Principles of European Contract Law And Italian Law 9041123725, 9789041157317, 9789041123725

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Principles of European Contract Law and Italian Law

Principles of European Contract Law GENERAL EDITOR Ewoud Hondius

1. D. Busch, E.H. Hondius, H.J. van Kooten, H.N. Schelhaas and W.M. Schrama (eds.), The Principles of European Contract Law and Dutch Law: A Commentary. 2002. ISBN 90411-1749-0 2. L. Antoniolli and A. Veneziano (eds.), Principles of European Contract Law and Italian Law. 2005. ISBN 90-411-2372-5

Principles of European Contract Law and Italian Law

EDITED BY

Luisa Antoniolli Anna Veneziano

A C.I.P. catalogue record for this book is available from the Library of Congress.

web-ISBN 978-90-411-5731-7 Published by: Kluwer Law International P.O. Box 85889 2508 CN The Hague The Netherlands Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 USA Sold and distributed in all other countries by: Extenza-Turpin Distribution Services Stratton Business Park Pegasus Drive Biggleswade Bedfordshire SG18 8TQ United Kingdom

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Printed and bound by Antony Rowe Ltd, Eastbourne

FOREWORD This book is the second of a planned series of volumes whose aim is to analyse the relationship between the Principles of European Contract law (PECL) and the contract law of different European national legal systems, a project under the direction of Prof. Ewoud Hondius of the University of Utrecht. The first volume, devoted to the PECL and the Dutch legal system, appeared in 2002. The volume on the PECL and Italian contract law follows this lead, and other volumes are planned in the coming years. As the first volume, the structure of the book follows the scheme of the PECL, providing the text of the Principles together with a short comment. The European material is then compared with the corresponding rules of Italian contract law, in order to highlight in a concise manner the main similarities and differences between the two bodies of rules. The book has two main aims: the first is to make it easier for European (and in general foreign) lawyers to find and learn Italian contract law, by using a common frame of reference, i.e. the PECL. Symmetrically, by referring systematically to the body of Italian contract law, the book also aims at making Italian lawyers more familiar with the structure and contents of the Principles of European Contract Law. Secondly, and very importantly, the systematic confrontation between the PECL and Italian contract law aims at providing a number of elements for the comparison and evaluation of the two systems, pointing to numerous issues that open up an extremely rich and challenging field of research. The global picture that can be drawn by analysing the contributions of the book is varied and complex, a result which is hardly surprising. In many important areas the PECL and Italian law show a significant degree of convergence (such as, for example, the requirements for the formation of contracts, interpretation, performance), while in a number of issues there are clear and significant differences, such as, just to mention another example, on whether an action in court is needed in order to terminate a contract. Differences can sometimes be explained by the fact that the Italian Codice civile dates back to the 1940s, and consequently a number of problems that are considered relevant today (such as e.g. the battle of the forms) were not yet felt at that time as requiring regulation within the civil code. It must also not be forgotten that the Italian Codice civile covers a much broader area of legal institutes than contract law, compared to the ‘‘isolated’’ character of the PECL and their need to find solutions that bridge different European legal traditions and rules. The comparison of the two bodies of law confirms the widespread view held by comparativists that divergences and convergences of the law in action often do not follow the lines of the rules as formally defined, but are rather to be found in the interaction of all legal formants that are at work within the legal systems under analysis. In this respect, an important part of the picture is still missing: the Principles of European Contract Law are still in their infancy, and up to now have generated a significant bulk of scholarly comment, but little application in practice. If courts and arbitrators gradually come to apply them in legal practice, this missing view of the picture will be available. This, in its turn, will require an efficient and comprehensive system of reporting, so as to enable meaningful comparison of 5

FOREWORD

the results within the different national legal systems, similarly to what has already been set up for the UNIDROIT Principles of International Commercial Contracts (UNILEX database). The hope of the editors is that this book will make a small contribution to the creation and spreading of knowledge on European private law, a challenging and demanding enterprise facing lawyers (and particularly legal scholarship) in these times of significant and rapid changes of the European and international legal context. At the time the book was conceived, the Principles of European Contract Law were composed of two parts, part I dealing with performance, non-performance and remedies for non-performance, and part II covering formation of contracts, authority of agents, validity of contracts, interpretation, contents and effects, which were published together in 2000. Thereafter, in 2003, part III of the PECL was published. The new part covers a wide range of issues, such as plurality of parties, assignment of claims, transfer of contract, set-off, prescription, illegality, condition, capitalisation of interest. The need to bring the work to an end within a reasonable time-limit and editorial constraints have led to the decision not to include the third part of the PECL in the book, although it is to be hoped that in the future a similar work of comparison between the European Principles and Italian law will be prepared. Some general remarks concerning the impact of the PECL in their updated version are to be found in the introductory contributions by Rodolfo Sacco and Michael Joachim Bonell. We would like to thank all the people who have contributed to the preparation of the book. Paula Howarth has revised with great care and skill the English language of the contributions. We are deeply grateful for her excellent work. Rodolfo Sacco and Michael Joachim Bonell have been so kind to accept our invitation to write an introduction to the book, highlighting the main features and the impact of the PECL both in the national and international legal context. We also wish to thank all the other authors of the book for their cooperation and patience in the performance of this common enterprise, as well as Silvia Chiavaroli for her helpful research work and for the index. Finally, we would like to thank prof. Ewoud Hondius for his trust in assigning us this demanding task and for his many useful suggestions. All provisions of the Italian Civil Code as well as the Italian private international law provisions are cited from the translation originally by M. Beltramo, G.E. Longo and J.H. Merryman (1969), subsequently supplemented by S. Beltramo, The Italian Civil Code, Dobbs Ferry, N.Y., Oceana, looseleaf ed., 2001–. We wish to thank Susanna Beltramo who has kindly given us permission to use this English translation of the Italian Civil Code. The PECL have been translated into Italian by C. Castronovo, Principi di diritto europeo dei contratti: parte I e II, Milano 2001 (with an extensive introduction); see also the translation of part III by C. Castronovo, Principi di diritto europeo dei contratti – parte III, in Europa e diritto privato, 2002, p. 949 et seq. The Italian translation of the PECL is also available at http://frontpage.cbs.dk/law/commission_on_european_contract_law/. Luisa Antoniolli and Anna Veneziano 6

Trento-Bolzano/Bozen, October 4, 2004

LIST OF ABBREVIATIONS ABGB Art. App. Banca, Borsa BGB BGH BGHZ Cass. Cass.civ. Cass.pen. cf. Ch. C.C. CISG Corr.giur. Cost. C.P. C.P.C. Dir.comm.int. D.lgs. Ed.(s) e.g. Enc.dir. et seq. Eur. Rev. Priv. Law/ERPL Foro amm. – Tar Foro it. Giur.agr.it. Giur.it. Giur.Merito Giud.Pace Giust.civ. Giust.civ.mass. Giust.civ.rep. ICC Award ICC Int.Bull. Idem i.e.

Allgemeines Bu¨rgerliches Gesetzbuch (Austrian Civil Code) Article(s) Corte d’appello (Appellate Court) Banca, borsa e titoli di credito Bu¨rgerliches Gesetzbuch (German Civil Code) Bundesgerichtshof (German Supreme Court) Entscheidungen des Bundesgerichtshofs in Zivilsachen Corte di Cassazione (Italian Supreme Court) Corte di Cassazione, civil law division Corte di Cassazione, criminal law division confer – compare Chapter Codice civile (Italian Civil Code) UN Convention on the International Sale of Goods (1980) Corriere giuridico Corte Costituzionale (Italian Constitutional Court) Codice penale (Italian Criminal Code) Codice di procedura civile (Italian Code of Civil Procedure) Diritto del commercio internazionale Legislative decree Editor(s) for instance Enciclopedia del diritto following European Review of Private Law Foro amministrativo – Tar Il Foro italiano Giurisprudenza agraria italiana Giurisprudenza italiana Giurisprudenza di Merito Giudice di pace ( Justice of the Peace) Giustizia civile Massimario della Giustizia civile Repertorio della Giustizia civile Arbitral Award of the International Chamber of Commerce ICC International Court of Arbitration Bulletin Same author as above id est – for instance 7

LIST OF ABBREVIATIONS

JDI JZ l. l. 218/1995

Mass.Foro it. No. Nuova giur.comm. OJ OLG p. para. PECL Prel. Relazione al Re Rep. Foro it. Rep.Gen.Giur.It. Rev.crit.dir.int.priv. Riv.dir.civ. Riv.dir.comm. Riv.dir.int.priv.proc. Rome Conv. Sez. Sez.lav. Sez.Un./SS.UU. T.a.r. Trib. T.U. Bancario e creditizio ULR UNIDROIT Principles UNIDROIT Principles (2004) UNILEX v. Vita not. Vol.

8

Journal de droit international JuristenZeitung legge (statute, Act) Law for the Reform of the Italian System of Conflict of Laws of 31 May 1995, No. 218 and following amendments Massimario del Foro italiano Number(s) Nuova giurisprudenza civile commentata Official Journal of the European Communities Oberlandesgericht (German Appellate Court) page(s) paragraph(s) Principles of European Contract Law Disposizioni preliminari al Codice Civile ( preliminary provisions to the Civil Code) Official Commentary to the Italian Civil Code of 1942 Repertorio del Foro italiano Repertorio generale di Giurisprudenza italiana Revue critique du droit international prive´ Rivista del diritto civile Rivista del diritto commerciale Rivista di diritto internazionale privato e processuale Rome Convention on the Law Applicable to Contractual Obligations (1980) Sezione (Court division) Labour Law Court Division Sezioni unite ( joint sitting of all divisions of the Italian Supreme Court (Corte di Cassazione)) Tribunale amministrativo regionale (Administrative court – first instance) Tribunale (First Instance Court) Consolidated Act on Banking Law Uniform Law Review/Revue de droit uniforme UNIDROIT Principles of International Commercial Contracts (Rome 1994) UNIDROIT Principles of International Commercial Contracts (2nd ed., Rome 2004) UNILEX Database on CISG and UNIDROIT Principles (http://www.unilex.info) versus Vita notarile Volume(s)

TABLE OF CONTENTS Foreword by the Editors

5

List of Abbreviations

7

Table of Contents

9

Interaction between the Pecl and Italian Law

R. Sacco

11

The Unidroit Principles of International Commercial Contracts and the Principles of European Contract Law: Two Similar Though not Identical Instruments Compared

M. J. Bonell

21

S. Ferreri A. Veneziano

27 30

L. Antoniolli

49

E. Ioriatti L. Antoniolli E. Ioriatti

62 69 72

A. Monti

87

Chapter 1: General Provisions Section 1: Scope of the Principles Art. 1:101 Art. 1:102–107 Section 2: General Duties Art. 1:201–202 Section 3: Terminology and Other Provisions Art. 1:301 Art. 1:302 Art. 1:303–305 Chapter 2: Formation of Contracts Section 1: General Provisions Art. 2:101–107 Section 2: Offer and Acceptance Art. 2:201–208 Art. 2:209 Art. 2:210–211 Section 3: Liability for Negotiations Art. 2:301–302

R. Peleggi A.M. Musy R. Peleggi

110 133 137

A.M. Musy

142

M. Graziadei

147

M. Graziadei

152

M. Graziadei

179

P. Iamiceli

187

Chapter 3: Authority of Agents Section 1: General Provisions Art. 3:101–102 Section 2: Direct Representation Art. 3:201–209 Section 3: Indirect Representation Art. 3:301–304 Chapter 4: Validity Art. 4:101–108

9

TABLE OF CONTENTS

Art. 4:109 Art. 4:110 Art. 4:111–119

A. Somma L. Antoniolli P. Iamiceli

214 220 226

S. Ferreri

251

A. Fici A. Bonito Oliva A. Fici A. Bonito Oliva A. Pretto-Sakmann F. Macario

273 283 287 298 305 310

A. Pretto-Sakmann V.M. Donini

317 332

A. Veneziano B. Gardella Tedeschi

357 370

Chapter 5: Interpretation Art. 5:101–107 Chapter 6: Contents and Effects Art. 6:101–102 Art. 6:103 Art. 6:104–6:107 Art. 6:108–6:109 Art. 6:110 Art. 6:111 Chapter 7: Performance Art. 7:101–105 Art. 7:106–112 Chapter 8: Non-Performance and Remedies in General Art. 8:101–103 Art. 8:104–109

Chapter 9: Particular Remedies for Non-Performance Section 1: Right to Performance Art. 9:101–103 Section 2: Withholding Performance Art. 9:201 Section 3: Termination of the Contract Art. 9:301–304 Art. 9:305–309 Section 4: Price Reduction Art. 9:401 Section 5: Damages and Interest Art. 9:501–510

F. Sartori

391

F. Sartori

403

L. Antoniolli A.M. Mancaleoni

406 425

A.M. Mancaleoni

440

A. Mari

443

List of Authors

481

Bibliography

485

Index

505

10

INTERACTION BETWEEN THE PECL AND ITALIAN LAW Rodolfo Sacco 1. – ‘‘Principles of European Contract Law’’. This is an expression which is translated – and has been translated – in all languages and is repeated every day in all languages. Does this translatability, this existence of translations (everyone keeps a number of them in his/her own library) tell us that those four words can be transferred without any trouble from one linguistic area to another, from one legal area to another? An affirmative answer is not a foregone conclusion. The words principles, law and European, do not pose any problem. Problems concern precisely the word contratto. To an Italian contratto is any agreement concluded for the purpose of regulating or extinguishing a right having patrimonial content. This means that when an Italian speaks of a contratto, he/she may refer to an agreement concluded in order to transfer the ownership of a thing, create an easement or an usufruct. A contratto is self-sufficient for the purpose of transferring property or creating an easement. Also an agreement concluded for the purpose of creating a mortgage or a pledge is a contratto (but it is a contratto which may require a form or a registration). An Italian who reads that a contratto does not need to be concluded in writing, nor is subject to any other requirement as to form delivery or registration (Art. 2:101 PECL) thinks that his house can be sold or mortgaged by means of an oral agreement without registration. On the contrary, to an Italian an agreement is not a contratto if it is concluded in order to regulate a non-patrimonial relationship. An agreement between spouses concluded for the purpose of determining how to educate their child is not a contratto. 2. – If an Italian jurist hears the word contratto he/she thinks first of all of an exchange of promises. The Codice civile encourages him/her in this direction: a contratto is formed by words (Art. 1362), clauses (Arts. 1363, 1368, 1370), expressions (Arts. 1364, 1369); moreover a party’s mistake can occur in a declaration (Art. 1433), etc. For sure, the Code explicitly mentions that sometimes the parties’ intention is expressed without any declaration. This is the case regulated by Art. 1327, where performance solicited by the offeror works as an acceptance; and this acceptance is effective even before the offeror has received notice of it. The interpreter completes this framework by pointing out that the declaration can be equated to the concluding act, i.e. a party’s behaviour, on the basis of which his/her intent to conclude a contract can unquestionably be inferred. In this case the concluding action is considered to be an expression of intention governed by the general rules on contractual declarations and does not therefore produce effects unless the other party has been given notice of it. R. SACCO – 11

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

In the PECL everything that helps to reveal an intention to contract has a uniform value and is uniformly regulated. The text deals with statements and conduct indicating intention in a single sentence: Arts. 1:107; 2:102; 2:106(2); 2:204. Art. 2:205 considers acceptance dispatched and acceptance by conduct separately, but regulates them in a single rule: i.e. they must reach the offeror. Nevertheless, para. 3 of Art. 2:205 contains an exception in a case similar to that provided for in Art. 1327 of the Codice civile. Offer and acceptance – regardless of whether they are made by declaration or ‘‘conduct’’ – as well as their revocation, refusal and so on, ‘‘become effective’’ only if they ‘‘reach’’ the other party. This rule is clear in the PECL (Art. 1:303; Art. 2:205). The Codice civile seems to establish a stricter requirement: the offeror must know of the offeree’s acceptance (Art. 1326), unilateral acts must be known by the person to whom they are directed (Art. 1334); but when a declaration reaches the addressee’s address, arrival is equated to knowledge, unless the addressee proves that he/she could not have had notice of it and was not negligent. It must be added that Arts. 1326 and 1334 have been formulated keeping in mind a contractual declaration, not ‘‘conduct’’ different from a declaration. At any rate, also in this case the interpreter construes a rule which is similar to that of Art. 2:205(2) PECL. 3. – The PECL as well as the Codice civile consider as normal the case in which both contracting parties express their intention. Arts. 1321 and 1325 of the Codice civile state that the agreement is the very basis of the contract. Art. 2:103 of the PECL, without defining the relationship between contract and agreement, refers to the agreement as something present in every contract. A careful legal analysis has determined that in the law of all countries of the world the intention of the two contracting parties is necessary in order for both to undertake an obligation or suffer a detriment. If only one of the contracting parties undertakes an obligation, his/her intention is sufficient to bind him/her. In Italy the lawgiver has in Art. 1333 expressly defined the obligee’s declaration to the creditor as a contratto (and regulates it by granting the addressee of the offer the power to reject it). Art. 1333 works in the field of gratuitous personal guarantees, promises to pay someone else’s debt, promises of reward conditional on performance, and so on. Art. 2:107 of the PECL adopts the same fundamental rule found in the Codice civile; it does not establish the addressee’s power to reject the declaration (but the promisee is certainly not denied this) and it qualifies the declaration as a ‘‘promise’’, without terming it a contract (and in any case the rules contained in the PECL will be applied to it, see Art. 1: 107). Art. 1333 of the Codice civile, which we have just mentioned, has caused disagreement among interpreters. Some consider an offer which has not been rejected, as governed by this article, to be a true contract made up of only one declaration. Others deny the unilateral nature of the declaration because they consider the addressee’s silence an implied declaration. Finally, others deny that the declaration is a contract and accept – as concerns Italian law – the classification employed by Art. 2:107 PECL. 12 – R. SACCO

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

4. – In the Italian legal tradition, an offer is revocable and revocation is valid if it reaches the addressee before the offeror has received acceptance (Art. 1328). An opposite solution, based on the irrevocability of the offer, has triumphed – and been codified – in Germany, is dominant in interpretations by lawyers in France and Belgium, but has never been very successful in Italy and was explicitly rejected in the Codice civile of 1942. The rule on revocability, nevertheless, is not mandatory. Art. 1329 recognises a case of irrevocability. The PECL adopt the same approach as taken in the Codice civile. In fact, Art. 2:202 establishes that an offer is revocable (§ 1) except where the parties have decided on its irrevocability (§ 3). There are nevertheless minor differences in the two texts. In the PECL the time for revocation is shorter (revocation must reach the addressee before the offeree has sent his/her acceptance) and an offer is considered irrevocable if a deadline for acceptance has been fixed (Art. 2:202). 5. – Until a short time ago, one proposition seemed unshakeable: that (with the exception we have analysed whereby an offer does not need to be accepted) the one requirement in order for a contract to exist is that offer and acceptance correspond. The Codice civile pays homage to this supposed truth in Art. 1326, § 1, echoing the corresponding § of the German BGB. The PECL themselves follow this common definition in Art. 2:205. But maybe Art. 1326 and Art. 2:205 must face a new reality evident in the new developments within the European Union. The European Union, by means of its directives, sides with the weak contracting party, particularly consumers. It protects them against contracts concluded outside the business premises (dir. 85/577/EEC), distance contracts (dir. 97/7/EC), contracts for the use of immovable property on a timeshare basis (dir. 94/47/EC) and so on. And how is this protection enforced? Consumers benefit from a right of withdrawal that they can exercise within a varying time limit (seven days, ten days, three months). The old dogma, according to which the contract exists when there are an offer and an acceptance, is no longer an absolute rule. The contract exists when there are an offer and an acceptance and there has not been a withdrawal. This argument can be better developed by affirming in general that a contract exists if there are an offer and an acceptance, if the offer has been neither revoked nor rejected and if – in cases where a right of withdrawal can be exercised – the consumer has not cancelled the contract. But one could go even further. There is no difference in structure and function between a consumer’s withdrawal ( protecting himself/herself against the damaging effects of his/her lack of experience in business matters) and avoidance of the contract by the party who is protecting himself/herself R. SACCO – 13

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

from the damaging effects of insufficient reflection, information and freedom when the contract was concluded. The conclusion of a contract could consequently be considered as the result of the concurrence of two positive events (offer, acceptance) and four negative events (lack of revocation, lack of refusal, lack of withdrawal, lack of annulment). This description would be more truthful. 6. – The ius commune that was in force until the epoch of codifications recognised three defects in a contracting party’s consent: mistake, fraud, threats. A contracting party must be protected against defects; therefore the law gives him/her the power to request avoidance of the contract. The French Code civil and the ABGB clearly show their origin in the traditional model. During the 19th century the need to provide a contracting party with better protection was felt. If a party must be free to express his/her intention, provision for the case of ‘‘threats’’ was not enough. It was also necessary to provide for the case of the state of danger that a contracting party can avoid only by concluding a ruinous contract. It is not enough to require his/her freely given and informed consent: consent must also be wellconsidered. Therefore, if the contracting party is disabled, disability renders every future contract voidable. At the end of the 19th century the BGB further increased the protection of a contracting party by insisting on freedom and careful consideration: § 138 considers a contract invalid if one contracting party has taken advantage of the other party’s need, thoughtlessness or inexperience. During the 20th century protection of a contracting party increased. The idea of a contracting party ‘‘incapable of understanding and intending’’ is was no longer coincident with the idea of a mentally ill person, but extends to all those who, although not ill, find themselves, at the moment when concluding a contract, in a situation that makes it difficult for them to evaluate, with the required careful consideration, the expediency of the contract (Art. 428 Codice civile). The ‘‘state of need’’, which is incompatible with the contracting party’s freedom, vitiates the contract if the other party has taken unfair advantage of it (Art. 1448 Codice civile). Towards the end of the century EU directives spread across Europe new forms of protection for a contracting party. If a contract is concluded outside business premises, it can be concluded with insufficient thoughtfulness, and the party will have a right to withdraw (dir. 85/577/EEC). Because of the concern of guaranteeing the effectiveness and fairness of competition, remedies have been provided for misleading advertising (dir. 84/450/EEC and 97/55/EC) and subliminal advertising; rules on competition and on the prohibition of agreements in restraint of trade, which are the very basis of European law, aim directly at guaranteeing the functioning of the market and indirectly at protecting consumers’ freedom. The same can be said of the curbing of abuses of economic dependency (cf., for Italy, Art. 9 of Act No. 192 of June 18, 1998). Also the guarantee of a sufficient level of information of the 14 – R. SACCO

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

contracting parties is making enormous progress. European and domestic rules are competing in imposing on the parties the duty to give relevant information in order to assess the usefulness of the deal. This increase and extension of remedies is evident also in the PECL. There one can find, in the headings to three articles, the traditional defects, i.e. mistake (Art. 4:103), fraud (Art. 4:107) and threats (Art. 4:108). However, along with them, one can also find in Art. 4:109(1)(a) rules, though less evident, on the dependency of one party on another, economic distress, improvidence, ignorance, inexperience, lack of bargaining skill. Italian law and the PECL move in the same direction. To both lawmakers the same question can be posed: has the time not come to abandon case-by-case legislation and grant a contracting party a general remedy every time he/she concludes a contract vitiated by his/her lack of the necessary freedom, information, and possibility to assess it? A new trend developed in Italy in the 20th century and was successful in the PECL. A defect in one party’s consent does not work in isolation. It works when the other party does not deserve protection. Protection is not deserved by the party who has derived a benefit from the defect (Arts. 428, 1447, 1448 Codice civile; Art. 4:109(1)(b) PECL), has determined it (express rules on ‘‘fraud’’ and ‘‘threats’’), or knew (or should have known) of it (Art. 4:103(1)(a)(i) and (ii) PECL; Art. 1431 Codice civile). Here too, the time has come when case-by-case rules could be substituted by general rules. 7. – Once the agreement has been concluded, according to the PECL a contract is alive and working. The solution is completely different in Italy, from the point of view of legislative text, the law in action and the discourse by scholars. In 1804 the French Code civil, in the interests of freedom, enabled parties to conclude almost all contracts (except those with respect to gifts and contrats de mariage) without a specific form; but it then established strict rules for the purpose of proving them. A century later the BGB opted on the contrary for a regime oriented towards formalism. Not only gifts, but also all acts pertaining to real property or to an obligation to transfer real property, as well as many acts, must be notarised. Half a century later, Italy too adopted a formalistic solution. Gifts need to be made with a notarial form. Contracts pertaining to real property must be made in writing. The requirement of written form is recurrent in the Codice civile and in special statutes. If the form is missing, the contract is null and void. And we must remember that voidness is not cured by performance of the agreement. The PECL now move in the opposite direction. A contracting party, after a fourth whisky, can donate orally all his/her assets to the table companion that he/her has met that very evening. Maybe the judge will say that a declaration rendered in this way is not serious, that the other party has not relied on it. And in this way it is possible to recreate a link between the PECL and the rule applied, with no regret, by Italians. R. SACCO – 15

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

But Italians – I mean, from now on, Italian jurists, since businessmen and citizens are not interested in the problem – love to declare that every contract must have a causa, i.e. an economic function admitted by law. The Codice civile promotes the recital of this definition (Art. 1325, Art. 1343). In fact, the requirement of a causa does not create significant practical problems. If the contract is a contract of exchange, the function is not missing because the exchange is a suitable function. If the contract is gratuitous, the causa not for value is fully admitted (as is well known, the difference between causa and consideration lies essentially in this element). In spite of the marginal relevance of causa, Italian jurists love to discuss this issue endlessly and are ready to transfer their ideas, or better, their habits also to the analysis of the PECL. 8. – Italian jurists should be happy to read the text of Art. 4:102: ‘‘A contract is not invalid merely because at the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates’’. Art. 1346 of the Codice civile seems to say exactly the opposite. Therefore impossibility to perform should lead to the voidness of the contract. But this voidness is not inevitable, because the promisor could assume the risk of impossibility and guarantee the promisee, even in the event of impossibility, expectation interest. According to logic, it is up to the promisor, not the promisee, to verify whether performance is possible (i.e. if that particular technical problem can or cannot be solved). Consequently, such a guarantee seems to be connatural to every promise. This reasoning is at the foundation of an unbroken line of authorities in Italian case law: this has emphasized the possibility of a guarantee and considers this guarantee as due on the basis of an implied and tacit clause. Art. 4:102 of the PECL adopts as a rule what is judge-made law in Italy. 9. – Once a contract has been concluded, it must be interpreted. This means that its meaning must be determined at law. At the beginning of the 19th century it was considered sufficient to accept the idea that interpreting meant reconstructing the parties’ intention. In the beginning it was not considered that the psychological intentions of both parties do not always coincide. When this possibility was taken into consideration, legal theory continued for a while to consider a declaration as being valid, even if tainted by unrecognized mental reserve, mistake in its communication, incapacity to understand, an intention that was not evident, and so on. At the end of the 19th century, in many countries legal writings accepted the doctrine of reliance. The BGB remained equidistant between the doctrine of intention and the doctrine of reliance. The Codice civile of 1942 has already been conquered by the idea of reliance, even if it did not adopt it as a profession of faith, leaving it to legal writings to emphasize this achievement of legal thought. The doctrine of reliance is now expressed in a perfectly logical wording in Art. 2:102 of the PECL, and is well integrated by Arts. 5:101 and 6:101. 16 – R. SACCO

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

Nevertheless, the choice of the meaning of the contract is often not linked to the conflict between declaration and intention, or between two intentions, but depends instead on the objective uncertainty of the meaning of the text that makes it difficult to solve problems not clearly envisaged by the parties. Rules on interpretation can then be applied. These rules are little developed in the French and German codes, but are complete and systematic in the Codice civile. Since they are well developed in the PECL too, we can compare the two sources and find out that they are extremely similar. The common intention prevails over the literal meaning of the words of the contract (Art. 5:101; Art. 1362); in order to establish the parties’ intention, their conduct, particularly their conduct subsequent to the contract, can be used (Art. 5:102, Art. 1362); every term must be interpreted with reference to all the others (Art. 5:105, Art. 1363); interpretation must be in accordance with good faith (Art. 5:102, Art. 1366); an interpretation leading to the effectiveness of the contract must be preferred (Art. 5:106, Art. 1367); practices and usages must be taken into account (Art. 5:102, Art. 1368); the nature and object of the contract must be taken into account (Art. 5:102; Art. 1369); terms drafted by one of the parties must be interpreted in the way most favourable to the other party (Art. 5:103; Art. 1370); negotiated terms prevail over other terms (Art. 5:104, Art. 1370: the PECL are however more explicit). When these rules are exhausted, the Codice civile refers to equita` (fairness), and the PECL to reasonableness (Art. 1371; Art. 5:101). An Italian lawyer could detect here a macroscopic difference. But on closer examination the interpreter of a contract, whether drawing inspiration from equita` or from reasonableness, will always come to the same conclusions. Equita` is merely natural justice; natural justice is what an ordinary person considers fair; and an ordinary person will never consider fair what he himself/she herself considers unreasonable. Interpretation will be useless if it is clear that the parties did not want to regulate a specific hypothesis. In this case it will be necessary to resort to the integration of the contract. The Codice civile mentions in this regard the importance of usages, fairness and good faith. In this area, the PECL on the other hand use the fiction of the parties’ intention and refer to implied terms. But the bricks of which implied terms are made are those that we expect: good faith, fair dealing, the nature of the contract. Among Italian jurists, someone has in fact said that integration of a contract takes place on the basis of what is supposed the parties would have decided if they had foreseen it; and this construction once more brings Italian law and the PECL closer to one another. 10. – An Italian jurist who reads the PECL can ascertain how simple the system of invalidity is. He/she mentally compares it to the extremely complicated Italian system. If he/she wishes to go a little further, he/she would wonder whether it would be possible to simplify the Italian system in the same way. During the 19th century Italians used a system of invalidity borrowed from the French. All invalidities were called nullita` (voidness, nullity). Nullita` stemming from a defect in form or illegality were called of public policy (ordre public) and were absolute, i.e. any interested R. SACCO – 17

INTERACTION BETWEEN THE PECL AND ITALIAN LAW

person could raise them. Invalidities stemming from incapacity or defects in consent were relative, i.e. only an incapable person or the contracting party whose consent was vitiated could invoke them. This taxonomy is still evident in Book I of the Codice civile of 1942. During the 20th century Italian legal scholars began to follow a system created by the Germans. The common qualification of all vitiated contracts was invalidita` (invalidity). A first type of invalidity (voidness, nullita`) implies that a contract cannot produce any effect. Consequently, any interested person can raise this defect. A second type of invalidity (voidableness, annullabilita`) implies instead that the contract is effective, but that the protected person can start an action leading to a judicial decision that will render the contract invalid. A third type of defect determines the inefficacia of the contract, and this implies the contract’s lack of effects, but it must be kept separate from invalidity. Another doctrine, corresponding to the lack of effects, is finally inopponibilita` (inopposability). The law of the European Union has been formulated by drafters who accept the French system. In order to protect the weak contracting party, it very frequently resorts to the remedy of the nullita` (voidness) of the contract. Of course, only the weak contracting party can avail himself/herself of the remedy, rightly termed ‘‘protection’’, of voidness. So, the concept of invalidita` relativa has entered with unfurled sails the Italian legal system. The PECL establish that a contract contrasting with overriding principles and mandatory rules ‘‘is not effective’’ (Art. 15:101 and Art. 15:102); they keep in the shade the concept of the weak party, focusing their attention directly on defects of intention. If a defect exists, the remedy is ‘‘avoidance’’ or, alternatively, ‘‘adaptation’’ (Arts. 4:103, 4:105, 4:107, 4:108, 4:109, 4:110, 4:115). ‘‘Avoidance’’ is the consequence of a ‘‘notice’’ directed ‘‘to the other party’’. The intervention of the judge is not required. 11. – A debtor who does not perform is liable, unless he/she proves that ‘‘the nonperformance is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract’’ (Art. 8:108). This is what the PECL provide. The words of the Codice civile are different. The Code refers to impossibility and imputabilita` (imputability) (Art. 1218): ‘‘The debtor who does not perform’’ is liable ‘‘unless he proves that the non-performance ( ... ) was due to impossibility of performance for a cause not imputable to him’’. The words are different, but the rules are equivalent. The rule on impossibility is very similar to the one on impediment, the one on non-imputability is very similar to the idea expressed by the words ‘‘beyond its control’’. An Italian interpreter does not find it difficult to adopt the rule of the PECL. In the case of non-performance, the law must tell us whether the creditor has a right to specific performance or whether the obligation is converted into a duty to pay damages. Apparently, in fact, both solutions can be envisaged: the former has been adopted by the BGB, § 241, and the latter is clearly enounced – in the field of obligations to do something or not to do something – in Art. 1142 of the French Code civil. 18 – R. SACCO

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But in Germany specific performance is often merely performance with expenses borne by the debtor (cf. § 879 ZPO); moreover, specific performance is excluded if performance has become impossible (§ 280 BGB) or if performance in not fungible; moreover, the rule on specific performance is not valid between traders (§ 376 HGB). Art. 1142 of the French Code civil is in its turn subject to considerable exceptions. In fact, if an obligation not to do something is violated, the creditor can destroy the abusive work at the debtor’s expense (Art. 1143); and Art. 1184 even states a rule according to which the creditor can compel the debtor to perform the obligation if performance is possible. In Italy the trend of the law is in accordance with the German solution (Arts. 2931, 2932, 2933 Codice civile), which has been inserted by using the expression ‘‘enforcement at the expense of the debtor’’. The PECL are well aware that within certain limits specific performance must be granted to the creditor, and they are equally aware that this solution is not always feasible. They tell us in which cases the law cannot guarantee specific performance: namely, when it would cause the debtor unreasonable expense, when the performance ‘‘consists in the provision of services or work of a personal character’’ and ‘‘the aggrieved party may reasonably obtain performance from another source’’ (Art. 9:102). It can be observed that in the PECL there is an opening to an idea which did not exist among jurists at the time of the various codifications, and has recently been developed by the law and economics movement. According to this teaching the debtor must be left free to choose whether to perform specifically or to pay damages: the debtor will opt for nonperformance when the damage non-performance causes to the creditor is inferior to the cost of performance to the debtor himself/herself. In these cases it is socially efficient that the debtor does not perform; in this way contractual performance will be on the party who can do it at lesser cost. 12. – Non-performance by a party can determine termination of the contract by the other party (PECL, Art. 9:301; Codice civile, Art. 1453). This happens when non-performance is not trivial (Art. 1453 Codice civile); in other words, when non-performance is fraudulent or substantially deprives the creditor of what he/she expected from the contract or when ‘‘strict compliance with the obligation is of the essence of the contract’’ (Art. 9:301 and 8:103). According to Italian law, the aggrieved party who wants to terminate the contract must (in general, with the exceptions that we will analyse later) bring an action and wait for the judge’s decision (Art. 1453 Codice civile). The PECL on the other hand allow the creditor to ‘‘terminate the contract’’ simply by a ‘‘notice to the other party’’ (Art. 9:303). This is a new instance of the trend of the PECL towards simplification, in contrast to the complexities that Italian law has inherited from canon law, through French law. According to Italian law, a dissatisfied creditor can terminate the contract autonomously, without having to ask the judge, in three cases. The three exceptions under analysis mark as many connections with the rules of the PECL. R. SACCO – 19

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The first exception in Art. 1454 of the Codice civile concerns the notice to perform (diffida ad adempiere): ‘‘The other party can serve a written notice on the defaulting party to perform within an appropriate time, declaring that, unless performance takes place within such a time, the contract shall be deemed dissolved’’. The mechanism is the one described in Art. 8:106 (1), (2) and (3). The second exception works if the parties have expressly established that the contract will be terminated automatically if one of the obligations is not performed (Art. 1456 Codice civile). In this case, once non-performance has occurred, the ‘‘aggrieved party’’ can declare that he/she intends to terminate the contract (Art. 1456, § 2). Here we find at work the mechanism established by the general rule stated in Art. 9:303(1) of the PECL. Finally, the code establishes that, if the time for performance by a party is of the essence and the time has lapsed, the contract is automatically terminated unless the creditor declares that he/she wants performance (Art. 1457). Here Italian law goes beyond the PECL as it exempts the ‘‘aggrieved party’’ from having to declare his/her intention to terminate. Termination obviously ‘‘releases the parties from their obligations to effect’’ the performance, empowers the parties to ask for restitution of what they have already performed, and obliges the non-performing debtor to pay damages. The recoverable damage comprises the profit that performance would have produced for the ‘‘aggrieved party’’. On this point the PECL and Italian law are coincident; the latter found this solution in French law and was not lured by the opposite model which had been accepted in Germany and Switzerland (according to which a terminated contract is treated as if it were void, and recoverable damages is that which the unsatisfied creditor has suffered in order to conclude the contract and to perform his/her obligations, and no other kinds). 12. – When the Italian Codice civile appeared in 1943 the rule expressed in Art. 1467 was hailed as an important novelty. The heading is ‘‘Excessive onerousness’’ (eccessiva onerosita`), and the text regulates the case in which ‘‘extraordinary and unforeseeable events make the performance of one of the parties excessively onerous’’. In this case the debtor can ask the judge to terminate the contract, but the other party can avoid termination by offering a suitable modification of the contract. After almost half a century, jurists have noticed that excessive onerousness is not the only change of circumstances that makes preservation of the contract useless, necessitating consequently the amendment or termination of it. Italian interpreters have not found an article in the Codice civile which corresponds expressly to this rule of justice. But scholars recommend judges to interpret Art. 1467 by way of analogy, or otherwise to invoke the rule on interpretation, or integration, of the contract according to good faith. The PECL, drafted when jurists were already familiar with these new techniques, solve the problem without any difficulty: Art. 6:111 reproduces precisely the thought that is today widely dominant in the minds of lawyers throughout the world.

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THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AND THE PRINCIPLES OF EUROPEAN CONTRACT LAW: TWO SIMILAR THOUGH NOT IDENTICAL INSTRUMENTS COMPARED Michael Joachim Bonell* 1. With the adoption in 2004 of a new enlarged edition of the Unidroit Principles of International Commercial Contracts (hereinafter the Unidroit Principles), the Unidroit Principles and the Principles of European Contract Law (hereinafter the European Principles) cover substantially the same topics.1 Hence an obvious question: is there room for both these two apparently very similar instruments or are they bound to compete with each other? 2. There are those who anticipate a veritable ‘‘nightmare scenario’’. Parties and arbitrators will be faced with two entirely equivalent, and therefore competing, instruments, and may find it difficult to choose between the two leges mercatoriae. Others go even further and do not exclude that there may come a time when a special international convention will be needed to lay down rules to solve the conflicts between the Unidroit Principles, the European Principles and, say, three additional leges mercatoriae originating in Asia, two in Africa and seventeen in Latin America. Yet are these fears justified? On closer examination, this does not seem to be the case. 3. To begin with, the two instruments definitely differ as to their scope. The Unidroit Principles relate specifically to international commercial contracts, while the European Principles are intended to apply to all kinds of contracts, including transactions of a purely domestic nature and those between merchants and consumers. Moreover, while the territorial scope of the Unidroit Principles is universal, that of the European Principles is formally limited to the member States of the European Union.2 4. In these circumstances it should not be surprising, nor cause too much concern, that the two instruments do not coincide, at least in their entirety, as to their content.3 To be sure – taking as a point of reference the Unidroit Principles – about two thirds of the 185 *

1 2 3

Professor of Law, University of Rome I ‘‘La Sapienza’’; Consultant, Unidroit; Chairman of the Unidroit Working Group for the Preparation of the Principles of International Commercial Contracts. The views expressed in this article are solely those of the author and do not necessarily reflect those of the other members of the Working Group. Except for plurality of parties, illegality, conditions and capitalisation dealt with in the European Principles and not (yet) in the Unidroit Principles. Cf. paragraph 1 of the Preamble of the Unidroit Principles and Article 1:101 of the European Principles, respectively. For an analytical comparison of the content of the two instruments accompanied by a synoptical table, see M.J. Bonell – R. Peleggi, Unidroit Principles of International Commercial Contracts and Principles of European Contract Law: A Synoptical Table, in Uniform Law Review 2004, pp. 315–396.

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articles contained in Unidroit Principles 2004 have almost literally corresponding provisions in the European Principles, the rest differ and, while most of the differences appear to be merely technical,4 others are of a ‘‘policy’’ nature, i.e. they clearly reflect the different scopes of the two instruments. 5. Some of the differences of policy stem from the universal sphere of application of the Unidroit Principles as opposed to the regional vocation of the European Principles. Thus, while the Unidroit Principles expressly state that they may be used as a means of interpreting and supplementing international uniform law instruments and as a model for national and international legislators (emphasis added),5 the European Principles do not contain similar provisions and significantly enough state in their Introduction that ‘‘[they] will assist both the organs of the Community in drafting measures and the courts, arbitrators and legal advisers in applying Community measures’’ (emphasis added).6 Furthermore, only the Unidroit Principles contain a special provision on the relevant time zone7 and take into account that at a global level there exist currencies that are not freely convertible8 or countries with no average commercial banking short rate or statutory rate of interest.9 Finally, the Unidroit Principles, but not the European Principles, specifically deal with the cases, particular frequent in East-West and North-South trade relationships, where the validity of single transactions or their performance is subject to public permission requirements,10 and expressly state that the expiration of the limitation period does not extinguish the right,11 thereby taking into account the strong reservations in this respect among Islamic laws. 6. Other differences reside in the fact that the Unidroit Principles specifically address international contracts, as opposed to the European Principles which cover contracts in general, including purely domestic ones. Thus, while in the European Principles the parties’ duty to act in accordance with good faith and fair dealing is stated in general terms,12 the corresponding provision in the Unidroit Principles refers to ‘‘good faith and fair dealing in international trade’’ (emphasis added),13 so as to make it clear that under the UnUnidroitrinciples the two concepts are 4

5 6 7 8 9 10 11 12 13

See, e.g., Art. 2.1.18 Unidroit Principles 2004 and Art. 2.106 of the European Principles, concerning the effects of so-called no oral modification clauses; Arts. 2.2.1 et seq. Unidroit Principles 2004 and Arts. 3.102 et seq. of the European Principles, concerning the distinction between ‘‘disclosed/undisclosed agency’’ and ‘‘direct/indirect representation’’, respectively; Art. 7.4.4 Unidroit Principles 2004 and Art. 9.503 of the European Principles, concerning the amount of loss for which the non-performing party is liable. Cf. paragraphs 5 and 7 of the Preamble. Cf. O. Lando – H. Beale (eds.), Principles of European Contract Law, Parts I and II (2000), xxiii. Cf. Art. 12(3) Unidroit Principles 2004. Cf. Arts. 6.1.9(1) and 8.2 Unidroit Principles 2004, as compared to Arts. 7.108 and 13.103 of the European Principles. Cf. Art. 7.4.9(2) Unidroit Principles 2004, as compared to Art. 9.508(1) of the European Principles. Cf. Arts 6.1.14 – 6.1.17 Unidroit Principles 2004. Cf. Art. 10.9(1) Unidroit Principles 2004. Cf. Art. 1.201 of the European Principles. Cf. Art. 1.7 Unidroit Principles 2004.

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not to be construed according to the meaning generally attached to them in the domestic sphere, but in the light of the special conditions of international trade. Likewise, while the European Principles state that the parties are bound by any usage which would be considered generally applicable by persons in the same situation as the parties,14 the UnUnidroitrinciples restrict the applicable usages to those which are ‘‘widely known to and regularly observed in international trade by parties in the particular trade concerned’’ (emphasis added).15 7. By far the most significant differences in ‘‘policy’’ derive from the fact that the Unidroit Principles deal only with contracts between merchants and other professionals, whereas the European Principles apply to consumer transactions as well. Examples of provisions in the European Principles intended to take into account that in consumer transactions parties typically do not have the same bargaining power and/or negotiating skill are Article 1.102(1) stating that ‘‘[p]arties are free to enter into a contract and to determine its content subject to the requirements of good faith and fair dealing [...]’’;16 Article 1.104(2) according to which a party may rely upon the law of the country of its habitual residence to establish that it would be unreasonable to interpret its conduct as consent to an agreement;17 Article 2.105 according to which only individually negotiated merger clauses prevent prior statements or agreements between the parties to become part of the written contract;18 Article 2.104 providing that not individually negotiated contract terms are binding only when the party invoking them has taken appropriate steps to bring them to the other party’s attention and that a mere reference to such terms in the contract document is not sufficient for this purpose;19 Article 4.110 permitting the avoidance of unfair terms which have not been individually negotiated;20 Article 4.118(2) restricting the possibility of excluding the remedies for mistake and incorrect information;21 Article 6.101(2) on the effects of information about the quality or use of services or goods given by a professional supplier before the conclusion of the contract;22 and Article 8.109 on the conditions for the validity of exemption clauses.23 By contrast, examples of provisions in the Unidroit Principles manifestly tailored to the special needs of commerce are Article 2.1.14 favouring the upholding of contracts with

14 15 16 17 18 19 20 21 22 23

Cf. Art. 1.105 of the European Principles. Cf. Art. 1.9 Unidroit Principles 2004. Cf. Art. 1.102(1) of the European Principles, as compared to Art. 1.1 Unidroit Principles 2004. Cf. Art. 1.104(2) of the European Principles, with no counterpart in the Unidroit Principles. Cf. Art. 2.105 of the European Principles, as compared to Art. 2.1.17 Unidroit Principles 2004. Cf. Art. 2.104(1) and (2) of the European Principles, as compared to Art. 2.1.19(1) Unidroit Principles 2004. Cf. Art. 4.110 of the European Principles, with no counterpart in the Unidroit Principles. Cf. Art. 4.118 of the European Principles, as compared to Art. 3.19 Unidroit Principles 2004. Cf. Art. 6.101 of the European Principles, with no counterpart in the Unidroit Principles. Cf. Art. 8.109 of the European Principles, as compared to Art. 7.16 Unidroit Principles 2004.

