14 14 - Invalidity , Rescissio and Termination

1. 1414 - Invalidity, Rescissio and Termination Prof. Avv. Bruno Tassone Docentedi Principles of Civil Law LUISS Guido Carli (References: Chapters 15 and 16 of Language and Rules of Italian Private Law).

2. Contractual “Pathologies” • The so-called “pathologies” of contracts concern the cases in which agreements are ineffective from the beginning or can be later on deprived of their effectiveness from a variety of reasons, so loosing their binding force. • Under Italian Law there are three main categories of contractual pathologies: • Invalidity, divided into nullity and voidability (Arts. 1418-1446 c.c.); • “Rescissio” (Arts. 1447-1452 c.c.); • Termination (Arts. 1453-1469 c.c.).

3. Invalidity Invalidity regards the cases in which contracts (and other “negozigiuridici”) are made outside the boundaries the legal system establishes for the exercise of private autonomy. Ineffectiveness is not necessarily linked to invalidity, because an act can be invalid but effective (e.g. when just voidable) or valid but ineffective (e.g. pursuant to a condition precedent). Nullity is a pathology more serious then voidability, as its regime will show.

4. Nullity Art. 1418 c.c. provides three main hypotheses of nullity: Nullity declared by the law (for an example, see Art. 1229 c.c.); Nullity for lack or unlawfulness of one of the four fundamental elements of the contract; Nullity for conflict of the contract with mandatory rules (which might be tricky to ascertain). Nullity can be partial if the “vice” concerns only part of the agreement and it results that the parties would have made it even without the clause which is declared null and void.

5. Voidability The main cases concern contracts made: by people legally or naturally incapable to act; on the basis of a mistake (that is a false representation of the reality) which must be (i) “essential” (falling on a main element of the transaction and decisive for its conclusion) and (ii) recognizable by the counterpart; on the basis of a fraud committed by the counterpart or a third party, if the former took advantage of it; under violence (the threat of an unfair evil) carried out by the counterpart or a third party.

6. Legal Regime There are important differences : Null and void contracts are ineffective and the Court only “declares” the nullity of the contract, while voidable ones are fully binding until the effects are removed by a judgment; Anyone and even the Court ex officio can object nullity, while an objection of voidability can be raised only by the party in favor of which the cause of voidability is established;

7. Legal Regime (II) As to the other differences: Null and void contracts cannot be validated, while voidable contracts can (see Arts. 1424 and 1444); The action for nullity does not undergo any statute of limitation, while the one of voidability has to be brought within five years (but voidability can always be objected during the lawsuit to ask the rejection of the counterpart action).

8. Rescissio While Nullity and Voidability concern a total vice of the contract, Rescissioimplies only a partial vice, related to two hypotheses: Rescissio in case of danger (art. 1447 c.c.), which requires (i) the need of the party to safe herself or other people from a danger known by the counterpart and (ii) the unfairness of the terms agreed upon. Rescissioin case of need (Art. 1448), which requires (i) the state of need of one of the parties, (ii) an advantage taken because of it by the counterpart and (iii) a disproportion in the performances by a ratio of ½.

9. Termination Termination does not implies a vice of the contract regarded as an act, but rather a vice of the legal relationship arising out under it, due to the behavior of one party or an external fact. There are three main hypotheses: Termination for breach; Termination for supervened impossibility; Termination for supervened and excessive burden in performance.

10. Termination for Breach In case of breach the diligent party can ask (i) compulsory fulfillment of the contract by her counterpart plus (ii) compensation for damages, if the counter-performance itself is not sufficient to cover all the negative consequences of the breach. But the diligent party can also opt for (iii) termination of the contract and ask compensation for damages plus (iv) restitution of the performance carried out (if any), as the contract is deprived from the beginning of all its effects (with the exception of art. 1458 c.c.) . The Court sustains the claim only if the breach is serious (see art. 1455 c.c.).

11. Extra-judicial Terminationfor Breach The discipline of termination for breach contains three cases of so-called extra-judicial termination: The notice to perform, which still requires the breach to be serious (art. 1454); The termination clause, which is effective for any breach previously identified in the contract by the parties, when the diligent party declares that she wants to activate the clause (art. 1456); The “essential term”, whose non-compliance makes the counter-performance useless for the diligent party (e.g. in case of late delivery of the wedding-dress) and which is effective unless she declares within three days that still wants the contract to be performed (art. 1457).

12. Termination for Supervened Impossibility Supervened impossibility of performance leads to termination when it does not depend on the conduct of one of the parties. The contract must not be an “aleatory” one (such as an insurance policy - see Art. 1463 c.c.). Termination can be partial if there is still an interest of the counterpart in the counter-performance (art. 1464 c.c.).

13. Termination for Supervened Burden in Performance Supervened burden in performance (Art. 1467 c.c.) is provided also by other systems - which are usually stricter that the Italian one – and in Common Law countries often comes under the heading of “commercial impracticability”. It leads to termination only when the burden is: “excessive”, that is a significant one and not within the normal risk dealt by the contract; due to events which are extraordinary and unforeseeable pursuant to the normal standard of care and knowledge of people.