Italian contract law

1. Italian contract law The main sources of the law of contract are: • The legislative provisions comprised in the Civil Code of 1942 • Various statutory laws enacted to regulate individual contracts or specific aspects Customs and equitable principles in general are residual sources. Judicial decisions play a primary role in the process of implementing legislative rules

2. Freedom of contract The principle of freedom of contract is not positively recognized as a general principle by the Italian Constitution of 1948. It is sometimes held that the freedom of contract principle is embodied in article 2, as well as in articles 41 and 42 of the Constitution

3. Article 2 The Republic recognizes and guarantees the inviolable human rights, be it as an individual or in social groups expressing their personality, and it ensures the performance of the unalterable duty to political, economic, and social solidarity.

4. Article 41 (1) Private economic enterprise is free.(2) It may not be carried out against the common good or in a way that may harm public security, liberty, or human dignity.(3) The law determines appropriate planning and controls so that public and private economic activities may be directed and coordinated towards social ends.

5. Article 42 (1) Property is public or private. Economic goods may belong to the state, to public bodies, or to private persons.(2) Private ownership is recognized and guaranteed by laws determining the manner of acquisition and enjoyment and its limits, in order to ensure its social function and to make it accessible to all.(3) Private property, in cases determined by law and with compensation, may be expropriated for reasons of common interest.(4) The law establishes the rules of legitimate and testamentary succession and its limits and the state's right to the heritage.

6. Judicial decisions The Italian Courts are called to implement general legislative rules and to apply equitable principles on a case-by-case basis. One example is the analysis of the duty to act and perform the contract in accordance with good faith and fair dealing set forth by arts. 1175 and 1375 CC

7. Civil Code Title II of book IV on Obligations, arts 1321 to 1469 It is a general section on typical contracts, which contains rules on requirements, interpretation, effects, discharge, rescission, assignment and validity of a contract Title III of book IV on Obligations, arts 1470 to 1986 It is a section on individual contracts, comprising specific rules and exceptions for the so called nominate or typical contracts

8. Atypical contracts Pursuant to article 1322, para. 2 CC, the parties can also make contracts that are not of the types specifically regulated in the Code provided that they are directed to the realization of interests worthy of protection according to the legal order. The Courts must determine that such contracts are worthy. When a certain form of agreement is widely accepted within the international legal community, therefore, Italian Courts always consider it enforceable

9. When is a promise legally binding? Art. 1325 states that every contract must have a causa. The causa of the contract explains its purpose. It is the reason that justifies the promise and the obligation. This is characterized by the concepts of cause suffisante, raisonnable et juste

10. Contratto di scambio The most important case in which a promise is considered binding under Italian Contract Law is the typical economic exchange. This means that a promise is enforceable whenever it is part of an exchange of an economic nature, such that a counter promise, or a reciprocal performance, can be identified. Therefore, when the parties face reciprocal legal detriment, corresponding to reciprocal economic interests, the causa requirement is fully satisfied and there is no enforceability problem related to the absence of causa

11. The consent of the parties Almost every legal system recognizes the general principle that a contract originates from the agreement of two or more parties and that it is substantially the expression of the consent of those parties to the promises made. Article 1321, in fact, states that a contract is the agreement of two or more parties to establish, regulate, or extinguish an economic legal relationship among themselves

12. Binding force of the offer The Civil Code regulates different situations in which the offer is deemed to be irrevocable or the revocation gives rise to liability. Pursuant to article 1329 CC, if the offeror has bound himself to keep the offer open for a certain time, the revocation is without effect. If no period of irrevocability is specified, according to art. 1328 CC., the offer can be withdrawn at any time before the contract is concluded.

13. Acceptance and conclusion of the contract A contract is formed at the moment the person who made the offer gains knowledge of the other party’s acceptance. The acceptance may be revoked, but revocation must come to the knowledge of the offeror before acceptance. According to article 1335 CC, an offer, acceptance, and their revocation, and any other declaration directed to a given person, are deemed to be known at the moment they reach the address of the person to whom they are directed.