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terms deliberately left open;24 Articles 3.5(1)(a), 3.8 and 3.10(2) on the criteria for determining the relevant mistake and fraud or for adapting the contract in case of gross disparity,25 Article 5.2.3 on the so-called Himalaya clauses,26 Article 7.1.4 on the nonperforming party’s right to cure even after termination of the contract by the aggrieved party;27 and Article 9.1.9 on the effectiveness of assignments of monetary rights notwithstanding an agreement between the assignor and the obligor prohibiting such assignment.28 8. Yet it is above all the practical experience gained over the last years which amply demonstrates that there is no real competition between the Unidroit Principles and the European Principles. In a recent ICC arbitral award (not yet published) the arbitral tribunal, in deciding to apply as the law governing the substance of the disputes the Unidroit Principles rather than the European Principles, pointed out that it was the Unidroit Principles which reflected the lex mercatoria or general principles of international contract law, whereas the European Principles constituted an academic work carried out in view of the preparation of a future European Code of Contracts and as such were not well-known to the international business community. Without entering into the merits of the decision in the case at hand – rather surprising indeed since the dispute concerned two European companies and one of the parties had expressly invoked the application of both the Unidroit Principles and the European Principles –, the general statement according to which in the context of international commercial contract and arbitration practice the Unidroit Principles play a much more important role than the European Principles can hardly be denied. 9. While no information is available concerning the actual use of the European Principles in international contract negotiation or their choice by the parties as the law governing the contract, there is only one reported decision – admittedly a very authoritative one yet significantly enough relating to a consumer transaction – that refers to the European Principles alone.29 By contrast, of the 89 reported arbitral awards or court decisions referring in one way or another to the Unidroit Principles, more than 90% completely ignore the European Principles, while only four arbitral awards and three court decisions also mention the latter, mainly in support of the solution provided by the Unidroit Principles.30

24 Cf. Art. 2.1.14 Unidroit Principles 2004, with no counterpart in the European Principles. 25 Cf. Arts. 3.5(1)(a), 3.8 and 3.10(2) Unidroit Principles 2004, as compared to Arts. 4.103(1)(a)(ii), 4.107 and 4.109(2) of the European Principles. 26 Cf. Art. 5.2.3 Unidroit Principles 2004, with no counterpart in the European Principles. 27 Cf. Art. 7.1.4 Unidroit Principles 2004, as compared to Art. 8.104 of the European Principles. 28 Cf. Art. 9.1.9 Unidroit Principles 2004, as compared to Art. 11.301 of the European Principles. 29 Cf. House of Lords, Director General of Fair Trading v. First National Bank (2001) UKHL 52. The case basically involved the interpretation of the 1994 Unfair Terms in Consumer Contracts Regulations implementing in the U.K. the 1993 EEC Unfair Contract Terms Directive. 30 See UNILEX at http://www.unilex.info.

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10. Nor can these figures come as too much of a surprise. Indeed, why should the parties or, in case of disputes, courts or arbitral tribunals outside Europe or even in transactions between a European and a non-European business person refer to the European Principles which by their own admission ‘‘are designed primarily for use in the member States of the European Union’’ and ‘‘have regard to the economic and social conditions prevailing in the Member States’’,31 instead of the UnUnidroitrinciples which were adopted by an intergovernmental organisation with universal representation such as Unidroit, and whose declared objective ‘‘is to establish a balanced set of rules designed for use throughout the world’’?32 Yet even within the European Union – and more than half of the reported cases actually relate to disputes between two European parties – in the context of cross-border business transactions there are good reasons to prefer the Unidroit Principles. To begin with, in view of the world-wide acceptance of the Unidroit Principles as a particularly authoritative expression of the lex mercatoria, why should parties or arbitrators from Europe insist on the application of the European Principles, thereby suggesting the existence of something like a ‘‘European lex mercatoria’’33 as opposed to a ‘‘global’’ lex mercatoria or the lex mercatoria tout court? Second, and more important, while it is true that also the Unidroit Principles aim at promoting good faith and fair dealing in international trade and at ‘‘policing’’ individual contracts against the most serious cases of unfairness, the European Principles, covering also consumer transactions, go much further and contain a number of provisions intended to protect the so-called weaker party against the mere possibility of abuse by the other party with superior bargaining power,34 without even – unlike similar provisions at domestic level – expressly restricting the scope of these provisions to consumer transactions or at least excluding their application to cross-border business transactions. 11. From the outset, the main objective of the European Principles has been to serve as a basis for a future European Code of Contracts. In their joint response to the European Commission’s Communication on European Contract Law of 11 July 2001, the Commission on European Contract Law and the newly established Study Group on a European Civil Code chaired by Christian von Bar recommended that the European Principles be incorporated in a more comprehensive ‘‘Restatement of European Patrimonial Law’’, which after a rather short transitional period of application on a voluntary basis, should ultimately be enacted as a binding Code. Also with respect to the Unidroit Principles, views have been expressed to convert them into an international convention at some stage in the future. Recently, the idea of promoting the legal status of the Unidroit Principles was re-launched in the context of the discussion concerning the preparation of a ‘‘Global Commercial Code’’ to consolidate 31 32 33 34

Cf. O. Lando – H. Beale, Principles of European Contract Law, Parts I and II, (200), p. xxv. Cf. Introduction to the 1994 edition of the Unidroit Principles. Cf. O. Lando – H. Beale, Principles of European Contract Law, Parts I and II, cit., p, xxiv. See in particular Arts. 1.102(1), 2.104, 2.105(2), 4.110, 4.118 (2) and 6.101(2): for further details cf. text supra Section IV.1.

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existing international uniform law instruments (e.g. CISG, the various transport law conventions, as well as Incoterms, UCP, etc.). Such a Code, it is suggested, might expressly refer to the Unidroit Principles as the (uncodified) ‘‘general contract law’’ or even incorporate them so as to become an integral part of it and have the same binding force. 12. In view of their different scope of application, in actual practice the Unidroit Principles and the European Principles have never overlapped so far but have played equally important, though not interchangeable, roles. Nor is there any reason for this to change, even if one or both of them were to become a binding instrument in the future. Indeed, the day on which the European Principles become part of the envisaged European Civil Code, there will still be a need for the Unidroit Principles – whether in their present form or as a binding instrument – as the rules governing international commercial contracts, especially, but not necessarily exclusively, those entered into outside Europe or involving non-Europeans. On the other hand, supposing that the Unidroit Principles were to be converted into an international convention at some stage in the future, such a convention on account of its universal vocation would necessarily have to be restricted to international commercial contracts, with the consequence that the European Principles would continue to play an important role within the European Union if only with respect to purely domestic transactions and cross-border transactions between merchants and consumers.

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Chapter 1 GENERAL PROVISIONS Section 1: Scope of the Principles PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:101: Application of the Principles (1) These Principles are intended to be applied as general rules of contract law in the European Union. (2) These Principles will apply when the parties have agreed to incorporate them into their contract or that their contract is to be governed by them. (3) These Principles may be applied when the parties: (a) have agreed that their contract is to be governed by ‘general principles of law’, the ‘lex mercatoria’ or the like; or (b) have not chosen any system or rules of law to govern their contract. (4) These Principles may provide a solution to the issue raised where the system or rules of law applicable do not do so. 1. The drafters’ perspective. In the intention of the drafters of the Principles the introductory section is meant to define the area in which the Principles are to operate: both from a geographical and from a subject-matter point of view. In the first paragraph it is stated that the scope of competence is that of ‘‘general contract law’’ (apart from specific rules concerning the various contracts most common in economic dealings) and the area relevant is that of the European Union. Within that jurisdiction no difference is drawn between commercial and common transactions, nor between international and domestic relationships (therefore introducing a difference between the Principles of European Contract Law and the Unidroit Principles of International Commercial Contracts). The terminology chosen by the drafters envisages a graduation of the relevance of the rules: in some cases their application is mandatory, in other cases their application is left to the discretion of the court (or of the arbitrators). As a matter of fact the first situation occurs when the parties have ‘‘agreed to incorporate’’ the Principles within their contract or they have agreed that the contract ‘‘will be governed’’ by them. That means that the parties may choose to include expressly the European rules within their clauses or they may simply make a general reference to them. In all other circumstances the application will depend on the interpretation of a clause stating that the contract is governed by ‘‘general principles of law’’ or ‘‘lex mercatoria’’ or by some equivalent expression. S. FERRERI – 27

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The two hypotheses mentioned above correspond closely to the provisions included in the Preamble of the Unidroit Principles of International Commercial Contracts (BonellBonelli (1997)). But according to the PECL also the omission of a choice of the law applicable to the contract may allow the judge to make a reference to the Principles. From a different perspective the PECL may come into play when the substantive law that would be normally competent to rule on the controversy is silent on the specific point of interest.

ITALIAN LAW Art. 1322 C.C.: Contractual autonomy The parties can freely determine the contents of the contract within the limits imposed by law. The parties can also make contracts that are not of the types that are particularly regulated, provided that they are directed to the realization of interests worthy of protection according to the legal order. Art. 57 of Act 218/1995: Contractual obligations Contractual obligations are in all cases governed by the Rome Convention of June 19, 1980 on the law applicable to contractual obligations (...) Art. 834 C.P.C. (Code of civil procedure): Rules applicable to the merits Parties can agree on the rules that the arbiters have to apply to the merits of the dispute, or they can decide that the arbiters have to decide according to equity. If parties do not decide on the issue, the law having the closest connection with the relationship applies. In both cases arbiters must take into account the indications of the contract and the trade usages. [translation by the editors]

COMPARISON AND EVALUATION Under the Italian rules governing contracts the parties enjoy fairly wide autonomy: both the rules governing choice of law questions and substantive matters leave options open to private bargaining. As a matter of fact Art. 57 of the 1995 statute reforming international private law (L. 31 May 1995, n. 218) refers to the Rome Convention of 1980 on the law applicable to contractual obligations, Art. 3 of which sets out the principle of the parties’ autonomy in 28 – S. FERRERI

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choosing the law that is to govern their dealings, the only limitation being that of the ‘‘mandatory rules’’ that are to be applied wherever the applicable law could be otherwise (Art. 7). According to Art. 1322 C.C. the parties are also free to ‘‘determine the content of the contract within the limits established by the law’’ and also to stipulate contracts different from those regulated by the legislator (as long as those contracts are meant to realize the interests the legal order considers worthy of protection: Art. 1322, par. 2 C.C.). Therefore, in theory at least, judges should be willing to recognize an express or implicit reference to the Principles (by referring to ‘‘lex mercatoria’’, in conjunction with other sets of customary rules, such as the INCOTERMS or collections of usages of the trade published by associations belonging to a specific trade). In practice one should be aware that Italian courts are not particularly prompt in taking notice of usages: scholars have often noticed a discontinuous attitude on the part of the judges; specific articles of the civil code referring to usages (e.g. Art. 1340 C.C.) are sometimes interpreted in a restrictive way and precedence is often given to domestic law over private practices customary in certain fields or trades. Relatively greater awareness seems to exist in the international field where cross-border contracts are concerned. A difference may also occur between national courts and panels of arbitrators. Arbitrators may be more alert to usages in commercial practice and instruments in force. As far as Italian sources of law are concerned notice should be taken of the reform introduced in the Code of civil procedure (Codice di procedura civile) in 1994, when Art. 834 was modified to allow parties to agree on the rules to be applied by arbitrators in reaching their decision. The use of the term ‘‘norms’’ (‘‘norme’’), rather than ‘‘statutes’’ (‘‘leggi’’) has been read as including also rules that have not been created by a legislator but that have gradually evolved by way of custom or been collected by trade associations or by international bodies (such as the ICC or some U.N. agencies) (Giardina (1994)). The other provisions of the PECL encouraging recourse to its principles when the parties have been silent on the point as to what law should govern their contract seems less likely to meet success: the traditional approach would be to look for the ‘‘objective connections’’ that would lead the judge to the legal system most closely related to the contract, according to the general principles of the choice of law doctrine (the same would be true for a board of arbitrators: the second paragraph of Art. 834 of the Code of civil procedure (Codice di procedura civile) states that if the parties do not choose the law applicable, that law will be applied that is most closely connected with their relationship). Finally, if the choice of law brings the judges to a legal system that lacks a provision specifically solving the point under discussion, the judges may find it useful to consult the PECL: in this event their authority will be equivalent to that of a prestigious doctrine or of a collection edited by an important private research institution, that is to say a persuasive rather than a binding authority. S. FERRERI – 29

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:102: Freedom of Contract (1) Parties are free to enter into a contract and to determine its contents, subject to the requirements of good faith and fair dealing, and the mandatory rules established by these Principles. (2) The parties may exclude the application of any of the Principles or derogate from or vary their effects, except as otherwise provided by these Principles. 1. General. This Art. expressly acknowledges the freedom both to enter into a contract and to determine its contents as part of the general principle of freedom of contract. At the same time, it highlights two of the most important restrictions thereto, namely the application of the principle of good faith and fair dealing and the effect of mandatory rules contained in the PECL themselves. The latter limitation is reaffirmed in para. (2), where the otherwise non-mandatory character of the PECL is expressly recognized. Parties’ autonomy may be further limited by the mandatory rules of the applicable domestic law, see infra, Art. 1:103, Comment Veneziano. 2. Restrictions: good faith and fair dealing. The separate mention of the requirements of good faith and fair dealing, which could have been simply included in the mandatory rules (see i.e. Art. 1.5. UNIDROIT Principles in connection with Art. 1.7), serves the purpose to strengthen its importance in the context of the PECL. For a more detailed treatment see infra, Art. 1:201, Comment Antoniolli). 3. Restrictions: mandatory rules in the PECL. In principle, the rules of the PECL can be freely derogated from, except when otherwise provided by the PECL themselves, such as is the case in Arts. 4:118, 6:105 and 8:109 (other limitations are added in the PECL, III Part). The existence of provisions with a mandatory character in a set of rules which is in itself not binding may be at first glance surprising (for a critical view with reference to the UNIDROIT Principles among Italian scholars see Giardina (1995), p. 547 et seq.). It must be however read together with Arts. 1:101 on the ways to apply the PECL (see Comment Ferreri) and 1:103 on the role of domestic mandatory rules (see Comment Veneziano). When parties choose the PECL as if they were the applicable law of the contract and not just as contractual clauses, and the (applicable) conflict of laws so allows, then the PECL must be seen as a coherent whole and regard should be had to the nonmandatory or mandatory character of their provisions (while at the same time national mandatory rules would not be applicable). On the contrary, when the reference to the PECL is to be considered merely a means to incorporate their content into the contract, or single provisions of the PECL are included in the contract, then parties can derogate from all rules, but are bound by the mandatory rules of the otherwise applicable domestic law. Whether the first or the second hypothesis occurs is dependent, of course, on the extent to which parties’ autonomy in deciding the applicable law to the contract is recognized by the (applicable) conflict of law rules. Such rules may well produce different 30 – A. VENEZIANO

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results if the controversy is not decided by a national court but by an arbitral body, and according to which paragraph of Art. 1:101 is considered to apply (see Art. 1:101, Comment Ferreri and also Art. 1:103, Comment Veneziano; in the same sense Grosheide (2002), p. 35 et seq.; with reference to the UNIDROIT Principles Bonell (1997), p. 187 et seq.). The existence of mandatory rules in the PECL can further serve a signalling function, should they be used as a basis for binding (European) legislation, since they give an indication concerning which provisions should not be subject to derogation from the parties.

ITALIAN LAW Art. 1322 C.C.: Contractual autonomy (1) The parties can freely determine the content of the contract within the limits imposed by law. (2) The parties can also make contracts that are not of the types that are particularly regulated, provided that they are directed to the realization of an interest worthy of protection according to the legal order. Art. 1323 C.C.: Rules regulating contracts All contracts, even though they are not of the types which are particularly regulated, are subject to the general rules contained in this title. Art. 1372 C.C.: Effects of contract (1) A contract has the force of law between the parties. It cannot be dissolved except by mutual consent or for a cause permitted by law. [...] 1. General. The general principle of freedom of contract is fully recognized in the Codice civile, which allows parties to determine the content of their contract (Art. 1322 (1) C.C.) and to conclude contracts which are not of the types already regulated by the law (Art. 1322 (2) C.C.). Moreover, though a right to enter into a contract (and to choose the contractual partner) is not expressly stated, it is commonly acknowledged as included in parties’ autonomy (Rescigno (1988), p. 14 et seq.; see also Alpa (1993), p. 295 et seq., on the principle of autonomy of the parties as general principle in Italian law and Rescigno (1988), p. 10 et seq. on the limits of constitutional protection of parties’ autonomy). 2. Restrictions to freedom of contract. As in all legal systems, freedom of contract encounters restrictions of various kind. Art. 1322 (1) C.C. refers to ‘‘limits imposed by law’’. They are found primarily, as far as general contract law is concerned, in mandatory legal provisions, public order and boni mores (Arts. 1343 and 1346 C.C.). More recently, scholarship and court decisions have made reference to good faith and fair dealing as a standard against which contractual autonomy must be measured (see infra, Art. 1:201, A. VENEZIANO – 31

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Comments Antoniolli). On its part, the freedom of the parties to create ‘‘new’’ contracts (Art. 1322 (2) C.C.) is accepted insofar as the parties pursue therewith an ‘‘interest worthy of protection’’. It is interesting to note that the latter provision is interpreted as prohibiting judges from declaring a contract void only because it is not expressly regulated in the Codice civile (Sacco, in Sacco-De Nova (2004), p. 444 et seq.). When it was used as a limitation, it substantially coincided with illegality (see Gorla (1954), p. 199 et seq.). Recently, however, it has mainly served the purpose of recognizing the validity of contractual agreements deriving from international practice such as financial leasing (Trib. Vigevano 14 December 1972, in Giur.it., 1973, I, 2, 886 et seq.), independent guarantees (Cass. 20 August 1998, no. 8248), letters of intent (Cass. 14 May 1998, no. 4853), as well as other contracts based on growing economical and social needs (i.e. sponsors contracts, Cass. 21 May 1998, no. 5086, in Giust.civ., 1998, I, p. 1833; support or alimony contracts outside family law (Cass. Sez. Un. 18 August 1990, no. 8432, in Giur.it., 1991, I, 1, 30). Restrictions to parties’ freedom of contract can be found outside general contract law, such as in special statutes for the protection of weaker parties deriving from the implementation of European directives as well as competition law. Further limitations may follow from the application of constitutional rights, though their impact in contract law has never been particularly strong in Italian court practice (Rescigno (1978), reprinted 1988, p. 462 et seq.).

COMPARISON AND EVALUATION Both Italian contract law and the PECL recognize the general principle of parties’ freedom, as freedom to enter a contract and to determine its content. This principle is likewise acknowledged in other EU domestic legal systems as well as in international instruments relating to the law of contract such as CISG (implicitly drawn from Art. 6, see among others Bonell (1987a), p. 51 et seq.; Ferrari (1999a), p. 146 et seq.) and the UNIDROIT Principles (Art. 1.1). It must be noted, however, that the latter instrument only apply to international commercial transactions, while the PECL purport to extend to all contracts including consumers’ and to be the ‘‘general rules of contract law’’ in the European Union. This explains why there is a stronger emphasis on the restrictions to parties’ autonomy. When we look at the rules which are considered mandatory in the PECL, however, we find that they are not many (a few more are added in the PECL, III Part, where it is noteworthy to mention that a Chapter 15 on Illegality has been drafted, see MacQueen (2004), p. 415 et seq.). This may depend on the fact that the PECL only deal with general contract law. They therefore leave out not only trade restrictions or on the contrary, obligations to conclude contracts deriving from competition law, but also some specific rules for the protection of the weaker party which are already part of European binding law (for a critique of the excessive emphasis on the principle of freedom of contract in the PECL as opposed to principles of solidarity and protection of weaker parties see Hesselink (2002), p. 113). Having said this, the restrictions found in the PECL are in substance of the same nature in Italian law and in the PECL, since they depend on the application of the principle of good faith and fair dealing and of rules for the protection of the weaker party.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:103: Mandatory Law (1) Where the law otherwise applicable so allows, the parties may choose to have their contract governed by the Principles, with the effect the national mandatory rules are not applicable. (2) Effect should nevertheless be given to those mandatory rules of national, supranational and international law which, according to the relevant rules or private international law, are applicable irrespective of the law governing the contract. 1. Application of national mandatory rules. The Art. in comment addresses, albeit in a rather complicated fashion, the problem of the impact of national mandatory rules in the case of choice of the PECL as the applicable law (for a clearer expression of the same concept see Art. 1.5 UNIDROIT Principles). Art. 1:103 is drafted with the implication that usually, national mandatory law would prevail over the parties’ agreement. When however parties have chosen the PECL as the governing law to their contract, such a choice has the effect of superseding national mandatory provisions. This Art. must be read together with Art. 1:101 (2) PECL, since choice by the parties is one of the ways through which the PECL find application (see Comments Ferreri) and with Art. 1:102, on restrictions to parties’ freedom of contract due to mandatory rules in the PECL (on this issue see Art. 1:102, Comment Veneziano). In order to better understand the scope of Art. 1:103, it must be borne in mind that parties are allowed to choose the PECL as governing law of the contract only if the (applicable) conflict of law rules permit such a choice. In this respect, a first difference may be drawn between proceedings in national courts, on the one hand, and arbitral proceedings, on the other hand. While national judges are bound by the conflict of law rules of their respective legal systems, arbitrators are usually more free to choose the governing law which is nearer to the subject matter at hand (though often, as it is well known, more than one applicable law is referred to in order to justify the decision). The application of a set of rules which is not binding and not part of a domestic legal system may therefore be easier in the latter situation, especially if the parties have clearly expressed an intent in this direction. Moreover, international rules on arbitral proceedings expressly recognise the possibility to apply ‘‘rules of law’’, which is interpreted as a wider concept than an existing legal system of a certain State (i.e. Art. 28 of the UNCITRAL Model Law on International Commercial Arbitration; Bonell (1997), p. 198 et seq.). On the contrary, the Rome Convention of 1980 on the law applicable to contractual obligation only refers to ‘‘law’’ (see Art. 3, Rome Conv.) and tends to be interpreted as excluding the possibility to choose a set of rules different than an existing national legal system. This would imply that the PECL be considered as mere content of the parties’ contract, and as such subject to the mandatory rules of the otherwise applicable national law (for this traditional and clearly prevailing view see for all Lagarde (1991), p. 300 et seq.; for a different interpretation in case of international contracts Hartkamp (2003), p. 86 et seq., where further references; see also A. VENEZIANO – 33

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Bonell (2004), p. 12 et seq.). It must be further noted that for certain consumer contracts as well as contracts in labour law the Rome Conv. affords in any event a special protection by restricting parties’ freedom of choice of the applicable law (see Arts. 5 and 6 Rome Conv.). This provision leaves open at least two questions. The first regards the meaning of ‘‘choice’’ of the governing law by the parties. Should it be an express choice, or would an implicit one suffice? It is submitted that this question must be solved by looking at the otherwise applicable (conflicts of ) law. The second problem concerns the role played by mandatory national rules when the parties have not chosen the PECL as governing law of the contract, but they find application according to the other options provided for in Art. 1:101 PECL. A contrario, it would seem that national mandatory rules should prevail in such cases. 2. Re`gles d’application ne´cessaire. The application of the PECL as the law governing the contract is however not unrestricted. They are still subject to the so called «directly applicable rules» (better known as re`gles d’application ne´cessaire or imme´diate, or Eingriffsnormen), which are «expressive of a fundamental public policy of the enacting country» (Comment under 1:103 PECL). The Comments expressly refer to Art. 7 (1) and (2), Rome Convention as statutory basis for such rules. One example is given in the Comment, Illustration 2, on domestic law provisions on restrictive trade practices. Other examples could be rules on environmental protection, on exchange regulations, on import-export licences (see also Art. 1.4 UNIDROIT Principles, Comment 3).

ITALIAN LAW Art. 57, l. 218/1995: Contractual obligations Contractual obligations are in all cases governed by the Rome Convention of June 19, 1980 on the law applicable to contractual obligations (...) Art. 3 Rome Conv.: Freedom of choice (1) A contract shall be governed by the law chosen by the parties. The choice must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract. (2) [...] (3) The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of the rules of the law at the country which cannot be derogated from by contract, hereinafter called ‘‘mandatory rules’’. 34 – A. VENEZIANO

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Art. 5 Rome Conv.: Certain consumer contracts (1) [...] (2) Notwithstanding the provisions of Art. 3, a choice of law made by the parties shall not have the result of depriving the consumer of the protection afforded to him by the mandatory rules of the law of the country in which he has his habitual residence: [...] Art. 7 Rome Conv.: Mandatory rules (1) When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the other country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application. (2) Nothing in this Convention shall restrict the application of the rules of law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract. Art. 834 C.P.C. (Code of Civil Procedure): Rules applicable to the merits (1) Parties can agree on the rules that the arbitrators have to apply to the merits of the dispute, or they can decide that the arbitrators have to decide according to equity. If parties do not decide on the issue, the law having the closest connection with the relationship applies. (2) In both cases arbitrators must take into account the indications of the contract and the trade usages. [Translation by the Editors] 1. General. In the following we will shortly address the questions of how the Italian legal system is expected to react to a choice of the PECL as governing law of the contract, and when (national) mandatory rules would be expected to prevail. In this respect, it is useful to distinguish between domestic courts and international arbitral proceedings. 1. Choice of the PECL and national courts. As regards the law applicable to contractual obligations, Art. 57 of the l. 218/1995 refers to the Rome Convention. This means that if the parties have chosen the PECL as governing law of their contract, an Italian court will have to decide whether Art. 3 Rome Conv. so allows. The prevailing view among Italian scholars excludes that parties can choose a set of rules different than the law of a State as governing law of the contract (see among others Giardina (1995), p. 547 et seq.); for a different view Carbone (1983), p. 279 et seq.; Marrella (2003), p. 843 et seq., with reference to international commercial contracts). A. VENEZIANO – 35

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2. Choice of the PECL in arbitral proceedings. The Italian Codice di procedura civile (C.P.C.) was amended in 1994 with the introduction of a special provision on the law applicable to the merits of the dispute in international arbitration (Art. 834 C.P.C.). When referring to the choice of the governing law of the contract by the parties, this Art. purposefully avoids the traditional expression ‘‘applicable law’’ and mentions ‘‘rules of law’’. This has been interpreted as allowing parties to choose not only a specific domestic law but also an a-national set of rules as governing law of the contract in the case of international commercial contracts (Carbone-Luzzatto (1999), p. 62 et seq.; Bonell (1997), p. 197, with reference to the UNIDROIT Principles). 3. Re`gles d’application ne´cessaire. Art. 7 Rome Conv. embodies the concept of mandatory rules of direct application. They prevail even when parties are allowed to choose foreign or a-national law as governing law of their contract. For a review of some of the rules of national, international or supranational origin which might find application if a controversy is decided by an Italian judge see for all Galgano-Marrella (2004), p. 214 et seq.

COMPARISON AND EVALUATION At present, it seems that the prevailing interpretation of the Rome Convention does not allow parties to choose a non-State set of rules to govern their transactions. This entails the application of mandatory rules of the (otherwise) applicable law, given the case Italian law. A more liberal view should be held by arbitrators. It remains to be seen if a different solution will be envisaged in the framework of the on-going modernisation of the Rome Convention (see Green Paper on the Conversion of the Rome Convention of 1980 on the Law Applicable to Contractual Obligations into a Community Instrument and its Modernisation, COM (2002) no. 654 final, 14 January 2003, esp., p. 23).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:104: Application to Questions of Consent (1) The existence and validity of the agreement of the parties to adopt or incorporate these Principles shall be determined by these Principles. (2) Nevertheless, a party may rely upon the law of the country in which it has its habitual residence to establish that it did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of the party’s conduct in accordance with these Principles. 1. General. This Art. is closely connected to the previous one, since it assumes that the PECL are chosen as the governing law of the contract. In such a case, the existence and the validity of the parties’ choice in favour of the PECL should be decided by applying the PECL rules on formation, interpretation and validity of the contract (Chapters 2, 5 and 4). This corresponds to Art. 8 (1) of the Rome Conv., which states that the existence and validity of a contract or a contractual term shall be determined by the law which would be applicable if the contract or term were valid. 2. Exception. Para. 2 is designed to prevent that the general rule contained in Para. 1 causes hardship in special situations, where one of the parties might be considered to be taken by surprise at the application of the PECL to the preliminary question of the existence or exact terms of the agreement (this corresponds to Art. 8 (2) of the Rome Conv.). The example given in the Comment concerns a professional letter of confirmation containing modifications to the original agreement, and to which the other party does not react. In this case it would be unreasonable to apply the PECL rules to determine whether the contract has been concluded with the modified term or not, if the other party comes from a legal system where such effects of Art. 2:210 PECL are unknown (see Art. 2:210, Comment Peleggi).

ITALIAN LAW Art. 8 Rome Conv.: Material validity (1) The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Convention if the contract or term were valid. (2) Nevertheless a party may rely upon the law of the country in which he has his habitual residence to establish that he did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in the preceding paragraph. 1. General. Italy has ratified the Rome Convention and therefore its conflict of law rules regarding contractual obligations correspond to Art. 1:304 PECL. A. VENEZIANO – 37

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:105: Usages and Practices (1) The parties are bound by any usage to which they have agreed and by any practice they have established between themselves. (2) The parties are bound by usage which would be considered generally applicable by persons in the same situation as the parties, except where the application of such usage would be unreasonable. 1. General. Usage and contractual practices that parties have established between themselves enjoy great protection under the PECL. Insofar as they correspond with the requirements set forth in Art. 1:105, they prevail over statutory provisions and are overridden only by the contrary agreement of the parties concerning the content of the contract. In this respect, the PECL are in line both with CISG (Art. 9, where the prevalence of parties’ autonomy is drawn from Art. 6, Bonell (1987c), p. 104) and the UNIDROIT Principles (Art. 1.9 UNIDROIT Principles 2004). 2. Usage accepted and practices established between parties. Art. 1:105 PECL expressly recognise the importance of individual contractual practices. They are course of dealings developed between parties such as, for example, tolerance regarding time of performance or ways to perform which differ from (the initial contract and) statutory law. Whether practices are to be considered established or usage accepted is clearly a question of contractual interpretation (see Chapter 5, Comment Ferreri). 3. Generally recognised usages. Para. 2 refers to usage which was not agreed upon by parties (neither expressly nor impliedly), but which operates by virtue of its being well established and generally applied in the particular economic sector or trade concerned. Unlike Art. 9 CISG, the PECL do not use a subjective language (‘‘parties knew or ought to have known’’), which avoids the problem of how to deal with newcomers into a specific market (see Notes, no. 4). Another difference with both CISG and the UNIDROIT Principles lies in the fact that Art. 1:105 PECL is not limited to international usage, which can be worldwide but also local in the sense that it is commonly applied in two countries or in a geographical area (see for CISG Zivilgericht Basel-Stadt, 21 December 1992, Abstract in English and Full Text in http://www.unilex.info) or applied in a specific market in one country when the other party permanently deals with that country (see Oberster Gerichtshof, 21 March 2000, Abstract and Full Text in http://www.unilex.info). The Comment E envisages that also a national usage which operates at the place of business of one of the parties but not at that of the other binds the latter, provided that the application of such a usage is reasonable. The Illustration 1 under Comment E shows that this solution would apply even when there were no previous dealings between the parties or within the market concerned. 4. Role of reasonableness. In contrast to Art. 9 CISG, but following the corresponding provision in the UNIDROIT Principles (Art. 1.9 UNIDROIT Principles 2004), the 38 – A. VENEZIANO

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PECL introduce a limitation by stating that even when usages do comply with the necessary requisite of being considered generally applicable, they cannot bind the parties if their application leads to unreasonable results (Art. 1:201 PECL). The widespread observance of a usage is prima facie evidence of its being reasonable. Even when, however, usage is regularly observed by persons in the same situation as the parties, it might nevertheless produce unreasonable effects in a given situation, taking the special circumstances of the case into account (see Bonell (1997), p. 66 et seq. with reference to the UNIDROIT Principles). The comment does not provide examples where a usage would not be reasonable. Since the PECL apply not only in business-to-business relationships, but also where a consumer is involved, it may be submitted that the reasonability test will be of special importance in the latter situations, in order for the consumer not to be unfairly surprised by the application of the usage.

ITALIAN LAW Art. 1 Prel.: Indication of sources The following are sources of law: (1) (2) (3) (4)

statutes regulations [...] usage

Art. 8 Prel.: Usage In matters regulated by statutes and regulations usage has effect only to the extent indicated by them. Art. 1340 C.C.: Customary terms Customary terms are deemed to be included in the contract, unless it appears that they were not intended by the parties. Art. 1368 C.C.: General interpretative practices (1) Ambiguous clauses are interpreted according to the general practice in the place in which the contract was concluded. (2) In contracts where one of the parties is an enterpriser, ambiguous clauses are interpreted according to the general practice of the place where the enterprise has its headquarters. Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. A. VENEZIANO – 39

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1. General. In the language of the Codice civile, as is the case for other civil law codifications, usage formally plays a marginal role in respect to legislation. Art. 1374 C.C. refers to usage (usi) as a source for the integration of the effects of the contract when there is a gap in the parties’ agreement and where there are no (non-mandatory) statutory rules on the matter. This provision is traditionally interpreted as referring to usage as a source of law in the sense of Art. 8 Prel., that is a non-written rule whose effectiveness depends on repeated application in the shared belief that it is a binding rule (for a general review of traditional opinions see Guarneri (1999), p. 531 et seq.). Usage as a source of law cannot derogate to express non-mandatory provisions of the Codice civile, but applies even if parties did not know of its existence or objected to its application. It is admitted when code provisions expressly refer to it: see for example among others the rules on performance of the obligation (Arts. 1181 et seq.) or on conclusion of the contract (Arts. 1326, 1327 and 1336 C.C.) or further in sales law (Arts. 1498 (2), 1510 (1) C.C.). Another field where such usage has been accepted is that of commercial law, in the absence of a legislative provision on the subject, in order to give effect to new contractual practices (see for example Cass. 23 December 1977, no. 5724, in Banca, Borsa, 1978, II, p. 129 et seq.; Cass. 15 November 1995, no. 11834 on stock exchange contracts). Bank contracts have long been another area where usage was mostly recognised (though with the risk of qualifying mere banking standard terms as commonly shared usages: Sacco in Sacco-De Nova (2004), p. 429). 2. Usage and contractual practices. Traditionally, Italian scholarship and case law distinguish between two kinds of usage: usi normativi and usi negoziali (Pavone La Rosa (1978), p. 43 et seq.; Cass.civ. sez.lav. 19 April 1980, no. 2583, in Giust.civ. Mass. 1980, fasc. 4; Cass. 23 December 1986, no. 7864, in Giur.it., 1987, I, 1, 1368 et seq.; Cass.civ. sez. II, 11 February 1987, no. 1489, in Giust.civ. Mass. 1987, fasc. 2). The former is a (subordinate) source of law in the sense of Art. 8 Prel. (and Art. 1374 C.C.). The latter consists in contractual practices which become part of the content of the contract if parties do not object (Art. 1340 C.C.) or which may be used to interpret ambiguous contractual terms (Art. 1368 C.C.). The contractual practices envisaged in Art. 1340 C.C. may well derogate from non-mandatory law and are considered as filling in the gaps of the parties’ agreement. A restrictive case law does not recognise them unless referred to by the parties, while Art. 1340 C.C. actually only excludes them when parties objected to their application (see for example Cass.civ. sez. II, 11 February 1987, no. 1489, in Giust.civ. Mass. 1987, fasc. 2; for a critique Sacco, in Sacco-De Nova (2004), p. 430). The reason might be that most case law deals with labour contracts. 3. Individual practices established between parties. Usage or accepted contractual practices are distinguished from individual contractual practices such as a course of dealing. The latter can play a role in interpreting the parties’ agreement but not in supplementing the content of the contract (Rodota` (1969), p. 71 et seq.).

COMPARISON AND EVALUATION Following a positivistic tradition, Italian contract law does not recognise to usage or to contractual practices (be they general or individual) the importance which they have in 40 – A. VENEZIANO

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the PECL. Scholars have criticised the marginal role played by them in court decisions (see Sacco, in Sacco-De Nova (2004), p. 411). Others have pointed out that there should be a relationship between usage and the principle of good faith or reasonableness as regards the question of the integration of the contract (Ferri-Angelici (1997), p. 134 et seq.). This latter view is in line with the requirement of reasonableness in Art. 1:105 PECL. Domestic law niceties such as the difference between usi normativi and negoziali should be further abandoned when interpreting international instruments such as the PECL. The PECL should be interpreted autonomously (for two recent Italian Supreme Court decisions on the application of individual practices between parties to delivery terms in sales contracts, which clearly show the danger of using domestic law concept when interpreting an international instrument such as Art. 9 CISG, see Cass. Sez.Un. 7 August 1998, no. 7759, in Dir.comm.int., 1999, p. 757 et seq.; Cass. 5 November 1998, no. 11088, in Dir.comm.int., 1999, p. 761 et seq., both in abstract in English and original Full Text in http://www.unilex.info).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:106: Interpretation and Supplementation (1) These Principles should be interpreted and developed in accordance with their purposes. In particular, regard should be had to the need to promote good faith and fair dealing, certainty in contractual relationships and uniformity of application. (2) Issues within the scope of these Principles but not expressly settled by them are so far as possible to be settled in accordance with the ideas underlying the Principles. Failing this, the legal system applicable by virtue of the rules of private international law is to be applied. 1. General. This Art. sets out general criteria for the interpretation and supplementation of the PECL (which are both fundamental questions of interpretation in a wide sense). The aim of such a provision is to avoid the risk of parochial interpretation of an international uniform law text both from the point of view of the techniques used and of the ( possible) influence of domestic law legal concepts. It is derived from Art. 7 CISG, which may well be considered the paradigm of such a norm in international uniform law instruments (see Art. 4 (1) Unidroit Convention on International Factoring, Art. 6 (1) Unidroit Convention on International Financial Leasing, as well as Art. 1.6 UNIDROIT Principles; on Art. 7 CISG among a vast literature Honnold (1999), p. 88 et seq.; Schlechtriem (1998), p. 55 et seq.; Bonell (1987), p. 65 et seq.; most recently Witz, in Ferrari (2003), p. 279 et seq.). 2. Purposes of the PECL and possibility of their development through interpretation. Art. 1:106 PECL does not refer to the ‘‘international character’’ of its text as an element to be taken into account in interpreting it (see Art. 7 (1) CISG and Art. 1.6 UNIDROIT Principles). This is probably the case because the PECL, though being a ‘‘supranational’’ body of law as far as their origin is concerned, define themselves as the ‘‘general rules of contracts’’ for European countries and do not restrict their application to international transactions. Nevertheless, the PECL should be autonomously interpreted (which is the meaning usually given to the ‘‘internationality test’’ in Art. 7 CISG, see Bundesgerichtshof (German Supreme Court), 24 March 1999, in JZ, 1999, p. 79 et seq., Engl.transl. in http://www.cisgw3.law.pace.edu, note Schlechtriem; ICC Arbitral Award, 23 August 1994, no. 7660/JK; Trib. Pavia, 29 December 1999, in Corr.giur., 2000, p. 932 et seq., note Ferrari; see also Hof ’S-Hertogenbosch, 16 October 2002; all cases with English Abstract and original Full Text in http://www.unilex.info). The need of an autonomous interpretation of the PECL is made clear by the reference to their purposes as a standard both for interpretation and further development. Thus, Art. 1:106 embodies the principle of teleological interpretation (below, no. 5). 3. Principle of good faith and fair dealing as a means for interpreting the PECL. The PECL follow the example of Art. 7 (1) CISG, where observance of good faith in 42 – A. VENEZIANO

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international trade is expressly mentioned as a standard for the interpretation of the Convention (see among others ICC Award, 23 January 1997; Hof ’S Hertogenbosch, 16 October 2002, Abstract and Full Text in http://www.unilex.info). Differently however from CISG, the PECL contain several other provisions mentioning good faith and fair dealing in negotiations, performance and interpretation of the contract, see Art. 1:201, Comments Antoniolli. Thus, the general principle of good faith and fair dealing certainly represents one of the underlying ideas of the PECL under Art. 1:106 (2). 4. Certainty and uniformity of application. Following again the example of Art. 7 (1) CISG, Art. 1:106 (1) underlines the importance of a uniform application of the PECL. This should ensure on the one hand, that the effort of producing uniform rules achieves the desired result; on the other hand, it fosters certainty on the content of the applicable law. The practical experience of other international instrument such as CISG has however highlighted the difficulties encountered when trying to meet the goal of a truly uniform interpretation and application of a uniform law text. Since the PECL are not (yet) a community law instrument, one cannot rely on the binding guidelines from a supranational judicial body such as the European Court of Justice. Thus, among the various means which can help reducing the danger of a non uniform application, it is submitted that the most effective way to comply with Art. 1:106 is first of all to consider how they have been applied by judges and arbitrators in the member States. For the time being, case law on the PECL is rather scarce. However, in order to facilitate the interpreters’ task, it would be useful to follow the example of existing initiatives regarding CISG and the UNIDROIT Principles and collect case law on the PECL in an easily accessible international database (on the experience of CISG see among others F. De Ly, in Ferrari (2003), p. 335 et seq.; A. Veneziano, in Ferrari (2003), p. 325 et seq.; for express reliance on the UNILEX database as a finding tool for international case law on CISG by Italian judges among others Trib. Pavia, 29 December 1999, in Corr.giur., 2000, p. 932 et seq., note Ferrari; Trib. Rimini, 26 November 2002, English Abstract and original Full Text in http:// www.unilex.info); in international case law most recently US District Court, North. District Illinois, East.Div., 21 May 2004, http://www.unilex.info). 5. Methods to fill in gaps of the PECL. Art. 1:106 PECL reproduces with minor variations Art. 7 (1) CISG on the supplementation of uniform law in case of gaps (the gist of this provision is found also in Art. 1.6 UNIDROIT Principles, where however the reference to conflict of law rules as a last resort in order to solve the controversial question is considered to be implicit, Comment 4). A first problem regards the meaning of ‘‘issues within the scope of these Principles’’ as opposed to issues which are excluded from the scope of application of the PECL (in other words, whether there is a veritable ‘‘internal’’ gap or a purposeful exclusion from the PECL). Such a distinction is of course not always easy, as demonstrated by case law on CISG (for an example regarding the question of the burden of proof, contrast Bundesgerichtshof (German Supreme Court), 9 November 2002 and Cour d’appel Paris, 6 November 2001, in Recueil Dalloz 2002, p. 2794 et seq., note Witz with Trib. Pavia, 29 December 1999, in Corr.giur. 2000, p. 932 et seq., note Ferrari and Trib. Rimini, 26 November 2002, English Abstract and original Full Text in A. VENEZIANO – 43

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http://www.unilex.info). It is submitted that the importance of an autonomous interpretation of the PECL and of their development through interpretation (above, no. 2) should make it preferable to find a uniform solution than to refer to domestic law in doubtful cases. A second issue concerns the ‘‘ideas’’ underlying the PECL, which should guide the interpreter in filling in the gaps. Since they are not provided in a specific ‘‘list’’ they should be found by interpreting the rules and the comments of the PECL. An indication may come from the practical application of CISG for the ideas or principles which are reflected by provisions common to the two sets of rules as well as from the practical application of the UNIDROIT Principles, taking into account the different scope of the latter instruments. A last question regards the possibility of an analogical application of PECL provisions to similar cases not expressly dealt with, before having recourse to the general principles or ideas underlying the PECL. It must be noted that a few decisions on CISG have used analogy to find the rule in matters not expressly settled (Oberster Gerichtshof – Austrian Supreme Court, 29 June 1999; Bundesgericht – Swiss Supreme Court, 19 February 2004, both with Abstract in English and Full Text in http://www.unilex.info; in favour of the recourse to analogy in CISG though Art. 7 does not expressly mention it Bonell (1987b), p. 78 et seq.; see also Art. 1.6 of the UNIDROIT Principles, Comment 4, where examples of possible analogical application of certain rules). The recourse to analogy makes it simpler to find an autonomous solution starting from a single rule which is not exceptional in character. It therefore counteracts the objection against autonomous supplementation according to which a general principle cannot be based on a single provision but should be enrooted in more than one. For a particular case of analogical application of the PECL see however below, Art. 1:107.

ITALIAN LAW Art. 12 Prel.: Interpretation of statutes (1) In applying statutes no other meaning can be attributed to them than that made clear by the actual significance of the words, according to the connection between them, and by the legislative intent. (2) If a controversy cannot be decided by a precise provision, consideration is given to provisions that regulate similar cases or analogous matters; if the case still remains in doubt, it is decided according to the general principles of the legal order of the State. Art. 14 Prel.: Application of penal and exceptional statutes Penal statutes and those that make exception to general rules or to other statutes apply only to cases and times considered by them. 44 – A. VENEZIANO

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Art. 21. no. 218/1995: International treaties (1) (...) (2) In the interpretation of said conventions account shall be taken of their international character and of the need for their uniform application. 1. General. The Preliminary Provisions to the Codice civile set forth general rules on the interpretation and application of statutory law. Since they are tailored to the existence of a codification, they aim at ensuring that the code be interpreted not only with regard to the literal meaning of the words, but also taking their systematic connection into account. Art. 12 (1) Prel. also expressly mentions the ‘‘legislative intent’’, which is interpreted as a reference to the underlying ratio of the legislative provision more than as an analysis of the subjective intent of the drafters. Scholars have further pointed out the need for a developing interpretation, since the code was meant as a lasting product which had however to be adapted to a changing society. On the whole, it is recognised that the guidelines given by Art. 12 substantially leave to judges a great discretion in identifying the interpretative criteria which might better justify a given solution (see Alpa in Alpa-Guarneri-MonateriPascuzzi-Sacco (1999), p. 297 et seq.; Sacco in Alpa-Guarneri-Monateri-Pascuzzi-Sacco (1999), p. 159 et seq.). 2. Supplementation of statutory law. Para. (2) of Art. 12 addresses the problem of the gaps in statutory law. Again, its reference point is the codification, which purports to be a complete regulation of all possible practical cases. Judges cannot plead absence of a specific provision but must find a way to solve a controversy even when there is no precise rule on it. The first step envisaged by Art. 12 (2) is interpretation by analogy of other provisions which govern similar cases; should this not be sufficient, then the judge has to look for the ‘‘general principles’’ of the legal system. Analogical interpretation is however prohibited for statutory law which makes exception to general rules (Art. 14 Prel.). It has been further pointed out that judicial decisions do not usually follow the two step- path embodied in Art. 12 (2) but tend first to find a general principle through which the (otherwise) preferred solution will be justified (see Guastini (1993), p. 435 et seq.).

COMPARISON AND EVALUATION A comparison between Italian law (and indeed, any national legal system) and the PECL on the question of interpretation and supplementation of codified rules must consider the different perspective of the PECL as a (non-binding) uniform law text in a specific area of the law. This explains the importance of an autonomous interpretation of the PECL, whose application should not be influenced by the varying interpretative techniques of statutory law in the member States. It also justifies the need of a uniform application of the PECL in order not to frustrate their aim. The cited recent Italian case law on CISG has shown a correct approach to this issue, by referring to (foreign) judicial precedents as highly persuasive authority in applying a uniform law text. A. VENEZIANO – 45

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The approach embodied in para. (1), Art. 1:106 is otherwise the same as the one set forth in Art. 12 (2) Prel., except for the fact that Italian law formally does not attribute the same importance to the standard of good faith. As far as para. (2) is concerned, the main difference with Italian law is of course that the PECL take it for granted that there should be an otherwise applicable law to fill in uncovered issues. Furthermore, being a national legal system, Italian law does not contain the distinction between ‘‘veritable gaps’’ and excluded issues. On the other hand, para. (2) of Art. 1:106 substantially corresponds with the rule set forth in Art. 12 (2) Prel., all the more so if the former is interpreted as allowing the application by analogy of the rules in the PECL to matters covered but not expressly settled by them. Since Art. 1:106 PECL clearly derives from Art. 7 CISG, existing case law on the Convention as well as scholarly interpretation of CISG may help understanding how to correctly apply the PECL rule.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:107: Application of the Principles by Way of Analogy These Principles apply with appropriate modifications to agreements to modify or end a contract, to unilateral promises and to other statements and conduct indicating intention. 1. Application to agreements to modify or end a contract. The first part of Art. 1:107, by stating that the provisions on contract apply to agreements to modify or end a contract, is useful insofar as there is no general definition of ‘‘contract’’, which would as a matter of fact encompass such agreements. 2. Application by analogy to unilateral declarations of intent. More interesting is the second part of Art. 1:107, where the PECL are said to apply with appropriate modifications to unilateral promises or other statements and conduct indicating intention. The Comment refers to declarations of will by one party only, in the form of a promise binding without the need of acceptance (such as the one envisaged in Art. 2:107 PECL) or other communications which have legal consequences such as offers, acceptances, notices to be given in various settings, voluntary renunciations and so on. The Comment also tries to guide the interpreter in finding which rules might be considered appropriate for analogical application according to the specific act concerned. Thus, it makes examples concerning the rules on interpretation (Ch. 5) and on validity (Ch. 4), which given the case might or might not be considered applicable to unilateral acts. In particular, though such acts do not show any common intent of the parties, in certain circumstances the way in which the recipient of the declaration understood or should have understood it will be relevant. As to remedies in case of fraud or mistake, they are to be considered generally applicable except when the practical result in terms of allocation of risk will run encounter some other provisions in the PECL.

