The Formation of Contracts under Italian Civil Law

Italy

• Freedom of contract (i.e. no numerus clausus of determined contract types).
  • The standard way for entering into a contract is through a contractual offer (made by one party) and the acceptance of such contractual offer (by the other party) (article 1326 of the Italian Civil Code).
  • Under Italian law (article 1325 of the Italian Civil Code), a contract to be enforceable requires: (i) the agreement between the parties; (ii) the so called causa (i.e. the essence of the contract); (iii) the object; and (iv) to the extent it is requested for specific contracts, a specific form (i.e. written and/or notarial form – the requirement of the written form mainly regards contracts related to real estate).
  • The object of a contract are the obligations thereto. It must be: possible, legal, determined or determinable (article 1346 of the Italian Civil Code).
  • The requirement of the causa correspond to the essence of the contract and need to be legal (i.e. it must not violate mandatory provisions). There is no need for an actual “bargain” (i.e. consideration).

Common Clauses

• Parties can agree on one or several condition(s) precedent for a contract (there could be also conditions subsequent) (article 1353 of the Italian Civil Code).
• In order for such condition(s) to be valid, said event shall be future and uncertain and shall be in accordance with any applicable mandatory provisions and the public order and morality principles.
• Such event cannot depend exclusively on one party’s will (i.e. condition(s) precedent must be objective) (article 1355 of the Italian Civil Code).
• The wording shall be clear in order to avoid uncertainty.

Limitation of liability is not permitted upon the following: (i) damages caused by gross negligence, wilful misconduct or in connection with public order provisions (article 1229 of the Italian Civil Code); or (ii) special case: Consumer Code

• Parties are entitled to insert penalty clauses in a contract (article 1382 of the Italian Civil Code).
• Parties by drafting a penalty clause in connection with the breach of a contract can decide whether it shall operate as a sole remedy (i.e. excluding any other damages).
• Should a penalty clause be excessively disproportioned with respect to the contract it relates to, it could be reduced accordingly by the judge, in accordance with article 1384 of the Italian Civil Code
• By default, one party can early terminate a contract in case its obligations become excessively onerous (article 1467 of the Italian Civil Code).
• Instead, the assignment of the contract is not possible without being explicitly permitted by the other party (article 1406 of the Italian Civil Code). There is no novation or new contract.

• General rule: the contract is only binding between its parties (article 1372 of the Italian Civil Code). No third parties can claim any rights with respect thereto.
• However, in accordance with article 1411 of the Italian Civil Code, a contract can be entered into also in the interest of a third party.
• By default, the set off operates automatically between claims that: (i) regard money or exchangeable goods; (ii) are liquid (i.e. existing and certain); and (iii) due (article 1243 of the Italian Civil Code).
• Parties can insert a set off clause derogating one or more of the by default requirements (i), (ii) or (iii) above in relation to certain reciprocal future obligations thereto (article 1252 of the Italian Civil Code). However, it is essential the reciprocal obligations exist.
• The parties are also entitled to expressly prohibit any setting off.
• By default, retention rights apply as a guarantee for the payment of certain obligations (i.e. article 2756 of the Italian Civil Code for any repairs carried out over a movable good). It operates as a lien.
• Parties can insert a specific retention right broadening or narrowing the by default definition.
• Parties cannot agree that the retaining party become the owner of the retained good in case its original owner has not duly fulfilled its obligation within a certain period of time (article 1963 of the Italian Civil Code).
• Parties are free to insert in a contract an early termination clause specifying that upon the breach of specific provisions of a contract, it shall be deemed to be immediately terminated (article 1456 of the Italian Civil Code). Said early termination is effective upon the relevant notification sent by the party not in breach to the other one. Alternatively, the parties can insert a cure period.
• Parties can freely insert a withdrawal clause in a contract (exception: bankruptcy). In any event, should the performance of the obligations of a contract already started, the withdrawal shall be effective only for the obligations not yet performed (article 1374 of the Italian Civil Code).

The principle of Good Faith in Italian Contracts

• Italian law contains a general clause on good faith under article 1175 of the Italian Civil Code.
• Specific clauses on good faith in the phase of negotiations are set out under article 1337 of the Italian Civil Code, which states that the parties shall behave in good faith in the phase of the negotiations and the formation of the contract.
• Article 1375 of the Italian Civil Code states that the parties shall perform in good faith the obligations set out under a contract.
• This results, among others, in duties of: (i) disclosure; (ii) cooperation; and (iii) protection of the other party’s rights and goods.

Pre-Contractual liability

• s Parties shall carry out the negotiations for the entering into an agreement in good faith (article 1337 of the Italian Civil Code).
  • The interruption of the negotiations might entail a pre-contractual liability only upon the occurrence of the following two conditions:
    • In the meanwhile the counterpart has matured a reasonable expectation of the entering into the contract.
    • The interruption of the negotiations is completely unjustified.
  • Under pre-contractual liability, the damages that can be compensated only cover cost and expenses arising in connection with the negotiations and any loss of opportunity.
  • As previously seen, a contract can be considered formed and enforceable when an offer (containing all the essential content under article 1325 of the Italian Civil Code) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case by case basis.

Contractual liability

• a By default (article 1453 of the Italian Civil Code) in case of a breach of contract by one party, the other party may decide either for:
  • Specific performance (non need for the breach to be material): delivery of missing services or non-defective product or replacement (new delivery of agreed service or product).
  • Termination of the contract (only if the breach is material with respect to the global obligations of the contract and is not justified).
• In any case: compensation of damages.
• Once termination is demanded, the specific performance cannot be demanded any more. However, once specific performance is demanded, termination can still be demanded at a later stage.