14. Preliminary negotiations Preliminary negotiations may be defined as including any communication prior to the time of acceptance. The Italian Civil Code highlights the importance of good faith in contractual relationships throughout several articles. Art. 1336 – contract must be interpreted following good faith Art. 1175 –Debtor and creditor must behave following the rules of good faith and fair dealing Art. 1337 – the parties must behave in good faith during the pre-contractual bargaining and contract drafting

15. Pre-contractual liability an appropriate cause of action Situations involving Knowledge of contractual unjustified breakdown invalidity of negotiations

16. Knowledge of contract invalidity Article 1338 CC [h]e, who knows or must know there is ground for contract invalidity and did not disclose it to the counterpart, has to pay the damages suffered by the other which relied, without fault, on the validity of the contract

17. Unjustified breakdown of negotiations Whenever the parties reach a stage during the bargaining process when one of them is induced to rely on the conclusion of the contract, the party who decides to abandon the negotiations without a valid justification is liable for damages

18. Capacity of the parties Any person who has not been formally declared incapable of entering into legal transactions by the law may enter into a contract. Italian law treats persons who are wholly lacking capacity and persons partially lacking capacity to enter into legal transactions differently

19. A transaction or a contract is voidable when it has been entered into by a person legally determined to lack capacity. Persons momentarily under incapacity may render a transaction void only if they prove the existence of incapacity at the time of the transaction

20. Absence of consent The contract might be annulled if consent was given only by error, or was extorted by duress or obtained by deceit

21. Mistake A contracting party whose consent was given by mistake can demand annulment of the contract when the mistake is essential and recognizable by another contracting party at the time of the contract’s making

22. Fraud (deceit) Fraud is a cause for annulment of the contract when the deception carried on by one of the contracting parties was such that without it, the other contracting party would not have entered into the contract. If the deception was committed by a third party the contract is voidable if the deception was known to the party who benefited from it

23. A deception that arises from innocent misrepresentation is not fraud, nor is the exaggerated praise of one’s own ware (dolus bonus) Silence by itself does not amount to fraud, unless an express duty to speak has been violated

24. Duress Duress is ground for annulment even if it has been committed by a third party. There is no definition of duress in the Code, but it is fair to say that it consists of physical or moral restraint upon the will of a person, which induces him or her to give consent

25. Other conditions of validity The causa of the contract is illicit when it proves contrary to mandatory rules, public policy, ordine pubblico or good morals. A contractual obligation is valid only if it has a legal causa. Article 1343 CC, by calling on the broad concept of mandatory rules, public policy, and good morals, offers the judge a powerful tool to test the compatibility of the contractual situation with the fundamental values of the legal order

26. The consequences of absence of consent or lack of substantive quality Defect of consent A contract vitiated by mistake, fraud or duress can be annulled. However, the party who suffered the fraud, the mistake or the duress bears the burden to enforce the right to annulment against the other party.

27. Lack of the essential elements of the contract A contract lacking one of its essential elements (consent, licit cause, object) is void under Italian law. The parties, as well as other interested persons can always oppose the party who wants to enforce the contract by affirming its nullity. Moreover, if the contract is void the action to obtain a declaration of nullity can be brought by anyone provided that they have an interest in the matter, and the court may declare a contract void ex officio, while resolving a controversy or dispute arising from it.

28. Annullabilità In cases of annullabilità (that is to say, merely voidable and not void) the only party entitled to seek annulment is the one whose protection has formed the basis of legal invalidity. While the person who could have claimed the annulment may validate a voidable contract pursuant to article 1444 CC, a void contract can never be validated by anyone.

29. Characteristics of performance The purpose of the contract is the performance of the parties, and full performance is its natural conclusion: it is what the parties have in mind when they enter into the agreement. In this sense, performance means the exact fulfillment of the promises made. It is referred with the expression esatto adempimento (exact performance)

30. The conduct of the parties Article 1176 sets forth two different levels of care and diligence. The first is the so-called bonus paterfamilias standard of care. This is the general standard of care, which is based upon an idealized reasonable man. The second standard is higher and it refers to the obligation undertaken by persons acting in their professional capacity (lawyers, accountants, doctors, consultants,etc). This standard requires a higher level of care proportionate to the special knowledge of professionals and to the nature of the activity as well as its social implications.

31. As a general rule, in contracts providing for mutual counter-performance, when one of the parties fail to perform his obligations properly, he is considered in breach, and the other party can choose to demand either exact performance or termination. The non breaching party is also entitled to recover compensation for the damages suffered as a consequence of the breach