ITALIAN LAW Art. 1321 C.C.: Notion A contract is the agreement of two or more parties to establish, regulate or extinguish a patrimonial legal relationship between themselves. Art. 1324 C.C.: Rules applicable to unilateral acts Unless otherwise provided in the law, the rules that regulate contracts apply, to the extent compatible, to unilateral inter vivos acts having patrimonial content. Art. 1987 C.C.: Effects of promises A unilateral promise of a performance is not binding except in specific cases permitted by law. A. VENEZIANO – 47

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Art. 1988 C.C.: Promise of payment and acknowledgement of a debt A promise of payment or the acknowledgement of a debt exonerates the person in whose favour it is made from the burden of proving the underlying obligation. Such obligation is presumed, subject to contrary evidence. Art. 1989 C.C.: Promise to the public (1) A person who, addressing himself to the public, promises a given performance in favour of a person who is found in a specific situation or who performs a specific action, is bound by such promise as soon as it is made. (2) (...) 1. Agreements to modify or extinguish a contract. The notion of contract set out in Art. 1321 C.C. includes agreements to extinguish a ‘‘patrimonial legal relationship’’ between the parties, as well as agreements to modify a contract (Sacco in Sacco-De Nova (2004), p. 26). 2. Unilateral promises and other statements indicating intent. Art. 1324 C.C. extends to unilateral acts with a patrimonial content and inter vivos the rules for contracts insofar as they are compatible. The most difficult problems of interpretation arise not so much in connection with this provision, but with the admissibility of the analogical application of the rules on contracts to unilateral acts which are not considered to express an intention (atti non negoziali), such as the notice putting the debtor in default or the unilateral act with which the authority of an agent is established (Roppo (2001), p. 87 et seq.; Sacco, in Sacco-De Nova (2004), p. 71 et seq.). Concerning the compatibility of the rules on contracts, for a comprehensive review of case law on the subject see Rescigno (2003), p. 1517 et seq. As to the rules on interpretation, while there is no room to appreciate the ‘‘common intention’’ of the parties and no regard is to be had to the conduct of the recipient, other provisions such as the preservation of the effects of a declaration (Art. 1367 C.C.) or the interpretation according to good faith (Art. 1366 C.C.) are applicable. As to the rules on validity, they are considered to be substantially applicable when the declaration of intent is intended for a specific person.

COMPARISON AND EVALUATION The definition of contract in Art. 1321 C.C. includes without any doubt agreements to modify or to end a contract. As concerns unilateral promises and other acts indicating intention, Art. 1324 C.C. corresponds in substance to Art. 1:107 PECL. There is however a terminological difference, since the Codice civile uses the category of ‘‘act’’ while the PECL are more concrete and talk about ‘‘promises’’ and ‘‘statements indicating intention’’.

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Section 2: General Duties PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:201: Good Faith and Fair Dealing (1) Each party must act in accordance with good faith and fair dealing. (2) The parties may not exclude or limit this duty. 1. General. The Comment to Art. 1:201 PECL opens by stating ‘‘This Art. sets forth a basic principle running through the Principles’’, making it clear that its application concerns the formation, performance and enforcement of a contract. This general principle is then applied in several specific instances in the PECL (Comment A) but is not limited to them, since it covers any aspect of a contract. Its purpose is ‘‘to enforce community standards of decency, fairness and reasonableness in commercial transactions’’ (Comment B). According to the Comment, this general principle not only supplements the rules of the Principles, but may also ‘‘take precedence over other provisions of these Principles when a strict adherence to them would lead to a manifestly unjust result’’ (Comment B). Yet the PECL are very cautious in suggesting that justice considerations should prevail: ‘‘Whether in such cases the court should let justice prevail will depend, inter alia, upon to what extent certainty and predictability in contractual relationships would suffer by letting justice get the upper hand’’ (Comment G, referring to limitations of Art. 1:201). 2. Mandatory nature. The parties cannot exclude by agreement the duty of good faith and fair dealing, nor vary its effects (Comment H; the same is provided in Art. 1.7.2 of the Unidroit Principles). This is one of the few instances of mandatory rules in the PECL, and relates to the need to keep the essential nature of the PECL once the parties have adopted them as the law applicable to their contract. 3. Good faith and fair dealing. According to the PECL, good faith means ‘‘honesty and fairness in mind’’ (Comment E), and consequently has a subjective content. Good faith is presumed; therefore the burden of proof is on the party that alleges the other party’s breach of the duty (see Comment F). Fair dealing, on the other hand, means ‘‘observance of fairness in fact’’, and refers to an objective standard. The two related aspects are taken into consideration in all European systems, even in those where both are grouped in a single concept of good faith. The terminology and meaning of the twin concepts of good faith and fair dealing is also employed in American law, see §§ 1-201 and 2-103 of the Uniform Commercial Code and § 205 of the Restatement of Contracts, Second (see E.A. Farnsworth, The Concept of Good Faith in American Law, Rome, 1993). A general rule on good faith and fair dealing is also contained in the Unidroit Principles in Art. 1.7, which explicitly links the concepts to international trade (see Di Majo (1997), pp. 145–146, 153–155). On the other hand, CISG does not employ good faith as a standard of behaviour for the parties, but only as a rule of interpretation (Art. 7(1); see Schlechtriem (1998), pp. 59–68). L. ANTONIOLLI – 49

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4. Good faith and protection of reliance. According to the PECL, the principle of good faith and fair dealing prevents a party from adopting inconsistent behaviour when the other party has reasonably acted in reliance on his/her statement or conduct. This is related to the idea of estoppel, developed in English law, according to which ‘‘a person should not be allowed to set up the invalidity of an act or another reason for its not being binding upon him when he has induced another person to alter his position on the faith of the act’’ (Comment C). 5. Mutual consideration. Good faith and fair dealing also imply that each party must show due regard for the interest of the other party, particularly in the case of subsequent contingencies which were not contemplated in their contract (Comment D).

ITALIAN LAW Art. 1175 C.C.: Fair behaviour The debtor and the creditor shall behave according to rules of fairness. Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. Art. 1375 C.C.: Performance according to good faith The contract shall be performed according to good faith. Art. 1358 C.C.: Behaviour of parties during pendency He who is under an obligation, or who has transferred a right, subject to a suspensive condition, or who has acquired a right subject to a resolutive condition, shall act according to good faith during the pendency of the condition, in order to safeguard the interests of the other party. 50 – L. ANTONIOLLI

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Art. 1366 C.C.: Interpretation according to good faith The contract shall be interpreted according to good faith. Art. 1460 C.C.: Defence based upon non-performance In contracts providing for mutual counterperformance, each party can refuse to perform his obligation if the other party does not perform or does not offer to perform his own at the same time, unless different times for performance have been established by the parties or appear from the nature of the contract. However, performance cannot be rejected if, considering the circumstances, such rejection is contrary to good faith. 1. General. Good faith is a general clause of Italian contract law; as in the PECL, although there are several codified instances in which it applies, its scope of application is much broader (see the leading case ‘‘Fiuggi’’, Cass. 20 April 1994, no. 3775, in Foro it., 1995, I, 1296, note by Barone). Like other general clauses, its flexibility and generality are at the same time its strength and weakness: strength, because it can keep contract law in line with the needs of the time despite the fact that rules remain formally unaltered; weakness, because its substantially undefined character gives the judges applying it wide discretionary power which can lead to uncertainty (see G. Alpa, ‘Un inventario dei principi generali nel diritto dei contratti’, in G. Alpa, M. Bessone (1999), pp. 103–126). The principle of good faith and fair dealing is recognized in all European systems, but the extent and method of application of it diverge significantly (see R. Zimmermann, S. Whittaker (2000), pp. 7–62, 653–701; M. Hesselink (2004), pp. 471–498; see also notes to Art. 2:210 PECL). At one end of the spectrum is German law, where Treu und Glauben of § 242 BGB have been used by judges as a powerful instrument for ‘‘moralizing’’ contractual relationships (as in the case of standard contract terms, the judicial creation of Wegfall der Gescha¨ftsgrundlage, i.e. change of circumstances, and Verwirkung, i.e. equitable estoppel), and can even modify the content of statutory provisions, while keeping within the limit of not being a general principle of fairness and equity. On the other hand, English law does not employ a general principle of good faith, but does nevertheless often reach the same result by employing different, more limited mechanisms such as implied terms, unconscionability, undue influence and others (see R. Goode, The Concept of Good Faith Roma, 1992); J. Stapleton, ‘Good Faith in Private Law’, in (1999) 52 Curr. Leg. Prob., pp. 1–36). Italian law, together with other European legal systems, lies in a middle position between these extremes, as it has a significant array of provisions in the Codice civile referring to the notion of good faith and fair dealing, but at the same time a more cautious attitude with respect to their application. Good faith is generally used in an objective sense in the context of contract law, referring to a standard of fairness (which is also employed in the Codice civile: see Art. 1175 C.C), although the same term may also be used in a subjective sense by referring to the animus of the party (e.g. Art. 1445 C.C. on the effects of annulment of the contract with respect to third parties in good faith). L. ANTONIOLLI – 51

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2. Good faith and pre-contractual liability. According to Art. 1337 C.C., parties negotiating a contract must behave according to good faith. This means that they must act seriously and loyally to one another, although this does not imply any duty to conclude a contract, which would intolerably limit contractual freedom. Good faith covers behaviour which is fraudulent as well as careless and negligent. It implies a duty to safeguard the interests of the other party (see Cass. 17 November 1997, no. 11394, in Mass. Foro It., 1997 [1740] no. 323). A particularly significant component of this duty relates to the duty to provide relevant information to the other party, especially if there is a significant information asymmetry between the two parties (see e.g. Cass., 19-11-1994, no. 9802, in Rassegna Locazioni Condominio, 1995, p. 65 et seq.). Another aspect refers to the protection of the reasonable reliance induced in the other party (see Court of Appeal Milan, 5 June 1987, in Nuova giur. civ. comm., 1987, I, p. 499 ff.). Pre-contractual liability has been discussed more by legal writers than in case law, particularly as concerns the nature of this kind of liability. The majority of scholars, in agreement with case law, considers that it relates to tort law since it has been separated from strictly contractual issues (cf. comment to Art. 2:301 PECL, Musy). Pre-contractual liability can arise in three cases: 1) when the contract has not been concluded; 2) when the contract that has been concluded is invalid: this instance is directly regulated by the Civil Code, Art. 1338 C.C. of which states that if a party knows or should know the existence of a reason for invalidity of the contract and does not give notice to the other party, he/she is bound to compensate for the damage suffered by the latter in relying, without fault, on the validity of the contract; 3) when the contract concluded is valid but unfavourable for the party that suffers the consequences of the other party’s behaviour in bad faith (but at the same time this is insufficient to entitle him/her to other remedies such as annulment for mistake or fraud). By far the largest number of cases concerns the breaking off of negotiations that prevents the conclusion of a contract. Precontractual liability in this case is established when the state of advancement of negotiations is such as to create the other party’s reasonable reliance on the conclusion of a contract, the decision of the party to break off negotiations is not related to a legitimate cause ( giusta causa) and this damages the other party. 3. Performance according to good faith and integration of the contract. Case law is crucial in defining the meaning and scope of the principle of good faith and fair dealing (see Bianca (2000), pp. 506–511). It must be noted that until the 1970s case law was rather reluctant to make extensive use of good faith, and the violation of a specific legal rule was required in order to trigger liability (see Cass., 16 February 1963, no. 357, in Foro it., 1963, I, 1768). Once this position had been overcome, the use of the good faith principle increased significantly. A significant number of cases concern labour contracts, particularly promotions and the use of disciplinary powers (see e.g. Cass. 25 January 1996, no. 557, in Dir. Lav., 1996, II, p. 413, note by Pomponio); fidejussione omnibus (a special kind of guarantee which guarantees not only existing but also all future debts contracted by the principal debtor with the lending party (usually a bank), where the creditor can extend credit without the guarantor’s agreement, even if this could significantly modify his/her 52 – L. ANTONIOLLI

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obligation; see e.g. Cass. 20 July 1989, nos. 3385 and 3386, in Foro it., 1989, I, 3100, note by Mariconda; since case law often recognized the validity of such agreements, rules were statutorily modified in 1992, amending the text of Arts 1938 and 1956. C.C. so as to fix a maximum amount of the credit guaranteed and make these provisions mandatory); leasing contracts (see e.g. Cass. 2 November 1998, no. 10926, in Foro it., 1998, I, 3081, note by Lener). Good faith is sometimes used to compel a party who has received an incorrect performance which can be easily corrected to allow the other party to remedy the defect. It is also used to require a party to co-operate with the other party in order to allow him/her to perform his/her obligation (see e.g. Cass., 9 March 1991, no. 2503, in Corr. giur., 1991, p. 789, note by Di Majo). It can even force a party to modify the performance required by the contract if this does not significantly limit his/her interests, while protecting the other party’s interests (see Cass. 22 May 1997, no. 4598, in Foro it., 1997, I, 1732). Moreover, it requires a party not to infringe the other party’s reasonable reliance (corresponding to the rule on venire contra factum proprium, on which see also art. 1.8 of the Unidroit Principles), and in this context it achieves results similar to those of estoppel (see Cass. 23 July 1997, no. 6900, in Giust. civ., 1997, I, p. 2727, which has established that certain methods for requiring performance by the creditor, although theoretically admissible, are in contrast with good faith; see also Cass. 21 May 1997, no. 4538, in Foro it., 1997, I, 2479, note by Caputi). In sum, good faith is used to compel each party to behave in such a way as to protect the other party’s interests, as long as this does not place an unfair limitation on his/her own interests (see Bianca (1983a), I, p. 210). Both case law and legal writings recognize that good faith in its objective meaning (corresponding to fair dealing in the PECL) is a source of legal integration. In fact, although Art. 1374 C.C. refers only to integration of the contract by law or, in its absence, by usage and equity, it is generally considered that good faith is part of the law as it is expressed in several provisions of the Codice civile, and amounts to a general principle applying to all contractual matters (see Cass., 13 April 1999, no. 3645, in Foro it., 1999, I, 3558, note by Fabiani, according to which the decision of a lower court based on good faith can be reviewed by the Court of Cassation for violation of law). 4. Interpretation according to good faith. Art. 1366 C.C. provides that the contract shall be interpreted according to good faith. The standard of good faith is objective, i.e. it does not refer to the actual state of mind of the parties, but rather to fair dealing, although it is often stated that interpretation according to good faith creates a link between objective and subjective criteria, referring it also to the idea of reasonableness (see Consiglio di Stato, sez. V, 12 June 1997, no. 625, in Foro amm., 1997, p. 1660). Since subjective criteria (intention and behaviour of the parties, etc.) must prevail in the interpretation of a contract, in order to respect as far as possible the parties’ intention, the rule of interpretation according to good faith is considered merely residual (see Cass. 12 November 1992, no. 12165, in Mass. Foro It., 1992 [1740] no. 281). This means that it can be applied only when the meaning of one or more contractual terms is obscure. It is generally considered that interpretation of the contract according to good faith is meant to protect a party’s reasonable reliance on a particular meaning of one or more contractual terms, even if this L. ANTONIOLLI – 53

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meaning is not shared by the other party. Case law has sometimes used Art. 1366 C.C. to imply the existence of a presupposizione (change of circumstances, see infra no. 5), but this mechanism refers to the integration rather than the interpretation of the contract (see L. Nanni (1986), p. 536). 5. Presupposizione (change of circumstances). If a certain situation (be it factual or legal, actual or future) is considered by both parties as being certain and fundamental to the contract, even though explicit provision has not been made for it in the contract, and the situation later turns out to be radically different, the contract is invalid since one of its basic elements ( presupposto) is missing (see e.g. Cass., 24 March 1998, no. 3083, in Giust. civ., 1998, I, 3161, note by Calderoni, where a contract for the supply of petrol was terminated because, due to new local regulations, the petrol station had to be built in a significantly different way than originally agreed between the parties). This invalidity exists only if the situation is totally external to the contract, i.e. the situation cannot be influenced by the parties and was not contemplated in the contract as a condition, the implication being that the parties could not have foreseen it when they concluded their contract (see Cass. 9 February 1985, no. 1064, in Foro it., 1986, I, 1981, note by Esposito). The concept of presupposizione, which is similar to the idea of hardship (or change of circumstances, see Art. 6:111 PECL), is judge-made law, since there is no explicit rule providing for it. It has been influenced by the development of German law on Wegfall der Gescha¨ftsgrundlage (fall of the contractual basis) and, as in German law, the principle on which it is based is good faith, leading to a new form of contract invalidity. In order to find a specific statutory basis, case law sometimes refers to Art. 1366 C.C. (but, as we have already seen ante no. 4, this refers to interpretation according to good faith of the contract, not to integration of the contract, as in this case); at other times it refers to Art. 1463 C.C. on supervening total impossibility and Art. 1467 C.C. on supervening excessive onerousness. In spite of this variance, there is broad agreement that this rule is an application of good faith. Less certain are the consequences of this invalidity: according to some, it leads to termination of the contract (which implies a valid contract), to others the contract is voidable, yet to others the contract is void. A related issue in case law and legal literature is the development of new kinds of remedies for long-term contracts and contracts related to complex transactions (which in an economic analysis of law are analysed in terms of the problems of incomplete and relational contracts) where traditional remedies aiming to remove all contractual effects do not work satisfactorily. In these cases the most suitable solution is to keep the contractual relationship and modify it according to the new emerging needs. The parties can make provision for this in their contract (so-called hardship clauses), but this solution is also contained in statutory rules such as Art. 6:111 of the PECL and Arts 6.2.1–6.2.3 of the Unidroit Principles. Similar results are sometimes proposed also in the Italian legal system by applying the principle of good faith (see V. Roppo (2001), pp. 1041–1047). 6. Good faith and related concepts. In its objective dimension, good faith refers to fair dealing (correttezza, used in Art. 1175 C.C. to define the way in which debtor and creditor 54 – L. ANTONIOLLI

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must behave with respect to legal obligations in general; it is firmly established that fairness in Art. 1175 C.C. and good faith in Art. 1375 C.C. refer to the same concept), co-operation with the other party, respect for the other party’s interests (and in this sense it is often connected to the constitutional principle of solidarity, ex Art. 2 of the Italian constitution) and other related concepts (see L. Rovelli, ‘La correttezza’, in Alpa-Bessone (1999), pp. 696–714). All these elements are also contained in another general principle of the Codice civile, that of equita` (equity), and in fact, although interpreters sometimes try to make a distinction between the two concepts, it seems preferable to analyse them as two related aspects of a single general principle (see Cass. 22 May 1997, no. 4598, in Foro it., 1997, I, 1732). In general it is said that equita`, which according to Art. 1374 C.C. is a source of integration of the contract, refers the concept of justice to the individual contract, relating it to the actual relevant circumstances of the case and the way in which the parties’ interests are actually regulated (see G. Alpa, ‘L’equita`’, in Alpa-Bessone (1993), pp. 127–136). It must be underlined (as made clear also with respect to the PECL, see supra no. 1) that there is no general principle in Italian law requiring contracts to be fair and just: as long as they do not break specific rules the parties are free to decide what is best for them (see Cass., 30 December 1997, no. 13131, in Giur.it., 1998, 1644; Roppo (2001), p. 492). ‘‘Extrinsic’’ values can prevail on the parties’ will only as far as they are embodied in the rules on ordine pubblico (ordre public) and buon costume ( good morals, Gute Sitten). Yet, the gradual expansion in the last decades of mechanisms that control several aspects of contractual relationships, such as the rules on mistake, fraud, rescission and termination for excessive onerousness, and the extension of review according to general standards such as good faith, point to an increase in the policing of the parties’ autonomy in defining the content of their contract (see Sacco, in this book, pp. 14–15; Gallo (2002), pp. 239–263; Vettori (2002), pp. 922–925). Related concepts are the protection of reliance (and this points to a convergence with standards employed in tort law) and abuse of rights (abuso del diritto), which forbids the party from exercising his/her rights in a way which, although formally lawful, actually aims only at damaging the other party (see Cass., 8 September 1995, no. 9501, in Mass. Foro it., 1996, [6260] no. 177). It must be noted that abuse of rights is not a codified principle but has been constructed by legal writings and case law starting from the Codice civile provisions limiting abuse of rights in the field of real property (cf. Art. 833 C.C. which prohibits uses of property exclusively aimed at damaging other parties). There is significant disagreement among judges and scholars concerning its scope of application and separation from other general clauses, particularly good faith (see R. Sacco (1988), pp. 217–234). It is generally recognized that an abuse of right requires the existence of a disproportionate relationship between the benefit derived from the exercise of the right and the damage it causes to the other party, which must be evaluated according to all relevant circumstances of the case (see Cass., 14 November 1997, no. 11271, in Giust. civ., 1998, p. 540). 7. Other instances of good faith in the Codice civile. a) Pendency of the condition. Art. 1358 C.C. provides that the parties must behave according to good faith during the L. ANTONIOLLI – 55

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pendency of the condition, in order to safeguard the interests of the other party. In fact, this rule is a specification of the general duty of creditors and debtors to behave according to fairness stated in Art. 1175 C.C. (see Cass., 2 June 1992, no. 6676, in Giur it., 1993, I, 1, 1308). In this context, good faith requires that each party refrain from actions that might interfere with the fact that determines the efficacy or termination of the contract. b) Defence based upon non-performance. According to Art. 1460 C.C. each party can withhold performance if the other party does not perform or does not offer to perform at the same time (the so-called principle inadimplenti non est adimplendum), unless different times for performance have been established by the parties or appear from the nature of the contract (cf. comment to Art. 8:105, Tedeschi). However, performance cannot be rejected if, according to the circumstances of the case, such rejection is contrary to good faith. Good faith in this case requires that the rejection be reasonable, and that there be a balance between the performances the two parties are withholding. That this must be evaluated according to all relevant circumstances, such as timing, seriousness and proportionality (see Cass., 21 February 1983, no. 1308, in Foro it., 1984, I, 248, note by Mazzia; Cass. 10 June 1991, no. 6576, in Giust. civ., 1992, I, 1333, note by De Tilla), implies a comparative evaluation of the parties’ positions (see Cass., 6 September 2002, no. 12978, in Mass. Foro it., 2002 [1740] no. 507). 8. Good faith as a mandatory standard. Although there is no clear rule establishing that parties cannot exclude or limit the duty of good faith, as provided in Art. 2:201(2) PECL, there is general agreement that they cannot totally exclude the application of the principle, since this would contrast with ordre public. On the other hand, it is a matter of dispute to what extent they can limit specific instances by providing a solution which would not be reached by applying the standard of good faith. It is generally recognized that contractual freedom should generally permit such deviations (see Roppo (2001), pp. 494–495), but it must be emphasized that in significant areas of contract law, such as consumer contracts, the limits to contractual freedom are more stringent (on the role of good faith in consumer contracts cf. Art. 1469 bis C.C. and comment to Art. 4:110 PECL, Antoniolli).

COMPARISON AND EVALUATION It has been said that ‘‘The PECL represent the international triumph of the principle of good faith’’ (Hesselink (2001), p. 33). Definitely, the role good faith and fair dealing play in the PECL is extremely relevant. If one looks at the provisions referring to good faith in the Italian Codice civile, there seems to be a large degree of convergence: good faith (in its objective meaning, i.e. fair dealing) is a standard that applies to pre-contractual dealings (Art. 1337 C.C.), the performance of obligations and contracts (Arts 1175 and 1375 C.C.), the interpretation of contracts (Art. 1366 C.C.) and is also explicitly provided with respect to several specific contractual issues (such as pendency of the condition, Art. 1358 C.C., and defence based upon nonperformance, Art. 1460 C.C.). Yet the mere existence of a sufficiently large array of good 56 – L. ANTONIOLLI

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faith provisions covering all relevant aspects of contracts (formation, performance, interpretation) does not tell the whole story. In fact, in order to check what the real scope of application of the principle is, it is necessary to analyse case law and legal writings. This is because good faith is a general clause whose content and meaning vary according to time and subject matter. According to some, good faith is not even a separate normative concept, but is instead similar to jus honorarium in Roman law and equity in the English common law, ‘‘a means to compensate for a formalist approach towards rules and rights’’ (Hesselink (2001), p. 34), typical of the European legal tradition. This means that in order to be able to compare the way in which good faith operates in the PECL and in Italian law, we must wait until some case law on the PECL develops. For the moment it can be said that Italian case law increasingly resorts to good faith in order to control the working of the contract between the parties, a development that has been strongly stimulated by legal writings, which have provided case law with a wealth of comparative studies showing the possible application of the principle of good faith.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:202: Duty to Co-operate Each party owes to the other a duty to co-operate in order to give full effect to the contract. 1. General. The duty of each party to co-operate with the other is meant to secure full performance of the contract and can require different kinds of action by the parties. For instance, it may require specific behaviour in order to allow the other party to perform his/her obligation, e.g. the request for a building licence by an owner who has contracted to have an office building erected: if the owner does not request it, the builder cannot perform his/her obligation; but this non-performance is due to the owner’s non-performance (see Illustration 2). The duty to co-operate may also concern a collateral duty if infringement of it prevents or inhibits the other party’s performance: for instance, a buyer’s undue failure to accept delivery of the seller’s goods is a breach of the duty to co-operate. Failure to co-operate in these cases constitutes a breach of the contract and consequently gives rise to all remedies the PECL provide for non-performance. In the PECL the duty to co-operate (Art. 1:202) and the duty to act according to good faith and fair dealing (Art. 1:201) are considered the two components of the parties’ general duties. Similarly, in civil law systems the duty to co-operate is linked to the principle of good faith and fair dealing, the former being considered a specification of the latter. The duty to co-operate, is expressly provided for also in the Unidroit Principles (Art. 5.3), while the CISG does not contain a general provision, but envisages several specific instances of co-operation between buyer and seller. 2. Limits to the duty to co-operate. Since the aim of the duty to co-operate is to give full effect to the contract, this duty is not infringed if a party does not perform an act that he/she did not undertake to perform and is of no interest to the other party: for instance, if someone buys a theatre ticket, paying for it in advance, and does not collect the ticket in order to attend the performance, this does not constitute a breach of the duty to cooperate since the theatre does not have any interest in the collection of the ticket (see Illustration 5). On the other hand, a refusal to co-operate due to non-performance by the other party of one or more obligations is legitimate, since Art. 9:201 PECL admits the right to withhold performance in this case.

ITALIAN LAW Art. 1175 C.C.: Fair behaviour The debtor and the creditor shall behave according to rules of fairness. Art. 1206 C.C.: Conditions [Default of the creditor] The creditor is in default when, without legitimate cause, he does not accept the 58 – L. ANTONIOLLI

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payment offered to him (...) or fails to do what is necessary in order that the debtor may perform the obligation. Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. Art. 1375 C.C.: Performance according to good faith The contract shall be performed according to good faith. Art. 1366 C.C.: Interpretation according to good faith The contract shall be interpreted according to good faith. 1. General. a) Duty to co-operate and good faith. Italian law does not contain an explicit rule obliging the parties to co-operate. Yet this duty is plainly inferred from the general principle of good faith and fair dealing, which is recognized in the Italian Codice civile in all phases of contracts (formation and performance) and their interpretation (see di Majo (1967), p. 412 et seq.). In fact, the general clause of good faith requires that parties behave loyally towards one another, implying the duty to protect the other party’s interests as long as this does not unfairly limit the interests of the acting party. So, for instance, good faith may require a party to modify his/her behaviour so that the contract can have full effect (e.g. the need to notify the other party in a particular place if it is known that the other party would not in fact have knowledge of it if notified in the legally established place), or accept a modification to the other party’s obligation (e.g. performance in a place different than the one established by law or by contract if the creditor can easily receive the goods or service in that different place) (see L. Nanni (1988), pp. 269–324). b) Mora creditoris. The duty to co-operate is related also to the issue of the mora creditoris (creditor’s default), which is regulated with respect to obligations in general by Art. 1206 C.C., according to which, if the creditor does not do what is required in order to allow the debtor to perform his/her obligation, non-performance is imputable to the creditor himself/herself. In case of mora creditoris, the debtor’s obligation is not extinguished, but a series of important effects follow: he/she is not liable for the supervening impossibility of performance, can claim damages and payment of expenses from the creditor and is no longer bound to pay interest (see Art. 1207 C.C.) 2. The duty to co-operate and good faith. As already discussed under the general heading of good faith and fair dealing (see comment to Art. 1:201 PECL, Antoniolli), good faith requires different kinds of behaviour by the parties, depending on the specific context and circumstances of every contract. Among such kinds of behaviour, good faith may require co-operation by one party so that the other party can perform his/her obligation (see Cass. 9 March 1991, no. 2503, in Corr. giur., 1991, note by Di Majo; in L. ANTONIOLLI – 59

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this case the court decided that good faith required the seller of an estate to conclude the contract with a party other than the one who had concluded the preliminary contract, since that was what was required to achieve the result foreseen by the parties). The duty to co-operate often refers to the duty to give relevant information to the other party, even if this is not explicitly provided for by the contract (see Trib. Bologna, 21 July 1970, in Riv. dir. comm., 1971, II, p. 277 et seq., note by Alpa: in this case the creditor, after having received as payment a cheque which, due to a mistake had not been signed, instead of asking the other party to sign it, brought an action for non-performance; the court considered this behaviour as a breach of the duty to behave fairly and of the constitutional duty of solidarity, ex Art. 2 Cost.). The duty to co-operate is frequently invoked with respect to labour contracts and construction and procurement contracts (appalto). In the former, case law has often stated that good faith requires that the employer’s discretionary powers (such as those relating to promotions, relocation and sanctions) be exercised to preserve as far as possible the employee’s interests (see e.g. Cass., 2 November 1979, no. 5688, in Giur.it., 1980, I, 1, 440, note by Di Majo, which imposed on the employer a duty to act in a transparent and impartial way even if the power (in this case the power to promote) was discretionary). In construction, service and procurement contracts, case law has repeatedly underlined that the contractee has a duty to co-operate in all necessary ways with the contractor in order to reach the mutual aim of the contract, if this does not cause undue detriment (see Cass., 23 May 2002, no. 7543, in Foro it., 2003, I, I, 447, note by Genesin, where the court referred the principle not only to the general rules on obligations and contract, but also to the specific ones regulating construction contracts (cf. Art. 1655 et seq. C.C.), even if the contractee is a public adminstration).

COMPARISON AND EVALUATION Although the PECL explicitly contain a duty for the parties to co-operate and the Italian Codice civile does not provide such a rule, it can be said that the two systems are similar, since the duty to co-operate is inferred in Italian law from the general principle of good faith and fair dealing. An explicit rule has the advantage of clearly signalling to the parties the need to co-operate during the entire duration of the contract, but whether this makes a difference in comparison to a system such as the Italian one, where such a duty is implied, is a matter that can be judged only by comparing the ways in which the rules are applied in practice, and (as remarked in general for the principle of good faith) this cannot be done until a sufficiently large body of case law concerning the PECL develops. According to Art. 1:201 PECL, failure by both parties to co-operate constitutes a breach of the contract, and consequently it gives rise to all remedies provided by the PECL in the case of non-performance. In Italian law the breach of the duty to co-operate may amount to a failure to perform if it infringes the duty of good faith and fair dealing, but a specific case of the duty to co-operate is regulated by the Codice civile and that is the case of the creditor’s default (mora creditoris), which entails a specific set of consequences for the parties’ 60 – L. ANTONIOLLI

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obligations (see Arts 1206 and 1207 C.C.; cf. Art. 8:101(3) PECL, according to which a creditor cannot resort to the remedies of Chapter 9 if it has caused the debtor’s nonperformance).

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Section 3: Terminology and Other Provisions PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:301: Meaning of Terms In these Principles, except where the context otherwise requires: (1) (2) (3) (4)

‘act’ includes omission; ‘court’ includes arbitral tribunal; an ‘intentional’ act includes an act done recklessly; ‘non-performance’ denotes any failure to perform an obligation under the contract, whether or not excused, and includes delayed performance, defective performance and failure to co-operate in order to give full effect to the contract; (5) a matter is ‘material’ if it is one which a reasonable person in the same situation as one party ought to have known would influence the other party in its decision whether to contract on the proposed terms or to contract at all; (6) ‘written’ statements include communications made by telegram, telex, telefax and electronic mail and other means of communication capable of providing a readable record of the statement on both sides. 1. General. Art. 1:301 defines some of the concepts used in the Principles. The aim of this provision is twofold: as the meanings of these notions are pertinent to a large number of articles of the Principles, Art. 1:301 provides parties with a single definition of each concept. Secondly, it also facilitates the understanding of the meaning of some of the fundamental notions frequently used in the PECL. In this regard the provision will contribute to the creation of a common terminology as a foundation of European contract law. The range of the provisions is therefore wider than that of the notions contained in the general parts of some domestic civil codes (such as the German BGB or the Dutch NBW). 2. Meaning of the term ‘‘act’’ (paragraph (1)). As in most legal systems, the notion of ‘‘act’’ includes an omission (see Comment A). Art. 1: 201(1) and Art. 8:101(3) PECL represent two examples where this definition is relevant. 3. Meaning of the term ‘‘court’’ (paragraph (2)). The Principles are designed for use both by arbitrators and courts; as a consequence, the notion of ‘‘court’’ includes an ‘‘arbitral tribunal’’ (see Comment B). References to the concept of ‘‘court’’ are to be found in Art. 4:105(3), Art. 4:109(2) and (3), Art. 6:106(1) and Art. 6:111 PECL. 4. Meaning of the term ‘‘intentional act’’ (paragraph (3)). Under the Principles, a person acts intentionally when he/she does so deliberately, with the purpose of producing the consequences of the act or in the awareness of the possible consequences, but regardless whether or not those consequences will in fact occur (see Comment C). By contrast, mere negligence, which occurs when a person merely acts carelessly without considering the 62 – E. IORIATTI

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consequences that may flow from his/her act, is excluded. Related provisions: Art. 1:305(2), Art. 4:107, Art. 8:103(c), Art. 9: 503 PECL. 5. Meaning of the term ‘‘non-performance’’ (paragraph (4)). a) General. The notion of ‘‘non-performance’’ in the PECL is an open concept, covering any failure to perform, for whatever cause. A differentiation is made between fundamental and nonfundamental non-performance, for the purpose of some of the remedies set out in Arts 8:104 and 8:105, and in Chap. 9. See comment to Art. 8:103 PECL. b) Non-performance. The definition embraces any failure to perform an obligation under the contract; the failure may consist of total inactivity or a situation in which a party performs late or defectively. Failure to fulfill the duty to co-operate, with the consequence of preventing the other party from performing, is also included in the notion of ‘‘non-performance’’ (see Art. 1:202; Comment D). c) Related provisions. The definition of ‘‘non-performance’’ is important in order to determine the type of remedy the aggrieved party has at his/her disposal; see Art. 1:202, Art. 7:110, Art. 7:111, Art. 8:101(2), Art. 8:108, Art. 8:104, Art. 8:105, Art. 9:301, Art. 9:302, Art. 9:304, Art. 9:401, Art. 9:508 PECL. 6. Meaning of the term ‘‘material’’ (paragraph (5)). a) General. Under the PECL a matter is ‘‘material’’ when it can influence a party’s decision. The concept of ‘‘material’’ is different from that of ‘‘fundamental’’; the latter serves, e.g., as the standard for determining whether a non-performance justifies termination (see Art. 9:301 et seq.). Therefore a ‘‘fundamental matter’’ is more important than a ‘‘material matter’’ (see Comment E). b) Related provisions. Reference to the notion of ‘‘material matter’’ is made in Art. 2:208 and Art. 2:210 PECL. 7. Meaning of the term ‘‘written statements’’ (paragraph (6)). a) General. The notion of ‘‘written statements’’ is used in the PECL as opposed to ‘‘oral statements’’ (which may be made by telephone or other electronic means, e.g. radio). In case of telecommunications other than telegram, telex and telefax, the statement is deemed to be in writing only if it is possible to provide a readable record of the message as transferred to both sides. A readable record produced by a telephone receiver capable of converting sound into writing is not included in the notion of ‘‘written statement’’ (see Comment F). b) Related provisions. The definition of ‘‘written statement’’ is relevant in Art. 2:106, Art. 2: 210 PECL.

ITALIAN LAW Article 1173 C.C.: Sources of obligations Obligations arise from contracts, unlawful acts, or any other acts or facts which are capable of producing obligations under the law. Art. 1175 C.C.: Fair behaviour The debtor and the creditor shall behave according to rules of fairness. E. IORIATTI – 63

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Art. 1218 C.C.: Liability of debtor The debtor who does not exactly render due performance is liable for damages unless he proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him. Art. 1326 C.C.: Formation of contract 1. 2. 3. 4.

(...) (...) (...) An acceptance that does not conform to the offer is equivalent to a new offer.

Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1453 C.C.: Dissolution of contract for non-performance In contracts providing for mutual counterperformance, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. (...) Art. 1454 C.C.: Notice to perform The other party can serve a written notice on the defaulting party to perform within an appropriate time, declaring that, unless performance takes place within such time, the contract shall be deemed dissolved. (...) Art. 1455 C.C.: Importance of non-performance A contract cannot be dissolved if the non-performance of one of the parties has slight importance with respect to the interest of the other. Art. 2058 C.C.: Specific redress (...) The court (...) can order that the redress be made only by providing an equivalent, if specific redress would prove to be excessively onerous for the debtor. Art. 806 C.P.C. (Codice di Procedura Civile): Arbitration clause Parties may have disputes that have arisen between them settled by arbitrators 64 – E. IORIATTI

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except those for which provision is made in Art. s 409 and 442, those concerning questions of civil status, the separation of spouses and the other disputes that cannot be the subject of a settlement. 1. General. The concepts contained in Art. 1:301 of the Principles are not defined in the Italian system. Some of the notions are, moreover, not well known (i.e. ‘intentional’, ‘material’); others are similar to concepts described in the Principles, but that have been formulated in a different source, such as case law and legal writings (‘written statement’). Therefore, in general these definitions can be retraced in Italian law: although both the Codice Civile (Civil Code) and the Codice di Procedure Civile (Code of Civil Procedure) do not contain a specific section devoted to the definition of the concept, the outlines of the rules contained in case law and legal writings may amount to definitions. 2. Meaning of the term ‘act’. a) No definition. Although no definition covers the term ‘act’, a reference can be found in Art. 1173 of the Codice Civile, according to which ‘‘Obligations arise from contracts, unlawful acts, or any other acts or facts which are capable of producing obligations under the law’’. Also in the Italian system an act could include an omission. b) Illustration. The Codice Civile contains a few rules covering situations in which a party simply fails to act. See, for example, Art. 1206 C.C. according to which the creation of specific consequences occurs when the creditor of the performance does not act in order to consent the debtor’s performance. Another rule is laid down in Art. 1218 C.C. concerning non-performance: see the following Comment on no. 5 (Ioriatti). Two more examples can be found in Art. 1337 and in Art. 1175 C.C. according to which the parties should act in good faith. Moreover omission is equated with ‘act’ in the area of tort law: Art. 2043 C.C. provides a general clause according to which behaviour giving rise to compensation for injury can consist of either an act or an omission. c) Related provisions. The term ‘act’ can be found in the following articles of the Codice Civile: Art. 1173 on the sources of obligations, Art. 1337 and Art. 1175 C.C. requiring parties to act in accordance with fairness and good faith, Art. 1218 C.C. on non-performance of the debtor, Art. 1206 C.C. on mora creditoris, Art. 2043 C.C. 3. Meaning of the term ‘court’. a) General. In Italian law the term ‘court’ refers to all public bodies belonging to the ordinary or special judiciary ( giurisdizione ordinaria o speciale) and which conclude a case with the rendering of a decision (sentenza) that can be enforced by some other public bodies (esecuzione). b) Arbitral Tribunals. Arbitration (arbitrato) on the other hand is a different system whereby disputes can be settled by private bodies (arbitri) whose decision ( lodo) only in specific cases can be enforced by the State. Arbitration is therefore considered a system of dispute resolution alternative to the ordinary (or special) judiciary. Consequently the term ‘court’, with reference to the Italian system, cannot generally and automatically include arbitral tribunals. However, Italian law provides parties with the possibility to attribute arbitral tribunals the same power normally attributed to courts; with this aim the request of one or both of the parties must therefore be included E. IORIATTI – 65

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in an agreement ex Art. 806 Codice di Procedura Civile (Code of Civil Procedure). It must be noted that the same article states that disputes concerning some particular matters cannot be submitted to arbitration. Moreover, in some cases arbitrators have been equated with the courts, i.e. under Art. 810 C.P.C., so that an arbitral tribunal may deliver a judgment ( lodo) which is binding on the parties and which can be enforced once it has been deposited at the competent court (Art. 825 et seq. C.P.C.). Differently, when some specific powers are accorded to the courts in their official capacity (i.e. Art. 2058 C.C. which authorises the court to compensate damage by providing an equivalent in case compensation by specific performance seems too onerous for the debtor), the term ‘court’ cannot be extended to include arbitral tribunals. c) Related provisions. The term ‘court’ is not defined in Italian Law. Arbitration is regulated by Art. 806 et seq. of the Codice di Procedura Civile (Code of Civil Procedure). 4. Meaning of the term ‘intentional act’. a) No definition. In the Codice Civile there is no definition of ‘intentional act’. However the concept can be found in some of its rules, as well as in case law and legal writing. The term ‘intentional act’ can be implied from Art. 1439 C.C. on fraud and from Art. 1218 C.C. on liability of debtor. b) Fraud. Art. 1427 C.C. distinguishes between duress, mistake and fraud: all these defects in consent lead to the invalidity (annullamento) of the contract. Ex Art. 1439, fraud occurs when a contracting party has employed deception in order to lead the other party to conclude the contract. Deception occurs when a party has given, or failed to give, information with the intention to mislead; see Comment on Art. 4:107 PECL. The deception must be such as to compel consent. c) Liability of debtor. Art. 1218 C.C. states that the debtor is liable for damages if he/she does not exactly render due performance: according to the same rule, the debtor is not liable if he/she proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him/her. Legal literature clarifies that nonperformance can derive from an intentional act (as well as from mere negligence). Therefore, with the exclusion of causes not imputable to the debtor, the rule indicates clearly a situation in which a party acts in the awareness of the possible consequence of his/her act, but regardless of whether or not the consequences will in fact occur. The mere fact that Italian law makes provision for this situation demonstrates that ‘intent’ is not a unitary or static concept in this system but can be of varying degrees. The debtor’s failure to perform means that he/she has realized the possibility of certain consequences and has accepted them but does not specifically intend to cause damage. Moreover, legal literature specifies that non-performance implies fault; and the concept of fault includes recklessness as well as mere negligence in Italian law. d) Related provisions. Art. 1439 C.C. on fraud and Art. 1218 C.C. on non-performance. 5. Meaning of the term ‘non-performance’. a) No definition. Although no definition of the term ‘non-performance’ is provided, the concept ‘inadempimento’ appears in the Codice Civile. b) Non-performance. The concept is not too far from the concept of nonperformance contained in the PECL. There can be non-performance when a party does not perform at all, or does not exactly perform his/her obligation (in time, in the right 66 – E. IORIATTI

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place or in a manner specified). As in the Principles, ‘non-performance’ is a wide concept which refers to all situations in which a party fails to comply with the terms of the agreement. There can be non-performance also when the obligation entails an omission. In this case a party fails to perform when, by acting, it breaches the other party’s right. A differentiation is made in Art. 1455 C.C. between fundamental and non-fundamental nonperformance (inadempimento di scarsa importanza); see Comment on Art. 8:103 PECL. The definition of fundamental non-performance is relevant because only in this case can the creditor terminate the contract (Art. 1455 C.C.). When a party fails to perform, the creditor must first send a diffida ad adempiere (notice of default) ex Art. 1454 C.C. to the non-performing party, before this party has been placed in breach. In this way an additional minimum period (15 days, Art. 1454 C.C.) for performance is granted, before the expiry of which non-performance cannot occur. c) Related provisions. The feature of non-performance can be deduced from two groups of rules: 1) Art. 1453 C.C. on dissolution for non-performance determines the remedies at the party’s disposal; 2) Art. 1218 C.C. and following deal with non-performance, including mora debitoris. Under Italian law the creditor of the performance, after the other party has been placed in breach, serves an ‘intimazione di costituzione in mora’ (notice of mora debitoris). After receipt of the notice, the debtor bears the risk of the supervening impossibility of the performance, unless he/she proves that the object of the performance would have perished anyway (Art. 1221 C.C.). 6. Meaning of the term ‘‘material’’. a) General. The term is not present in Italian law. In Art. 1326 C.C., however, the concept can be deduced by implication. This rule lays down the offer and acceptance model for the conclusion of the contract and regulates the situation in which the acceptance varies from the offer (see Comment on Art. 2:208 PECL). Since the law considers an acceptance that does not ‘conform’ to the offer a new offer, the question seems to be whether there are substantial differences. According to legal writers (Sacco, in Sacco-De Nova (2004), p. 262 et seq.) the required conformity between offer and acceptance means that acceptance must refer to the exact offer made; only proposals for modifications are admissible. Consequently, under Italian law, the decision as to whether the contract has been concluded, with respect to the terms on which the parties have agreed, is a matter of interpretation of contract. Concerning the case of a professional’s written confirmation (see Comment on Art. 2:210 PECL), according to Italian literature, if the additional or different terms contained in the confirmation concern the essential points of the contact (i.e. price), the confirmation leads to a new offer. b) Related provisions. Art. 1326 C.C. on the formation of contract. 7. Meaning of the term ‘written statement’. a) No definition. In the Codice di Procedura Civile (Code of Civil Procedure), as well as in the Codice Civile, there is no definition of the term ‘written statement’. In the law of evidence the notion of ‘scrittura’ is taken for granted and considered a wide concept. According to literature, the concept of ‘written statement’ is indissolubly linked to that of document, with reference to the law of evidence; as a consequence a statement is any object that can express a thought. Such an object may be written by hand, by means of a printer, typewriter, computer (video, tape recording and cinematography are excluded) b) Related provisions. Art. 214 Codice di Procedura Civile E. IORIATTI – 67

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and subsequent rules on private written statements; Art. 2699 C.C. and subsequent rules on the law of evidence.

