeseeable event, remain strictly necessary, and in any case, not exceed 50% of the initial contract amount. 

The difficulty lies in getting the parties involved, especially the contracting authority, to collaborate in making the necessary adjustments. The best solution is always to take particular care when drafting price revision clauses, in order to prevent potential difficulties throughout the contract's duration.  

Italy and France are facing the same challenges. This discussion on price revision clauses shows that, while crises can be difficult, they also present unique opportunities to improve the law through a fruitful dialogue between member states of the European Union. 

This article was co-written by members of the Italian and French Real Estate teams – Bruno Richard, Tristan Annoot, Ivan El Knizi & Giovanni Maccioni 

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References

1.The reference is to Report No. 56 of July 8, 2020, of the Corte di Cassazione. 
2. Such compulsoriness was previously excluded by Article 106 of the former Public Contracts Code. 
3. The legislative decree is not yet in force and will be submitted to Parliament and other public bodies for their opinion. 
4. This represents the proposed amendment contained in the Corrective Decree, whereby in its original version, the revision operates at a rate of 80% of the total variation.