COMPARISON AND EVALUATION The Principles contain a specific article defining concepts which will find application in the following rules. The reason for this choice is that they provide a new (not always known or recognisable) terminology for European private law, and no court has as yet been designated to explain these concepts (Veldman, PECL DL). The need for definitions of the concepts in the national systems is therefore not so pressing. Italian legislation, as well as the domestic legislation of each European State, has been ‘‘sharpened’’ thanks to extensive court decisions and legal literature. Rules from different sources have been formulated and may sometimes have the same purpose as Art. 1:301 PECL. Consequently Italian legal literature and court decisions must be verified in order to clarify the true meaning of these concepts. Some of the Principles’ concepts do not consequently seem to have corresponding terms in Italian law but just equivalent ones, in the sense that they do not diverge from with respect to substance. This is the case of the concept of ‘act’: even if a sharp definition is not present in Italian law, the concept includes an omission as in the PECL. The same situation occurs with respect to the term ‘written statement’: the Italian system does not provide a definition but, as in the Principles, the concept includes everything capable of providing a readable record. However, there might be some dissimilarities between the Italian system and the Principles stemming from the latter’s choice of a clear definition of all the concepts. This is the case of the term ‘court’: Italian law does not in fact make it clear when the concept of court includes arbitral tribunals. The solution to this issue may imply an ascertainment, case by case, on the base of the powers attributed to the arbitral tribunal. Moreover, the concept of ‘intentional act’ is not defined in the Codice Civile and, unlike the Principles, may encompass mere negligence. Finally, some terms under the Principles have an Italian counterpart. This is the case of nonperformance, some features of which coincide with the features of the Italian concept of inadempimento. Like the Principles, Italian law recognizes ‘fundamental non-performance’ but, on the other side, requires a party to serve a notice of default, as a consequence of which an additional period for performance is established.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:302: Reasonableness Under these Principles reasonableness is to be judged by what persons acting in good faith and in the same situation as the parties would consider to be reasonable. In particular, in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case and the usages and practices of the trades or professions involved should be taken into account. 1. General. The standard of reasonableness is often employed in the PECL to establish a number of specific requirements in all phases of a contract, such as e.g. the time within which a notice of termination is given, the balance between the seriousness of nonperformance and the remedy exercised, and many other cases (see Comment A). The PECL also refer to unreasonableness, a twin concept, in a number of cases (e.g. what constitutes an unconscionable or unreasonable term when determined only by one party). 2. Reasonableness and good faith. Reasonableness is linked to the principle of good faith. This means that it is to be judged by what a person acting in good faith would consider as reasonable. Art. 1:302 PECL lists a number of factors that must be taken into account in making this evaluation: the nature and purpose of the contract, the circumstances of the case and the usages and practices of the trade or profession of the parties involved in the contract. Comment B also refers to the status of the parties, seeming to imply that if a party is a consumer, the standard of reasonableness must be evaluated differently than in the case of a professional. The concept of reasonableness is known in all European legal systems, although is not expressly defined by statutory rules in any of them (see note to Art. 1:302 PECL). The Unidroit principles as well as the CISG do not contain a separate provision on reasonableness, but the standard of reasonableness is frequently employed in specific rules.

ITALIAN LAW Art. 1175 C.C.: Fair behavior The debtor and the creditor shall behave according to rules of fairness. Art. 1176 C.C.: Diligence in performance In performing the obligation the debtor shall observe the diligence of a good pater familias. In the performance of obligations inherent in the exercise of a professional activity, diligence shall be evaluated with respect to the nature of that activity. L. ANTONIOLLI – 69

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Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1366 C.C.: Interpretation according to good faith The contract shall be interpreted according to good faith. Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. Art. 1375 C.C.: Performance according to good faith The contract shall be performed according to good faith. 1. General. The Italian Codice civile does not contain any definition of reasonableness, although the term is used several times in its provisions, not only in those on contract law but also those on tort law and property law. In the field of contract law, for instance, Art. 1454 C.C. states that if the debtor does not perform, the creditor can serve him/her a written notice asking for performance within a reasonable time; according to Art. 1435 C.C. a contract can be annulled for duress only if this is such as to impress a reasonable person. In the field of contract law, case law, like the PECL, relates the concept of reasonableness to the principle of good faith. Outside the Codice civile, reasonableness is also employed in constitutional law (see Art. 3 of the Constitution on the principle of equality), administrative law (reasonableness of administrative action), criminal procedure (see Art. 111 of the Constitution on due process) and civil procedure (see Act no. 89 of 24 March 2001 on the reasonable duration of civil proceedings and the right to compensation in case of excessive length). 2. Reasonableness, good faith and fair dealing. Reasonableness is used as a standard for evaluating the behaviour of the parties in the absence of an explicit rule laid down by law or established by the parties themselves. The general nature of this standard makes it very flexible, and consequently adaptable to the circumstances of every case. It is generally recognized both by case law and legal doctrine that reasonableness is closely linked to the principle of good faith and fair dealing (see comment to Art. 1:201 PECL, Antoniolli). Consequently the factors considered in its application are the same (see e.g. Cass., 24 December 1999, no. 14547, in Giust. civ., 2000, I, 1017 on the use of discretionary powers of employers in hiring and selecting employees according to a standard of reasonableness, referring also to good faith and fair dealing; see also Cass. 17 May 1996, no. 4570, in Foro it., 1996, I, 1989, note by Amoroso, where it was decided that reasonableness, as connected to good faith and fair dealing, does not apply to the assessment of the equivalence of comparable work performed by employees). Four elements are usually listed: the 70 – L. ANTONIOLLI

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social and private interests involved in a contract; the usages and practices applied; the specific circumstances of the case; the relevant legal values of the system, particularly those enshrined in the Constitution (such as solidarity and equality). As with respect to good faith, the standard of reasonableness concerns all phases of the contract, from formation to performance. Reasonableness is what a certain group of people, to which the parties belong, would usually consider as reasonable. As in the PECL, usages and practices of the trade or profession are precious indicia: Art. 1176 C.C., for instance, provides that in performing his/her obligation, the debtor must act with the diligence of a good pater familias. This means that he/she must act in a way that would be considered reasonable by a person in his/her position. Moreover, the same article specifies that if the performance relates to a professional activity, diligence shall be evaluated with respect to the nature of that activity. 3. Related provisions. Art. 1454 C.C. (reasonable time for performance by the defaulting party after the creditor has served a written notice); Art. 1460 C.C. ( party’s withholding performance in case of non-performance by the other party); Art. 1569 C.C. (reasonableness of the time of withdrawal in supply contracts); Art. 1578 C.C. (termination or price reduction in sales contracts due to defects; case law considers defects to be easily detectable; consequently the seller is not liable when defects would have been detected by a reasonable person); Art. 1667 C.C. (containing a rule equivalent to Art. 1578 C.C. for construction, service and procurement contracts).

COMPARISON AND EVALUATION The standard of reasonableness is more clearly expressed in the PECL than it is in Italian law, since Art. 1:302 explicitly states the factors to be taken into consideration in evaluating the parties’ behaviour and explicitly links reasonableness to the principle of good faith. On the other hand, the Italian Codice civile contains several provisions scattered throughout referring to reasonableness, but does not provide a general framework of factors for assessing reasonableness. Yet it must be underlined that both case law and legal doctrine agree that reasonableness is closely linked to good faith and fair dealing, as well as to equity (see Art. 1374 C.C., which also refers to usages for the integration of contract). Therefore the area of application of the standard seems to be largely comparable in the field of contract law. As all general clauses, the mere convergence of the theoretical framework is not enough to conclude that the law in action is the same (see the remarks concerning the principle of good faith and the duty to co-operate, Arts 1:201 and 1:202 PECL, Antoniolli): being sensitive to the context and circumstances in which the rule is applied, it is necessary to analyse in detail its actual application, particularly by case law.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:303: Notice (1) Any notice may be given by any means, whether in writing or otherwise, appropriate to the circumstances. (2) Subject to paragraphs (4) and (5), any notice becomes effective when it reaches the addressee. (3) A notice reaches the addressee when it is delivered to it or to its place of business or mailing address, or, if does not have a place of business or mailing address, to its habitual residence. (4) If one party gives notice to the other because of the other’s non-performance or because such non-performance is reasonably anticipated by the first party, and the notice is properly dispatched or given, a delay or inaccuracy in the transmission of the notice or its failure to arrive does not prevent it from having effect. The notice shall have effect from the time at which it would have arrived in normal circumstances. (5) A notice has no effect if a withdrawal of it reaches the addressee before or at the same time as the notice. (6) In this Article, ‘notice’ includes the communication of a promise, statement, offer, acceptance, demand, request or other declaration. 1. General. Under the Principles a general rule regulates the effectiveness of a notice. The rule also lays down regulations concerning the withdrawal of a notice. 2. Notice (paragraph (6); by any means (paragraph (1)). The term ‘‘notice’’ is broadly defined and therefore applicable to a whole range of notices, declarations and other kind of communications. The rule in this article does not require any formalities (e.g. written form), provided that the form in which it is made is appropriate in the circumstances. Therefore, the rule does not exclude that in some specific cases the written form may be required (see Comments A and B). 3. The receipt principle (paragraphs (2) and (3)). According to the PECL, a party cannot rely on a notice sent to the other party unless and until the notice has reached that party. However, it is not necessary that the notice has come to the addressee’s attention: a notice subject to the ‘‘general’’ receipt principle takes effect when it is received (see Comments C, E and F). 4. The dispatch principle in case of default (paragraph (4)). When a party to be notified is in default, or default appears to be likely, under the Principles the risk of loss, mistake or delay in the transmission of the message is on the defaulting party and not on the aggrieved one. However, the receipt principle will apply instead of the dispatch principle when the aggrieved party uses a means of notice inappropriate in the circumstances. When a notice is not subject to the ‘‘general’’ receipt principle, but to the dispatch 72 – E. IORIATTI

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principle, it may be effective even through it never arrives or is delayed, but is not effective the moment it is dispatched (see Comments D, E and F). 5. Simultaneous withdrawal (paragraph (5)). A withdrawal or countermand of the notice received by the recipient at the same time or earlier than the notice, makes the notice ineffective (See Comment G). 6. Related provisions. The notion of ‘‘notice’’ is important for the purpose of Art. s 2:202 to 2:208 PECL, concerning the regulation of offer and acceptance, and for the purpose of Art. 4: 104 (Inaccuracy in Communication).

ITALIAN LAW Art. 1334 C.C.: Efficacy of unilateral acts Unilateral acts take effect from the time when they come to the knowledge of the person to whom they are directed. Art. 1335 C.C.: Presumption of knowledge An offer, acceptance, 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, unless proves that, without his fault, it was impossible for him to have notice of them. Art. 1328 C.C.: Revocation of offer and acceptance (...) The acceptance can be revoked, provided that the revocation comes to the knowledge of the offerer before the acceptance. 1. General. Unlike the Principles, the Italian Codice Civile does not contain a specific rule on the effectiveness of notice, declarations and other communications. As a consequence, several provisions have to be taken into account in determining the conditions required in order to make a notice effective. Moreover, a description of the different terms can be found in legal literature: a declaration is considered a unilateral juridical (legal) act (atto giuridico unilaterale) whereby the intention or thought of a party can be communicated. Declarations include communications, whose aim it is to inform a party or, finally, special rules are laid down in Art. 1182 of the Codice di Procedure Civile (Code of Civil Procedure) concerning notices, including communications, having procedural effects. 2. Declaration by any means. The Codice Civile does not contain specific provisions describing the means required for declarations. In general, a party may disclose his/her intention through any means which are adequate to reach this result. In this regard, the E. IORIATTI – 73

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party carries the burden of choosing a correct means of expressing the declaration in order to make it clear and understandable to the other party. Concerning the form of the declaration, in general no formalities are required. However, written form is imposed by the law in some cases: Art. 1219 C.C. (‘intimazione di costituzione in mora’: placing in default), Art. 1454 C.C. (‘diffida ad adempiere’: notice to perform). Moreover, in certain circumstances, the formality of the atto pubblico is required by law: Art. 2699 C.C. of the Codice Civile defines it as ‘‘an instrument drawn with the required formalities by a notary or by another public official authorized, in the place where it is drawn up, to clothe such as instrument with public reliability’’. In order to ensure legal certainty, under Italian law some declarations must fulfil this requirement. A few examples are: the declaration of acknowledgement of a child, which requires an atto pubblico (Art. 254 C.C.); this is also true of marriage agreements (Art. 162 C.C.) and of the constitution of a family patrimony (Art. 167 C.C.). The written form is required also for the transfer of immovable property (Art. 1350 C.C.). Sometimes, specific formalities are required: see for example the declaration contained in a bill of exchange or promissory note: Art. 1 L. 14 Dec. 1933 n. 1669 requires the written form, together with the indication of some elements, such as denomination, promise to pay a specified amount of money, etc. 3. The receipt and dispatch principles. A distinction should be made between recettizie and non recettizie declarations (Castiglia (1988), p. 2 et seq.). According to legal literature (Ferrero (1989), p. 354), declarations belonging to the first group are those which, as they establish obligations for the other party, need to be known by the other party in order to be effective. With regards to the former, according to Art. 1334 C.C., unilateral acts take effect from the time when they come to the knowledge of the person to whom they are directed. Art. 1334 C.C. should however be read in connection with Art. 1335 C.C. which provides that any declaration directed to a given person is deemed to be known at the moment it reaches his/her address. The recipient can however prove that, without his/her fault, it was impossible for him/her to have notice of the declaration. The burden of proof that a declaration has reached the person to whom it was directed is on the party who makes this declaration. Proof leads to a presumption of knowledge of the declaration. Exceptions to the rule according to which the mere sending of a declaration is sufficient to lead to the presumption of knowledge are defined by case law. The Corte di Cassazione (Cass. 2001/10284, Giust. Civ. Mass, 2001, p. 1484) has declared that, given the presence of the receipt, the mere sending of a telegram or of a registered letter leads to the above mentioned presumption. Moreover, according to the Corte di Cassazione, the mere sending of a declaration of revocation of the contractual offer (before the acceptance has reached the offeror) prevents the conclusion of the contract (see n. 5). Moreover, non recettizie declarations are effective even if they do not reach the addressee: this is the case of Art. 1989 C.C., according to which a promise to the public binds the person who has made it as soon as it is made. According to the courts (Cass. 2001/2600, 74 – E. IORIATTI

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Giust. Civ. Mass, 2001, p. 301), the declaration served by the creditor to the nonperforming party (diffida ad adempiere, notice of default ex Art. 1454 C.C.) is recettizia. As a consequence, the defaulting party is in breach from the moment he/she comes to know it. Under Italian law, and differently from the Principles, the risk of loss or mistake in the transmission of a notice of default is consequently placed on the aggrieved party. 4. Simultaneous withdrawal. According to legal literature, the Italian legal system adopts a general principle of irrevocability of juridical acts (Gentile (1991), p. 7). Nevertheless, there are many exceptions: a certain number of revocable juridical acts are provided in the Codice Civile. A few examples: Art. 1336 C.C. (offer to the public); Art. 1921 C.C. (revocation of the designation of the beneficiary in a life insurance); Art. 1270 C.C. (revocation of delegation); Art. 1396 C.C. (revocation of power of attorney). However, the Codice Civile does not provide a general rule regulating the effects of a notice of withdrawal, but only a specific rule for the revocation of offer and acceptance of a contract (Art. 1328 C.C.). However, courts’ decisions in which the rule is extended by analogy to all declarations are not rare. Art. 1328 C.C. provides that an offer can be revoked until the contract is concluded. According to legal writings (Gentile (1991), p. 2), the declaration of revocation is effective by mere dispatch. Moreover, ex Art. 1328 C.C., acceptance can be revoked provided that revocation comes to the knowledge of the other party before acceptance. Differently, Italian doctrine keeps the two concepts of revoca (revocation) and ritiro (withdrawal) separate. This second situation occurs when a declaration is accompanied by a counter-declaration whose content is different, as well as when the party who has sent the declaration withdraws it before it reaches the addressee. 5. Related provisions. The above mentioned provisions and rules are connected, to the following articles of the Codice Civile: Art. 1313 C.C. (insolvency of co-debtor in case of waiver of solidarity); Art. 1236 C.C. (declaration of remission of debt); Art. 1308 ( placing in default of one of the debtors in solido); Art. 1411 C.C. (contract in favour of a third party) Art. 1855 C.C. (banking transaction of indefinite duration).

COMPARISON AND EVALUATION Whereas the PECL lay down a specific provision on notice, in the Italian system the corresponding rules are to be found in different provisions of the Codice civile, as well as in case law and legal literature. The situation of the Italian system is therefore more complex and less clear. Some similarities exist, however: first at all, according to the Principles, a ‘notice’ explicitly includes a promise, statement, offer, acceptance, demand, request and other declarations. Although under Italian law only declarations and communications are mentioned, the two terms are likely to cover the same range of declarations as in the PECL. Moreover, under Italian law, as well as in the PECL, a declaration is effective when E. IORIATTI – 75

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it reaches the person to whom it is addressed; the principle of receipt applies therefore in both systems. The same holds true of the principle according to which if there are no provisions requiring a particular formality, declarations can be made in any form. There are also important differences: under the PECL the party who gives notice because the other party does not perform is protected by the dispatch principle: a notice can be effective even if it has not reached the non-performing party, even if the latter is not responsible for not having received it. Under Italian law this situation is regulated entirely by the receipt principle and notice of default is treated as all other kinds of declarations. Other minor differences may be noted. The PECL have a clear rule with regard to the places or circumstances in which a notice is considered to have reached the addressee: place of business or mailing address or, in default of these places, the habitual residence. Differently, Art. 1335 of the Codice civile uses a general expression, i.e. the ‘‘address of the addressee’’. According to case law the expression should be understood as the ‘‘more suitable place for the reception’’. The differences between the provisions of the PECL and those of the Codice civile may lead to divergent results: for example in the situation in which a declaration or communication is sent to the home address of a business person. The consequences are clear under the PECL, according to which in order to evaluate the reception specific places are indicated in order of importance. Italian law, on the contrary, leads to ambiguous situations in which the conditions for reception are not clearly indicated.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:304: Computation of time (1) A period of time set by a party in a written document for the addressee to reply or take other actions begins to run from the date stated as the date of the document. If no date is shown, the period begins to run from the moment the document reaches the addressee. (2) Official holidays and official non-working days occurring during the period are included in calculating the period. However, if the last day of the period is an official holiday or official non-working day at the address of the addressee, or at the place where a prescribed act is to be performed, the period is extended until the first following working day in that place. (3) Periods of time expressed in days, weeks, months or years shall begin at 00.00 on the next day and shall end at 24.00 on the last day of the period; but any reply that has to reach the party which set the period must arrive, or any other act which is to be done must be completed, by the normal close of business in the relevant place on the last day of the period. 1. General. The choice of the Principles to introduce a general and unambiguous rule on computation of time is based on the need of certainty for both the parties involved in communications and declarations. The rule ensures that a party which has to perform or reply within a certain period knows how much time he/she has in which to do so. On the other hand, also the party setting the time-limit knows whether or not the other party has acted or replied within the time set (see Comment A). 2. Starting time (paragraph (1)). In general, the starting time which is expressly stated in a document prevails. However, in some situations the Principles require a reasonable time (see e.g. Art. 8:106). The rules on notice may fix an extension of the period for performance. If a method of computation is lacking, the date shown as the date of the document should normally be treated as the starting date, whatever the means of transmission of the document. If the document is undated, in the case of non-instantaneous communications (such as letters or telegrams), time runs from the date on which it was received. As concerns an oral communication, time runs from the moment in which it was communicated (see Comments B,C, D and E). 3. Non-working days (paragraph (2)). On the basis of the European Convention of the Council of Europe on the Calculation of Time-Limits (1972, Art. 5), the Principles have included official holidays and non-working days in the period, unless the last day of a period is an official holiday and non-working day in the relevant place (e.g. where the act has to be performed or the message has to be delivered). In this case the period is extended to include the next working day, unless local usage provides for the contrary (see Comment F). E. IORIATTI – 77

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4. From midnight to midnight (paragraph (3)). In accordance with Art. 3 of the Convention on the Calculation of Time-Limits, the Principles rule that time runs from midnight to midnight, but not beyond the normal working day in the place of the party who has set the period (see Comment G). 5. Related provision. The rule is relevant for the purpose of Art. 8:106(3) PECL.

ITALIAN LAW Art. 1187 C.C.: Computation of time limit The time limit established for the performance of obligations is computed according to the provisions of art. 2963. The provision regarding the extension of a time limit falling on a holiday applies in the absence of contrary usage. Art. 2963 C.C.: Computation of time limits The time limits of prescription contemplated by the present code and by other laws are computed in accordance with the regular calendar. The day on which the first moment of the time limit falls is not computed, and prescription occurs on expiration of the last moment of the last day of such time limit. If the last day of the time limit falls on a holiday, it is postponed to the following work day by operation of law. When prescription is measured by the month, it becomes operative in the month of expiration of the time limit and on the day corresponding to the day of the month of commencement. If such day does not exist in the month of expiration, the time limit is completed on the last day of such month. Art. 1182 C.C.: Place of performance If the place in which the performance is to be carried put is not specified by the agreement of by usage and cannot be inferred from the nature of the performance or from other circumstances, the following rules apply. The obligation to deliver a certain specified thing shall be performed in the place where the thing was situated when the obligation arose. 78 – E. IORIATTI

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The obligation having as its subject matter a sum of money shall be performed at the domicile of the creditor at the time the obligation matures. If such domicile is different from that of the creditor at the time the obligation arose and this makes the performance more burdensome, the debtor, having previously so notified the creditor, has the right to make payment at his own domicile. In all other cases the obligation shall be performed at the domicile of the debtor at the time the obligation matures. Art. 155 C.P.C. (Codice di Procedura Civile, Code of civil procedure): Computation of terms. In the computation of terms by days and hours, initial day and hour are excluded. In the computation of terms by months and years, the regular calendar must be comply with. Holiday must be calculated in the computation of terms. If the last day of the time limit falls on a holiday it is postponed to the following work day by operation of law. 1. General. a) No Provision. The Codice Civile does not contain a specific rule (nor does a general principle exist in Italian law) regulating the starting time of a period set by a party in a written document. Thus, this time is generally considered to run from the day on which the document reaches the addressee. The time limit established in the document should however be evaluated with regard to the principle of reasonableness (cfr. Art. 1:302 Antoniolli). Moreover, specific provisions exist with regard to performance: Art. 1183 C.C. regulates the situation in which the time for performance is not specified. In this case the creditor can demand performance immediately. However, if a period of time is necessary (due to usage or the nature, manner, or place of performance) and the parties have not agreed on it, it is fixed by the judge. The same holds true when the time of performance is at the discretion of the creditor. Finally, where the fixing of a period of time is at the discretion of the creditor, the judge can fix it at the request of the debtor who wishes to be free of his/her obligation. Art. 1184 C.C. provides that if a time limit for performance is established, it is presumed to be in favour of the debtor, unless it appears to have been established in favour of the creditor. The subsequent rules (Arts 1185, 1186, 1187) regulate the situation in which performance can be demanded with regard t the time limit, in case it is established in favour of the debtor, of the creditor, or neither of them. 2. Non-working days. Both the Codice Civile and the Codice di Procedura Civile contain specific provisions regulating the situation in which a period of time ends on a holiday. The time limit is extended until the following working day by operation of law. Under E. IORIATTI – 79

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Italian law, non-working days are listed in some special laws (See l. 27 May 1949 n. 260; l. 31 March 1954 n. 90; l. 4 March 1958 n. 132; l. 5 March 1977 n. 54). Moreover, Art. 155 of the Code of Civil Procedure expressly provides a method for computing time periods; although the rule is dedicated to the computation of trial time limits, according to court decisions (e.g. Cass. 1991/9536, Giust. Civ. Mass., 1991, 9) the rule contains a general principle which should be applied to all kinds of time limits. 3. From midnight to midnight. a) No provision. In Italian law there is no provision comparable to Art. 1:304, para. (3). Therefore, the principle providing that time runs from midnight to midnight may be deduced from Art. 1366 C.C. (according to which the contract shall be interpreted according to good faith), as well as from Art. 1175 Codice Civile on fair behaviour (according to which debtor and creditor shall behave according to the rules of fairness). Since good faith is also meant as a means for controlling the reasonableness of private acts (cfr. Art. 1:302 on reasonableness), it may be deduced that a party cannot require performance, for example, during the night. 4. Related provisions. Time-limits are mentioned in many provisions of book four of the Codice Civile on obligations. Amongst others, Art. 1454 C.C. (concerning the reasonable time for performing after the creditor has served a written notice on the defaulting party); Art. 1457 C.C. (concerning the essential time fixed for performance by one of the parties); Art. 1183 C.C. (time of performance); Art. 1184 C.C. (time limit established for performance); Art. 1186 C.C. (loss of benefit of time limit); Art. 1187 C.C. (computation of time limit).

COMPARISON AND EVALUATION With regard to the main provision contained in Art. 1:304 of the PECL, i.e. the rule on non-working days (§ 3), the two systems seem to be basically in agreement. It has been noted (see Veldman PECL DL, sub. art. 1:304) that the similarities between the PECL and some national systems may be explained by the fact that the European Convention on the Calculation of Time-Limits (Basle, 16.05.1972) had previously regulated the issue. However, an exception has to be underlined: Italian law does not specify that if the last day of the time limit falls on a holiday ‘‘at the address of the addressee or at the place where a prescribed act has to be performed’’, it is postponed to the following work day. The reason why the PECL provide a specification concerning the place of performance is easy to understand: the PECL must be applied in different legal systems which might use different calendars. Under Italian law such a rule is not required and its consequences are anyhow self-evident. On the other hand, rules on the computation of time such as those in § (1) and § (2) do not exist in Italy. In the second case (§ 3), under Italian law it is a matter of interpreting the contract or evaluating the party’s behaviour, as to when an act has to be performed. The criterion to be applied should be the one of reasonableness. However, in Art. 1182 80 – E. IORIATTI

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the Codice Civile devotes a clear and detailed provision to the place where the performance has to be rendered, in case the place is not specified in the agreement or by usage; information concerning time limits is included in the provision. With reference to the rule of § (1) of the Principles, under Italian law the receipt principle applies (see Comment on Art. 3:37).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 1:305: Imputed Knowledge and Intention If any person who with a party’s assent was involved in making a contract, or who was entrusted with performance by a party or performed with its assent: (a) knew or foresaw a fact, or ought to have known or foreseen it; or (b) acted intentionally or with gross negligence, or not in accordance with good faith and fair dealing, this knowledge, foresight or behaviour is imputed to the party itself. 1. General. Under modern conditions contracts are frequently made or performed not by the contracting parties personally but by employees or other persons: parties normally entrust performance of their contract to employees, agents, subcontractors and other third persons. The purpose of Art. 1:305 is to neutralize the risks inherent in the modern division of labour in trade and industry. In order to achieve this result, actual or constructive knowledge (subparagraph a), or state of mind or behaviour (subparagraph b), are imputed to the person assisting in the making or performance of the contract to the contracting party to whom that assistance is rendered (see Comments A and B). 2. Knowledge and foresight (sub. (a)). a) Normally, when a contract is being made, the knowledge of the employees and agent is imputed to the party who made the contract through the agency of these persons. However the employee or other person must have been someone who was, or who appeared to be, involved in the negotiation or performance of the contract because when a party is not related in this way to the contract, he/she cannot appreciate the relevance to the contract of some facts connected to the contract. Therefore the party considered to be responsible on the basis of the knowledge of an employee or agent, may prove that this third person was not related to the contract in such a way that he/she could not appreciate its relevance and therefore might not report it (see Comment C). b) Related provisions: Arts 1:301 (5), 2:104, 3:102 (2), 3:204 (2), 3:205 (1) and (3), 3:208, 3:209 (1), 3:301 (1), 4:103 (1), 4:109 (1), 4:111(2), 4:113 (1), 4:114, 4:117 (1), 6:101 (2) and (3), 6: 110 (3), 6:111 (2), 7:101 (2), 8:103 (b), 8:108 (3), 9:102 (3), 9:303 (2) and (3), 9:503 PECL. 3. Intention, negligence, bad faith (sub. (b)). a) According to the Principles, certain states of mind or behaviour of the person acting are imputed to the contracting party for whom the contract has been concluded or performance has been rendered. Moreover, under several PECL rules, intentional or gross negligence or bad faith increases his/her liability. The intentional or grossly negligent behaviour of a person whose state of mind is imputed to a party only refers to the act or omission which constitutes the non-performance. It is not necessary that the intention or gross negligence also extend to the 82 – E. IORIATTI

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consequences that may follow from the non-performance (see Comment D). b) Related provisions: Art. 1:201(1), 2:301(2), 4:107(2), 7:106, 8:103(c), 9:503 PECL.

ITALIAN LAW Art. 1228 C.C.: Liability for acts of auxiliaries The debtor who avails himself of the services of third persons in the performance of the obligation is also liable for their malicious, fraudulent or negligent acts, unless otherwise intended by the parties. Art. 2232 C.C.: Performance of work The person who performs the work shall personally discharge the task he has assumed. However, under his own supervision and responsibility he can avail himself of substitutes and auxiliaries if the cooperation of others is permissible under the contract or by usage and is not incompatible with the object of the services. Art. 1388 C.C.: Contract entered into by representative A contract made by a representative in the name and in the interest of the principal, within the limits of the powers conferred on the representative, produces effects directly as to the principal. Art. 1390 C.C.: Defects in consent A contract is voidable if the consent of the representative is defective. However, if such defect concerns matters predetermined by the principal, the contract is voidable only if the consent of the latter is defective. Art. 1391 C.C.: Material subjective conditions In cases in which it is material to ascertain the existence of good and bad faith or of knowledge or ignorance of certain circumstances, regard is had to the representative, unless the matters at stake were predetermined by the principal. In no case can a principal who is in bad faith take advantage of the ignorance or good faith of a representative. 1. General. Italian law regulates the imputation of state of knowledge and behaviour to third parties. In general, the possibility of making a contract through employees, substitutes, auxiliaries or other persons is expressly provided under Art. 2232 C.C., which is inserted in the section dealing with autonomous work. A general provision regulating the consequences of the state of mind of employees or other third persons is contained in Art. 1228 C.C.; the rule stems from the section dealing with non performance of obligations. E. IORIATTI – 83

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Moreover, the Italian legal system provides a specific legal instrument, rappresentanza (representation), in Art. 1387 C.C. ff., whereby a party may entrust a person with the power to make a contract, the effects of which may be ascribed directly to the former. A different situation arises when a party spontaneously (i.e. without any request or obligation to do so) assumes the administration of the patrimonial affairs of another person. This mechanism can work only in case the interested party is not capable of administrating his/her own affairs (Art. 2028 C.C. ff.). In this case, the law imposes certain obligations upon both the administrating party and the interested one but the state of mind of the interested party has no consequences on the validity of the act. 2. Imputation of knowledge and foresight. In Italy the principle corresponding to Art. 1:305 lit (a) may be found in Art. 1391 C.C.: when a person entrusts another with the power to conclude a contract, the knowledge of this third person is normally imputed to him/her. However, under Italian law, it will depend on the degree of freedom that the principal has left to the representative: in case the content of the contract has been determined by the representative, his/her state of mind will also be taken into account. When the representative has acted according to the principal’s instructions, only the latter’s state of mind is considered. Consequently, under Italian law different degrees of awareness are possible depending on the roles the representative and the principal have played in concluding the contract. The same holds true with respect to Art. 1390 C.C. according to which a contract is voidable if the consent of the representative is defective, unless the defect concerns matters predetermined by the principal. In this case the contract is voidable only if the latter’s consent is defective. However, if the principal is in bad faith, he/she cannot invoke the representative’s ignorance or good faith (Art. 1391 (2), C.C). 3. Imputation of intention, negligence and bad faith. The Italian Codice Civile provides a general rule (Art. 1228 C.C.) according to which any malicious, fraudulent or negligent acts of third persons are imputed to the debtor who has availed himself of the services of these persons. The rule is important also in the area of fault liability: according to the provision, a non-performing party is liable for the behaviour of the persons whom he/she has charged with performing the obligation. This rule is not mandatory, therefore its effects can be excluded by agreement. According to Italian legal literature, knowledge of the third person is imputed to the debtor even when the former has acted outside the limit of the debtor’s authority (Bianca (1995), p. 463). Moreover, according to some authors (Bianca (1999), p. 457) the rule is applicable by way of analogy to non-patrimonial obligations as well, unless they are strictly personal. 4. Related provisions. Art. 1704 C.C. (mandate with power of representation); Art. 1670 C.C. (Liability of sub-contractors); Art. 1783 n. 2 and n. 3 C.C. (liability for property delivered to hotelkeeper); Art. 1785bis C.C. (liability for negligence of the hotelkeeper). Concerning tortious conduct: Art. 2049 C.C. (liability of masters and employers). 84 – E. IORIATTI

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COMPARISON AND EVALUATION The issues covered by Art. 1:305 of the Principles are not regulated in a corresponding provision of the Codice Civile. However, some of the features of the idea underlying the Principles coincide with those provided in two groups of rules: under Italian Law a differentiation is made between imputation of intention and imputation of knowledge. As a consequence, Italian law seems to establish a more complex system, although some scholars (Visintini (1993), p. 244 et seq.) see a convergence of the two rules. According to this doctrine, both Art. 1228 C.C. and Art. 1391 C.C. lead to the imputation to the contracting party the result of the activity and the state of mind of the person working with him/her. Therefore, the purpose of both rules is to protect a party concluding a contract by neutralizing the legal risks inherent in the modern division of labour. The difference is therefore to be found in the role or powers given to the persons assisting the contracting party: they can act as representatives having the power to conclude the contract, or as mere employers or auxiliaries. On the other hand, compared to the PECL the Italian solution is more flexible: Arts 1390 and 1391 C.C. do not impute knowledge directly to the principal but take into account the roles the representative and the principal have played in concluding the contract.

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Chapter 2 FORMATION OF CONTRACTS Section 1: General Provisions PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:101: Conditions for the Conclusion of a Contract (1) A contract is concluded if: (a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement. (2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses. 1. Notion and requisites of a ‘‘contract’’. Proof. This article provides for the essential requirements which have to be met in order to conclude a ‘‘contract’’. It lies at the heart of the first section of Chapter 2 on contract formation. It is worth noting, however, that the PECL do not provide any definition of ‘‘contract’’. Pursuant to official Comment A, the notion of ‘‘contract’’ covers: – agreements under which two or more parties have undertaken an obligation to make a performance, – agreements where the offeree accepts the offer by doing the act or suffering the forbearance which the offeror asks of him/her, – agreements where only one party has obligations and where his/her promise needs acceptance by the offeree, – promises to which one party is bound without acceptance by the other, as provided in Art. 2:107 PECL. The concept of ‘‘contract’’ adopted in the Principles, therefore, appears to be quite broad, since it comprises not only the case in which two or more parties agree (either expressly or by their conduct) to establish a binding legal relationship, but also the case in which only one party promises to perform, for instance to pay a sum of money, if the other party performs an act (so-called: ‘‘offers calling for an act’’) and the case in which only one party unilaterally undertakes an obligation by promising something, without the need for acceptance (express or by conduct) or reliance by the promisee (see Art. 2:107). 2. Intention to be bound. In any case, in order to be bound by a ‘‘contract’’ under the PECL, a party must have an intention to be legally bound. Whether in fact he/she has such intention is immaterial if the other party has reason to infer from the first party’s A. MONTI – 87

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statements or other conduct that he/she intends to be bound (see Art. 2:102, but see also Arts. 6:101 and 6:103). 3. Agreement. Where more than one party is to be bound all the parties must agree. Their agreement may be reached by one party’s acceptance of the other’s offer (see Section 2) by agreeing to a contract drafted by a third party, or in other ways. What constitutes sufficient agreement is spelled out in Art. 2:103. 4. No further requirements. Whether or not agreement is needed, no further requirements are imposed by the PECL. In particular, this means that a promisee does not need to undertake to furnish or to furnish something of value in exchange for the promise. ‘‘Gratuitous’’ promises are therefore, as long as the intention of the promisor to be legally bound can be established, treated as binding contracts. 5. No delivery requirement. It shall be noted, moreover, that the PECL do not require delivery of goods in order to conclude certain contracts. Even an undertaking to lend money and a promise to receive a deposit are binding before they have been performed. 6. No form required. Furthermore, pursuant to Art. 2:101(2), contracts are not subject to any requirement as to form. This means that, unless the parties agree otherwise, the conclusion as well as the modification and termination by agreement of a contract are valid without any special form, be it writing, sealing, authentication by a notary, filing in a public registry, etc. Nothing in the PECL requires a contract to be evidenced in writing. A contract, therefore, may be proved by any means, including witnesses. This ‘‘no formalities’’ principle appears to be widely accepted, especially with regard to international commercial contracts. Art. 11 of the CISG, for instance, provides that a contract for the sale of goods need not be concluded in writing, is not subject to any other requirement as to form and may be proved by any means, including witnesses. Along the same lines, Art. 1.2 of the Unidroit Principles of International Commercial Contracts states that a contract need not be concluded in or evidenced by writing and that it may be proved by any means, including witnesses. 8. As far as the PECL are concerned, however, not only commercial contracts, but any ‘‘contract’’ – as defined in Comment A – can be concluded without any special formalities having to be adopted. It follows that also informal ‘‘gratuitous’’ unilateral promises are legally binding under the PECL even if they have not been accepted or relied upon by the promisee. According to the drafters of the PECL, the fear that the enforcement of such promises would lead to socially undesirable results is not well founded since such promises often serve legitimate purposes.

ITALIAN LAW Art. 1321 C.C.: Notion A contract is the agreement of two or more parties to establish, regulate or extinguish a patrimonial legal relationship among themselves. 88 – A. MONTI

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Art. 1174 C.C.: Patrimonial nature of performance The performance which is the object of an obligation must be of such nature as to be capable of economic evaluation and must correspond to an interest, even if not patrimonial, of the creditor. Art. 1325 C.C.: Indication of requisites The requisites of the contract are: 1. 2. 3. 4.

agreement of the parties; causa; object; form, when prescribed by law, under penalty of nullity.

Art. 1343 C.C.: Unlawful causa The causa is unlawful when it is contrary to mandatory rules, public policy, or morals. Art. 1344 C.C.: Contract in fraud of law The causa is also considered unlawful when the contract constitutes the means for evading the application of a mandatory rule. Art. 1346 C.C.: Requisites The object of the contract must be possible, lawful, determined, or determinable. Art. 1350 C.C.: Acts that must be in writing The following must be made by public act or by private writing, under penalty of nullity: 1. contracts that transfer ownership of immovables; 2. contracts that constitute, modify or transfer the right of usufruct in immovables, the right of superficie and the rights of the emphyteutic grantor and of the emphyteutic tenant; 3. contracts that constitute in common the rights indicated in the preceding numbers; 4. contracts that constitute or modify predial servitudes, the right of use in immovables and the right of habitation; 5. waivers of the rights indicated in the preceding numbers; 6. contracts of enfranchisement of emphyteutic land; 7. contracts of antichresis; 8. contracts of lease of immovables for a term longer than nine years; A. MONTI – 89

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9. contracts of partnership or association whereby the enjoyment of immovables or of other real rights in immovables is conferred for a period of time exceeding nine years or for an undetermined length of time; 10. acts constituting perpetual or life annuities; the provisions relating to Government annuities are unaffected; 11. acts of partition of immovables and of other real rights in immovables; 12. compromises of controversies relating to the legal relationships mentioned in the preceding numbers; 13. other acts specifically indicated by law. Art. 2721 C.C.: Admissibility; Limitations with respect to value Proof of contracts by witnesses is not admissible when the value of the subject matter exceeds euro 2,58. However, the court can admit proof by witnesses even beyond such limit, taking into account the character of the parties, the nature of the contract, or any other circumstances. Art. 2724 C.C.: Exceptions to prohibition of proof by witnesses Proof by witnesses is admissible in all cases: 1. when there is a prima facie written evidence; this consists of any writing which makes the alleged fact appear likely and which originates from the person against whom the action is directed, or from his representative; 2. when it has been morally or materially impossible for the contracting party to secure any written evidence; 3. when the contracting party has without fault lost the document which provided him with evidence Art. 2725 C.C.: Acts for which evidence in writing or written form is required When, according to law or to the agreement of the parties, a contract must be evidenced in writing, proof by witnesses is admissible only in the case set out in number 3 of the preceding article. The same rule applies when the written form is required under penalty of nullity. 1. Notion and requisites of ‘‘Contract’’. Pursuant to Art. 1321 C.C., a contract is the agreement of two or more parties to establish, regulate or extinguish a patrimonial legal relationship among themselves. 2. Requirements. Despite this definition, however, in order to have a binding contract the mere agreement of the parties is not enough. Pursuant to several other provisions, including Arts. 1325, 1326, 1343 C.C., other requirements have to be met. Such additional requisites include: 90 – A. MONTI

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– the existence of a lawful causa; – the existence of a possible, lawful, determined, or determinable object; – compliance with formalities, when prescribed by law under penalty of nullity. The rules defining what constitutes agreement of the parties under Italian contract law are comprised in Arts. 1326 to 1342 C.C. 3. Causa. Art. 1325 C.C. states that every contract must have a causa. The scope and definition of this requirement has historically been rather controversial among scholars (see, generally, Giorgianni (1960); Betti (1955); Gorla (1954); Id. (1958) (lit.); D’Angelo (1992); Sacco (1975); Birocchi (1997); Alpa (1995), 1; Gambaro (1997), p. 551 et seq.). It does not seem appropriate here to report all the conflicting theories as well as their complex implications; suffice it to say that the concept of causa has been described from both subjective and objective perspectives (Mirabelli (1951), 323). The former interpretation referred to the aim pursued by the parties in undertaking their obligations, while the latter identified the causa with the typical social and economic function of the contract (Betti (1955); but see also Sacco (1975) at 577 et seq.; Gorla (1954) at 199 et seq.; this is the concept of causa generally accepted by Italian case law), giving the State extensive control over private agreements. 4. Lawful causa. More precisely, as mentioned, every contract must have a lawful causa. The causa is unlawful when it is contrary to mandatory rules, public policy or morals, as well as when the contract constitutes the means for evading the application of a mandatory rule. 5. Specific contracts. It is worth mentioning that Italian law provides specific rules aimed at regulating several types of contracts, such as sales contacts, contracts for leases, carriage and insurance contracts, etc. Pursuant to Art. 1322(2) C.C., however, the parties can also make contracts of types other than those specifically regulated in the Code provided that they aim to achieve the interests worthy of protection according to the legal order. Courts are called upon to determine that such contracts regulate interests worthy of protection. In general, when a certain form of agreement is widely accepted within the international legal community, Italian courts tend to consider it enforceable. These ‘‘innominate’’ or ‘‘atypical’’ agreements are subject to the rules on contracts in general contained in Title II of Book 4. Courts very often tend to treat innominate contracts as they would treat contracts of the closest ‘‘legal type’’ in order to apply the rules governing the specific nominate contract. 6. Object of the contract. According to Art. 1325(3) C.C., moreover, the contract must also have an object, which must be possible, lawful, determined or determinable (see Art. 1346 C.C. and infra, the Comment to Art. 2:103 PECL). 7. Contracts requiring special forms. Art. 1350 C.C. states that certain contracts must be made by public (notarial) act or by ( private) writing, under penalty of nullity. The list A. MONTI – 91

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includes, among others, contracts for the sale of land or other immovable property, acts of partition of immovables and of other real rights in immovables and settlement of disputes concerning the legal relationships mentioned in said article. Other contracts such as donations, except for donations of modest value, must be made by public act, for which delivery is not sufficient to conclude the contract (see Art. 783 CC). It is worth noting, therefore, that donative promises, whatever their value, must be made by public act in the presence of witnesses (according to Art. 782 CC and notarial law), under penalty of nullity. 8. Courtesy promises. Even if the intention to be legally bound is not expressly mentioned as being one of the requisites of a contract, under Italian contract law several types of agreements and/or promises are deemed unenforceable in cases in which such intention appears to be lacking. Courtesy promises, for instance (dinner invitations, informal promises made between friends or family members, etc.), are not considered legally binding according to Italian case law: the declared legal justification for this solution is that such promises lack a causa, or that the performance promised is not patrimonial, in the sense specified by Art. 1174 C.C., but the undisclosed rationale is that the intention to be legally bound is highly questionable (see Gordley (2001)). For this purpose, it is very important to ascertain the underlying intentions and interests of the parties: if there is a recognizable lawful economic interest, even a ‘‘gratuitous’’ promise (i.e. a promise not for value) can be binding, without special requirements as to form, except for the transactions listed in Art. 1350 C.C. (see Gazzoni (2001), pp. 813–815; Castiglia (1983), 327; see also Gianola (2002). 9. Contracts requiring delivery. Moreover, for the conclusion of certain types of contracts – including, inter alia, contracts of loan, deposit and pledge (i.e. the so-called contratti reali) – in addition to the above mentioned elements, Italian law also requires delivery. In this respect, it should be noted that the enforceability of promises to lend money for value, or to receive a deposit for value has been upheld by case law, on the basis of the argument that such agreements are atypical, obligatory contracts admissible pursuant to Art. 1322(2) C.C. (see Gazzoni (2001), 847). If the loan or the deposit is gratuitous by operation of law or by intention of the parties, however, the informal promise to lend or to receive in deposit is not legally binding, unless the promisor has another underlying economic interest (see Gordley (2001), 129). 10. Evidence. As mentioned, under Italian law certain contracts must be made in writing ( public act or private writing), under penalty of nullity; others – such as, for instance, insurance contracts (see Art. 1888 C.C.) – moreover, must be evidenced in writing. This means that a valid contract can be concluded orally (or otherwise, for example by conduct), but there must be written proof of its existence. 12. Proof by witnesses. In any event, pursuant to Art. 2721 C.C., proof of contracts by witnesses is not admissible when the value of the subject matter exceeds euro 2,58. Nevertheless, the court may, at its discretion, admit proof by witnesses even beyond such limit, taking into account the character of the parties, the nature of the contract, or any 92 – A. MONTI

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other circumstances. It is worth noting that, since the value stated in that provision is so trivial, the usual relationship between rule and exception is inverted in this context. Proof by witnesses is nevertheless admissible in all cases when there is a prima facie written evidence (this consists of any writing which makes the alleged fact appear likely and which originates from the person against whom the action is directed, or from his representative); when it has been morally or materially impossible for the contracting party to secure any written evidence; when the contracting party has without fault lost the document which provided him with evidence (in this latter case proof by witnesses is admissible also when, according to law or to the parties’ agreement, a contract must be made or evidenced in writing).

COMPARISON AND EVALUATION 1. Notion and requisites of ‘‘contract’’. In the light of the above discussion, it is clear that there are several differences between the PECL and Italian law with respect to the notion of contract and its requisites. Contrary to Italian law, the PECL do not require the elements of causa and form. The PECL, moreover, do not recognize the legal category of ‘‘real contracts‘‘ (contratti reali, i.e. those contracts an essential element of which is delivery). It follows that, unless the promisor lacks the intention to be legally bound, informal gratuitous promises are always enforceable under the PECL, whereas Italian law distinguishes between donative promises, i.e. promises made gratuitously with the intention of enriching the promisee (enforceable only if made in writing by notarial act), informal courtesy promises (unenforceable) and informal gratuitous promises made in the light of an underlying economic interest on the part of the promisor (enforceability of which has been upheld but is to some extent debated). As to informal promises to lend money free of charge or to receive something in deposit free of charge, the PECL always consider them enforceable (if the parties have made them with the intention to be legally bound; see Art. 2:102 PECL) while Italian law appears to be much more sceptical (see the discussion above). For this purpose, it should be finally noted that some legal scholars maintain that the formal requirements of the contract of donation could be used to render any ‘‘gratuitous’’ promise enforceable under Italian law (see Sacco (1975); Gorla (1954); see also Musy-Monti, ‘Contract Law’, in Mattei and Lena (2002) at 253). 2. Evidence. As to the rules concerning proof of a contract, the PECL and Italian law differ. Pursuant to Art. 2:101 PECL, in fact, a contract may be proved by any means, including witnesses. Italian law, instead, sets several limitations to the admissibility of proof of contract by witnesses, especially where the contract must be made or evidenced in writing.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:102: Intention The intention of a party to be legally bound by contract is to be determined from the party’s statements or conduct as they were reasonably understood by the other party. 1. Intention to be legally bound. Pursuant to Art. 2:101(1)(a) PECL, a contract is only concluded if the parties to it indicate an intention to be legally bound. Against this backdrop, Art. 2:102 lays down a general principle on the effects of a party’s statement or (other) conduct: they are to be determined as they reasonably appear to the other party. However, if a party’s true intention is actually understood by the other party, the inner intention of the first party prevails; the other party may not rely on apparent intention. This follow from the rule of interpretation provided in Art. 5:101(1), which states that the common intention of the parties prevails even if this departs from the literal meaning of the words used. In other cases the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the circumstances (see Art. 5:101). Other rules, such as Arts. 5:102, 5:103(a) and (c-f ), 5:104 6:101 and 6:103 may also be applied to settle the matter.

ITALIAN LAW Art. 1362 C.C.: Intent of contracting parties That which was the common intent of the parties, not limited to the literal meaning of the words, shall be sought in interpreting the contract. In order to ascertain the common intent of the parties, the general course of their behaviour, including that subsequent to the conclusion of the contract, shall be taken into account. 1. Intention to be legally bound. Italian contract law does not list the intention to be legally bound among the express requisites of a contract (See Art. 1325 C.C.). However, the intention to be legally bound can still be considered as an informal requirement under Italian law. In fact, promises made out of courtesy, as a joke, or in any other way that denotes the absence of a serious intention to create a binding legal relationship are not deemed enforceable. The intention to be legally bound is generally presumed when the transaction involves a patrimonial interest for the parties. It should be noted, moreover, that even if in his/her inmost mind a party had no intention to be legally bound, Italian law will hold that he/she is bound if the party to whom the statement or other conduct was addressed had reason to assume that the first party intended to be bound. Whether this is the case is to be decided according to the rules of interpretation (See e.g. Art. 1362 C.C.) and the general principle of good faith. 94 – A. MONTI

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COMPARISON AND EVALUATION 1. Intention to be legally bound. While the PECL list the intention to be legally bound among the requisites of a contract, Italian law does not. However, in both systems promises made in any manner which denotes the absence of a serious intention to create a binding legal relationship are not deemed enforceable. In determining the existence of an intention to be legally bound, the reasonable understanding of the party to whom the declaration or the conduct has been addressed shall be taken into account pursuant to both the PECL and Italian law. The objective evaluation of the parties’ statements and/or conduct is aimed at protecting reasonable reliance.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:103: Sufficient Agreement (1) There is sufficient agreement if the terms: (a) have been sufficiently defined by the parties so that the contract can be enforced, or (b) can be determined under these Principles. (2) However, if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached. 1. Sufficient agreement. This article elaborates upon the condition contained in Art. 2:101(1) sub a) PECL, which requires sufficient agreement between the parties. According to Art. 2:103(1), there is sufficient agreement if the terms of the contract have been sufficiently defined by the parties so that the contract can be enforced, or if the terms can be determined under the PECL. Art. 2:103(2) PECL lays down an exception: if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached. In other words, where two or more parties conclude a contract, agreement must be reached on the terms which are necessary for determining their mutual rights and obligations and which are decisive for each of them. Thus, sufficient agreement covers two requirements: terms which are determinable, and consensus on disputed terms. The parties must have made an agreement the terms of which are so definite that it can be enforced in court. With respect to usual types of contract (sale of goods, supply of services, employment, insurance, etc.), the agreement as to the type of contract (e.g. sale) and a few crucial terms (type of goods and quantity) will suffice. If the parties are silent on other issues (e.g. price and quality) these issues will be decided by the rules of Chapter 6, notably Arts. 6:104–6:108 of the PECL. These issues may also be determined by other means such as usages and practices between the parties (see Art. 1:105 PECL), or supplying an omitted term (see Art. 6:102 PECL). If it is not apparent what type of agreement is being made, the agreement cannot be enforced unless the parties’ essential rights and duties have been agreed upon. A party may consider a term to be so essential that he/she will make his/her assent to the contract dependent upon agreement on that point. Thus, terms which are normally not considered essential can be rendered so by a party. No contract comes into being until an agreement on that term has been attained. Nevertheless, a party which has made one or more points essential to its assent to the contract may accept performance of the envisaged contract by the other party. The contract is then considered to have been concluded by the conduct of the parties. The PECL will supply the disputed terms.

ITALIAN LAW Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to 96 – A. MONTI

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all the consequences deriving from it by law or, in its absence, according to usage and equity. Art. 1346 C.C.: Requisites The object of the contract must be possible, lawful, determined, or determinable. 1. Sufficient agreement. Object and content of a contract. Italian law considers agreement of the parties as an essential element of the contract (see Art. 1325(1) C.C.). If agreement on the terms is missing, the contract is void (see Art. 1418 C.C.), or – according to some authors – inexistent (see also comments under PECL Chapter 4 – Validity). 2. Object of a contract. Moreover, Arts. 1325 and 1346 C.C. state that a contract must have an object (i.e. the content of the agreement) and that the object must be possible, lawful, determined, or determinable. More precisely, legal scholars distinguish between the object (oggetto) and the content (contenuto) of a contract, but the respective features are very much debated (see Sacco-De Nova (2004). The object must be possible (both physically and legally), lawful (the object is unlawful when it is contrary to mandatory rules, public policy or morals), determined (the intent of the parties must be clear) or determinable using objective criteria. The determination of the object of a contract can also be deferred to a third party, pursuant to Art. 1349 CC. (see also Art. 6:106 PECL). In any event, it does not follow that the parties are required by Italian law to expressly mention in the contract every detail of the transaction, since default rules will supply omitted terms which are not essential. It should be noted, in fact, that pursuant to Art. 1374 C.C., a contract binds the parties not only as to what it expressly provides, but also as to all the consequences deriving from it by law or, in the absence of legislative rules, according to usage or equity. However, if one of the contracting parties makes it clear that he/she does not intend to be bound until agreement is reached upon a certain term (even if non-essential), no contract is formed until then. This is subject to the rules on interpretation.

COMPARISON AND EVALUATION 1. Sufficient agreement. Content. Both the PECL and Italian law require that agreement of the parties must be reached on the essential terms of a contract. In contrast to PECL, however, Italian law states that the object of the contract must also be lawful. Both systems allow for the enforcement of a contract whenever the intention of the parties is sufficiently determined, or is determinable pursuant to the applicable rules on contract integration.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:104: Terms not individually negotiated (1) Contract terms which have not been individually negotiated may be invoked against a party which did not know of them only if the party invoking them took reasonable steps to bring them to the other party’s attention before or when the contract was concluded. (2) Terms are not brought appropriately to a party’s attention by a mere reference to them in a contract document, even if that party signs the document. 1. Standard conditions and standard forms. Under Arts. 2:101 and 2:103 PECL a contract is concluded if and only if the parties have agreed on its express terms. This rule must also apply when a party invokes standard terms or other not individually negotiated terms as part of the contract (see also Art. 4.110 PECL). The other party can only be held to terms which the first party took appropriate steps to bring to his/her knowledge before or when he/she accepted the contract. This requirement will be fulfilled when the standard terms form part of the contract document which the other party has signed. According to the official Comment to this Article, the requirement is also fulfilled when the terms are printed on the back side of the letter containing the offer or on a separate enclosure when reference has been made to the standard terms in the offer. However, terms are not brought appropriately to a party’s attention by a mere reference to them in the contract document, even if signed on behalf of that party, unless it knew of them beforehand – for instance, because in earlier similar contracts between the parties the other party had brought the terms to the first party’s attention; it this case a reference to them may suffice. If the first party does not know of the terms referred to, those terms must be included in the document, or other steps must be taken to make them known to the other party. It is not sufficient, for instance, to send the terms with the letter containing the offer with no reference to them in that letter. 2. Duty to inform the party. General conditions must be brought to the attention of the party when the contract is made or beforehand. Standard terms sent with a supplier’s acceptance of the customer’s offer may be treated as a modified acceptance (see Art. 2:208 PECL). Terms which the seller sends with the goods the buyer has ordered may be considered as being accepted by the buyer when he/she accepts the goods. However, terms sent with a supplier’s bill which the customer receives after receiving performance will not bind the customer. A party cannot unilaterally discharge the duty to bring his/her general conditions to the attention of his/her contracting partner by a term in his/her offer or by posting it on a notice board on his/her premises. However, before or after the conclusion of the contract, the other party may waive his/her right to be informed of the terms, and such a waiver can be implied when under the circumstances it would not be reasonable to require that other party to be informed. 98 – A. MONTI

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Terms which have been duly brought to the attention of a party will become part of the contract. If a party has not taken appropriate steps to bring the terms to the other party’s attention, the contract is treated as having been made without these terms. For the case of the conflicting use of standard forms by both parties, see Art. 2:209 PECL; for unfair terms not individually negotiated, see Art. 4:110 PECL; for the interpretation of standard forms, see Art. 5:103 PECL (interpretation against the drafter).

ITALIAN LAW Art. 1341 C.C.: Standard conditions of contract Standard conditions prepared by one of the parties are effective as to the other, if at the time of formation of the contract the latter knew of them or should have known of them by using ordinary diligence. In any case conditions are ineffective, unless specifically approved in writing, which establish, in favour of him who has prepared them in advance, limitations on liability, the power of withdrawing from the contract or of suspending its performance, or which impose time limits involving forfeitures on the other party, limitations on the power to raise defences, restrictions on contractual freedom in relations with third parties, tacit extension or renewal of the contract, arbitration clauses, or derogations from the competence of courts. Art. 1342 C.C.: Contracts made by means of forms or formularies In contracts made by subscribing to forms or formularies prepared for the purpose of regulating certain contractual relationships in a uniform manner, clauses added to such forms or formularies prevail over the original clauses of said forms or formularies when they are incompatible with them, even though the latter have not been stricken out. The provisions of the second paragraph of the preceding article also apply. Art. 1370 C.C.: Interpretation against the author of provision Provisions contained in the standard conditions of a contract or in forms or formularies which have been prepared by one of the contracting parties, are interpreted, in case of doubt, in favour of the other. 1. Standard conditions and standard forms. Pursuant to Art. 1341(1) C.C., standard conditions prepared by one of the parties are binding on the other only if, at the time of formation of the contract, the latter knew of them or should have known of them by using ordinary diligence. A. MONTI – 99

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The party who unilaterally drafts the standard conditions is obliged to render them accessible to the other party who must exercise ordinary diligence in order to know their content. Art. 1342 C.C., moreover, states that in contracts made by subscribing to forms or formularies prepared for the purpose of regulating certain contractual relationships in a uniform manner, clauses added to such forms or formularies prevail over the original clauses of said forms or formularies when they are incompatible with them, even though the latter have not been stricken out. In any event (for both standard conditions and contracts made by subscribing to standard forms), pursuant to Art. 1341(2) C.C., conditions are ineffective, unless specifically approved in writing, which establish in favour of him/her who has prepared them in advance, limitations on liability, the power of withdrawing from the contract or of suspending its performance, or which impose time limits involving forfeitures on the other party, limitations on the power to raise defences, restrictions on contractual freedom in relations with third parties, tacit extension or renewal of the contract, arbitration clauses, or derogations from the competence of courts (i.e. the so-called clausole vessatorie, unfair contract terms). In practice, specific reference to such unfair contract terms and their content is made in a special notice at the end of the standard form containing the general conditions and the non-drafting party is requested to specifically approve the unfair contract terms by signing the notice (See Cass. civ., Sez. III, 16/07/2002, no. 10285; Cass. civ. (Ord.), Sez. III, 06/02/2002, no. 1637). If such terms are deemed ineffective because specific written approval is lacking, the rest of the contract may still remain valid. In case of unfair terms in consumer contracts, a separate set of rules will apply, namely Arts. 1469 bis – 1469 sexies C.C. (implementing Directive 1993/13/EC). It should be noted, finally, that provisions contained in the standard conditions of a contract or in forms or formularies which have been prepared by one of the contracting parties, are interpreted, in case of doubt, in favour of the other (Art. 1370 C.C.).

COMPARISON AND EVALUATION 1. Standard conditions and standard forms. Both the PECL and Italian law provide for special rules governing the use of standard conditions and standard forms. Under the PECL, however, standard terms are effective only if the drafting party took appropriate steps to bring them to the other party’s knowledge before or when the latter accepted the contract, while Italian law states that the non-drafting party is bound to the standard conditions if he/she knew of them or should have known of them by using ordinary diligence. By imposing a duty of care on the non-drafting party, therefore, Italian law appears to be more favourable to the party who wishes to enforce his/her standard conditions. 100 – A. MONTI

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2. Unfair contract terms. It should be noted that even though the special regime governing unfair contract terms (for which specific written approval is required) does not appear to be able to protect the weaker contracting party, at least it aims to force the drafting party to bring the onerous conditions to the other party’s knowledge; the way Italian courts have enforced such a duty, however, has very often led to unsatisfactory results. With regard to unfair terms, moreover, Italian law clearly distinguishes between contracts concluded between a professional and a consumer (governed by Arts. 1469 bis – 1469 sexies CC implementing Directive 1993/13/EC) and all other contracts (subject to the rule in Art. 1341(2) which merely provides for specific written approval of them), while the PECL do not (see Art. 4:110 PECL which to some extent resembles Art. 3 para. 1 Directive 1993/13/EC). Both systems acknowledge the rule of interpretation against the drafter of the provision (see Art. 5:103 PECL and Art. 1370 C.C.). It is worth noting that pursuant to Art. 2.20 of the Unidroit Principles of International Commercial Contracts, no term contained in standard terms (defined in Art. 2.19 of the Unidroit Principles as provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party) which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party. In determining whether a term is of such a character regard is to be had to its content, language and presentation. In case of conflict between a standard term and a term which is not a standard term the latter prevails (see Art. 2.21 of the Unidroit Principles).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:105: Merger Clause (1) If a written contract contains an individually negotiated clause stating that the writing embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements which are not embodied in the writing do not form part of the contract. (2) If the merger clause is not individually negotiated it will only establish a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted. (3) The parties’ prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause. (4) A party may by its statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on them. 1. Notion. Art. 2:105 PECL deals with merger clauses: stipulations in contract to the effect that the written contract contains the parties’ entire agreement and that earlier statements, undertakings and agreements do not form part of the contract. Art. 2:105 PECL distinguishes in paragraphs (1) and (2) between individually negotiated merger clauses and merger clauses which have not been individually negotiated. These are subject to different rules. In addition, Art. 2:105(3) PECL deals with the meaning of a merger clause with respect to the interpretation of the contract, while Art. 2:105(4) PECL limits the right to invoke a merger clause under certain circumstances. Art. 2:105(1) PECL is the expression of the principle of freedom of contract, laid down in Art. 1:102 PECL. The official comments make reference to the case in which during the negotiations for the sale of a property the parties orally agree that the seller shall remove an unsightly ice house from a nearby tract. This agreement was not mentioned in the written contract containing an individually negotiated merger clause; the buyer cannot require the ice house to be removed. Pursuant to Art. 2:105(2), however, if the merger clause has not been individually negotiated it will only establish a rebuttable presumption that the parties intended that their prior statements should not form part of the contract. A rule according to which such a clause would always prevent a party from invoking prior statements or undertakings would be too rigid and would often lead to results contrary to good faith. A merger clause will not prevent the parties’ prior statements from being used to interpret the contract. This rule in Art. 2:105(3) applies also to individually negotiated merger clauses, but in this case the parties may agree otherwise. 102 – A. MONTI

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Art. 2:105(4), finally, is aimed at protecting the party who reasonably relied on the other parties’ statements or conduct which are contrary to the content of a merger clause.

ITALIAN LAW Art. 1322 C.C.: Contractual autonomy The parties can freely determine the contents of the contract within the limits imposed by law. (...) Art. 1362 C.C.: Intent of contracting parties That which was the common intent of the parties, not limited to the literal meaning of the words, shall be sought in interpreting the contract. In order to ascertain the common intent of the parties, the general course of their behaviour, including that subsequent to the conclusion of the contract, shall be taken into account. Art. 2722 C.C.: Stipulations added or contrary to contents of document Proof by witnesses is not permitted to establish stipulations which have been added or are contrary to the contents of a document, and which are claimed to have been made prior to or at the same time as the document. Art. 2724 C.C.: Exceptions to prohibition of proof by witnesses Proof by witnesses is admissible in all cases: (1) when there is a prima facie written evidence; this consists of any writing which makes the alleged fact appear likely and which originates from the person against whom the action is directed, or from his representative; (2) when it has been morally or materially impossible for the contracting party to secure any written evidence; (3) when the contracting party has without fault lost the document which provided him with evidence. 1. Notion. There are no provisions in Italian contract law dealing expressly with merger clauses. It should be noted, however, that pursuant to Art. 1322 CC, the parties can freely determine the contents of the contract; therefore, if the parties intended to exclude any prior statement from the written contract they signed, a merger clause should be enforceable. Of course, this is a matter of interpretation and, according to Art. 1362 CC, the common intent of the parties prevails over the literal meaning of the words. In order to ascertain the common intent of the parties, the general course of their behaviour, including that subsequent to the conclusion of the contract, shall be taken into account. A. MONTI – 103

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As to merger clauses not individually negotiated that have been inserted in standard conditions or in forms or formularies, Arts. 1341 and 1342 C.C. shall apply (see discussion above, under Art. 2:104 PECL). 2. Evidence. From an evidentiary point of view, another relevant provision is that in Art. 2722 C.C., stating that proof by witnesses is not permitted to establish stipulations which have been added or are contrary to the contents of a document, and which are claimed to have been made prior to or at the same time as the document. With the limited exception of the cases listed in Art. 2724 C.C., therefore, courts are not allowed to admit witnesses to prove such prior stipulations (see Cass. civ., Sez. III, 19 July 2002, no. 10558). Under Italian law, a party who reasonably relied on the other parties’ statements or conduct which are contrary to the content of a merger clause could be allowed to invoke the doctrine of venire contra factum proprium, which follows from the duties of good faith (Art. 1375 C.C.) and fair dealing (Art. 1175 C.C.).

COMPARISON AND EVALUATION Italian law, contrary to PECL, does not devote any special provision to merger clauses. Both, however, recognise that, in principle, parties are free to determine the content of the contract. The ascertainment of the parties’ intent by means of contract interpretation, therefore, plays a central role both in the PECL and in Italian law. With respect to merger clauses, Art. 2.17 of the Unidroit Principles of International Commercial Contracts states that a contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements; however, such statements or agreements may be used to interpret the writing.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:106: Written Modification Only (1) A clause in a written contract requiring any modification or ending by agreement to be made in writing establishes only a presumption that an agreement to modify or end the contract is not intended to be legally binding unless it is in writing. (2) A party may by its statements or conduct be precluded from asserting such a clause to the extent that the other party has reasonably relied on them. 1. Notion. Under Art. 2:106(1) PECL a written modification clause is considered to be a clause in a written contract determining that any modification or termination by agreement must be in writing. The PECL do not differentiate between written modification clauses which are the result of individual negotiations and those which are not. Art. 2:106(1) PECL only partially recognises written modification clauses, while stating that such clauses will only establish a presumption that subsequent agreements made orally or by conduct to terminate or to modify the written contract are not intended to be legally binding. This means that both parties may rebut this presumption and furnish evidence to prove that later they concluded an agreement – orally or by conduct – they intended to be legally binding. The idea behind this provision is – as may be deduced from the Comments – that it would be contrary to good faith to let the parties’ agreement to use writing bind them to that form when later they have clearly made up their minds to use another form. If, therefore, it can be shown that both parties had agreed to modify or terminate the contract, but did not do so in writing, effect must be given to their agreement. A written modification clause, therefore, only carries evidentiary weight. If the parties by their conduct – for instance by oral agreement – have agreed to modify a contract containing a written modification clause and one party has reasonably acted in reliance on this conduct, the other party will be precluded from invoking the clause.

ITALIAN LAW Art. 1352 C.C.: Form agreed upon for contract If the parties have agreed in writing to adopt a specified form for the future contract it is presumed that such form was intended for the validity of the contract. Art. 2723 C.C.: Stipulations subsequent to drawing of document When it is alleged that, after the drawing of a document, a stipulation has been made, in addition or contrary to its contents, the judge can admit proof by witnesses only if, in consideration of the character of the parties, the nature of A. MONTI – 105

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the contract, and any other circumstances, it appears likely that verbal additions or modifications have occurred. 1. Notion. Pursuant to Art. 1352 C.C., if the parties have agreed in writing to adopt a specified form for the future contract it is presumed that such form was intended for the validity of the contract (ad substantiam) and not merely for evidentiary purposes (ad probationem). The same rule applies if parties to a contract have agreed in writing to a specified form for any subsequent addition to and/or modification of the agreement. In this case modifications and additions made in a different form are deemed null and void. It follows that any modification to a written modification clause would be made in writing (Cass. civ., Sez. III, 14 April 2000, no. 4861; but see also contra Cass. civ., Sez. I, 5 October 2000, no. 13277). The voluntary formal requirement, however, shall apply solely to the extent expressly envisaged by the parties; if, for instance, the parties only agree that additions and modifications shall be made in writing, termination by conduct ( facta concludentia) is admissible (See Cass. civ., Sez. III, 24 June 1997, no. 5639). As for written modification clauses not individually negotiated and inserted in standard conditions, forms or formularies, Arts. 1341 and 1342 C.C. shall apply (see discussion above, under Art. 2:104 PECL). Finally, it is worth recalling that, in any event, pursuant to Art. 2723 C.C., when it is alleged that, after the drawing of a document, a stipulation has been made, in addition or contrary to its contents, the court can admit proof by witnesses only if, in consideration of the character of the parties, the nature of the contract, and any other circumstances, it appears likely that verbal additions or modifications have occurred.

COMPARISON AND EVALUATION The PECL are not in favor of formal requirements and this affects the rules governing written modification clauses. As mentioned, written modification clauses only carry evidentiary weight under the PECL. On the contrary, Italian law recognises the enforceability of such clauses, within the limits stated above. In this respect it is worth mentioning that both Art. 2.18 of the Unidroit Principles of International Commercial Contracts and Art. 29(2) CISG state that a contract in writing which contains a clause requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:107: Promises Binding Without Acceptance A promise which is intended to be legally binding without acceptance is binding. 1. Notion. In general, an offer is a promise which requires acceptance. However, Art. 2:107 PECL recognises that there are promises that are binding without acceptance and that such promises shall be treated as contracts, albeit with some modifications (see supra under Art. 2:101 PECL). Whether there is a promise which is intended to be legally binding without acceptance depends on the statements or conduct of the promisor, as reasonably understood by the promisee (see Art. 2:102 PECL). The language of the promise and other circumstances have to be taken into account. Of course, in order to have effect the promise has to be communicated to the promisee or to the public (see also Art. 2:201(2) PECL). Art. 2:107 PECL does not cover so-called ‘abstract’ promises: when the promisor issues an instrument of debt containing a promise which is binding per se, i.e. with no regard to the underlying relationship. Notwithstanding the fact that a promise may be binding without acceptance, the offeree may nevertheless reject such a promise (see Art. 2:203 PECL).

ITALIAN LAW Art. 1333 C.C.: Contract binding on offeror only An offer for the purpose of forming a contract that creates obligations only for the offeror is irrevocable as soon as it comes to the knowledge of the party to whom it is directed. The offeree can reject the offer within the time required by the nature of the transaction or by usage. In the absence of such rejection the contract is concluded. Art. 1987 C.C.: Effects of promises A unilateral promise of a performance is not binding except in specific cases permitted by law. Art. 1988 C.C.: Promise of payment and acknowledgment of debt A promise of payment or the acknowledgement of a debt exonerates the person in whose favour it is made from the burden of proving the underlying obligation. Such obligation is presumed, subject to contrary evidence. A. MONTI – 107

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Art. 1989 C.C.: Promise to public A person who, addressing himself to the public, promises a given performance in favour of a person who is found in a specific situation or who performs a specific action, is bound by such promise as soon as it is made public. If no time limit is set in the promise or is implicit in its nature or purpose, the promisor is freed from his obligation if he is not notified within one year from the time of the promise that the specified situation or performance called for in the promise has occurred.

1. Notion. Art. 1987 C.C. states that a unilateral promise is not binding except in specific cases permitted by the law, such as the case of a promise made to the public pursuant to Art. 1989 C.C. (see comments under Art. 2:201 PECL). According to Art. 1333 C.C., however, an offer for the purpose of forming a contract that creates obligations only for the offeror is irrevocable as soon as it comes to the knowledge of the party to whom it is directed (see also Art. 2:202 PECL); the offeree can reject the offer within the time required by the nature of the transaction or by usage. In the absence of such rejection, the contract (creating obligations for the offeror only) is concluded. These promises, therefore, do not need express acceptance to be legally binding but can be timely refused by the promisee. Whenever there is an underlying economic interest of the promisor, Art. 1333 C.C., therefore, can be used to overcome the limit set by Art. 1987 C.C. (see Castiglia (1983), 327; Carresi ‘‘Contratti e atti unilaterali’’, in Studi in memoria di Vassalli (1960); Id. (1974), 393; Sacco, see also Gordley (2001), 305–307).

Art. 1988 C.C. (A promise of payment or the acknowledgment of a debt exonerates the person in whose favour it is made from the burden of proving the underlying obligation. Such obligation is presumed, subject to contrary evidence), in turn, does not stand against the general principle that informal promises lacking a causa are unenforceable under Italian law (see the discussion above, under Art. 2:101 PECL); in fact, it merely has the procedural effect of reversing the burden of proving the source of the obligation, which is presumed, subject to evidence to the contrary (see Cass. civ., sez. III, 18 July 1997, no. 6642). It follows that the abstract promise itself is not an independent source of obligation (Cass. civ., sez. III, 17 March 1993, no. 3173, in Giur. it., 1994, I, 1, 1398). The practical consequences of such a procedural abstraction, however, can be very important, especially in those cases in which the promise to pay or the acknowledgement of a debt does not refer explicitly to any particular source of obligation. In this event, in fact, the promisor faces a probatio diabolica, because he/she bears the burden of proving the non-existence of any relationship that may justify the payment promised or the debt acknowledged. 108 – A. MONTI

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COMPARISON AND EVALUATION Art. 2:103 PECL states that a promise which is intended to be legally binding without acceptance is binding. Art. 1333 C.C., in turn, allows for a promise to be binding without acceptance when its purpose is to conclude a contract with obligations for the promisor only. Both the PECL and Italian law state that such promises can be rejected. A very important case of unilateral promises which are binding without acceptance is that of promises made to the public at large (see Art. 1989 C.C. and also Art. 2:201 (2) PECL).

A. MONTI – 109

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Section 2: Offer and Acceptance PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:201: Offer (1) A proposal amounts to an offer if: (a) it is intended to result in a contract if the other party accepts it, and (b) it contains sufficiently definite terms to form a contract. (2) An offer may be made to one or more specific persons or to the public. (3) A proposal to supply goods or services at stated prices made by a professional supplier in a public advertisement or a catalogue, or by a display of goods, is presumed to be an offer to sell or supply at that price until the stock of goods, or the supplier’s capacity to supply the service, is exhausted. 1. General. The rules laid down in this section deal with contracts concluded by offer and acceptance. Although the correspondence between offer and acceptance is the way a contract usually comes about, the PECL recognize that other models may also lead to the conclusion of a contract. Pursuant to Art. 2:211 PECL below, the rules of this section may be applied, with adaptations, to agreements in which an offer and acceptance cannot be precisely identified. 2. Requirements for an offer to be effective. Under Art. 2:201 PECL, an offer must be such that, if accepted, a contract is concluded. To this effect the offer must meet three main requirements: a) it must show the offeror’s intention to be bound in case of acceptance. Such an intention must be determined in accordance with Art. 2:102 PECL and Chapter 5 PECL on Interpretation; b) it must be sufficiently precise in its content (in this respect see Arts. 2:101 and 2:103 PECL); c) it must be addressed to one or more specific persons or to the public. 3. Proposals made to the public. The PECL do not establish any presumption as to whether a proposal made to the public has to be treated as an offer which, by virtue of acceptance, gives rise to a contract or merely as an invitation to make offers which confers no power of acceptance. However, as explained in Comment C, under the PECL proposals made to the public in advertisements, posters, window displays, or by putting up an item for auction, normally have to be considered as offers if they clearly show the offeror’s intention to be bound. Also sufficiently precise proposals that can be accepted regardless of the quality of the acceptor have to be treated as offers (see Comment C for illustrations). On the other hand, proposals such as an advertisement for a house for rent at a certain price or for a job-opening for persons who meet certain requirements (so called proposals ‘with an eye on the person’) are generally presumed to be only invitations to make offers since the offeror is not bound to conclude the contract or to employ job applicants. As to putting an item up for auction, it is supposed to be merely an invitation to bid, unless otherwise required under the circumstances. 110 – R. PELEGGI

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4. Goods and services offered at stated prices. Pursuant to para. (3), proposals to supply goods or services at stated prices made by professional suppliers in public advertisements, catalogues or by a display of goods are presumed to be offers to sell or supply at that price until the stock of goods or the supplier’s capacity to supply the service at those conditions is exhausted. As explained in Comment D, the supplier’s choice to advertise goods or services in such ways leads one to believe that the supplier may effectively rely on that quantity of goods or that capacity to supply services. The presumption established in para. (3) may however be rebutted in particular circumstances, such as where the creditworthiness of the people to whom the proposal is directed is uncertain. Rules similar to those set forth in Art. 2:201(1) PECL can be found both in Art. 14(1) CISG, which specifies that an offer is sufficiently definite if it indicates the goods and expressly or impliedly fixes criteria for determining quantity and price (see, among others, U.S. District Court, S. D., New York, 10 May 2002, abstract in English and original full text available on the Internet at http://www.unilex.info/, where the Court found that the indication of a ‘commercial quantity’, taking into account the industry usages incorporated into the agreement, was an appropriate criterion to determine quantity and price) and in Art. 2.1.2 of the Unidroit Principles (2004). It is worth noting that, in contrast to the PECL, CISG establishes the presumption that a proposal addressed to no specific persons amounts to a mere invitation to make offers. Yet this rule does not apply if the proposal clearly shows a contrary intent (see Art. 14(2) CISG). On the contrary, the Unidroit Principles seem to be inclined to treat proposals made to the public as invitations only to open negotiations (see Comment 2 to Art. 2.1.2 Unidroit Principles (2004)).

ITALIAN LAW Art. 1326 C.C.: Formation of contract A contract is formed at the moment when he who made the offer has knowledge of the acceptance of the other party. (...) Art. 1335 C.C.: Presumption of knowledge An offer, acceptance, 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, unless he proves that, without his fault, it was impossible for him to have notice of them. Art. 1336 C.C.: Offer to public An offer to the public, when it contains the essential terms of the contract toward whose formation it is directed, is effective as an offer, unless it appears otherwise from the circumstances or usage. (...) R. PELEGGI – 111

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Art. 1989 C.C.: Promise to public A person who, addressing himself to the public, promises a given performance in favour of a person who is found in a specific situation or who performs a specific action, is bound by such promise as soon as it is made public. (...) Art. 1900 C.C.: Revocation of promise Before the end of the period indicated in the preceding article, a promise can be revoked only for just cause, provided that the revocation be made public in the same manner as the promise or in an equivalent form. In no case shall the revocation be effective if the situation called for in the promise has already materialized or if the act called for has already been performed. 1. General. In Italian law, the rules governing contract formation are laid down in Arts. 1326 –1342 of the Codice Civile. They deal with contracts concluded by offer and acceptance, but they may nonetheless govern agreements in which offer and acceptance cannot be precisely identified (see Comment to Art. 2:211 PECL, below). 2. Requirements for an offer to be effective. According to Italian scholars and case law, a proposal purporting to be an offer must meet the following requirements: firstly, it must be complete, i.e. it must specify the essentials of the proposed deal with sufficient precision so that a contract can come into existence by a mere acceptance (see Cass. 24 May 2001, in Mass. Giust. Civ., 2001, no. 7094). Secondly, it must show the offeror’s intention to be legally bound (see, among others, Cass. 3 July 1990, no. 6788, published in excerpt in Bessone (2002), p. 813 et seq.). Where not expressly declared, such an intention has to be inferred from the particular nature of the deal (see Camerieri (1991), p. 63) or from the circumstances: e.g., if a proposal contains formulae such as ‘senza impegno’ (not binding), ‘con riserva’ (with reserve), it results merely in an invitation to make offers. An offer may normally be either express or implied. It may be addressed to one or more specific persons or to the public. No specific form is necessary unless required by law or by a prior agreement between the parties (see Bianca (2000), p. 215). The offer becomes effective only when it reaches the person to whom it is addressed (unless it amounts to an offer to the public: see below). When contracts are concluded between persons living at some distance from each other or who do not use an instantaneous means of communication, the offer is presumed, pursuant to Art. 1335 C.C., to be effective when it reaches the address of the person to whom it is directed (for further explanations see Comment to Art. 2:205 PECL, below). The burden of proving the impossibility of receiving notice of the offer is on the offeree. 3. Offer to the public. Pursuant to Art. 1336 C.C., a proposal made to the public is regarded as an offer when it is sufficiently precise, i.e. when it satisfies, at least implicitly, all the requirements of an offer to conclude a contract. A contrary result may however 112 – R. PELEGGI

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follow depending on the circumstances of the case or usages. An offer made to the public becomes effective as soon as it is made known by advertisements, posters, window displays and other means capable of reaching a large number of people (see Roppo (2001), p. 112). Instances of offers made to the public are proposals made through automatic vending machines or self-service stores (see Bianca (2000), p. 248). Putting an item up for auction is also normally considered an offer, and the highest and last bid amounts to acceptance (see Bianca (2000), p. 249). Under Italian law an offer to the public has to be distinguished from a promise to the public. In the latter case the promissor undertakes to render performance in favour of a person who is in a specific situation or who perform a specific act. However, the difference between the two may sometimes be slight (see Roppo (2001), p. 115). Unlike an offer to the public, a promise to the public does not aim at the conclusion of a contract (see Cataudella (1994), p. 39). Moreover, the promise is binding upon the promissor as soon as it is made public, whereas the offer to the public is binding only when it is accepted (see Bianca (2000), p. 250). Again, unlike an offer to the public (see Comment to Art. 2:202 PECL, below), a promise may be revoked only for just cause; yet pursuant to Art. 1990 C.C., revocation has no effect if, at the time of revocation, the specific situation has already occurred or the specific act has already been performed. 4. Goods and services offered at stated prices. Proposals to supply goods or services at stated prices made by professional suppliers to a large range of addressees by means of radio, television or distribution of advertising material, are deemed to be offers, provided that there is a stock of goods and the offeror can really supply the service at the stated conditions. If the offeree has shown his/her intention to conclude a contract but the stock of goods or the supplier’s capacity to provide the service has been exhausted, he/she will not be considered as being bound as otherwise he/she would be forced to wait until the stock or the capacity has been re-established (see Bianca (1993), p. 247 et seq.).

COMPARISON AND EVALUATION Both the PECL and Italian law provide a set of rules governing contracts concluded by offer and acceptance that may be applied by way of analogy when a sequence of offer and acceptance cannot be precisely identified (see Comment to Art. 2:211 PECL, below). Like the PECL, the Codice Civile provides that an offer may be addressed to one or more specific persons or to the public but does not specifically deal with what is required of an offer in order for it to be effective. Rules similar to those set forth in Art. 2:201(1) PECL have nevertheless been developed by Italian legal writers and case law: a proposal amounts to an offer when it is sufficiently precise and shows the offeror’s clear intention to be bound in case of acceptance; in order to ascertain that a proposal amounts to an offer or only to an invitation to make offers, recourse to circumstances and usages may be decisive. As to a proposal made to the public, in contrast to the PECL, the Codice Civile establishes the presumption that such a proposal has to be treated as an offer, provided that it contains the essentials of the proposed deal.

R. PELEGGI – 113

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:202: Revocation of an offer (1) An offer may be revoked if the revocation reaches the offeree before it has dispatched its acceptance or, in cases of acceptance by conduct, before the contract has been concluded under Art. 2:205 (2) or (3). (2) An offer made to the public can be revoked by the same means as were used to make the offer. (3) However, a revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; or (b) it states a fixed time for its acceptance; or (c) it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. 1. Revocation of an offer. Pursuant to Art. 2:202 PECL, an offer is generally revocable. However, the revocation must reach the offeree before he/she has dispatched his/her acceptance or, in case of acceptance, by conduct (see Art. 2:204 PECL, below) before he/she has dispatched the notice of it. This rule has to be read in conjunction with Art. 2:205 PECL (see below), according to which a contract is deemed concluded at the time when acceptance (or notice thereof ) reaches the offeror. It follows that, whereas the contract is not concluded until the acceptance reaches the offeror, the offeror loses his/her right of revocation when the acceptance (or the notice thereof ) is dispatched, even though he/she is not aware that an acceptance is on its way. As far as contracts concluded by commencement of performance are concerned, revocation of an offer is effective provided that it reaches the offeree before he/she has started performance, i.e. before the contract has been concluded (see Art. 2:205(3) PECL, below). The issue of revocation becomes relevant only once an offer has become effective. For this reason one must distinguish revocation of an offer from withdrawal of an offer, as withdrawal is effective when it reaches the addressee before or at the same time as the offer (see in this respect Art. 1:303 PECL). In accordance with para. (2), revocation of an offer to the public is possible as long as it is made by the same means as used to make the offer and it reaches the addressee within the time set forth in para. (1). 2. Irrevocable offers. Para. (3) provides for three exceptions to the principle laid down in para. (1). Revocation of an offer is without effect firstly when it is clear from the wording of the offer or from the offeror’s conduct that the offer is irrevocable; secondly, when the offeror chooses to keep the offer open for a certain period by fixing a time-limit for acceptance; finally, when it was reasonable for the offeree to understand that the offer was irrevocable due to the offeror’s behaviour or to the nature of the offer and he/she has acted in reliance thereon. As explained in Comment I, the rules relating to excuse due to an impediment (see Art. 8:108 PECL) or change of circumstances (see Art. 6:111 PECL) are equally applicable to contracts concluded on the ground of irrevocable offers. 114 – R. PELEGGI

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Art. 16 CISG and Art. 2.1.4 of the UNIDROIT Principles (2004) laid down rules close to those set forth by Art. 2:202 PECL. However, contrary to the PECL, neither under CISG nor under the UNIDROIT Principles, the stating of a fixed time for acceptance seems to mean by itself that the offer is irrevocable (with respect to CISG, see G. Eo¨rsi in BiancaBonell (eds) 1987, p. 157 et seq., see also Bernstein-Lookofsky (2003), p. 54; as to the UNIDROIT Principles, see Comment 2(a) to Art. 2.1.4).

ITALIAN LAW Art. 1328 C.C.: Revocation of offer and acceptance An offer can be revoked until the contract is concluded. However, if the acceptor has begun performance in good faith before having notice of the revocation, the offeror is bound to indemnify him for the expenses and losses sustained in beginning performance of the contract. The acceptance can be revoked, provided that the revocation comes to the knowledge of the offeror before the acceptance. Art. 1329 C.C.: Irrevocable offer If the offeror has bound himself to keep the offer open for a certain time, the revocation is without effect. In the case contemplated in the preceding paragraph, the death or supervening incapacity of the offeror does not deprive the offer of effect, unless the nature of the transaction or other circumstances preclude such effect. Art. 1331 C.C.: Option When the parties agree that one of them is to remain bound by his declaration and that the other has the power to accept or not, the declaration of the first is considered an irrevocable offer within the meaning of Art. 1329. If no time limit has been fixed for the acceptance, it can be established by the court. Art. 1333 C.C.: Contract binding on offeror only An offer for the purposes of forming a contract that creates obligations only for the offeror is irrevocable as soon as it comes to the knowledge of the party to whom it is directed (...). Art. 1336 C.C.: Offer to public (...) Revocation of the offer, if made in the same form as the offer or in equivalent form, is effective even as to one who has no notice of it. R. PELEGGI – 115

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1. Revocation of an offer. Under Italian law an offer may generally be revoked. As provided by Art. 1328 (1) C.C., revocation of an offer is possible until the contract has been concluded, i.e. until the offeror has knowledge of the other party’s acceptance (see Comment to Art. 2:205 PECL, below). Italian scholars are divided in their interpretation of this rule. The majority hold revocation effective if it is dispatched before the acceptance reaches the offeror (see, among others, Roppo (2001), p. 153 et seq.), while others, basing their reasoning on the rule (set out in para. (2) of Art. 1328 C.C.) that acceptance is revocable provided that the revocation reaches the offeror before the acceptance, maintain that revocation of an offer is effective only if it reaches the offeree before the offeror has knowledge of acceptance (see Bianca (2000), p. 232). The latter solution, which seems to be more consistent with the principles governing revocation of legal transactions and, moreover, with the need to protect the offeree (see Sacco-De Nova (1993), p. 238), has recently been adopted also in case law (see Cass. 16 May 2000, no. 6323, in Mass. G.I., 597), as opposed to the opinion which prevailed in the past (see, among others, Cass. 9 October 1981, no. 2083, in Mass. Giust. Civ., 1981, 794). As a counterbalance to the offeror’s power to revoke an offer, the offeree who has in good faith initiated performance before receiving notice of revocation is entitled to recover expenses and losses connected with beginning performance. By virtue of Art. 1336 C.C., if revocation of an offer to the public is made by the same means as was used to make the offer, revocation is effective also with respect to persons who did not receive notice of it. 2. Irrevocable offers. Pursuant to Art. 1329 C.C., revocation of an offer made during the time for acceptance is without effect when the offeror has decided to keep his/her offer open for a certain time, e.g. in order to grant the offeree a longer time to examine the proposal and, consequently, to increase the chances of concluding the contract. An offer may be deemed irrevocable when the offeror has made a declaration in that sense or has promised to keep his/her proposal open for a certain time (see Bianca (2001), p. 234). The mere fixing of a time for acceptance does not automatically lead to the conclusion that an offer is irrevocable: this will depend on the offeror’s real intention. Scholars are divided as to whether the offer may still be treated as irrevocable when no time-limit for acceptance has been fixed by the offeror. Some writers, excluding that the time-limit for acceptance might be determined otherwise, i.e. by a judge or in accordance with Art. 1326 (2) C.C., hold that where no time-limit has been fixed, the offer may only remain effective as revocable (in this respect see also Cass. 19 February 1981, no. 1011, in Mass. Foro it. 1981, 223). Others, taking the contrary view that if the time for acceptance has not been fixed it may nevertheless be determined otherwise, maintain that in such a situation the offer can still be treated as irrevocable (see Bianca (2000), p. 234 et seq.). Under Art. 1329 (2) C.C., an irrevocable offer can be accepted despite intervening death or incapacity, unless the nature of the agreement or other circumstances require otherwise. Finally, the question as to whether the expiry of the time for acceptance causes the offer to be terminated or to be left open and acceptable under the rules governing revocable offers must be answered according to the relevant circumstances (see Roppo (2001), p. 160). Pursuant to Art. 1331 C.C., when the parties agree in their contract that one of them will remain bound by his/her declaration, whereas the other will be free to accept it or not, 116 – R. PELEGGI

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such a declaration is treated as an irrevocable offer; a time-limit for acceptance, if lacking, can be fixed by a judge. A promise that is binding only on the offeror is irrevocable as soon as it reaches the addressee (see Comment to Art. 2:107 PECL).

COMPARISON AND EVALUATION Notwithstanding the fact that under both the PECL and Italian law an offer is generally revocable, the solutions adopted by the two systems on this topic diverge. Under the PECL an offer is revocable provided that revocation reaches the offeree before he/she has dispatched his/her acceptance, while under the Codice Civile an offer may be revoked at any time before the conclusion of the contract. Yet, the differences between the PECL and Italian law seem to lose significance if we look at the view increasingly taken by Italian scholars and case law as to the interpretation of Art. 1328 C.C., i.e. that revocation of an offer is effective if it reaches the offeree before the offeror has knowledge of the acceptance. Since this latter solution aims at granting more protection to the offeree, it seems to be more in line with the principle underlying Art. 2:202 (1) PECL. With regard to revocation of an offer to the public, the two systems take much the same position. Furthermore, both PECL and Italian law exclude that an offer which has to be deemed irrevocable under certain circumstances (such as an express statement by the offeror, a promise to keep the offer open for a certain time, or other facts that lead the offeree to treat the proposal as irrevocable) can be affected by revocation. However, as opposed to the PECL, under Italian law the mere fixing of a time for acceptance does not make the offer irrevocable.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:203: Rejection When a rejection of an offer reaches the offeror, the offer lapses. 1. Notion. An offer normally lapses if it has not been accepted within the time indicated in Art. 2:206 PECL (see Comment to Art. 2:206 PECL, below). Yet, the offeree may reject the offer either expressly or impliedly when time for acceptance is still running. This rule applies also when the offer is irrevocable under Art. 2:202(3) PECL, above. When rejected, the offer expires, so that the offeree cannot accept it later (if he/she tried to do so, the purported acceptance might itself be an offer to the other party). However, a rejection may normally be withdrawn provided that the withdrawal reaches the offeror before or at the same time as the rejection. An acceptance which materially diverges from the offer normally amounts to a rejection and a new offer (see Comment to Art. 2:208 PECL, below). Both CISG and the UNIDROIT Principles contain provisions relating to rejection of an offer that correspond in substance to Art. 2:203 PECL (see Art. 17 CISG and Art. 2.1.5 UNIDROIT Principles (2004), respectively).

ITALIAN LAW Art. 1334 C.C.: Efficacy of unilateral acts Unilateral acts take effect from the time when they come to the knowledge of the person to whom they are directed. 1. Notion. The Codice Civile does not contain any rule dealing expressly with rejection of an offer. However, the principle that an offer (including an irrevocable offer) may be rejected by the offeree is well established in Italian law (see Sacco (1999), p. 133). Rejection terminates the offer: pursuant to Art. 1334 C.C., a rejection becomes effective when it comes to the knowledge of the offeror, i.e. when it reaches the address of the offeror in cases where the presumption established by Art. 1335 C.C. applies (for further explanations see Comment to Art. 2:205 PECL, below). It seems possible to answer in the negative the question as to whether an offer which has been rejected may still be accepted, because rejection of an offer gives the offeror reason to believe that the contract will not be concluded, thereby leading him/her to act accordingly (see Roppo (2001), p. 108). Scholars usually make a distinction between rejection and counter-offer: whereas the former implies termination of the offer, the latter does not affect the offer. As a result, even though the offeree can make a counter-offer, the initial offer may still be accepted under the terms originally fixed therein (see Bianca (2000), p. 227; Sacco-De Nova (1993), p. 220). On the contrary, case law (rather sparse) seems to take the view that the offeror is no longer bound by its offer when the offeree either rejects the offer or makes a counteroffer (see Cass. 19 November 1983, no. 6891, in Giust. Civ. Mass., 1983, fasc.10). 118 – R. PELEGGI

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COMPARISON AND EVALUATION Although, contrary to the PECL, there are no general provisions on rejection of an offer in the Codice Civile, it is a well-known principle under Italian law that an offer may be rejected by the person to whom it is addressed. As in the PECL, also in Italian law the consequence of rejecting an offer is that the offeror is released from any duty towards the original offeree.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:204: Acceptance (1) Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. (2) Silence or inactivity does not in itself amount to acceptance. 1. General. Under PECL, an offer must be accepted in order to become effective. Silence or inactivity does not amount per se to acceptance. However, there may be cases where a promise is binding without acceptance (see Comment to Art. 2:107 PECL). 2. Mode of acceptance. Under Art. 2:204(1) PECL, acceptance may be constituted either by a statement or by other conduct of the offeree (e.g. by commencing performance). In order to be effective, acceptance must express the offeree’s intention to be bound under the terms of the offer (as to the existence of a sufficient agreement between the parties as a condition for the conclusion of a contract, see Comment to Art. 2:101). Whether the offeree’s statement or conduct amounts to an assent to the offer is to be decided according to the rules on interpretation (see Chapter 5 PECL). As a rule the acceptance may not diverge from the offer. However, an acceptance containing terms different from those of the offer may nevertheless amount to an acceptance when the conditions set forth in Art. 2:208 PECL are met (see Comment to Art. 2:208 PECL, below). Acceptance may not normally be subject to a condition; a final approval by the offeree or by a third party is admissible as long as the offeror knew or ought to have known that an approval was required. 3. Relevance of silence or inactivity. According to para. (2), silence or inactivity does not in itself amount to the acceptance of an offer. Yet silence or inactivity on the part of the offeree may lead to the conclusion of the contract when, for instance, it follows as a result of a previous statement of the offeree, usages, practices established between the parties or a framework agreement. Like the PECL, both CISG and the UNIDROIT Principles provide that an offer can be accepted either by statement or by conduct and, moreover, that silence or inactivity does not in itself mean acceptance (see Art. 18(1) CISG and Art. 2.1.6(1) UNIDROIT Principles (2004)). As to the taking of delivery of goods and the sending of a letter of credit being valid means to manifest consent under CISG see Oberlandesgericht Saarbru¨cken, 13 January 1993, abstract in English and original full text available on the Internet at http://www.unilex.info/, and U.S. District Court of Illinois, 7 December 1999, abstract in English and original full text available on the Internet at http://www.unilex.info/, respectively; with regard to the possibility of manifesting acceptance by conduct under the UNIDROIT Principles, see ad hoc Arbitration (Rome), 4 December 1996, abstract in English and original full text available on the Internet at http://www.unilex.info/. Moreover, as to the relevance of silence under CISG, see Cour d’Appel de Grenoble, 21 October 1999, in abstract and full text available on the Internet at http://www.unilex.info/, where the buyer was not entitled to rely on the principle that 120 – R. PELEGGI

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silence does not amount to acceptance because the practices previously established between the parties demonstrated otherwise (see Art. 9 CISG).

ITALIAN LAW Art. 1321 C.C.: Notion A contract is the agreement of two or more parties to establish, regulate or extinguish a patrimonial legal relationship among themselves. Art. 1333 C.C.: Contract binding on offeror only (...) The offeree can reject the offer within the time required by the nature of the transaction or by usage. In the absence of such rejection the contract is concluded. 1. General. Under Italian law acceptance is the action whereby the offeree manifests his/her intention to be bound by the terms of the offer (for further explanations see Comment to Art. 2:101 PECL). Although Italian law normally requires an offer to be accepted, a contract binding on the offeror alone, pursuant to Art. 1333 C.C., is deemed as having been concluded as long as the offer is not rejected within a reasonable time (see Comment to Art. 2:107 PECL). 2. Mode of acceptance. Acceptance may be effected either by means of a statement or by conduct (see Bianca (2000), p. 215). Confirmation thereof is to be found in Art. 1327 C.C. which provides that by commencing performance the contract will be concluded (see Comment to Art. 2:205 PECL, below). According to Italian case law, the intention to conclude a contract may be manifested either expressly or impliedly (see Cass. 19 November 1991, no. 12411, published in excerpt in Bessone (2002), p. 824 et seq., where the Court found that the issue of a cheque by the offeree amounted to a valid acceptance even though the offeree had failed to sign the document drawn up at the same time as the cheque and incorporating the offer). As a rule, acceptance must be timely (see Comment to Art. 2:206 PECL, below) and may not diverge from the offer (see Comment to Art. 2:208 PECL, below). 3. Relevance of silence or inactivity. Under Italian law silence or inactivity on the part of the offeree is in general not considered a valid expression of the offeree’s intention to be legally bound. Both scholars and case law state that the general rule may however be derogated from in particular circumstances (see Sacco (1999), p. 78 et seq.; as to case law, see, among others, Cass. 15 January 1973, no.126, in GI 1974, I, 1573). For instance, silence or inactivity constitute acceptance where so prescribed by statute (see Cass. 10 October 1963, no.2697, in Mass. Foro it., 767) or where a specific duty to speak arises R. PELEGGI – 121

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from usages or from the practices established between the parties (see Cass. 14 June 1997, in Mass. Giust. Civ. 1997, 988). In any case, due account has to be taken of the general principle of good faith (see Bianca (2000), p. 211 et seq.).

COMPARISON AND EVALUATION Both in the PECL and Italian law acceptance is the offeree’s action (statement, conduct or performance) that creates a contract. Although the Codice Civile, in contrast to the PECL, does not contain any specific provision regarding acceptance, the solution adopted by Art. 2:204(1) PECL corresponds in substance to that embraced by Italian law. Also the rule set forth in Art. 2:204(2) PECL as to the relevance of silence or inactivity is a widely known principle under Italian law, but exceptions to it are known in the Italian system as well. In order to ascertain whether silence or inactivity amounts to acceptance, both the PECL and Italian law rely heavily on the interpretation of the course of dealings established between the parties.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:205: Time of Conclusion of the Contract (1) If an acceptance has been dispatched by the offeree the contract is concluded when the acceptance reaches the offeror. (2) In the case of acceptance by conduct, the contract is concluded when notice of the conduct reaches the offeror. (3) If by virtue of the offer, of practices which the parties have established between themselves, or of a usage, the offeree may accept the offer by performing an act without notice to the offeror, the contract is concluded when the performance of the act begins. 1. General. The rules set forth in Art. 2:205 PECL determine the time when the contract is concluded. Time of conclusion of contract is the moment when the parties are bound to each other with no possibility of revoking or withdrawing their consent. As from that moment acceptance is binding upon the offeree, and the offeror cannot revoke his/her offer once acceptance has been dispatched (see Comment to Art. 2:202 PECL, above). 2. Moment of conclusion of contract. Under the PECL, the determination of the time of conclusion of the contract depends on whether acceptance has been manifested by statement, conduct or commencing performance. (a) In the case of acceptance by statement, the contract is concluded at the time when acceptance reaches the offeror. The acceptance does not need to be made by the same means as the offer. By virtue of Art. 1:303(3) PECL, a notice is presumed to reach the offeror when it is delivered to him/her, to his/her place of business, mailing address or habitual residence. (b) In the case of acceptance by conduct (e.g., when the offeree accepts by delivering the goods ordered by the offeror, by opening a credit in the offeror’s favour and so on) the contract is concluded when notice of the conduct reaches the offeror. Rules laid down in Art. 1:303 (3) PECL apply. (c) Conclusion of a contract by commencing performance without giving notice to the offeror is not the rule under the PECL. However, such a result is admissible when it can be inferred from the terms of the offer, from the practices established between the parties, or from usages. In such a case, the contract is concluded when performance begins and it is of no matter that the offeror has notice of the commencing of the performance after the time for acceptance has lapsed. Both CISG and the UNIDROIT Principles contain rules similar to Art. 2:206 PECL. Indeed, Art. 23 CISG provides that the contract is concluded when acceptance becomes effective, that is the moment when the manifestation of the consent reaches the offeror pursuant to Art. 18(2) CISG. The same rule is set forth in Art. 2.1.6 UNIDROIT Principles (2004) and applies also in the case of acceptance by conduct (see Comment 4 to Art. 2.1.6 UNIDROIT Principles). Moreover, both CISG and the UNIDROIT Principles, with respect to the issue of acceptance by commencing performance without prior notice to the offeror, provide that the contract is concluded when the act is performed (see Art. 18(3) CISG, and Art. 2.1.6(3) UNIDROIT Principles (2004), respectively). R. PELEGGI – 123

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ITALIAN LAW Art. 1326 C.C.: Formation of contract A contract is formed at the moment when he who made the offer has knowledge of the acceptance of the other party. (...) When the offeror requires a specific form of acceptance, the acceptance is ineffective if given in a different form. (...) Art. 1327 C.C.: Performance before reply by acceptor When, at the request of the offeror or by the nature of the transaction or according to usage, the performance should take place without a prior reply, the contract is concluded at the time and place in which performance begins. The acceptor must promptly give notice of the beginning of performance to the other party and, if he does not, is liable for damages. Art. 1335 C.C.: Presumption of knowledge An offer, acceptance, 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, unless he proves that, without his fault, it was impossible for him to have notice of them. 1. Conclusion of a contract in general. Under Italian law a contract is concluded when the offeror has knowledge of the other party’s acceptance effected either by means of a statement or by conduct (see Comment to Art. 2:204 PECL, above). This rule applies to contracts concluded inter praesentes or between parties who can communicate instantaneously (by telephone, fax and so on). As to contracts concluded inter absentes, Art. 1326 C.C. must be read together with Art. 1335 C.C., which establishes the presumption that a contract is formed when the acceptance reaches the address of the person to whom it is addressed. The offeror is always granted the right to provide evidence of not having received notice of the acceptance. However, conclusion of the contract is not excluded when the impossibility of receiving notice of the acceptance is the offeror’s fault, given that in order for such an impossibility to be effective, it must depend upon circumstances beyond the offeror’s control (see Bianca (2000), p. 220). The concept of ‘address’ must be interpreted in a broad sense (see Bianca (2000), p. 219) so as to include residence, domicile, working place, principal place of business (in the cases of companies or organizations), e-mail address (in the case of contracts concluded by e-mail: see Parigi (2001), p. 111) and any other place under the offeror’s control (see Cass. 13 December 2000, no. 15696, in Mass. G.I., 2000, 1456; see also Art. 13 of D. Lgs. 70/2003, which has implemented the European Directive no. 2000/31 on certain legal aspects of information society services, in particular electronic commerce, where it is stated that the order and the acknowledgement of receipt are deemed to be received when the parties to whom they are addressed 124 – R. PELEGGI

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are able to have access to them). As a general rule, acceptance does not have to be made in a specific form, but the offeror may request otherwise. In such a case, acceptance given in a form other than that requested by the offeror has no effect. 2. Conclusion of contract by commencing performance. Pursuant to Art. 1327 C.C. a contract may be concluded by commencing performance without prior notice to the offeror. An act of performance leads to the conclusion of a contract, for instance, when it is made in compliance with a specific request on the part of the offeror (e.g., by the inclusion of clauses such as ‘pronto consegna’ ( prompt delivery) in the agreement: see Cass. 23 December 1995, no. 13103, in Mass. Foro it. 1995, 1344), when it follows from the nature of the transaction (e.g., where negotiations are not needed: see Cass. 6 December 1966, no.2858, in Mass. Foro it. 1966, 984) or from usages. The person who begins performance must promptly give notice thereof to the offeror, otherwise he/she is liable for the damage suffered by the offeror as a consequence of acting in reliance on the assumption that the offer would not be accepted. A notice is deemed prompt when it is given within the time for acceptance (see Bianca (2000), p. 239; see Comment to Art. 2:206 PECL, below). According to case law, Art. 1327 C.C. must be interpreted strictly (see Cass. 22 April 2002, no. 5874, in I Contratti 2003, p. 5 et seq.; see also Cass. 21 March 2000, no. 3296, in Mass. G.I. 2000, 343). It follows that, where an act of performance on the part of the offeree is not one of those covered by Art. 1327 C.C., the contract will be deemed concluded only at the time when the offeror has knowledge of the conduct (see Roppo (2001), p. 122). A notice of beginning of performance made in situations not covered by Art. 1327 C.C. has been nonetheless considered a valid acceptance pursuant to Art. 1326 C.C. (see Cass. S.U., 9 June 1997, no. 5139, published in excerpt in Bessone (2002), p. 880 et seq.).

COMPARISON AND EVALUATION As to the time of conclusion of a contract, the PECL and Italian law provide similar rules. The two systems seem to diverge because under the PECL the contract is deemed concluded at the time when acceptance reaches the offeror, whereas under Italian law the contract is held to be formed when the offeror has knowledge of the acceptance. Nevertheless, upon closer examination, such divergence does not appear to be crucial. In fact, as to contracts concluded inter absentes (where a difference between the two systems can be envisaged), Italian law adopts a solution close to that provided in the PECL as a result of the correlation between Art. 1326 C.C. and Art. 1335 C.C. In addition, the Codice Civile contains a provision regarding conclusion of a contract by commencing performance that corresponds in substance to Art. 2:205(3) PECL, the main difference being that, unlike the PECL, it expressly provides that the offeree is liable for damages if the offeror is not promptly notified that performance has commenced.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:206: Time-Limit for Acceptance (1) In order to be effective, acceptance of an offer must reach the offeror within the time fixed by it. (2) If no time has been fixed by the offeror acceptance must reach it within a reasonable time. (3) In the case of an acceptance by an act of performance under Art. 2:205(3), that act must be performed within the time for acceptance fixed by the offeror or, if no such time is fixed, within a reasonable time. 1. General. Art. 2:206 PECL determines the period of time within which acceptance must reach the offeror in order to be effective. To this effect, a distinction is drawn depending on whether the offeror has fixed a time for acceptance; para. (3) expressly governs the case of acceptance by performance under Art. 2:205(3) PECL. 2. Time-limit for acceptance. a) If the offeror has fixed a time-limit for acceptance, the acceptance will be effective if it reaches the offeror within that time. b) If no time-limit has been fixed, the acceptance must reach the offeror within a reasonable time under the circumstances. In this respect, the means of communication used by the offeror, the nature of the transaction et similia have to be taken into account. The same rules apply in the case of acceptance by conduct pursuant to Art. 2:205(2) PECL, above; thus, notice of the conduct must reach the offeror within the time he/she has fixed or within a reasonable time. Lastly, pursuant to para. (3), when acceptance is through an act of performance under Art. 2.205(3) PECL, above, performance must be accomplished within the time fixed by the offeror, or a time otherwise considered reasonable under the circumstances. As to the time for acceptance, both CISG and the UNIDROIT Principles distinguish between written and oral offers (see Art. 18(2) CISG and Art. 2.1.7 UNIDROIT Principles (2004)). As to written offers, the same rules as those laid down in Art. 2:206 (1) and (2) PECL apply; oral offers must be, as a rule, immediately accepted. It is worth saying that, unlike the PECL, both CISG and the UNIDROIT Principles lay down rules of interpretation as an aid to determine when a period of time starts to run (see Art. 20(1) CISG and Art. 2.1.8 UNIDROIT Principles (2004)) and the effects of holidays that occur during or at the expiry of that period (see Art. 20(2) CISG and Art. 1.12 UNIDROIT Principles (2004)).

ITALIAN LAW Art. 1326 C.C.: Formation of Contract (...) 126 – R. PELEGGI

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2. The acceptance must reach the offeror within the time set by him or within that ordinarily necessary according to the nature of the transaction or usage. 1. General. Under Art. 1326 of the Codice Civile, acceptance must be timely. Acceptance is timely if it reaches the offeror within the time for acceptance (see Bianca (2000), p. 156). 2. Time-limit for acceptance. Time for acceptance may be fixed by the offeror; it may also be inferred from the nature of the transaction, from usages or from the practices established between the parties. An offer lapses if it is not accepted within the time-limit. The prevailing case law treats an acceptance as untimely even if the delay is due to the offeror (see, among others, Cass. 10 May 1996, no. 4421, published in excerpt in Bessone (2002), p. 831 et seq., where acceptance was found to be untimely even though the possibility of a timely acceptance had been excluded from the very beginning owing to the fact that the time for acceptance fixed by the offeror had lapsed when the offer reached the offeree. However, in that case the offeror was ordered to pay damages for having carried out negotiations in bad faith). A late acceptance may nonetheless be effective when it is treated as such by the offeror (see Comment to Art. 2:207 PECL, below). According to most legal writers, the fixing of a period of time prior to which the offer cannot be accepted is equally effective (see, among others, Roppo (2001), p. 109).

COMPARISON AND EVALUATION There are similarities between the rules adopted by the PECL and Italian law with respect to the time for acceptance. Under both the PECL and Italian law the offeror is entitled to fix the time for acceptance. Moreover if such a determination by the offeror is lacking, the two systems agree on the principle that acceptance must reach the offeror within a reasonable time. In fact, although the Codice Civile, contrary to the PECL, does not expressly so provide, the reference to the nature of the transaction and usages in Art. 1326 (2) C.C. clearly aims at determining a reasonable time for acceptance dependent on the relevant circumstances.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:207: Late Acceptance (1) A late acceptance is nonetheless effective as an acceptance if without delay the offeror informs the offeree that he treats it as such. (2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror informs the offeree that it considers its offer as having lapsed. 1. General. Notwithstanding that Art. 2:206 PECL (see above) provides that acceptance is ineffective when it reaches the offeror after the time for acceptance has expired, a late acceptance may nevertheless bring about the conclusion of the contract when the conditions set forth in Art. 2:207 PECL are met. This article distinguishes between two basic situations: one in which acceptance is late because of late dispatch, and another in which acceptance is late because of an impediment in the transmission. 2. Late acceptance. a) If delay is due to the late sending of the acceptance, para. (1) provides that the offeror may consider the late acceptance as timely and accept it, giving prompt notice thereof to the offeree. The contract is deemed concluded when the acceptance reaches the offeror. b) In case of delay due to an impediment in transmission, para. (2) establishes the presumption that, as long as there is evidence (e.g., the date on the letter or postmark on the envelope) that the acceptance would have reached the offeror in due time if it had been transmitted correctly, the late acceptance may nonetheless be effective. Yet, such a result is excluded when the offeror informs forthwith the offeree that he/she treats the offer as having lapsed. Art. 2:207 PECL correspond almost literally to Art. 21 CISG and Art. 2.1.9 UNIDROIT Principles.

ITALIAN LAW Art. 1326 C.C.: Formation of contract (...) 3. The offeror can treat late acceptance as effective, provided that he immediately so informs the other party. 1. General. Under Italian law, an acceptance that fails to reach the offeror within the time for acceptance (either determined by the offeror or in accordance with the nature of the contract or usages: see Comment to Art. 2:206 PECL, above) may nonetheless be effective 128 – R. PELEGGI

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when it is so treated by the offeror. The offeror must inform the offeree forthwith that he/she considers the late acceptance as effective. Lacking a prompt notice, the offeree is entitled to consider the contract as not having been concluded (see Roppo (2001), p. 109).

COMPARISON AND EVALUATION In case of late acceptance, both the PECL and the Codice Civile give the offeror the power to choose whether he/she wants to conclude the contract. He/she will be contractually bound if he/she treats the late acceptance as effective. In order to grant protection to the offeree, the offeror must inform the offeree without delay that he/she considers the contract concluded by virtue of the late acceptance. Contrary to the PECL, the Codice Civile does not expressly address the issue of late acceptance due to a delay in transmission.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:208: Modified acceptance (1) A reply by the offeree which states or implies additional or different terms which would materially alter the terms of the offer is a rejection and a new offer. (2) A reply which gives a definite assent to an offer operates as an acceptance even if it states or implies additional or different terms, provided these do not materially alter the terms of the offer. The additional or different terms then become part of the contract. (3) However, such a reply will be treated as a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; or (b) the offeror objects to the additional or different terms without delay; or (c) the offeree makes its acceptance conditional upon the offeror’s assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time. 1. General. Art. 2:208 PECL deals with the effects of a purported acceptance which contains or implies terms that in some way alter the original offer. The different solutions provided in Art. 2:208 PECL depend on whether or not the acceptance diverges materially from the offer. 2. Modified acceptance. a) Acceptance containing material alterations. Under para. (1), if an acceptance contains or implies additional or different terms which cause a material alteration to the terms of the offer, such acceptance has to be treated as a rejection of the original offer and constituting a new offer (counter-offer). The PECL do not provide a list of terms to be deemed ‘material’. Consequently, in order to establish whether a term constitutes a material alteration to an offer, the relevant provision is Art. 1:301(5) PECL, according to which a term is material if the offeree knew or, a reasonable person in the same position as the offeree, should have known that that term was essential for the offeror for the purpose of concluding a contract. b) Acceptance containing non-material alterations. Under para. (2), an acceptance giving definitive assent to the offer but containing modifications that do not alter materially the terms of the offer operates as an acceptance. As a result, additional or different terms become part of the contract. Yet this rule does not apply where the conditions laid down in para. (3) are met. Thus an acceptance will be considered a counter-offer if the offer expressly limits acceptance to its terms, if the offeror objects to the additional or different terms without delay and if the required assent to the additional or different terms on the part of the offeror does not reach the offeree within a reasonable time. As pointed out in Comment D, the rules laid down in Art. 2:208 PECL apply also in case of conduct purporting to be an acceptance but which alters, whether materially or not, the terms of the offer. Furthermore, as Comment F explains, Art. 2:208 PECL applies also when the modifications are due to clauses contained in general conditions to which the 130 – R. PELEGGI

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offeree refers to in his/her acceptance, provided that the offeror has not made any reference to his/her own general conditions in the offer; otherwise Art. 2:209 PECL (see below) applies. As a rule, a modified acceptance may be accepted by conduct or by act of performance. The rules set forth in Art. 2:208 PECL are close to those provided in Art. 19 CISG and Art. 2.1.11 UNIDROIT Principles (2004) (see, in this respect, ICC Court of Arbitration (Paris), no. 10422, 2001; as to the possibility of accepting a modified acceptance by an act of performance see also ICC Court of Arbitration (Milan), no. 8908, September 1998: both abstracts in English and original full texts available on the Internet at http://www.unilex.info/). However, contrary to both the PECL and the UNIDROIT Principles, CISG contains an illustrative list of terms that are presumed materially to alter the offer, such as those relating to price (see in this respect Handelsgericht des Kantons Zu¨rich, 10 July 1996, abstract in English and original full text available on the Internet at http://www.unilex.info/), quantity of goods (see, in this respect, Oberster Gerichtshof, 20 March 1997, abstract in English and original full text available on the Internet at http://www.unilex.info/, where the Court excluded that a modification of the quantity of goods, exclusively favourable to the offeror, was material), mode of payment, time of performance, settlement of disputes (see in this respect U.S. Circuit Court of Appeal, 9th Circuit, 5 May 2003, abstract in English and original full text available on the Internet at http://www.unilex.info/) and so on.

ITALIAN LAW Art. 1326 C.C.: (...) An acceptance that does not conform to the offer is equivalent to a new offer. 1. General. Under Italian law acceptance must be the ‘mirror image’ of the offer; otherwise a manifestation of consent purporting to be acceptance but diverging from the terms of the offer amounts to a new offer (counter-offer). According to scholarly opinion, in order to establish whether an acceptance diverges from the offer, recourse has to be had not only to the legal criteria on which interpretation is based, but also to the rules agreed by the parties with respect to a specific contract; practices established between the parties are relevant as well (see Bellelli (1992), p. 52). The rule that acceptance has to conform to the offer is interpreted strictly by judges. Consequently, it is irrelevant whether an additional or different term determines a material alteration to the offer since any modification of the terms of the offer prevents a contract from coming into existence (see, among others, Cass. 24 October 2003, no. 16016, in I Contratti (2004), p. 221 et seq.). The same view is taken by some legal writers (see Ferri (1969), p. 202 et seq.). 2. Acceptance containing non-material alterations: a possible exception to the ‘mirror image’ rule. More recently, some legal writers, in the light of the principle of good faith and taking into account the need to provide a more flexible rule, have maintained that the ‘mirror image’ rule should be derogated from when the additional or R. PELEGGI – 131

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different terms contained in the acceptance do not materially alter the terms of the original offer. In such a case, an acceptance providing new terms may nevertheless operate as an acceptance (see Roppo (2001), p. 107; Bellelli (1992), p. 130 et seq.). An acceptance is deemed not to alter significantly the terms of the offer when the modification contained therein does not prejudice the offeror’s interests; this might be the case if the modification concerns a clause whose relevance is not essential to the offeror (see Bellelli (1992), p. 133). 3. Modification by conduct. Since the rule that the acceptance must conform to the offer constitutes a general principle, it must be applied also to situations where acceptance is effected by conduct (see Bellelli (1992), p. 18). However, the criteria for determining whether an acceptance by conduct differs from the original offer should be other than those for interpreting acceptance by statement (Bellelli (1992), p. 141 et seq.). In fact, in case of acceptance by conduct, regard has to be had for the general rules on performance of contract (rather than those on interpretation). In this perspective, conduct diverging from the terms of the offer may all the same lead to the conclusion of the contract if, in the light of the principle of good faith, the offeror is rendered a performance corresponding in substance to what he/she had a right to expect under the contract. As long as the offeror’s position is not prejudiced, modifications that do not alter the terms of the offer may, for example, be those relating to place of performance, means of dispatch, time for delivery (see Bellelli (1992), p. 145). When the delivered quantity exceeds the amount agreed upon by the parties, the contract may nonetheless come into existence provided that the creditor separates the agreed amount from the surplus which has to be withdrawn by the other party (in this respect see Cass. 6 August 1965, no.1885, published in excerpt in G.I., 1966, I, 18 et seq.). 4. Counter-offer not accepted by the offeror. Since the Codice Civile remains silent on the issue, the prevailing scholarly opinion is that a counter-offer that has not been accepted by the offeror does not automatically mean that the original offer has been rejected. A contract might then come into existence through a subsequent acceptance which complies with the original terms of the offer (see Roppo (2001), p. 108; Bianca (2000), p. 227).

COMPARISON AND EVALUATION The Codice Civile contains a rule contrasting with Art. 2:208 PECL, as it embraces the principle according to which the acceptance must be the ‘mirror-image’ of the offer. However, upon closer examination, the divergence between the PECL and Italian law seems to decrease. It is true that this rule is strictly applied by judges but, on the other hand, some legal writers, taking a view more in line with the PECL, maintain that an acceptance providing for non-material modifications of the original offer may nevertheless operate as an acceptance. Unlike the PECL, there is no agreement among Italian legal scholars as to whether a counter-offer amounts to a rejection of the original offer.

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THE PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:209: Conflicting General Conditions (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance. (2) However, no contract is formed if one party: (a) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or (b) without delay, informs the other party that it does not intend to be bound by such contract. (3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties. 1. General. The provision at issue deals with standardized production of goods and services, generally accompanied by the conclusion of standardized contracts through the use of pre-printed supply- and purchase orders (see Art. 2:209(3); its model is § 2:207 of the Uniform Commercial Code which unfortunately was not updated by the 1996 Draft Revised Art. 2-Sale, where the provision – now § 2:206 – was modified to meet the specific needs of electronic transactions. Art. 2:209 applies when parties have agreed to a contract except that both are using a different set of standard clauses, some of which conflict with one another. In this case the rule provided is the so called ‘‘knock-out’’ rule: conflicting clauses are not enforceable. A battle of forms may occur even if only one party’s conditions contain standard provisions; in this case Art. 2:209(2) frees the other party from the general conditions if its declaration not to be bound has been made in advance or it informs the other party without delay. 2. Contract existence. a) Conflicting general conditions do not prevent contract formation. Art. 2:209(1) provides that a contract may be formed even though the general conditions exchanged by the parties are conflicting. The aim is to preserve the highest number of contracts, considering the enhancement of contracts always an efficient result. b) However, no contract is formed when one party explicitly informs the other that it does not intend to be bound by such a contract, Art. 2:209 provides a prescriptive rule concerning the duty to inform according to the informational rent-seeking theory [Craswell (1988), p. 401; AyresGertner (1989), p. 87; Katz (1996), p. 1249]. The party who does not want to be bound by a standard clause must inform the other in advance or shortly after contract conclusion in order to let the other decide if he/she wants to deal at a different level of contract drafting complexity [Ayres-Gertner (1992), p. 729] and, in consequence thereof, at a different price. 3. Contract content. If, despite a conflict between the two sets of conditions, a contract does come into existence, which conditions will apply? Until recently many legal systems A.M. MUSY – 133

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would answer the question as follows: by performing without raising objections to the new offer, the recipient must be considered to have accepted the general conditions contained in the new offer (the ‘last shot’ theory). According to Art. 2:209 the general conditions form part of the contract only to the extent that they are common in substance. The conflicting conditions ‘knock out’ each other. As neither party wishes to accept the other party’s general conditions, neither set of conditions should prevail over the other. A similar rule is found in sales governed by CISG, part II: where the terms of the acceptance do not materially alter the terms of the offer, the acceptance will conclude the contract unless the offeror objects without undue delay (see Art. 19(2)). Art. 2:209, also, is in accordance with the Unidroit Principles of International Commercial Contracts Art. 2.22, [see Bonell (1997)], which reads ‘‘Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.’’ Under CISG, the battle of forms should be considered a gap that must be filled by applying the general principles upon which the Convention is based. Following this approach, clauses contained in the forms that are contradictory would cancel each other out, leaving the issue to be governed by the applicable law, usage or good faith. The most widely held opinion however leads to the application of what is known as the ‘‘last-shot rule’’ – the last person to send his/her form is considered to control the terms of the contract and therefore the one who wins the battle. The PECL decided to follow the more recent American approach of the ‘‘knock-out rule’’. However, following Art. 2:209(2), no contract is formed if one party: a) has indicated in advance, explicitly, and not by general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1), i.e., there is a so-called ‘‘clause paramount’’; or b) without delay, informs the other party that it does not intend to be bound by such contract. 4. General conditions. Art. 2:209(3) provides three cumulative definitions of general conditions. They must a) have been formulated in advance, b) incorporated into an unlimited number of contracts and c) have not been individually negotiated between the parties. This definition is actually the same one provided for ‘‘standard form’’ in the Draft proposed to modify the UCC in 1996, which reads: ‘‘standard form’’ means a record prepared by one party in advance for general and repeated use that substantially contains standard terms and was used in transaction without negotiation’’.

ITALIAN LAW Art. 1326 C.C.: Formation of contract A contract is formed at the moment when he who made the offer has knowledge of the acceptance of the other party. 134 – A.M. MUSY

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The acceptance must reach the offeror within the time set by him or within that ordinarily necessary according to the nature of the transaction or usage. The offeror can treat late acceptance as effective, provided that he immediately so informs the other party. When the offeror requires a specific form of acceptance, the acceptance is ineffective if given in a different form. An acceptance that does not conform to the offer is equivalent to a new offer. Art. 1341 C.C.: Standard conditions contract Standard conditions prepared by one of the parties are effective as to the other, if at the time of formation of the contract the latter knew of them or should have known of them by using ordinary diligence. In any case conditions are ineffective, unless specifically approved in writing, which establish, in favour of him who has prepared them in advance, limitations on liability, the power of withdrawing from the contract or of suspending its performance, or which impose time limits involving forfeitures on the other party, limitations on the power to raise defences, restrictions on contractual freedom in relations with third parties, tacit extension or renewal of the contract, arbitration clauses, or derogations from the competence of courts. Art. 1342 C.C.: Contracts made by means of forms or formularies In contracts made by subscribing to forms or formularies prepared for the purpose of regulating certain contractual relationships in a uniform manner, clauses added to such forms or formularies prevail over the original clauses of said forms or formularies when they are incompatible with them, even though the latter have not been stricken out. The provisions of the second paragraph of the preceding article also apply. 1. General. Italian law does not have provisions regulating the battle of forms problem, even though the Italian Codice civile was the first code to deal with standard forms. The ‘‘mirror image’’ rule is the general principle which still applies. According to the general contract law provisions, when the offeror requires a specific form of acceptance, the acceptance is ineffective if given in a different form; moreover, an acceptance that does not conform to the offer amounts to a new offer (Art. 1326 C.C. para. 5). This leads to the conclusion that, in the case of a battle of forms, Italian law – both doctrine and case law – will use what is known as the ‘‘last-shot rule’’: the last person to send his/her form is considered to control the terms of the contract and therefore the one who wins the battle. Indeed, this must be considered one author’s position [Bellelli (1992)]. Bellelli, starting with the analysis of the provisions of the American Uniform Commercial Code and the Vienna Convention on Contracts for the International Sale of A.M. MUSY – 135

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Good (CISG), considers secondary conflicting clauses not to be crucial to acceptance and that the contract is therefore concluded. Art. 1419 C.C. seems to admit such an interpretation where, in case of partial nullity of a contract clause, it states: ‘‘The nullity of single clauses does not import the nullity of the contract when, by operation of law, mandatory rules are substituted for the void clauses’’. Mutatis mutandis, the author thinks that also in the case of conflicting offer and acceptance forms the rule in Art. 1419 C.C. should apply. Unfortunately, there is no Italian case law concerning battle of forms [Sacco-De Nova (2004)]; Sacco and De Nova seem to favour a solution where in case of conflicting forms, both sets of clauses will be considered invalid and the Code’s provisions will apply to fill the gap in the contract in order to save it.

COMPARISON AND EVALUATION Italian private law does not deal with the battle of forms. This is not surprising since the Codice civile was drafted in 1942 when Italian society had not yet been exposed to the developments of business usages. However the Code deals with standard forms and provides some solutions in the case of conflicting clauses (see Arts. 1419 and 1342 C.C.), generally that the contract remains effective and conflicting clauses are substituted either by clauses the parties bargained for (Art. 1342 C.C.), or by default rules (Art. 1419 C.C.). Nowadays the Italian legal community is exposed to the battle of forms issue via the CIGS and the Unidroit Principles of International Commercial Contracts; it would consequently not be surprising to see some courts adapt the Codice civile provisions to a rule such as the ‘‘knock-out rule’’ stated by PECL in Art. 2:209.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:210: Professional’s Written Confirmation If professionals have concluded a contract but have not embodied it in a final document, and one without delay sends the other a writing which purports to be a confirmation of the contract but which contains additional or different terms, such terms will become part of the contract unless: (a) the terms materially alter the terms of the contract, or (b) the addressee objects to them without delay. 1. General. Art. 2:210 PECL deals with the situation where a contract has already been concluded between professionals (i.e. persons engaged in business transactions) and one party subsequently sends the other a document intended merely to clarify what has been already agreed upon, but which in effect contains terms other than those previously agreed by the parties. In other words, a party sending a written confirmation to the other seeks to be sure of the terms of the contract before starting performance. In most cases, silence on the part of the recipient is considered as assent to the content of the written confirmation. 2. Conditions for a written confirmation to be binding. Under the PECL, a written confirmation is binding upon the recipient provided that the following conditions are met: a) the parties act in their professional capacity; b) the confirmation is given in writing; c) the contract is not embodied in a final document; d) the letter reaches the recipient without delay after the conclusion of the contract and refers thereto. If all these conditions are met, the additional or different terms contained in the written confirmation become part of the contract, provided that they do not materially alter the terms of the original agreement (as to the concept of ‘material alteration’ see Comment to Art. 2:209 PECL, above). On the contrary, if the written confirmation implies a material alteration of the previous agreement, the new terms will be binding on the recipient only if he/she expressly accepts them. However, even in the case where the different terms do not materially deviate from those contained in the initial agreement, the recipient always has the right to object forthwith to the discrepancy. The rule laid down in Art. 2:208 PECL is also set forth in Art. 2.1.12 UNIDROIT Principles (2004) (as to the reasons underlying the choice of providing the same rules both for the case of different terms contained in the acceptance and for the case of modifications contained in a written confirmation see Bonell (1997), p. 121). With respect to CISG, the matter of the letters of confirmation is traditionally considered as one of those implicitly excluded from the scope of the Convention. While there are decisions where the question has been solved in accordance with the applicable domestic law (see, in this respect, Rechtbank van Koophandel, Hasselt, 24 January 1995, abstract in English and original full text available on the Internet at http://www.unilex.info/, regarding the case of standard terms referred to in a letter of confirmation), some others have made recourse to the rule set out in Art. 9 CISG dealing with relevance of usages and practices (see, in this respect, R. PELEGGI – 137

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Oberlandesgericht Dresden, 9 July 1998, abstract in English and original full text available on the Internet at http://www.unilex.info/, where the Court, in the absence of a usage widely known and regularly observed in international trade providing expressly so, denied that silence to a commercial letter of confirmation was sufficient for the contract to be concluded with the content of the letter).

ITALIAN LAW 1. General. Although sending confirmations in writing by professionals has become more and more frequent due, inter alia, to the increasing speed with which contracts are concluded thanks to the huge development of means of communication, only a few Italian legal writers have addressed this topic (see Bonell (1988), p. 3 et seq.) and the first comprehensive study devoted to it is fairly recent (see Addis (1999)). According to legal writers, in order for a written confirmation to be effective two conditions have to be met: firstly, the parties must have already reached an agreement either orally or informally; secondly, the letter must reach the recipient within a short time after the conclusion of the agreement. In this perspective, a letter of confirmation may be defined as a document sent by one party to the other purporting to state the terms of the agreement allegedly concluded and to give such an agreement a formal shape (see Addis (1999), p. 20 et seq.). Even though it frequently occurs, it is not required that the word ‘‘confirmation’’ appear on the head or the body of the document (see Addis (1999), p. 116). A letter of confirmation can be sent by either party spontaneously or by virtue of an agreement concluded prior to, at the same time as, or after the conclusion of the contract (see Addis (1999), p. 132). Furthermore, written confirmation may be a requirement by virtue of a statute in order for an agreement to be valid: an important example thereof is represented by Art. 17 (1) of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, whereby an agreement conferring jurisdiction must be either in writing or evidenced in writing. Italian legal writers have questioned the meaning of this provision, in particular whether the requirement provided in Art. 17(1) of the Convention may be deemed fulfilled where the forum selection clause is included in the standard terms to which the party has referred for the first time in a written confirmation (see Bonell (1978), p. 404 et seq.). The leading case on this matter is represented by Cass. S.U., 9 June 1995, no. 6499 ( published in Foro it. 1997, I, 562 et seq.), where the Supreme Court denied the validity of a forum selection clause on the ground that the document purporting to confirm the terms of the prior agreement (which contained the forum selection clause) did not amount to a written confirmation but to a counter-offer as it diverged from the terms of the original offer. Since such a counter-offer had not been accepted by the recipient, it followed that no forum selection clause had validly been agreed upon. 2. Correspondence between the written confirmation and the parties’ agreement. As to the correspondence between the confirmation in writing and the agreement already concluded by the parties, three possibilities are given: a) total correspondence; b) partial divergence; c) total divergence (see Addis (1999), p. 123 et seq.). The first case does 138 – R. PELEGGI

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not seem to cause any difficulty. In the event of partial divergence, the statement that the confirmation would in any case amount to a proposal modifying the terms of the original agreement (to be accepted, in turn, by the recipient) does not seem to be satisfactory. In fact, this result should be restricted to situations in which the modifications contained in the letter alter materially the terms of the original offer, whereas in the opposite situation the different terms should become part of the original agreement (see Addis (1999), p. 232 et seq.) As to the third case, it is worth noting that a distinction has been drawn in legal writings between the case in which the terms of the letter differ totally from those of the prior agreement – resulting, consistent with the rule discussed below, in a proposal to modify the terms originally agreed upon – and the (extreme) case in which there is no agreeement to be confirmed so that the document embodying the confirmation may in itself bring about the conclusion of the contract (see Addis (1999), p. 126). 3. Relevance of silence. According to legal writers, if the document expressly requires further confirmation by the recipient and the recipient remains silent, silence would amount to a rejection of the confirmation. The same result would occur where the silent party denies in advance the effect of a letter of confirmation he/she has not expressly accepted (see Addis (1999), p. 215). In a situation where the confirmation adds to or varies the terms of the contract, the silent recipient will not be bound by it unless a different result might be inferred from the circumstances of the particular case (see Addis (1999), p. 341).

COMPARISON AND EVALUATION Unlike the PECL, the Codice Civile has no specific provision relating to written confirmations. However, according to the scholars, the rules to be applied in this matter should not deviate from those laid down in Art. 2:208 PECL. On the contrary, Italian case law (very sparse on this topic) appears to be stricter, taking the view that a written confirmation diverging from the terms of a prior agreement concluded between the parties results in a proposal to modify such an agreement. As a consequence, such a confirmation would be effective only if accepted by the party to whom it is addressed.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:211: Contracts not concluded through Offer and Acceptance The rules in this Section apply with appropriate adaptations even though the process of conclusion of a contract cannot be analysed into offer and acceptance. 1. General. Art. 2:211 PECL deals with the situation in which the process of formation of contract cannot be clearly separated into offer and acceptance. As already pointed out in the Comment to Art. 2:201 PECL (see above), the correspondence between offer and acceptance is only one of the feasible schemes for contract formation under the PECL. The rules laid down in this section are nevertheless applicable, if necessary with adaptations, to cases that cannot be described in terms of offer and acceptance (see Comment A and B for illustrations; as to promises binding without acceptance see Art. 2:107 PECL). Also under the UNIDROIT Principles contracts can be concluded irrespective of a clear sequence of an offer and acceptance (see Art. 2.1.1 UNIDROIT Principles (2004)); as to CISG, notwithstanding the fact that there is no rule saying expressly so, the possibility of concluding a contract even though an offer and acceptance cannot be precisely identifiable is to be inferred from the general principles governing contract formation (see in this respect Oberlandesgericht Mu¨nchen, 8 March 1995, abstract in English and original full text available on the Internet at http://www.unilex.info/).

ITALIAN LAW Art. 1327 C.C.: Performance before reply by acceptor When, at the request of the offeror or by the nature of the transaction or according to usage, the performance should take place without a prior reply, the contract is concluded at the time and place in which performance begins (...). Art. 1331 C.C.: Option When the parties agree that one of them is to remain bound by his declaration and that the other has the power to accept or not, the declaration of the first is considered an irrevocable offer within the meaning of Art. 1329. (...) Art. 1332 C.C.: Adherence of other parties to contract If other parties can adhere to a contract and the manner of adherence has not been determined, the question can be directed to such agency as may have been constituted for the implementation of the contract or, in the absence thereof, to all the original contracting parties. 140 – R. PELEGGI

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Art. 1333 C.C.: Contract binding on the offeror only (...) The offeree can reject the offer within the time required by the nature of the transaction or by usage. In the absence of such rejection the contract is concluded. 1. General. In Italian law the rules governing contract formation by the correspondence between an offer and acceptance (Art. 1326 et seq. C.C.) may be applied, by way of analogy, also to contracts where a sequence of offer and acceptance is not identifiable (see Roppo (2001), p. 136; Bianca (2000), p. 238). Yet, such an application is excluded when specific rules are expressly set forth by the law. For instance, there are specific rules for contracts that may be concluded by commencing performance without prior notice to the offeror under Art. 1327 C.C. (in this respect see Comment to Art. 2:205 PECL, above), as well as for contracts implying obligations for the offeror alone pursuant to Art. 1333 C.C. (where the offer is presumed to have been accepted unless the recipient objects to it within a reasonable time: see Comment to Art. 2:107 PECL). Specific rules are also given for so-called ‘open contracts’, i.e. contracts that may be subsequently agreed upon by parties other than those who first entered into the agreement (where, pursuant to Art. 1332 C.C., the new party’s acceptance must be addressed to all the parties, unless specific rules provide otherwise or a specific entity entrusted with the implementation of the contract has been established), as well as for contracts for which handing over is needed (so called ‘real contracts’: deposit, bailment, loan, gift of moderate value and so on). Special rules are provided also when the parties contractually agree that one of them will remain bound by his/her offer for a certain period, whereas the other will be free to accept it or not by virtue of Art. 1331 C.C. (see for further explanations Comment to Art. 2:202 PECL, above).

COMPARISON AND EVALUATION Both the PECL and Italian law recognize that the rules governing contract formation through offer and acceptance may be applied to agreements where this two-step formation procedure is lacking. However, under Italian law the application of these rules is prevented by the existence of specific provisions relating to the conclusion of contracts.

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Section 3: Liability for Negotiations PRINCIPLES OF EUROPEAN CONTRACT LAW Article 2:301: Negotiations Contrary to Good Faith (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party which has negotiated or broken off negotiations contrary to good faith and fair dealing is liable for the losses caused to the other party. (3) It is contrary to good faith and fair dealing, in particular, for a party to enter into or continue negotiations with no real intention of reaching an agreement with the other party. 1. General. Art. 2:301 PECL states three important kinds of conduct that parties, during preliminary negotiations, must have. First of all, the pre-contractual stage is governed by the principle of freedom of negotiation. However, a party is liable for the losses caused to the other party when his/her behaviour is contrary to good faith or fair dealing. Para. (3) gives an example of negotiation contrary to good faith and fair dealing which occurs when a party enters or continues negotiations without any intention of reaching an agreement. 2. Freedom to negotiate and to break off negotiations. Paragraph (1) states that parties are not only free to contract, deciding with whom, when and on which terms negotiate, but are also free to break off negotiations, deciding how long to proceed usefully to reach an agreement, without having to justify their conduct (see also comment to Art. 1:102 PECL which formulates the principle of freedom of contract). 3. Liability for negotiation in bad faith. The principle of freedom of contract operates as long as the principle of good faith and fair dealing is not violated (see comment to Art. 1:201 PECL). That means that if one party decides to abandon negotiations he/she must have a valid justification. If he/she does not, he/she is liable for damage caused to the other party due to the other party’s reliance on the positive outcome of the negotiations. Losses consist in expenses related to negotiations and lost opportunities in concluding another contract with another party.

ITALIAN LAW Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1338 C.C.: Knowledge of reasons for invalidity A party who knows or should know the existence of a reason for invalidity of the 142 – A.M. MUSY

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contract and does not give notice to the other party is bound to compensate for the damage suffered by the latter in relying, without fault, on the validity of the contract. 1. General. Preliminary negotiations may be defined as including any communication prior to the time of acceptance (Cass. 30 August 1995, no. 9157; Cass. 11 May 1990, no. 4051, Giust.civ., 1990, 832). On this point the Italian Codice civile of 1942, which was drafted keeping in mind paragraph 242 of the German B.G.B., highlights the importance of ‘good faith’ in contractual relationships in several articles: ‘The contract shall be interpreted according to good faith’ (Art. 1366 C.C.); ‘The contract shall be performed according to good faith’ (Art. 1375 C.C.); ‘The debtor and the creditor shall behave according to rules of fairness’ (Art. 1175 C.C.); ‘The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith’(Art. 1337 C.C.). 2. Foundation of pre-contractual liability. (Alpa (1991)). During preliminary negotiations in the bargaining process, the parties are under an obligation of good faith and fair dealing. The cause of action is in tort (Sacco (2004); Cass. 4 October 1948, no. 1667, in Giur. it., 1949, I,1, 29; and other decisions up to Cass. 11 May 1990, no. 4051, in Foro it., 1991, I, 184; the opposite solution, close to the German tradition, has been followed in Italy by Mengoni (1954). Parties enter into a bargaining process under the principle of freedom of contract. Modern Italian contract law, after the 1942 Code, has rejected the concept that an actual, subjective meeting of the minds is necessary to form a contract and is based on a theory that protects the parties’ reasonable expectations in relying on promises and communications (Allara (1955), p. 148 et seq.; Martorano (1959), p. 217; Pietrobon (1990), no. 29 et seq; for the Italian case law see Cass. 9 February 1952, no. 316, Giur.it. 1952, I, 1, 162; Cass. 20 May 1954, no. 1623, Giur.it 1954, I, 1, 700; Cass. 22 May 1958, no. 1721; Cass. 9 October 1963, no. 2684, Foro it 1963, I, 2088, and Riv.dir.comm. 1963, II, 468; Cass. 20 September 1978, no. 4240. Some authors however consider the rule to be still relied upon in Italian courts). Also a duty of fair dealing is designed to enforce a standard of conduct in preliminary negotiations. The approach currently taken by Italian courts is to consider pre-contractual liability an appropriate cause of action especially in two classes of cases: knowledge of contract invalidity (Art. 1338 C.C.) and unjustified breakdown of negotiations (Art. 1337 C.C.). 3. Knowledge of contract invalidity. Art. 1338 C.C. states that the plaintiff is protected by the law only if he/she relied ‘without any fault’ on the validity of the contract. Generally, the party that has ignored the rules imposing transaction formalities, is considered at fault (Cass., 10 May 1950, no. 1205, in Foro it., 1950, I, 1307; Cass., 27 May 1960, no. 1358, in Foro it., 1960, I, 1508; Cass., 27 June 1972, no. 2199; Cass., 11 July 1972, no. 2325). A.M. MUSY – 143

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4. Unjustified breakdown of negotiations. Whenever, during the bargaining process, parties reach a stage in which one of them is induced to rely on the conclusion of the contract, the party who decides to abandon negotiations without a valid justification is liable for damages. This is the most common and frequent use that courts make of this article. Withdrawal, indeed, gives rise to liability only when withdrawal is unjustified. A more suitable offer from a third person or any other circumstances making the deal less favourable have been considered a valid reason for abandoning negotiations. 5. Duty to inform. A party who knows (or has reason to know) that the other party lacks essential information about the transaction involved that would warn him/her of foreseeable damage is under a duty properly to represent the situation, possibly by disclosing such information. Though widely supported by scholars, courts narrowly apply this doctrine. Art. 1337 C.C. imposes a duty to bargain in good faith during preliminary negotiations. This rule might be read as obliging the parties to inform each other when they discover the other party’s mistake. 6. Damages. In case of unjustified withdrawal, reliance damages (interesse negativo) are due (see Cass. 12 February 1982, no. 855; Cass. 25 January 1988, no. 582). For instance, all expenses incurred by a prospective landlord in order to restructure the renting space to suit the prospective lessee’s requirements must be refunded when negotiations have been interrupted without a well-founded reason (see Trib. Roma, 25 September 1973, in Temi Romana, 1974, 89). In any event, the amount of damages can never surpass the value of the prospective contract (see Sacco-De Nova (2004)).

COMPARISON AND EVALUATION The Principle of good faith and fair dealing in preliminary negotiations is expressed both in Art. 2:301 PECL, and in Arts. 1337 and 1338 of the Italian Codice civile. It is possible that Italian courts or arbitration panels asked to apply Art. 2:301 PECL will interpret it, as they do Arts. 1337 and 1338 C.C. by means of a wide range of possible solutions. In Europe and also in Italy the traditional legal culture requires that a contract be considered an agreement between subjects fully informed and willing to conclude it. Until the 1990’s the contract was considered the symbol of the freedom of the parties. With the beginning of the twenty-first century, the parties’ freedom has lost more and more lost ground in favour of the principle of good faith and fair dealing.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Art. 2:302: Breach of Confidentiality If confidential information is given by one party in the course of negotiations, the other party is under a duty not to disclose that information or use it for its own purposes whether or not a contract is subsequently concluded. The remedy for breach of this duty may include compensation for loss suffered and restitution of the benefit received by the other party. 1. General. During negotiations parties are free to decide which facts to reveal to the other party in order to reach an agreement. Generally, this information is confidential and has an economic value, so that disclosure of such information by the receiver in the case that negotiations are broken off would be contrary to the general principle of good faith and fair dealing. 2. Remedies. In case of breach of the duty of confidentiality, which is considered implicit in the disclosure of information, the injured party is entitled to be refunded for the loss suffered. The amount of the damages incurred may also include benefits the receiver may have gained by disclosing the confidential information.

ITALIAN LAW Art. 2043 C.C.: Compensation for unlawful acts Any fraudulent, malicious or negligent act that causes an unjustified injury to another obliges the person who has committed the act to pay damages. 1. General. The Italian Codice civile does not contain a specific article on the duty of confidentiality. However, the duty not to disclose or use information revealed by the other party during preliminary negotiations can be based on the general duty expressed in Art. 2043 C.C. which is the general rule for extra-contractual liability. Whereas Art. 2041 C.C., which regulates unjustified enrichment, cannot be applied as it is a residual clause, it can be applied whenever no other rules are applicable.

COMPARISON AND EVALUATION Art. 2:302 PECL recognizes a demand expressed by the market and universally applied in practice. In fact, in Italy, where no specific rule imposing the duty of confidentiality exists, it is more and more frequent to insert in preliminary negotiations a specific clause imposing such a duty on both parties. It implies lower costs of negotiations than those incurred by A.M. MUSY – 145

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the application of Art. 2043 C.C. to prove bad faith and losses due to negligent disclosure of confidential information. By using non-disclosure agreements parties also avoid facing the risk of uncertainty with respect to courts’ responses, since courts can interpret duty of confidentiality in different ways, reaching different decisions in similar cases. As a consequence, the lack of statutory rules on breach of confidentiality is solved by private parties by including in their agreements clauses mirroring the principle expressed in Art. 2:302.

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Chapter 3 AUTHORITY OF AGENTS Section 1: General Provisions PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:101: Scope of the Chapter (1) This chapter governs the authority of an agent or other intermediary to bind its principal in relation to a contract with a third party. (2) This chapter does not govern an agent’s authority bestowed by law or the authority of an agent appointed by a public or judicial authority. (3) This chapter does not govern the internal relationship between the agent or intermediary and its principal. 1. General. The title of Chapter 3 of the PECL is ‘‘Authority of Agents’’. This is somewhat misleading since Chapter 3 regulates both the authority of agents and the effects of their acts. Furthermore, the chapter also governs the effects of acts performed by other intermediaries who, by definition, do not have authority to act in the principal’s name. Hence, the notion of authority featuring in the heading of the Chapter and in Art. 3:101 is ambiguous. It does not correspond to the meaning of the same term in subsequent articles of the PECL where it is employed in the restricted sense of authority to act in the principal’s name. Here, instead, this term covers both the authority to perform acts in the principal’s name and the authority to act in his/her own name but on behalf of the principal and in accordance with his/her instructions. 2. Limitations. a) Agency in contracts and legal acts. Chapter 3 of the PECL governs the authority of an agent (or of another intermediary) to ‘‘bind’’ its principal in relation to a contract with a third party. The meaning of the verb ‘‘to bind’’ in this context must be stretched to cover the entire set of legal relations governed by Chapter 3. It appears that Chapter 3 governs generally the creation, regulation and termination of a legal relationship by an agent or other intermediary (cp. Comment A to Art. 3:202 PECL). In this chapter, the verb ‘‘to bind’’ may also mean the opposite of its usual meaning. To avoid this kind of contradiction it should be clear that the verb in question denotes in a general way the power to affect the principal’s legal relations with a third party as a consequence of statements or conduct indicating intention (cp. Art. 1:107, Art. 3:201(a) PECL). Art. 1:107 and the Comment include in the scope of Chapter 3 the performance by an agent or other intermediary of legal acts other than contracts such as unilateral promises and other manifestations of intent; b) Acts performed by an agent or by another intermediary. The distinction between ‘‘agent’’ and ‘‘intermediary’’ is not self-explanatory. In the PECL the first of these two words stands for any person who has the power to ‘‘bind the principal and the third party directly to each other’’ and who is in turn ‘‘not bound to the third party’’ M. GRAZIADEI – 147

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(Art. 3:202 PECL). On the other hand, according to the PECL an ‘‘intermediary’’ is any person acting for a principal, who does not establish such a direct legal relationship between the principal and the third party by acting in a representative capacity (cp. Art. 3:301 PECL, and Commentary upon it); c) Authority of agent stemming from the principal’s consent. The chapter does not govern the authority of agents bestowed by law or the authority of an agent appointed by public or judicial authority (Art. 3:101(2) PECL). This negative provision means, in positive terms, that Chapter 3 governs consensual transactions only, i.e. those transactions for which the principal granted the agent actual authority. The PECL provide some exceptions to this approach, however (cp. Art. 3:201(3) on apparent authority; Art. 3:209 on the powers to perform acts necessary to protect the principal); d) External relationship only. The scope of Chapter 3 is further limited by the provision according to which Chapter 3 does not govern the internal side of the relationship between the agent or intermediary and its principal. Once more, in positive terms this means that the PECL govern the external side of that relationship only, but, once more, this approach is not always followed (see PECL Comment C to Art. 3:101). The internal side of the relationship is considered also with respect to possible conflicts of interest (cf. Art. 3:205) or to the duration of authority (Art. 3:209), not to mention the rules on indirect representation (Art. 3:301).

ITALIAN LAW Art. 1387 C.C.: Sources of representation The power of representation is conferred by law or by the principal. 1. General. This provision concerns the sources of the legal relationship known under the PECL as ‘‘direct representation’’. Direct representation, or simply ‘‘representation’’, is regulated in various books of the Italian civil code. Arts 1387–1400 C.C. in Book 4 (on ‘‘obligations’’) govern representation based on a grant of authority by the principal in cases outside the commercial context. Representation of the entrepreneur (Art. 2082 C.C.) is regulated by the provisions of Arts 2138, 2150, 2203 C.C. ff. contained in Book 5 of the Codice civile, ‘‘on labour’’. Representation in the context of partnership and company law is governed by a number of other provisions which will not be considered here. Forms of representation by law are also regulated in other parts of Book 4 of the code, i.e. negotiorum gestio with representative effects (Art. 2031 C.C.). Representation of minors and of other persons lacking full legal capacity by parents and guardians is regulated in Book 1 of the C.C. (Title IX ‘‘On guardianship and emancipation’’; Title XII ‘‘On measures of protection of persons lacking autonomy in part or completely’’). The recent law of 9 January 2004, no. 6, introducing the new institution of ‘‘amministrazione di sostegno’’, enacts a completely new approach to agents for persons of legal age who lack complete autonomy. 2. Indirect representation. No article of the Italian c.c. is expressly devoted to ‘‘indirect representation’’. In Italy this notion gained currency in academic writings during the first 148 – M. GRAZIADEI

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half of the twentieth century under the influence of German legal scholarship (rappresentanza indiretta) (see on this point: De Lorenzi (2002)). Today its use is rather limited both in academic writings and in practice, but the concept is far from unknown (see, e.g. Visintini (1993), p. 205; Galgano (2002), p. 413). 3. Terminology. In this commentary the word ‘‘representation’’ shall translate the Italian ‘‘rappresentanza’’, which corresponds to the notion in the PECL of ‘‘direct representation’’. ‘‘Representative’’ translates the word ‘‘rappresentante’’, i.e. ‘‘agent’’ under the PECL. ‘‘Principal’’ is the term for both the notion of ‘‘rappresentato’’, i.e. the person in whose name an agent acts, and/or ‘‘mandante’’, for whom a mandatory acts.

COMPARISON AND EVALUATION 1. General. Both the PECL and the Codice civile regulate the power of representation as distinct and independent from other legal relations and recognise that such power may have different sources. The power of representation resulting from a grant of authority is the only legal relationship that is expressly governed by the PECL. On the other hand, the Italian C.C. adopts a more comprehensive approach to the theme, though there are certain well known differences between the various kinds of representation regulated by the c.c. (cp. Sacco-De Nova (2004), p. 178 et seq., 199 et seq.; G. Visintini, Della Rappresentanza, cit., p. 175 ff.). The PECL regulate in general direct and indirect representation, despite the last paragraph of Art. 3:101 which declares that Chapter 3 of the PECL: ‘‘does not govern the internal relationship between the agent or intermediary and its principal’’. The Italian C.C. does not have a general provision on indirect representation, but is not hostile to it since several of its provisions leave the door open to this concept (e.g. the rules on mandate commented upon infra).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:102: Categories of Representation (1) Where an agent acts in the name of a principal, the rules on direct representation apply (Section 2). It is irrelevant whether the principal’s identity is revealed at the time the agent acts or is to be revealed later. (2) Where an intermediary acts on instructions and on behalf of, but not in the name of, a principal, or where the third party neither knows nor has reason to know that the intermediary acts as an agent, the rules on indirect representation apply (Section 3). 1. General. The pedigree of the distinction between direct and indirect representation is traceable to nineteenth century legal scholarship and its efforts to create a logical partition of the emerging general legal category of ‘‘representation’’. The distinction has all the charms and defects of scholastic dichotomies as it relies on the assumption that perfect symmetry exists between the two sub-categories of direct and indirect representation. It could be considered tautological inasmuch it depends upon the following proposition: the agent acts as direct representative by acting in the principal’s name; the agent (rectius, the intermediary under the PECL) acts as indirect representative if he/she does not act in the principal’s name, i.e. if ‘‘the third party neither knows nor has reason to know that the intermediary acts as an agent’’ (Art. 3:102(2) PECL). Hence, the ultimate test to ascertain the effect the relationship between the parties shall produce is to know whether or not the agent was acting ‘‘as an agent’’. 2. Acts performed in the principal’s name. The indeterminacy of the expression ‘‘to act in the principal’s name’’ and the tautology involved in the dichotomy cannot be considered harmful however. By necessity the PECL capitalise on the diffuse knowledge of the above mentioned dichotomy in several civilian jurisdictions and its implicit dimensions. To establish what ‘‘to act in the principal’s name’’ or to act ‘‘as agent’’ actually means, involves, in most cases, the decision of a question of fact. Hence, the solution of this thorny question is seldom reviewed on appeal.

ITALIAN LAW 1. Direct representation. The hallmark of direct representation in Italian law is the same element prominent in Art. 3:102 PECL, i.e. the fact that the agent acted in the principal’s name (or did not) (for critical considerations see Sacco-De Nova (2004), pp. 177–178). Art. 1388 C.C. provides that: ‘‘A contract made by a representative in the name and in the interest of the principal, within the limits of the powers conferred on the representative, produces effects directly as to the principal.’’ Reference to the interest of the principal in this article is currently understood as a reminder that a contract concluded by an agent in conflict with the interest of the principal is invalid (Art. 1394 C.C., see below). 150 – M. GRAZIADEI

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2. Principal not nominated. If the principal is not nominated at the time of the conclusion of a contract, at least two possibilities must be considered: i) that the third party entered into a contract with the agent, who has the power to nominate a person to be considered a party to the contract in his/her place; ii) that the third party did not intend to enter into a contract binding upon the agent, but declared to the agent its willingness to enter into a contract with whomever would be identified as a party to the contract. The first case is regulated by the c.c. under the rubric ‘‘Contracts for persons to be named’’ of Chapter VII, Book 4 (Arts 1401–1405 C.C., see below). A variation on this theme is the rule enacted by Art. 1762 C.C. with respect to brokers: ‘‘A broker who fails to reveal the name of one contracting party to the other is answerable for the performance of the contract and, after performance, is subrogated to the rights against the undisclosed contracting party. If after the conclusion of the contract the undisclosed contracting party reveals himself to the other or is named by the broker, each contracting party has a direct cause of action against the other, but the responsibility of the broker remains unaffected.’’ The second case is that of the contract ‘‘for whom it may concern’’ ( per conto di chi spetta). A typical instance of such a contract is the insurance contract ‘‘for whom it may concern’’ (Art. 1891 C.C.; see also Arts 1690, 1513 C.C.) (cf. Bianca (2000), p. 126 et seq.; Venditti (1998)). 3. Indirect representation. As mentioned above, this category is known in Italy as a doctrinal notion, but there are no legislative provisions in which it is mentioned by that name. The provisions of the civil code which are usually discussed under the label of ‘‘indirect representation’’ concern: i) mandate without representation (Art. 1705 C.C. ff.) and mandates without representation such as the commission contract (Arts 1731–1736 C.C.) and the forwarding contract (Arts 1737–1741 C.C.); ii) the relationship between the entrepreneur and the intermediary who manages the entrepreneur’s firm by acting in his/her own name. This is a marginal case since, in most cases, the firm is managed in the principal’s name (cp. Art. 2208 C.C.); iii) the ostensible partner who manages a partnership business without disclosing the existence of the partnership. Another, rather marginal, case is iv) that of the negotiorum gestor who deals with the third party in his/her own name (cf. Art. 2031 C.C.).

COMPARISON AND EVALUATION As mentioned above, the distinction between direct and indirect representation set out in Art. 3:102 PECL is not unknown in Italy, though the Italian c.c. does not contain any article which expressly makes use of it. The distinction between these two forms of representation in Italy is based on the same element utilised by the PECL, i.e. whether or not certain acts were performed in the principal’s name, pursuant to his/her consent. This is a significant tribute to will theories of contract, which emphasise the role of consent in contract formation.

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Section 2: Direct Representation PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:201: Express, Implied and Apparent Authority (1) The principal’s grant of authority to an agent to act in its name may be express or may be implied from the circumstances. (2) The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted. (3) A person is to be treated as having granted authority to an apparent agent if the person’s statements or conduct induce the third party reasonably and in good faith to believe that the apparent agent has been granted authority for the act performed by it. 1. General. Under Art. 3:201 PECL the relationship of direct representation is established only if the agent is authorised to act in the name of its principal. Hence, the agent’s act shall produce direct effects between the principal and the third party only if the agent acts in the principal’s name and is authorised to do so. Both of the two requirements must exist to this effect. The notion of authority emerging from this article is clearly modelled on the German Vollmacht and the corresponding concepts of other civilian jurisdictions. It has little in common with the notion of ‘‘authority’’ as known in England and in other common law jurisdictions where the term ‘‘authority’’ does not, by definition, denote the power to act in the principal’s name only. 2. Independent nature of authorisation. Art. 3:201, like many twentieth century civil codes, adopts the approach first advocated by nineteenth century legal writers in separating the internal side of the relationship between principal and agent from the external one (see also Art. 3:101 PECL). The authorisation is thus in principle conceived as an independent juridical act, separate from the internal legal relationship between principal and agent. The ‘‘grant of authority’’ to the agent, according to this theory, is a unilateral act which does not require the agent to assume any corresponding obligation. 3. Express and implied authority. The principal’s manifestation of consent is the source of the agent’s powers of representation in most cases, which are classified as cases of express authority, or of authority implied from the circumstances. Such manifestation of consent may be addressed to the agent or to the third party with whom the agent deals. The analysis of this kind of authority does not pose special problems different from the general problems usually related to ascertaining the consent to unilateral acts. On the other hand, Art. 3:201(2), according to which: ‘‘The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted’’ raises some problems. This provision expands the scope of the authority granted to the agent through a purposive interpretation of it. In most cases Art. 3:201(2) shall be applied to hold that the agent has authority to perform all the acts instrumental to those 152 – M. GRAZIADEI

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expressly or impliedly authorized by the principal. In the case of a sudden change of circumstances the same provision may, however, tolerate different interpretations, some of which could considerably expand the powers of the agent. Nonetheless, since the acts in question must be ‘‘necessary’’ in the light of the circumstances, suggest some caution here. The PECL do not prescribe requirements as to form for the principal’s grant of authority to the agent. 4. Apparent authority. Art. 3:201(3) PECL on apparent authority allows direct representation though the principal’s (either express or implied) consent to the agent’s acts was lacking, but the third party reasonably and in good faith believed that the apparent agent was authorised to perform those acts. No specific reliance by the third party on conduct or statements by the person who is treated as having granted the authority is required to prove the existence of apparent authority. Since only the conduct or the statements of the principal are mentioned in Art. 3:201(3) the statements or the conduct of the agent alone cannot establish its apparent authority. Apparent authority can, of course, coexist with express and or implied authority and will normally operate to expand the agent’s powers of representation. To be sure, in many cases it will be difficult to distinguish the one from the other, especially if the principal’s conduct is the only element under discussion in the circumstances.

Art. 3:202: Agent acting in Exercise of its Authority Where an agent is acting within its authority as defined by Art. 3:201, its acts bind the principal and the third party directly to each other. The agent itself is not bound to the third party. 1. General. Art. 3:202 PECL is the key provision on the legal consequences of acts done by the agent exercising its authority. 2. Representation. In the exercise of his/her authority, the agent acts in the principal’s name, thereby revealing the intention to establish a direct relationship between the third party and the principal. As a consequence, direct representative effects are established and the principal and the third party are to be considered the only parties to the contract for most purposes. A clear exception to this basic assumption is provided by the rules on conflicts of interest (see below). As a rule, the agent neither incurs obligations nor acquires rights under the contract with the third party. Since this mechanism is based on party autonomy the agent and the third party are free to reach a different agreement on the point, however. For example, they can agree that the agent shall also be liable under the contract, or shall guarantee the principal’s performance. Art. 3:203 PECL provides the default rule for the case in which the agent fails to identify his/her principal. 3. Publicity principle. As noted above, Art. 3:202 PECL operates when the agent acted in the principal’s name. To ascertain whether the agent did so involves the interpretation M. GRAZIADEI – 153

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of statements of intention or the conduct of the contracting parties in accordance with the PECL articles on interpretation of contracts (see Chapter 5, Arts 5:101–5:107). 4. Agent’s notice and conduct imputed to the principal. The knowledge of certain facts or the intention relevant to the production of some legal effects with respect to the principal, may be imputed to the principal though it is the agent’s knowledge or intention. Art. 3:202 does not cover this aspect of the agency relationship. The attribution of the agent’s notice or intention to the principal is, however, governed by the general provisions of Art. 1:305 (Imputed Notice and Intention) PECL and of Art. 4:111 (Third Persons) PECL. These articles essentially provide that the agent’s notice and intention are imputed to the principal (as he/she is the contracting party).

ITALIAN LAW Art. 1388 C.C.: Contract entered into by representative A contract made by a representative in the name and in the interest of the principal, within the limits of the powers conferred on the representative, produces effects directly as to the principal. Art. 1389 C.C.: Capacity of representative and of principal When a power of representation is conferred by a principal, it is sufficient for the validity of a contract made by the representative that he have the capacity to understand and to intend, taking into account the nature and content of the contract and provided always that the principal has legal capacity. In all cases, it is necessary for the validity of a contract made by the representative that said contract not be one into which the principal is forbidden to enter. Art. 1390 C.C.: Defects in consent A contract is voidable if the consent of the representative is defective. However, if such defect concerns matters predetermined by the principal, the contract is voidable only if the consent of the latter is defective. Art. 1391 C.C.: Material subjective conditions In cases in which it is material to ascertain the existence of good or bad faith or of knowledge or ignorance of certain circumstances, regard is had to the representative, unless the matters at stake were predetermined by the principal. In no case can a principal who is in bad faith take advantage of the ignorance or good faith of a representative. 1. General. Art. 1388 C.C. spells out the basic effect of direct representation under Italian 154 – M. GRAZIADEI

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law. The article does not expressly provide that the agent drops out of the transaction with the third party, but this is not disputed. Reference to the principal’s interest in this context is a reminder of the invalidity of the contract concluded by the agent in conflict with the interest of the principal (cf. Art. 1394 C.C.). Note, however, that until avoided by the principal, such contract produces its effects. Art. 1388 C.C. refers only to contracts concluded by the agent pursuant to his/her actual authority. The doctrine of apparent authority is not mentioned by the Italian C.C., but has been received in our law by judicial precedents and academic writings (see below). 2. Publicity principle. Acts done by the agent in the principal’s name produce direct effects with respect to the principal pursuant to Art. 1388 C.C. An act done in the principal’s name is an act which declares that the principal (and not the agent) is the person that will be affected by the contract (see on this point Sacco-De Nova (2004), pp. 178–178; delle Monache (2001)). Several judicial decisions hold that this intention can be expressed without special words having to be used (Cass., 26 August 1982, no. 4735) or can be inferred from the representative’s conduct (cp. Cass., 5 September 1985, no. 4614, Arch. Locaz., 1985, 646; Cass., 14 December 1985, no. 6334; Cass., 17 June 2002, no. 8699; but see, for a more restrictive approach, Cass., 7 April 1979, no. 1999). Since the C.C. prescribes that certain contracts are subject to a requirement of form, several cases hold that in those contracts intent must be declared in the document which meets the prescribed formalities (Cass., 30 March 2000, no. 3903; Cass. 20 October 1982, no. 5471). 3. Capacity of the representative and of the principal. It is common ground that the agent neither undertakes obligations nor acquires rights on the basis of the contract concluded with the third party in the principal’s name. Furthermore, the grant of authority to the agent empowers the agent to act in the principal’s name, but does not oblige him/her to do so. For this reason, Art. 1389 C.C. provides that the contract concluded by the third party with the agent is valid, though the agent lacks full legal capacity, provided that he/she realized what he/she was doing. On the other hand, the requirements as to the principal’s capacity to contract are those established in the code’s general provisions concerning capacity to enter into contracts and other legal transactions. 4. Material subjective condition. Art. 1391 C.C. affirms that the agent’s knowledge is material in all the circumstances raising an issue concerning subjective conditions. The same article poses also the exception to the rule, which is excluded for any element of the contract predetermined by the principal. In no case does the good faith of the representative shield the principal who acted in bad faith from the legal consequences of that subjective condition. Art. 1392 C.C.: Form of Power of Attorney A power of attorney has no effect unless it is conferred with the formalities prescribed for the contract which is to be made by the representative. 1. General. According to the general provisions of Art. 1387 C.C. on the power of representation, the grant of authority to act in the principal’s name is known as ‘‘procura’’. M. GRAZIADEI – 155

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This term is often employed to denote also the document in which such consent is expressed (hence procura is sometimes translated as ‘‘power of attorney’’). The procura is a unilateral act that may be isolated or linked to different legal relations (De Lorenzi (1997), p. 317 et seq., with further references). Since the Codice civile regulates cases in which the power of representation may be linked to certain contracts (e.g. mandate, Art. 1704 C.C.) or to certain positions (cp. Art. 2203 C.C.), it is arguable that the procura is just one of the several means to empower a person to act as a representative (see Sacco-De Nova (2004), pp. 180–181; but, special rules apart, the power of representation does not automatically flow from the fact that a person is appointed to perform certain acts on behalf of another: Cass., 27 June no. 2525, on a tax consultant’s position that does not carry with it the power to represent the client). Both authority and acting in the principal’s name are required to establish direct representation, but under Italian law some effects of the acts done by a person acting in its own name are enforceable by the principal as well (see below). 2. Independent nature of the authorisation. The independent nature of the authorisation in typical cases is at the root of the choice to codify rules on representation in a separate chapter of the Codice civile. Given this basic choice, it should nonetheless be kept in mind that the separation of the two sides of the relationship between principal and agent in the Codice civile is hardly as absolute as it could be. The code leaves the door open to interference between the two sides of the agency relationship at different levels. The articles on representation regulate conflicts of interest, which sometimes derive from facts that would otherwise be immaterial, being related to the internal side of the relationship between the parties (Pugliatti (1964), p. 395 et seq., 415 et seq.). Termination of representation for causes linked to the internal side of it is also to be considered in this perspective. Last, but not least, due to defects in codification techniques some articles concerning mandate in Italy are applicable to representation by way of interpretation (and vice versa see Mirabelli (1967), p. 353, n. 9), quite apart from the circumstance that the contract of mandate may be coupled with the power of representation by an express provision of the code (Art. 1704 C.C.). 3. Express and implied authority. The distinction between express and implied authority is not spelled out in the Codice civile, but is familiar to Italian theory and practice. If the act that the agent is authorised to perform requires a certain formality, the power to act in the principal’s name is also subject to the same formality. Hence, such consent shall be in writing, either expressed in a notarised act, or authenticated by a notary in a number of cases. By way of interpretation a general power of attorney does not cover acts which exceed the ordinary course of business, unless such acts are specifically indicated (on the basis of the analogy of the rule enacted for the contract of mandate: see Art. 1708 C.C.). 4. Apparent authority. The Codice civile does not contain a general rule on apparent authority. Such a rule has been developed by judicial cases and by academic writings and is now firmly established in Italian law (Sacco-De Nova (2004), p. 193 et seq..; Bianca (2000), p. 117 et seq.; for a reductive approach: Galgano (2002), p. 382 et seq.) The present law can 156 – M. GRAZIADEI

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be summarised as follows. There is apparent authority when: i) the conduct of the person who is deemed to be a principal is capable of generating the third party’s belief that the agent was duly authorized; ii) such conduct was negligent; iii) the third party assumed in good faith that the agent was duly authorised; iv) the third party’s assumption was reasonable under the circumstances (see, e.g., Cass., 18 February 1998, no. 1720, Danno e resp. 1998, 451; Cass., 1 March 1995, no. 2311, Giur. it., 1995, I, 1 2032; according to Cass., 19 February 1993, no. 2020, Foro it., 1994, I, 159, the third party is entitled to rely on the agent’s apparent authority even though the principal’s conduct was not negligent; but the point is disputed by legal authors). Since negligent conduct by the third party in dealing with the apparent agent is not reasonable, it has been held, e.g., that there can be no apparent authority where the grant of authority was not made in the specific form required by the law (Cass., 9 July 2001, no. 9289, Contratti, 2002, 241, annotated by Ruggeri). A thorny question arises whenever the conduct of the apparent principal, which allegedly should ground a finding of apparent authority, consists of an omission. In principle, such conduct cannot be the source of liability. But in special circumstances the person who is deemed to be a principal may be under a duty to speak to avoid misapprehension about the agent’s authority. 5. Authorisation made public. In Italy the authorisation of certain agents is made public by registration in the commercial register (registro delle imprese) organised under the law of 29 December 1993, no. 580. The said register is computerised. It is kept by the Chambers of Commerce established for each of the 103 Italian provinces under the supervision of the judge appointed to this function by the president of the local Court of justice (Tribunale). The powers of representation of the managers of a firm, or its branch, or a certain sector of the firm (institori) must be made public by registration of the grant of authority (procura) in the register. If more than one agent is appointed for the same business, each agent can act severally, unless otherwise specified in its authorisation (Art. 2203 C.C.) This authorisation concerns all the acts related to the business, with the exception of the alienation or mortgaging of immovables, if not specifically authorised (Art. 2204 C.C.). The grant of authority must be made in writing and authenticated by a notary. Limitations to the agent’s powers shall have no effect vis-a`-vis third parties in good faith unless registered in the commercial register. Accordingly, grants of authority which are not duly registered work as a general power of representation (cp. Art. 2206 C.C.). The documents by which the authorisation is subsequently limited or revoked shall be filed in the commercial register even if the original grant of authority was not published. In the absence of registration, the limitations or revocation are without effect with respect to third persons, unless it is proved that they knew them when the transaction was concluded (Art. 2207 C.C.). These provisions apply also to representatives ( procuratori) who do not manage the firm, but have a permanent relationship with it (Art. 2209 C.C.). The Codice civile regulates also the powers of employees of the firm dealing with third parties. Subject to limitations set out in the instrument granting the power of representation, those employees are authorised to do acts which the kinds of functions entrusted to them ordinarily entail. They cannot, however, collect the price of goods they do not deliver, or grant delays or M. GRAZIADEI – 157

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discounts which are not customary, unless they are expressly authorized to do so (Art. 2210 C.C.). Even if authorized to make contracts in the name of their principal, they do not have the power to deviate from the firm’s standard conditions of the contract, unless specifically authorised to do so (Art. 2211 C.C.). Pursuant to Art. 2212 C.C., these employees are authorised to receive declarations concerning performance of the contract they have concluded and complaints relating to non-performance of the said contract, as well as the power to petition for precautionary measures in the interest of the firm. Employees in charge of sales on the firm’s premises can collect the price of goods sold by them, unless a special cashier is clearly designated for collection (Art. 2213 C.C.).

COMPARISON AND EVALUATION The effects of direct representation according to the PECL and to the Italian C.C. are exactly the same. The Codice civile does not make a distinction between express and implied actual authority, but this is not a real difference between our law and the PECL. Italian authors and cases are familiar with that distinction, which is in accordance with the general rules on contract law. The idea that an agent has authority to perform all the acts necessary under the circumstances to accomplish its tasks is also common to the PECL and to Italian law. The Codice civile lacks a general rule on apparent authority, but the PECL rule on apparent authority substantially matches the Italian approach to this aspect of the law which has been developed by judicial precedent and academic writings. It should be remarked that in commercial matters the C.C. requires publicity of the grant of authority which should be registered in the commercial register. This registration contributes to legal certainty in commercial transactions. On the other hand, the piecemeal approach of the Italian C.C. to the authority of certain of the entrepreneur’s agents and employees probably burdens the treatment of the topic with excessive details. The Codice civile spells out the consequences of the agent’s and principal’s lack of capacity in accordance with the unilateral character of the grant of authority. Under our Code, the subjective conditions affecting the transactions to be carried out by the representative are evaluated according to the respective contributions of the agent and of the principal to the said transactions with the third party. The PECL contain general provisions on imputed notice and intent (Art. 1:305), third persons (Art. 4:111), good faith and fair dealing (Art. 1:201) that take care of the same problems. The Codice civile prescribes that the grant of authority must be made in the same form required for the contract to be made by the representative. This solution, which has no correspondence in the PECL, is consistent with the C.C. rules on formalities regarding certain transactions (mostly involving gifts, or the transfer of land, or the creation of rights over land). The PECL policy against formal requirements in contract formation or proof (Art. 2:101) is radically different from the C.C. approach to the matter, which is more cautious. It is hardly surprising that the different general approaches of the two texts on the matter of formal requirements for the validity of the contract also entail significant differences with respect to formal requirements for the validity or proof of the grant of 158 – M. GRAZIADEI

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authority. In a critical vein, it is clear that the insistence on formal requirements for the grant of authority collides with the idea of providing effective protection for the third party via an expansive doctrine of apparent authority.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:203: Unidentified Principal If an agent enters into a contract in the name of a principal whose identity is to be revealed later, but fails to reveal that identity within a reasonable time after a request by the third party, the agent itself is bound by the contract. 1. General. Under this article, if the agent acted in a representative capacity there will be direct representation even though the principal’s identity was not disclosed at the time when the contract with the third party was concluded. However, if the agent fails to disclose the principal’s name within a reasonable time (upon request by the third party) the contract is concluded with the agent in his/her personal capacity. 2. Scope of Art. 3:203. This rule operates only where the personal qualities involved in the performance of the contract are compatible with the agent’s power to identify one of the contracting parties. The rule of Art. 3:203 must also be read subject to the general provisions of Arts 4:109–4:110 on unfair contract terms.

ITALIAN LAW Art. 1401 C.C.: Nomination of contracting party reserved At the moment a contract is made a party can reserve the power to subsequently name the person who is to acquire the rights and assume the obligations arising from said contract. Art. 1402 C.C.: Time and manner of naming declaration The naming declaration must be communicated to the other party within three days from the making of the contract, unless the parties have established a different time limit. Such declaration is not effective unless accompanied by the acceptance of the person named or unless a power of attorney earlier than the contract exists. Art. 1403 C.C.: Form and publication The naming declaration and the power of attorney or acceptance of the person named have no effect unless made in the same form that the parties used in making the contract, even if such form is not prescribed by law. If the contract requires a form of publication to produce certain effects, the naming declaration, in order to have such effects, must also be published, with a reference to the power of attorney or the acceptance given by the person named. 160 – M. GRAZIADEI

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Art. 1404 C.C.: Effects of naming declaration When the naming declaration has been validly made, the named person acquires the rights and assumes the obligations arising from the contract, with effect from the date when such contract was made. Art. 1405 C.C.: Effects of lack of naming declaration If the naming declaration is not validly made within the time set by law or by the parties, the contract produces its effects between the original contracting parties. 1. General. Accoding to the principle of freedom of contract (Art. 1322 C.C.) the parties can postpone the identification of the person who will acquire rights and obligations under the contract. This reservation is common in Italy in contracts for the sale of land (which under our code have real effects: Art. 1376 C.C.), as well as in contracts to conclude a subsequent sale of land (contratti preliminari di vendita immobiliare, cf. Art. 1351, 2645bis, 2932 C.C.). The contract term regulated by Arts 1401 C.C. et seq. must be distinguished from a different case, i.e. that of reservation of the power to nominate the buyer in the subsequent contract for the sale of land, which is indeed a different contract rather than a contract term (see: Cass., 2 February 1994, no. 1023, Giust. civ., 1994, I, annotated by Battaglia; Cass., 10 April 1970, no. 1003, Giur. it., 1971, I, 1, 1759; see Graziadei (1989), p. 261 et seq.). 2. Nomination of the unnamed principal. The time limit set by Art. 1402 C.C. to communicate the naming declaration to the other contracting party is three days from the date of the contract, unless a different term was agreed. There are precedents to the effect that such a different term cannot be uncertain or vague (Trib. Trento, 7 January 1993, Riv. Notar., 1993, 916, which holds that an uncertain term is void and the contract produces its effects between the original parties). The text of the C.C. states that, to be effective, the naming declaration must be accompanied by a power of attorney that has been granted before the conclusion of the contract, or by the acceptance of the nomination. This makes it clear that the power to name a party to the contract can be reserved even though the person reserving such power was not authorised to act as representative. In that case, subsequent acceptance of the nomination will have the same effect as subsequent ratification of what was done in excess of authority. According to most commentators and court decisions, pending the period fixed for the naming declaration, the contract produces its usual effects in favour of and against the person who reserved such power (Cass., 4 October 1983, no. 5777, Foro pad., 1984, I, 354, in conformity with previous cases; Cass., 12 December 1995, no. 12733, Rass. dir. civ., 1997, 158, with critical annotation by Pennasilico, holds that the parties cannot reach a contrary agreement on this point; Sacco-De Nova (2004), p. 204, note that if the naming declaration has retroactive effects, it seems logical that the contract should take effect from the date of its conclusion). 3. Form and effects of the naming declaration. Quite often, in practice, a contract involving an unidentified principal is subject to formal requirements. In such a case, the M. GRAZIADEI – 161

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naming declaration must be made in the same form as that of the contract to which it pertains and must be accompanied by the acceptance of the person named or by the power of attorney granting authority to the same effect, which are also subject to the requirement as to form. If the contract requires publication to achieve certain effects, all these declarations are also to be made public in order to achieve the same effects (cp. Art. 2643 et seq. C.C.). The naming declaration has retroactive effects, i.e. the person named as contracting party will be so considered from the date of the contract. 4. Lack of a naming declaration. If there is no naming declaration, or if the declaration is not timely or invalid, the contract will produce its effects between the original parties to it.

COMPARISON AND EVALUATION According to both the PECL and the Italian Codice civile an agent can enter into a contract in a representative capacity without revealing the principal’s identity. Whether the agent is actually concluding the contract for a principal in this case may be questioned, as it will be known for sure only if timely disclosure of the principal’s name occurs. The Codice civile takes good notice of this fact by expressly providing that acts performed by a self-appointed agent may subsequently be accepted with retrospective effects by the person nominated principal within a certain period of time (Arts 1402, 1403 C.C.). Thus there may be direct representation even though the contract was concluded by a self-appointed agent, provided that the principal accepts what the agent agreed on his/her behalf. Art. 3:203 PECL seem to ignore this possibility, yet the rule on ratification of unauthorised acts (Art. 3:207) produces the same effect as the Italian rule on this point. The C.C. provides for a fixed term for the nomination of the principal and prescribes formal requirements and publicity of the declarations made by the principal in cases in which the transaction with the third party is subject to these formalities. The PECL do not contain similar rules. Once more, these differences reflect more general differences between the PECL and the Italian C.C. concerning the requirements that are apt to produce legal certainty and to promote good faith and fair dealing. The PECL do not clarify what effects (if any) the contract has pending the naming declaration. This silence may raise problems in certain contexts.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:204: Agent acting without or outside its Authority (1) Where a person acting as an agent acts without authority or outside the scope of its authority, its acts are not binding upon the principal and the third party. (2) Failing ratification by the principal according to Art. 3:207, the agent is liable to pay the third party such damages as will place the third party in the same position as if the agent had acted with authority. This does not apply if the third party knew or could not have been unaware of the agent’s lack of authority. 1. General. This article spells out the consequences of acts done by the agent without authority or outside the scope of its authority, i.e. there will be no direct representation, as defined in previous articles of PECL. On the other hand, under some circumstances an agent may be held liable for its activity, failing ratification (see Art. 3:207). 2. Agent acting without authority, but within the scope of the principal’s instructions. The article covers the case of acts done by an agent without any (real or apparent) authority. But under the PECL the term ‘‘authority’’ has the restrictive meaning of ‘‘authority to act in the principal’s name’’. It may well happen that an agent is acting without authority, or outside the scope of his/her authority, but that his/her acts are nonetheless done on instruction and on behalf of the principal (cp. Arts 3:301–3:304). It is submitted that the PECL rules on indirect representation apply to such a case, though the commentary to the PECL does not mention this possibility. The amount of damages available to the third party under Art. 3:204(2) may be correspondingly reduced in this case. 3. Agent’s liability for unauthorised acts. The agent’s unauthorised acts involve his/her liability unless the principal ratifies them pursuant to Art. 3:207, or the third party knew or should have known that they were unauthorised. The measure of the agent’s liability for unauthorised acts is the expectation interest, i.e. the full contractual interest.

ITALIAN LAW Art. 1398 C.C.: Representation without power One who has contracted as a representative without having the power to do so, or in excess of the authority conferred on him, is liable for the damage which a third person suffers as a result of having, without fault, relied on the validity of the contract. 1. General. The representative’s unauthorised acts involve his/her liability with respect to the third party on the basis of Art. 1398 C.C. M. GRAZIADEI – 163

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2. Unenforceability of the unauthorised contract. Contracts concluded by a representative lacking the power of representation are unenforceable by either party. They have no effect with respect to the alleged principal, unless they are ratified by him/her pursuant to Art. 1399 C.C. The same article provides that the third party and the representative cannot terminate the contract by agreement pending ratification by a unilateral act (Cass., 16 luglio 1997, no. 6488, Danno e resp., 1998, 188). This solution avoids opportunistic behaviour (Sacco-De Nova (2004), p. 188; for a different approach: Salanitro (1997)). 3. Liability of the agent for unauthorised acts. On the basis of Art. 1398, the third party who was negligent in dealing with the unauthorised representative cannot recover damages for the unauthorised act. The burden of proof concerning negligence by the third party is on the representative (Cass., 24 November 1971, no. 3422). Negligence is exemplified by the failure to check the statements made by a notoriously unreliable person (Cass., 29 January, 1960, no. 115), while there can be no negligence if the erroneous belief as to the existence of authority was induced by the self-appointed representative (Cass., 26 March 1965, no. 509) (see further on this point: Sacco-De Nova (2004), p. 192). The measure of the representative’s liability for unauthorised acts is not specified in the code. Most commentators and judicial decisions hold that the third party is entitled to the reliance or ‘‘negative interest’’ measure of damages, i.e. loss of chances, costs and expenses incurred by the third party as a consequence of the negotiation of the non-enforceable contract (Cass., 29 September 2000, no. 12969, Giur. it., 2001, 69, following previous decisions; Sacco-De Nova (2004), pp. 192–193; Galgano (2002), 406; Visintini (1993), p. 323.). The third party may claim damages from the representative without first enquiring whether the principal intends to ratify the contract, or before the expiration of the period during which ratification may occur (Cass., 12 April 2001, no. 5468, is the latest decision in this sense, but the point is disputed: Sacco-De Nova (2004), p. 188).

COMPARISON AND EVALUATION It is common ground that acts performed by an agent lacking authority do not bind the principal and the third party to one another. Lack of authority in this context means lack of real and apparent authority. But do the unauthorised acts of the agent that are not binding upon the principal produce interim effects pending ratification? The PECL are silent on this point. Yet, there is a period during which the principal may ratify the contract under both texts. While that period is running, it is reasonable to hold that the third party and the agent cannot withdraw from the contract by a unilateral act, as Italian law provides. This seems to be in accordance with the principle of good faith and fair dealing in contracts (Art. 1:201). In any case, it would be contrary to good faith and fair dealing to hold that the third party can send written confirmation of the contract to the principal or request ratification of it pursuant to Art. 3:208 C.C., without allowing for a reasonable time during which the third party must wait to know the principal’s intention with regard to the contract. 164 – M. GRAZIADEI

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One significant difference between Italian law and Art. 3:204 PECL concerns the measure of the agent’s liability for acts done in excess of, or without, authority. Under Art. 3:204(2) PECL this measure is the full contractual interest (expectation loss). Under the rule which has evolved in Italy the agent is liable as if the contract with the third party had not been concluded (reliance loss). Reliance interest is, however, a rather flexible measure. Therefore, though the difference between the PECL approach and the Italian approach to this issue seems to be stark, there is abundant margin for compromise at the trial level. Incidentally, the PECL rule on damages for unauthorised acts could be criticised on the ground of ambiguity. Art. 3:204 recites that the agent is liable to pay the full measure of contractual damages, but ‘‘this does not apply if the third party knew or could not have been unaware of the agent’s lack of authority.’’. What exactly is excluded by these words? The agent’s liability tout court, or liability up to the measure of full contractual interest only? In the latter case, the third party could still hold the agent liable for reliance interest, possibly on the basis of a comparative negligence judgment.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:205: Conflict of Interest (1) If a contract concluded by an agent involves the agent in a conflict of interest of which the third party knew or could not have been unaware, the principal may avoid the contract according to the provisions of Arts 4:112 to 4:116. (2) There is presumed to be a conflict of interest where: (a) the agent also acted as agent for the third party; or (b) the contract was with itself in its personal capacity. (3) However, the principal may not avoid the contract: (a) if it had consented to, or could not have been unaware of, the agent’s so acting; or (b) if the agent had disclosed the conflict of interest to it and it had not objected within a reasonable time. 1. General. The agent is employed to act in the interest of the principal. His/her conduct must be loyal. Acts done by the agent in conflict of interest can be avoided by the principal, provided that the third party knew or could have known that the agent was violating his/her duty of loyalty to the principal by contracting in conflict of interest. 2. Cases involving a conflict of interest. Art. 3:205(2) establishes the presumption of a conflict of interest where the agent deals for the third party as well, or concludes the contract in his/her personal capacity, as the principal’s counterpart. The contract cannot be avoided, however, if the principal consented to the agent’s acts, or could not have been unaware of them, or if the agent disclosed the conflict of interest, but the principal did not object within a reasonable time. The article is framed in terms of a presumption of a conflict of interest (and for a rebuttal thereof, see the commentary to the PECL). But there can be little doubt that in the circumstances described in Art. 3:205(2) there is a material conflict of interest, unless the principal consents to the acts, or does not object within a reasonable time, after disclosure of the conflict of interest. Reference in Art. 3:205(2)(a) to the possibility that the principal ‘‘could not have been unaware of the agent’s so acting’’ is unclear; under letter (b) of the same provision acquiescence by the principal precludes avoidance of the contract only if the agent discloses the conflict of interest to the principal (see also Art. 4:414 on the confirmation of invalid contracts). Doubts as to whether a so-called potential conflict of interest should be considered on the same footing as an actual conflict of interest are justified. Though it is notoriously difficult to draw a line between the two cases, damage to the principal is clearly not a prerequisite for avoidance of the contract. In any case, the two cases of conflict of interest mentioned in Art. 3:205(2) are only specific instances of the wider category of acts done in conflict of interest. 3. Legal consequences of acts in conflict of interest. a) Avoidance. The principal may avoid acts done in conflict of interest, in accordance with the rules on avoidance (Arts 4:112 to 4:116 PECL); b) Avoidance not possible. Avoidance of the contract is precluded in the cases discussed above of the principal’s consent or acquiescence to the agent’s acts. 166 – M. GRAZIADEI

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ITALIAN LAW Art. 1394 C.C.: Conflict of interests A contract made by a representative in conflict with the interest of the principal can be annulled at the request of the principal, if the conflict was known or was knowable to the third person. Art. 1395 C.C.: Contract with oneself A contract which the representative makes with himself, whether acting in his own behalf or as the representative of another party, is voidable, unless specifically authorised by the principal or unless the content of the contract is established in such a way as to preclude the possibility of a conflict of interests. Such a contract can be attacked only by the principal. 1. General. There is a conflict of interests where the agent concludes within his/her powers a contract, which is however in conflict with the interest of the principal. The principal may avoid the contract, provided that the conflict was known or knowable to the third party. Contracts made by the representative with himself are always voidable unless they are not vitiated by the possibility of a conflict of interests. 2. Cases involving a conflict of interests. There is a conflict of interests in every case in which the agent is pursuing his/her own interest, or those of a third party, instead of the principal’s. Art. 1395 C.C. is a specification of this principle. A similar provision is contained in Art. 1735 C.C. on a commission agent’s acts concerning the sale or purchase of goods and other assets having a current price (cf. Art. 1515 C.C.). The commission agent can supply, at such price, the things he/she was commissioned to purchase, or can purchase on his/her own account things he/she was commissioned to sell, but in either case his/her right to the commission is unaffected. Even when the principal has fixed a price for carrying out the transaction, the commission agent who purchases on his/her own behalf cannot pay the principal a price lower than the price of the day on which the transaction was made, if the current price is higher than the price set by the principal. The commission agent who supplies the things he/she is required to purchase cannot charge his/her principal a price higher than the current price, if such price is lower than the price set by the principal. However, according to judicial decisions the agent may pursue interests which are concurrent or compatible with those of the principal (Cass., 17 April 1996, no. 3630). The majority of commentators and several court decisions hold that the contract with the third party can be avoided on the ground of a conflict of interests not only where there is proof of actual damage to the principal or personal advantage to the agent, but also in cases in which such damage or advantage can potentially follow from the agent’s acts (see, e.g. Cass., 27 January 1979, n. 1614, Foro it., 1979, I, 2069; Cass., 4257/1992; SaccoDe Nova (2004), p. 197; Visintini (1993), p. 273; see also Maffeis (2002)). On the other hand, there seems to be no conflict of interests if the contract concluded by the agent is M. GRAZIADEI – 167

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better than the one the principal could have concluded without employing the agent (Cass., 7 December 1999, no. 13708). However, negligent dealings by the agent, which are of no benefit to the principal, are not necessarily done in conflict of interests (Cass., 10 April 2000, no. 4505; Cass., 16 February 1994, no. 1498). The principal’s consent to the contract excludes that the contract is concluded in conflict of interests, but such consent must be specific and not generic (Cass., 21 August 1996, no. 7698, on this point: Gabrielli, ‘Il requisito di specificatezza dell’autorizzazione a contrarre in conflitto di interessi: un eccesso di rigore formalistico’, Riv. dir. civ., 1999, I, 557; Maffeis (2002), p. 295). Whether the principal’s consent is subject to requirements of form, if prescribed by the law for the authorised acts, is debated (cf. Maffeis (2002), p. 237). 3. Legal consequences of acts in conflict of interests. a) Avoidance. Acts done by the agent in conflict of interests are avoided by the principal in accordance with Arts 1441–1446 C.C. on voidable contracts; b) Avoidance not possible. As mentioned above, if the principal expresses specific consent to the representative’s acts which raise a problem of conflict of interests, those acts cannot be avoided.

COMPARISON AND EVALUATION 1. General. There are few differences between Art. 3:205 PECL and the provisions of Italian law on contracts concluded in conflict of interests. The most evident is the PECL list of transactions which are presumed to be in conflict of interest. This does not have correspondence in the Codice civile, but each of the cases included in that list would also be a case of conflict of interests in Italy. The Italian rule on conflict of interests in the contract of commission is hardly more lenient than the PECL provisions on conflict of interest, and should be read subject to the special provisions relating to financial services law. A second difference is the role of the principal’s consent in authorising contracts that raise a conflict of interests. 2. Consent by the principal. Under the Codice civile contracts vitiated by a conflict of interests are voidable, unless ‘‘specifically authorised by the principal, or unless the content of the contract is established in such a way as to preclude the possibility of a conflict of interests’’ (Art. 1395 C.C.). The second part of this provision is tautological, hence of little help. The first part is important because it requires the specific consent of the principal to validate the transaction carried out in conflict of interests. Art. 3:205(3) PECL does not require specific consent to the transaction, but only ‘‘consent’’; furthermore, it imposes on the principal a duty to object to acts done in conflict of interest within a reasonable time after disclosure of the conflict to the principal, which is in agreement with the PECL general approach to contract avoidance (cf. Art. 4:113), but does not meet the Italian requirement of ‘‘specific consent to the transaction’’. On its face, the Italian rule seems to impose a higher standard of disclosure than the PECL rule. But this is doubtful because the current interpretation of the requirement makes it clear that only the essential elements of the transaction are the object of specific approval. 168 – M. GRAZIADEI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:206: Subagency An agent has implied authority to appoint a subagent to carry out tasks which are not of a personal character and which it is not reasonable to expect the agent to carry out itself. The rules of this Section apply to the subagency; acts of the subagent which are within its and the agent’s authority bind the principal and the third party directly to each other. 1. General. Under this rule, the subagent has the authority to act as a direct representative of the principal, provided that he/she does not exceed the agent’s authority. The rule facilitates the performance of the tasks entrusted to the agent but, as it is non-mandatory, the principal may derogate from it. 2. Authority to appoint a subagent. Art. 3:206 covers the case in which the principal did not expressly authorise the agent to appoint a subagent. Though under it the agent ‘‘has implied authority to appoint a subagent’’ the agent’s authority in this case is actually conferred by the law. If the principal’s conduct was equivocal, or not relevant to the effect, the agent will nonetheless be authorised to appoint the subagent by virtue of Art. 3:206 if his/her tasks are not of a personal character and the agent cannot be reasonably required to carry out the task himself/herself. This means that Art. 3:206 is a default rule that can be displaced by the principal’s consent, but does not require such consent in order to operate. The express or implied actual grant of authority by the principal to appoint a subagent will interfere with Art. 3:206 by expanding or restricting its range of application. 3. Legal effects of acts done by the subagent. The subagent’s acts within the scope of the authority granted to him/her have effect in favour of and against the principal. 4. Substitution. Art. 3:206 regulates the appointment of a subagent but does not deal with the case of substitution. Hence, if the agent is not replaced by the subagent; he/she may still do the acts for which the subagent was authorised.

ITALIAN LAW 1. General. There is no provision in the Italian C.C. corresponding to Art. 3:206 PECL. Art. 1717 C.C. deals with a similar problem with respect to the contract of mandate. Of course, the principal may authorise the agent to appoint a subagent but this elementary remark leaves a number of problems open (see Cian (1992)). 2. Subagent appointed in defect of authorisation. The first problem, of course, is precisely whether under our law the representative can appoint a sub-representative when the principal’s manifestation of consent does not decide the issue. Several authors hold that M. GRAZIADEI – 169

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the agent can appoint a sub-agent if the principal’s authority to perform acts that do not have a personal character, provided that it is necessary to appoint a sub-agent or such appointment may reasonably take place. This opinion is advanced either on the basis of general arguments concerning the purpose of the authorisation granted to the agent (Mosco (1961), p. 409), or on the basis of Art. 1717 C.C., concerning the appointment of a sub-mandatary (Visintini (1993), p. 304; Cass. 25 September 1953 no. 3073). The acts of the sub-representative have direct effects towards the principal in accordance with the general rules on representation.

COMPARISON AND EVALUATION Though the Italian Codice civile lacks a specific rule on subagency, our law appears to be in accordance with Art. 3:206 PECL, which responds to the needs of commerce, provided that the costs of employing another agent are reasonably incurred.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:207: Ratification by Principal (1) Where a person acting as an agent acts without authority or outside its authority, the principal may ratify the agent’s acts. (2) Upon ratification, the agent’s acts are considered as having been authorised, without prejudice to the rights of other persons.

Art. 3:208: Third Party’s Right with Respect to Confirmation of Authority Where the statements or conduct of the principal gave the third party reason to believe that an act performed by the agent was authorised, but the third party is in doubt about the authorisation, it may send a written confirmation to the principal or request ratification from it. If the principal does not object or answer the request without delay, the agent’s act is treated as having been authorised. 1. General. Unauthorised acts performed by the agent can be ratified by the principal with retroactive effects, without prejudice to the rights of other persons. 2. The act of ratification. This is a manifestation of consent to the acts performed by the agent which can be addressed to the agent or to the third party. The manifestation of consent can be express or implied from the principal’s conduct (e.g.: voluntary performance of the unauthorised contract by the principal). 3. Position of the third party. Under Art. 3:208 PECL the third party may request ratification of the contract, or may send a written confirmation of the transaction made with the agent. Silence by the principal after such a request or such confirmation produces by itself the ratification. 4. Other persons’ rights. The rights of third persons cannot be prejudiced by ratification, in accordance with Art. 3:207(2).

ITALIAN LAW Art. 1393 C.C.: Proof of authority of representative A third person who contracts with a representative can always require that he present proof of his authority and, if the power of representation is shown by a written instrument, that a copy thereof signed by the representative be given to him. M. GRAZIADEI – 171

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Art. 1399 C.C.: Ratification In the case contemplated in the preceding article [i.e. Art. 1398, on representation without power], the contract can be ratified by the principal, with the formalities prescribed for the formation of such contract. The ratification has retroactive effect, but the rights of third persons are unaffected. A third person and one who has contracted with him as representative can dissolve the contract by agreement prior to ratification. The contracting third party can ask the principal to make his intention known as to ratification, setting a time limit at the expiration of which, in case of silence, ratification is deemed to be denied. The power of ratification descends to the heirs. 1. General. Under the Italian Codice civile ratification has the same effects regulated by Art. 3:207 PECL. 2. The act of ratification. The manifestation of consent amounting to ratification can be express or implied from the circumstances (on the performance of the contract: Cass., 22 January 1986, no. 440, Giur. comm., II, 873). It is subject to a requirement of form ( just like the grant of authority) if it concerns a contract that is also subject to such a requirement. 3. Position of the third party. Prior to ratification, the third party and the agent are bound by the contract if they do not agree to terminate it (see above). Such a contract generates a situation of subjection to the principal’s power of ratification (Cass., 6 July 1997, no. 6488). The third party can provoke ratification by asking the principal whether he intends to ratify the unauthorised acts performed by the agent or not. If the term fixed by the third party for ratification expires, in the absence of the principal’s manifestation of consent to the unauthorised act, such act shall have no effect. Art. 1712 C.C., which provides a similar solution for the contract of mandate, is held to be inapplicable to representation (Cass., 18 March 1997, no. 2387; Cass., 10 June 1982, no. 3732, Arc. civ., 1982, 981). 4. Other persons’ rights. Ratification cannot prejudice other persons’ rights.

COMPARISON AND EVALUATION There are some differences between the PECL and the Italian law on ratification. According to the Codice civile, ratification of the contract must meet some requirements as to form if the ratified transaction is also subject to requirements as to form. The PECL reject a similar requirement as to form, though confirmation of the contract pursuant to Art. 3:208 must be in writing. The Italian C.C. does not allow for confirmation of the 172 – M. GRAZIADEI

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transaction by the third party (nor does it expressly mention the third party’s request for ratification, though this is well known in practice). Incidentally, it may be noted that it is unclear whether such a request must also be in writing to produce the effects that Art. 3:208 connects to silence by the principal, as seems likely. Furthermore, contrary to the PECL rule on this point, the principal’s failure to object to a confirmation in writing of the contract, or a request for ratification, implies the denial of ratification under the Italian Codice civile. The gap between the PECL and the Italian C.C. on this specific point is however limited because Art. 3:208 PECL provides that the third party must have ‘‘reason to believe that an act performed by the agent was authorised’’ in order to rely successfully on the fact that the principal did not react to the confirmation or request for authorisation of the transaction by the third party. This requirement of good faith and fair dealing effectively restricts the scope of application of Art. 3:208. Art. 1393 C.C., concerning proof of authority, lacks correspondence in the PECL as well. But the third party’s right to obtain proof of an agent’s authority under the PECL stems from the duty of good faith and fair dealing in contracts (Art. 1:201). The Codice civile lends itself to some criticism because of the divergence of the rules concerning mandate and representation as to the effects of the principal’s failure to react to communications concerning unauthorised acts. The divergent treatment of such communications does not seem to be justified.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:209: Duration of Authority (1) An agent’s authority continues until the third party knows or ought to know that: (a) the agent’s authority has been brought to an end by the principal, the agent, or both; or (b) the acts for which the authority had been granted have been completed, or the time for which it had been granted has expired; or (c) the agent has become insolvent or, where a natural person, has died or become incapacitated; or (d) the principal has become insolvent. (2) The third party is considered to know that the agent’s authority has been brought to an end under paragraph (1)(a) above if this has been communicated or publicised in the same manner in which the authority was originally communicated or publicised. (3) However, the agent remains authorised for a reasonable time to perform those acts which are necessary to protect the interests of the principal or its successors. 1. General. Art. 3:209 lists the events that terminate the agent’s authority. Those events operate with respect to the third party when that party knows or ought to know of them. A presumption of knowledge of terminating events is established for those events that are communicated or made public in the same manner in which the authority was originally communicated or made public. When those events occur, acts which are necessary to protect the interests of the principal (or its successor) are nonetheless authorised for a reasonable time. 2. Terminating events. a) Manifestation of intent to terminate by the principal or by the agent. Once more, the intention to terminate can be express, or implied; b) Expiry of term, realisation of the authorisation purpose. Grants of authority for a certain period of time lapse when that period expires; the realisation of the purpose for which the authority was granted is also a terminating event under the PECL. Though the PECL are silent on the point, impossibility to realise the purpose for which the authority was granted is probably also a terminating event; c) Agent’s insolvency, death or incapacity; Principal’s insolvency. The provision on agent’s and principal’s insolvency are self-explanatory. The same is true with respect to the agent’s death. Incapacity of the agent as a terminating event is more troublesome, because the PECL purport not to deal with capacity incapacity, as the level of incapacity that produces termination may vary (cf. Art. 4:401). Death and incapacity of the principal are not mentioned as terminating events in the list, but successors to the principal will always be able to revoke the authority if the relationship has to come to an end. 174 – M. GRAZIADEI

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3. Third party knowledge of terminating events. According to Art. 3:209(1) terminating events affect the third party, provided that it knows or ought to have known of them. 4. Irrevocable grants of authority. The PECL do not contain specific provisions on irrevocable grants of authority. The Comment to the PECL states that: ‘‘if the principal promises a third party not to revoke an authority granted to an agent, by virtue of Art 1:107, the normal rules on formation, performance and non-performance of that promise apply’’ ( p. 217). This probably means that the agent’s authority cannot be made irrevocable with absolute effect. Hence, if the principal revokes a grant of authority that was ‘irrevocable’, the agent’s authority should terminate, though the third party is entitled to compensation for breach of promise. But this interpretation is doubtful, because the promisor enjoys the full range of contractual remedies, including the right to obtain performance in certain cases (Art. 1:107 PECL). By virtue of Art. 1:107 PECL, specific performance of the promise not to revoke would lead to absolute irrevocability. Though the Comment mentions only the possibility of a promise of irrevocability to the third party, the validity of such a promise to the agent should also be considered as possible. 5. Liability of the agent for acts performed after termination of the authority. Art. 3:204 PECL governs the agent’s liability towards the third party for acts performed after termination of the authority. Under that provision the agent is liable for the lack of authority, unless the third party ‘‘knew or could not have been unaware’’ of the occurrence of a terminating event. This wording is different from the formula adopted in Art. 3:209(1), according to which: ‘‘an agent’s authority continues until the third party knows or ought to know’’ the terminating event. It is difficult to maintain that the positive expression ‘‘ought to know’’ has a different meaning from the negative expression ‘‘could not have been unaware’’. The conclusion to be drawn is that in certain cases the third party can sue neither the principal nor the agent for damage suffered as a consequence of unauthorised acts. The textual argument which emphasises the different wording of Arts 3:204 and 3:209 PECL is of little weight and should give way to the application of the overriding principle of good faith and fair dealing proclaimed by Art. 1:201. 6. Modification of authority. As the Comment makes clear, Art. 3:209 PECL applies also to modifications of the agent’s authority, in particular to those restricting the scope of the agent’s power of representation.

ITALIAN LAW Art. 1396 C.C.: Modification and termination of power of attorney The modification and revocation of a power of attorney must be made known to third persons by appropriate means. In the absence of such notification, said modification or revocation cannot be set up against third persons, unless it is proved that the latter knew of them at the time the contract was made. M. GRAZIADEI – 175

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Other grounds for termination of a power of representation conferred by the principal cannot be set up against third persons who, without fault, had no knowledge of them. Art. 1397 C.C.: Return of document evidencing representation The representative is bound to return the document evidencing his powers, when they have terminated. 1. General. These two articles do not cover all the issues relating to modification and termination of the authority granted to the agent. Art. 1396 draws a distinction between acts of the principal or of the representative aimed at terminating authority, and other terminating events. Those other events operate against third parties only if they knew them, or ignored them due to their negligent conduct. On the other hand, termination of authority by act of the principal or agent must be communicated to third parties by appropriate means. If no appropriate means are employed to that effect, those acts do not affect third parties unless known to them (for commentary see Visintini (1993), p. 302 et seq.). 2. Terminating events. The Codice civile articles on representation do not contain a list of terminating events. This list is construed by way of interpretation on the basis of C.C. Arts 1722–1730 on termination of the contract of mandate (for an in-depth commentary see Nanni (1994); on the application of these provisions to the termination of representation: see Visintini (1993), p. 305 et seq.; Bianca (2000), p. 100 et seq.). The list of terminating events which has been so construed is the following: a) Manifestation of intent to terminate by the principal or by the agent. Unilateral acts to this effect are the principal’s revocation of the grant of authority, or the agent’s renunciation of power of representation. The intention to terminate the authority may be express or implied. For example, performance of the authorised acts by the principal, or the appointment of another agent for the same acts, normally operates by revoking previous authority. b) Expiry of time, realisation of the authorisation purpose, or impossibility of it. Grants of authority for a limited period of time expire when the period of time has lapsed; completion by the agent of the transactions for which he/she was authorised terminates the authority as well; permanent impossibility to perform the authorised acts also terminates the authority on the basis of general contract principles. c) Death, incapacitation, insolvency of the principal or of the agent. The death or the incapacity of one of the parties terminates the relationship, unless the authority was granted for acts connected with the operation of an enterprise (Art. 2188 et seq.). In that case, the authority is not extinguished, subject to the rights of the parties or their heirs to withdraw from the relationship (Art. 1722, n. 4 C.C.). Insolvency of the principal or the agent terminates the relationship, in accordance with Art. 78 of the Italian law on insolvency (r.d. 16 March 1942, no. 267). 3. Irrevocable grants of authority. In Italy, Arts 1723, 1725 C.C. on irrevocable mandates are applied by analogy to grants of authority to a representative (see Sacco-De 176 – M. GRAZIADEI

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Nova (2004), p. 185; Bianca (2000), p. 103 et seq.; Visentini (1993), pp. 305–306; for commentary on the provisions on mandate: Nanni (1994)). Hence, the discussion of terminating events contained in the previous paragraph should be read in the light of the following observations. The key provision on mandate, which governs irrevocable grants of authority as well, is Art. 1723 C.C.: ‘The principal can revoke the mandate, but if it was agreed that the mandate should be irrevocable, he is liable for damages, unless revocation was made for a just cause. A mandate which is given also in the interest of the mandatory or of third persons is not extinguished by revocation by the principal, unless it is otherwise agreed or unless there is a just cause for such revocation; it is not extinguished by the death or supervening incapacity of the principal’. Pursuant to the current interpretation of this provision, grants of authority that are intended to be irrevocable do not have the effect of absolute irrevocability. Nonetheless, they oblige the principal to pay damages for termination of the agent’s authority by way of revocation, unless such termination was grounded in a just cause (‘relative irrevocability’). A different conclusion obtains if the principal granted authority to the agent in the interest of the agent. In this case, the agent’s authority will not be terminated by the principal’s attempt to revoke it, unless it was otherwise agreed or there is a just case for revocation (‘absolute irrevocability’). If the principal granted authority to the representative in the latter’s interest, the death or supervening incapacity of the principal will not terminate it (on the complex issues raised by the principal’s insolvency see Nanni (1994), p. 135 et seq.: in most cases sums paid to the mandatory of the insolvent principal by the third party must be handed over to the principal’s insolvency administrator). The distinction between relative and absolute irrevocability does not depend (in the first place) upon the fact that the authority was declared to be irrevocable or was intended to be irrevocable. It is rather linked to the fact that the authority was granted in the interest of the mandatory, though this regime may be varied by consent. Furthermore, whenever a just cause for revocation occurs the agent’s authority may be freely revoked, with no further consequences. A typical instance of ‘just cause’ for revocation is the agent’s violation of his duties. What interest of the agent entails absolute irrevocability is debated in marginal cases. In the typical case it is a patrimonial interest: e.g. the principal authorises the agent to claim from a third party the money that he/she owed to the agent in the first place.

COMPARISON AND EVALUATION 1. The specification of terminating events. There are some differences between the PECL and the Codice civile with respect to the general approaches taken to the termination of authority. A first difference concerns the fact that the PECL set out the list of terminating events, while the Codice civile does not mention them at all. This glaring omission is a weak point of the Italian C.C., which is remedied by recourse by analogy to the law on mandate. Hence, the PECL approach to terminating events has the advantage of being more comprehensive when compared to that of the Codice civile. On the other hand, the PECL are completely silent on how indirect representation comes to an end because M. GRAZIADEI – 177

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‘‘authority’’ in most PECL provisions means only ‘‘authority to act in principal’s name’’ (see above, on Art. 3:101). 2. Irrevocable grants of authority. A second major difference between the PECL and the Italian C.C. concerns the possibility of making the grant of authority absolutely irrevocable. The Italian solutions on this point form a rather complex set of rules and subrules, which allows the absolute irrevocability of the authority when coupled with an interest of the representative. This outcome is hardly questionable because the principal granted the representative authority, fully knowing all the material circumstances. Similar grants of authority occur in Italy quite often. They are for many purposes functional equivalents of assignment of claims. The policy choice of the PECL against the validity of such arrangements is doubtful since the Comment to the PECL on this point is silent. Art. 3:209(3) on the agent’s authority that is necessary for the protection of the principal’s (or his/her successor’s) interests generalises the solution that the C.C. enacts with respect to mandate in the case of the principal’s death (Art. 1728 C.C.).

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Section 3: Indirect Representation PRINCIPLES OF EUROPEAN CONTRACT LAW Article 3:301: Intermediaries not acting in the name of a Principal (1) Where an intermediary acts: (a) on instructions and on behalf, but not in the name, of a principal, or (b) on instructions from a principal but the third party does not know and has no reason to know this,the intermediary and the third party are bound to each other. (2) The principal and the third party are bound to each other only under the conditions set out in Arts 3:302 to 3:304. 1. General. There is a relationship of indirect representation when an intermediary does not act in the name of the principal either expressly, or impliedly, or apparently, but acts on instructions and on behalf of the principal. Such a relationship exists whether or not the third party knows this, or has reason to know this. Since the intermediary did not act in the principal’s name, no direct legal relationship is established between the principal and the third party. Contractual relations are created between the third party and the intermediary, but under the conditions set out in Arts 3:302 to 3:304 PECL the principal can exercise the agent’s contractual rights against the third party and vice versa. 2. Comparative Remarks. Though all modern legal systems have rules on direct representation, in several legal systems some representative effects follow from the simple fact that an intermediary acted on instructions and on behalf of a principal. Under a will theory of contract, those effects will not be easily reconciled with the fact that the agreement between the parties does not give an inkling as to the principal’s intention to become a party to it. Nonetheless, at a deeper level of analysis, rules which provide contractual effects in favour of and against the principal cannot be considered irrational where the principal controls the intermediary and the intermediary is under a duty to act for the benefit of the principal. The solution adopted by the PECL in this respect is inspired by the rules adopted in the Geneva Convention on agency in the international sale of goods, Art. 13, and by the Dutch civil code, art. 7:412, which followed its approach.

Art. 3:302: Intermediary’s Insolvency or Fundamental Non-performance to Principal If the intermediary becomes insolvent, or if it commits a fundamental nonperformance towards the principal, or if prior to the time for performance it is clear that there will be a fundamental non-performance: (a) on the principal’s demand, the intermediary shall communicate the name and address of the third party to the principal; and M. GRAZIADEI – 179

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(b) the principal may exercise against the third party the rights acquired on the principal’s behalf by the intermediary, subject to any defences which the third party may set up against the intermediary. 1. General. As a consequence of acts performed by the intermediary in his/her own name, the intermediary and the third party are to all purposes contracting parties. Nonetheless, the principal may sue the third party in accordance with the rules set out in Art. 3:302. 2. Fundamental non-performance and insolvency of the intermediary. The principal’s right to obtain what the intermediary acquires on his/her behalf and pursuant to his/her instructions is in peril where the intermediary commits, or may commit, a fundamental non-performance of his/her obligations towards the principal. In these cases the principal is entitled to exercise the rights acquired by the intermediary on the principal’s behalf. The Comment to the PECL specifies that the articles on indirect representation ‘‘[...] do not prejudice the position of principal and/or third party in the intermediary’s insolvency, especially the fate of assets furnished to the intermediary. This is to be decided by national law, either by the general rules on insolvency or under specific rules, for example on, e.g., commission agents’’ (Comment B to Art. 3:304, p. 225). This annotation makes it clear that some of the most delicate issues concerning the protection of the principal’s rights will still be governed by the national law. 3. Rights that may be exercised. The principal may only exercise rights the intermediary acquired upon the principal’s instructions and on the principal’s behalf. Accordingly, the principal cannot exercise rights that protect the agent’s interests, i.e. the agent’s right to his/her commission. 4. Communication of the identity of the third party to the principal. When the conditions required under Art. 3:302 occur, the principal is entitled to known the identity of the third party and his/her address. The intermediary is obliged to communicate these data to the principal. Failure to do so is not addressed by the PECL. The Comment notes that damages may be of little help if the agent is insolvent. A judicial order for disclosure of the identity of the third party may be the only effective remedy available to the principal in that case (Comment, p. 254). 5. Notice and performance towards the intermediary. The principal’s intention to enforce the rights acquired by the intermediary must be communicated to the third party pursuant to Art. 3:304. After that communication, performance of the contract towards the agent does not discharge the contractual obligations owed by the third party to the principal. 6. Defences. The exercise by the principal of the rights that the intermediary acquired on his/her behalf is subject to any defences available to the third party against the intermediary, including set-off. The third party cannot be prejudiced by the non-contracting 180 – M. GRAZIADEI

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principal’s power to protect his/her claims by intervening on the contract. The third party can probably also raise against the principal any defences which are personal to him/her.

Art. 3:303: Intermediary’s Insolvency or Fundamental Non-performance to Third Party If the intermediary becomes insolvent, or if it commits a fundamental nonperformance towards the third party, or if prior to the time for performance it is clear that there will be a fundamental non-performance: (a) on the third party’s demand, the intermediary shall communicate the name and address of the principal to the third party; and (b) the third party may exercise against the principal the rights which the third party has against the intermediary, subject to any defences which the intermediary may set up against the third party and those which the principal may set up against the intermediary.

Art. 3:304: Requirement of Notice The rights under Arts 3:302 and 3:303 may be exercised only if notice of intention to exercise them is given to the intermediary and to the third party or principal, respectively. Upon receipt of the notice, the third party or the principal is no longer entitled to render performance to the intermediary. 1. General. Art. 3:303 is symmetrical to the rule of Art. 3:302. It provides that the third party may exercise against the principal the rights acquired towards the intermediary if the latter is insolvent or commits a fundamental non-performance of the contract (or it is clear that such fundamental non-performance may occur). 2. Fundamental non-performance and insolvency of the intermediary. The rationale for this provision may simply be the need to establish equality of treatment between the rules applicable when the intermediary is insolvent or commits or risks fundamental non-performance of the contract and those applicable when such events concern the third party. 3. Rights that may be exercised. The third party may exercise against the principal all the contractual rights it has against the intermediary. 4. Communication of the identity of the principal to the third party. On the third party’s demand the intermediary must communicate the principal’s name and address. As noted above, this obligation shall be enforced in most cases by a judicial order for disclosure of the relevant data. M. GRAZIADEI – 181

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5. Notice and performance towards the intermediary. Notice to the principal of the third party’s intention to exercise the intermediary’s rights against him/her affects the discharge of the principal’s obligations related to that contract. According to Art. 3:304, prior to notice, the principal’s performance towards the intermediary discharges his/her obligations towards both the intermediary and the third party. After notice, performance towards the intermediary does not bar the third party’s rights against the principal based on the contractual rights acquired towards the intermediary. 6. Defences. The third party’s action against the principal is subject to the defences the intermediary could have raised against the third party. It is also subject to the defences the principal has against the intermediary. On the other hand, the principal’s right to set-off against the intermediary should be available against the third party as well.

ITALIAN LAW Art. 1705 C.C.: Mandate without power of representation A mandatory acting in his own name acquires the rights and assumes the duties arising from transactions made with third persons, even if the latter had knowledge of the mandate. Third persons have no relationship with the principal. However, the principal can, by substituting himself for the mandatory, exercise claims arising from the performance of the mandate, except when in doing so he impairs the rights attributed to the mandatory by the provisions of the following articles. Art. 1706 C.C.: Purchases by mandate The principal can claim movables acquired for his account by the mandatory who has acted in his own name, without prejudice to the rights of third persons as a result of good faith possession. If the things acquired by the mandatory consist of immovables or movables inscribed in public registers, the mandatory is under an obligation to transfer such things to the principal. In case of non-performance, the provisions relating to the enforcement of the obligation to enter into a contract apply. Art. 1707 C.C.: Creditors of the mandatory The creditors of a mandatory cannot enforce their rights on property which the mandatory has acquired in his own name in carrying out the mandate, provided that in the case of purchase of movable property or claims, the mandate be evidenced by a writing bearing a certain date prior to attachment of the property or, in the case of immovable property or movable property inscribed in public registers, the transcription of the transaction effecting the transfer of ownership 182 – M. GRAZIADEI

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or of the judicial petition for the purpose of obtaining said transfer be prior to such attachment. 1. General. As mentioned above, the category of indirect representation does not feature as such in the Italian civil code. Nonetheless, it is well-known to Italian authors and has gained limited recognition by our courts. The articles reproduced above are the main provisions of our code related to the topic. If the acts performed by the intermediary are related to activities carried out for a firm, Art. 2208 C.C. provides that he/she is personally liable if he/she fails to inform the third person that he/she is dealing for his/her principal. In this case, however, ‘‘the third party can also bring an action against the principal for acts done by the institore’’. 2. Effects of the contract between the mandatory and the third party. The contract concluded by the mandatory in his/her own name with the third party produces effects between them. This is specified in the first part of Art. 1705 C.C., according to which the mandatory: ‘‘acquires the rights and assumes the duties arising from the transactions made with third persons, even if the latter had knowledge of the mandate.’’. The reciprocal is also true, i.e. ‘‘third persons have no relationship with the principal’’, even though they knew the existence of the mandate. 3. Principal’s action on the claims against the third party arising from the performance of the mandate. The second part of Art. 1705 C.C. provides that the principal may exercise claims acquired by the mandatory towards the third party in performing the mandate. Quite obviously, this rule is a strange companion to the general rule enacted by the first part of the article. Several theories have been advanced to reconcile the two parts of this article: Graziadei (1994), p. 154 et seq., p. 165 et seq., with further references. 4. Can the third party sue the principal with respect to the contract concluded with the mandatory in his/her own name? No provision of the civil code mentions such an action. To be sure, countless cases relying on the first paragraph of Art. 1705 C.C. deny it, and authors show little interest in its development. In specific instances the Courts have however opened the door to it. Cass. 13 January 1990, no. 92, Giust. Civ., 1990, I, 1252 et seq., note by Giammaria, is the latest case of this kind. Here the court held that the action was admissible after the principal sued the third party with respect to the contract concluded by the mandatory in his/her own name. 5. Principal’s action to vindicate movables acquired by the mandatory in his own name. Art. 1706 C.C. provides that the principal can vindicate unregistered movables acquired by the mandatory in his/her own name when performing the mandate. The action mentioned in the first paragraph of Art. 1706 C.C. (rivendicazione) is the real action that the owner of the thing has to recover it from any third party who holds it without being entitled to do so. On this action and the relationship with the other actions regulated by Arts 1705–1706 C.C. see Sacco-De Nova (2004), p. 884 et seq.; Graziadei (1994), p. 162 et seq.) M. GRAZIADEI – 183

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6. Principal’s action to obtain transfer of registered movables and immovables. In contrast with the first paragraph of Art. 1706 C.C., the second paragraph of Art. 1706 C.C. provides that the principal cannot vindicate immovables or registered movables acquired by the mandatory on his/her behalf unless they were transferred by the intermediary to the principal by a separate act. 7. Principal’s rights over movable goods and claims vis-a`-vis the creditors of a mandatory. Art. 1707 C.C. shields the principal from the claims of the creditors of the mandatory on movable goods or to the claims acquired by the mandatory on the principal’s behalf. The requirement that the mandate be evidenced in writing with a definite date (established pursuant to Art. 2704 C.C.) prior to attachment of the property or the claims of the creditors of the mandatory confirms the general provision of Art. 2914 C.C. as to the need to fulfil this formal requirement in order to prevent fraudulent conveyances. 8. Principal’s rights over registered movables and immovables vis-a`-vis the creditors of the mandatory. The second paragraph of Art. 1707 C.C. provides that the creditors of the mandatory cannot attach registered movables or immovables acquired by the mandatory on behalf of the principal after the registration of their transfer in the name of the principal, or after registration of the principal’s claim to those assets in the same register (cf. Arts 2652, 2653, 2915 C.C.).

COMPARISON AND EVALUATION 1. General vs. piecemeal approach to indirect representation. The advantage of the PECL rules on indirect representation over the Italian law on this matter is that the PECL approach covers all cases where an intermediary acts upon instructions and on behalf of a principal, but in his/her own name, while the Italian law distinguishes various kinds of intermediaries and provides special rules for each of them. On the other hand, the PECL provisions on the authority of an agent have no parallel with respect to an intermediary, or to indirect representation. Hence, the PECL do not provide any clear guidance with respect to certain problems concerning indirect representation. For example, is it possible to apply the provisions on authority to the internal relationship between principal and intermediary? Do the rules on termination of authority apply also in the case of indirect representation, at least by way of analogy? 2. Evaluation of the approach to indirect representation in the PECL and the Codice civile. All in all, the PECL rules on indirect representation are not radically different from the corresponding rules of the Codice civile. There are, however, some significant differences between them. The PECL approach to indirect representation is more liberal than that of the Codice civile because our code does not have a general rule allowing the third party’s right to sue the principal with respect to a contract concluded with the mandatory. Art. 2208 C.C. is a very timid step in that direction with regard to the business context, but that provision is not really helpful, as it addresses marginal cases. Therefore, in 184 – M. GRAZIADEI

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most cases the third party will be unable to sue the principal, even though the mandatory is insolvent. Only in truly exceptional cases will the third party successfully pursue such an action against the principal. Unfortunately, it is very difficult to predict under what circumstances this will happen. The Italian cases on this point are not very instructive and there is little doctrinal authority on this point as well. Italian law suffers from a lack of a clear set of rules on this point. On the other hand, the PECL approach to indirect representation is more restrictive than that of Italian law. The Codice civile does not limit to the circumstances set out in Arts 3:302–3:302 the principal’s right to sue the third party with respect to the contract concluded by the mandatory. The only limit set by the Codice civile to this action is that it must not impair the exercise of the mandatory’s rights (e.g. the right to remuneration). Under the Codice civile the principal may sue the third party even though the mandatory is solvent and does not have to face liability for non-performance towards the third party. Furthermore, the Codice civile does not require notification of the claim to the third party as a precondition for such action, contrary to the PECL. Notification will in fact usually take place in any case to prevent the performance towards the intermediary operating as a discharge in favour of or against the principal. The Italian Codice civile governs the real effects of contracts concluded by the mandatory in his/her own name, on behalf of the principal, and provides protection for the principal vis-a`-vis the mandatory’s creditors (Art. 1706 C.C., paragraph 1; Art. 1707 C.C.). These provisions are very valuable to the principal. They secure what is actually owed to him/her in most cases. They will not be displaced by the application of the PECL, however. From the historical point of view, their roots go back to the jus commune (cf. Supino, La rivendicazione nel fallimento, Firenze, Pellas, 1881).

M. GRAZIADEI – 185

Chapter 4 VALIDITY Chapter 4: Validity PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:101: Matters not Covered This chapter does not deal with invalidity arising from illegality, immorality or lack of capacity. 1. General. According to Art. 4:101, invalidity arising from illegality, immorality and lack of capacity is a matter not covered by Chapter 4 of the PECL (for a very similar provision, see Art. 3.1 of the Unidroit Principles; on the subject see also Drobnig (1992), p. 636 et seq., 642 et seq.; Kramer (1999), p. 270). In fact illegality, intended as a violation of fundamental principles, is covered by Chapter 15, as set out in the third edition of the PECL, while immorality is one of the topics on which the Commission still intends to work (Preface, XV). In particular, defects in consent and illegality affect the formation of the contract in different ways, calling for different rules in many respects. A comparison of Chapter 4 and Chapter 15 would highlight these differences with special reference to the effects of the contract and rules governing restitution and damages. By contrast, lack of capacity is not covered by the PECL, which do not deal with questions concerning persons.

ITALIAN LAW Art. 1418 C.C.: Causes of nullity of contract (1) A contract that is contrary to mandatory rules is void, unless the law provides otherwise. (2) A contract is rendered void by the lack of one of the requisites indicated in Art. 1325, unlawfulness of causa, unlawfulness of the motives in the case indicated in Art. 1345, and lack in the object of the requisites set forth in Art. 1346. (3) A contract is also void in other cases established by law. Art. 1425 C.C.: Incapacity of parties (1) The contract is voidable if one of the parties was legally incapable of contracting. (2) A contract made by a person incapable of understanding or intending is likewise voidable, when the conditions established by Art. 428 occur. P. IAMICELI – 187

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Art. 428 C.C.: Acts performed by persons incapable of understanding and intending [...] Contracts cannot be annulled except when the bad faith of the other party to the contract is apparent from the prejudice that has ensued or can ensue to the person incapable of understanding and intending, or from the nature of the contract, or otherwise. [...] 1. Illegality and immorality. Also under Italian law illegality and immorality are distinguished from defects in consent and other causes of annulment. Indeed, according to Art. 1418 C.C., unless the law provides otherwise, a contract that is contrary to mandatory rules is void and not simply voidable. Nullity may also derive from the unlawfulness of causa or object (or motives, but only in specific circumstances) and, in particular, the causa is unlawful when it is contrary to mandatory rules, public policy or morals. This should cover both illegality and immorality. The distinction between voidability and nullity can be significant in many respects, although some profiles do overlap, blurring the distinction itself (Sacco (1995), p. 293). For instance, while a voidable contract can be validated by the party who is entitled to ask for the annulment, this could never happen with respect to a void contract. 2. Lack of capacity. Differently, lack of capacity makes a contract voidable. Apart from minor aspects, in this case the rule governing annulment is like the one established for defects in consent, the reason being that the party’s ability to form freely its intention is vitiated in both cases (Roppo (2001), p. 779). However, the conditions under which capacity is lacking are stated in the first book of the Civil Code on persons and the family. In this context, Art. 1 C.C. concerns legal capacity and Art. 428 C.C. regulates incapability of understanding or intending, also with respect to voidability of contract.

COMPARISON AND EVALUATION Differently from the PECL, the Codice civile identifies two broad categories, nullity and voidability, and, in the category of voidability, includes a larger number of defects than does the fourth chapter of the PECL. In particular, under Italian law lack of capacity is governed by the same rule that regulates defects in consent (setting aside some special rules), while it is expressly excluded by the PECL. The different approach at the European level can be explained with respect to the specific connection between capacity and the law concerning persons, especially if legal capacity is taken into account. A different solution might have been adopted with respect to the capacity to understand and intend. Not only does it not strictly depend on rules of the law concerning persons as such, but it also presents some connection with mistake, especially when this has not been caused by the other party, and with fraud, considering that the other party takes advantage of the incapacity in order to conclude the contract.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:102: Initial Impossibility A contract is not invalid merely because at the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates. 1. General. Also Art. 4:102 helps to define the matters covered by Chapter 4, excluding initial impossibility of performance as a cause of invalidity. The same is stated with respect to lack of title to dispose. In other words, as already the Unidroit Principles at Art. 3.3 (see Kramer (1999), p. 272), the PECL exclude that these events could allow per se a party to avoid the contract; however, they do not exclude that these circumstances may be relevant in other respects and the contract avoided or other remedies applied if additional conditions occur. 2. Relevance under different provisions of the PECL. The Comment to the PECL makes it clear that initial impossibility of performance and lack of title to dispose could be regulated also by the provisions on fundamental mistake if the requested conditions occur (Comment, p. 228). The same could be said of fraud. The question is: what happens if none of these rules can be applied because some condition does not occur? For instance, the party who is interested in avoiding the contract could have been affected by an inexcusable mistake. Or the other party’s representation may not have been fraudulent in the sense required by Art. 4:107. In these circumstances no specific performance can be requested but a liability issue may arise with regard to non-performance (Comment, p. 228). Nevertheless it can be questioned whether this would be a case of non-performance, given that initial possibility and title to dispose constitute conditions of fact or law, preceding the contract and do not constitute a kind of performance.

ITALIAN LAW Art. 1346 C.C.: Requisites The object of the contract must be possible, lawful, determined, or determinable. Art. 1347 C.C.: Supervening possibility of the object A contract subject to a suspensive condition or time limit is valid, if the performance which was originally impossible becomes possible before fulfilment of the condition or expiration of the time limit. 1. Impossibility of performance. Under Italian law initial impossibility of performance makes a contract void (see Art. 1346). Exceptionally, supervening possibility can make a contract valid if the contract is subject to a suspensive condition or time limit (see Art. 1347). Therefore, generally speaking, the risk of original impossibility of performance is shared by the parties to the extent that the transaction cannot be enacted and no P. IAMICELI – 189

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exchange of performances can be enforced on this basis. This does not exclude that precontractual liability can shift the risk onto a sole party, if he/she had violated a duty to inform based on good faith according to Arts. 1337 and 1338. 2. Lack of title. In the Codice civile there is no general provision regarding lack of title to dispose. However, many rules stated in different parts of the Code allow interpreters to consider contracts stipulated under these circumstances as originally devoid of effects unless other conditions occur (e.g. subsequent ratification, subsequent acquisition of the title by the party, delivery, good faith of the buyer, ...). Provisions concerning direct representation as well as sale of goods or possession can prove this conclusion (see Arts. 1398–1399, 1479 et seq., 1153, C.C.). The law of sale is also interesting, because it considers the case of the buyer’s ignorance of the seller’s lack of title as being different from either the case of fundamental mistake (Pietrobon (1990), p. 358; Roppo (2001), p. 797) or the case of nonperformance: with respect to the former, because the contract is not voidable but can be dissolved and diverse rules will apply (see Art. 1479 C.C.); with respect to the latter, since the seller is required to ‘guarantee’ that the buyer will purchase, notwithstanding his/her non performance.

COMPARISON AND EVALUATION The different approach to the two questions mentioned is quite substantial. As to initial impossibility, while the Codice civile chooses the solution of voidness, the PECL rely on rules on defects in consent or non-performance to face the problem, if (and only if ) the requested conditions occur. Then, according to the PECL, under certain circumstances the risk of initial impossibility is borne by the creditor, even if it is not under his/her control. By contrast, according to Italian law, this risk is normally shared by the parties (the contract is void and restitution will occur), unless a pre-contractual liability emerges on the debtor’s part. The same conclusion can be drawn as to lack of title to dispose, if the rules concerning mistake or fraud cannot be applied and the transaction as such cannot be considered as non-performance. Then the contract is normally considered as devoid of effects under Italian law, while no remedies are available under the PECL. Moreover, even if both initial impossibility and lack of title to dispose are regarded as defects in consent or non-performance, the Italian approach keeps its distance from the PECL: both nullity (in the former case) and lack of effects (in the latter) differ from voidability and the effects of non-performance. As to the relation between voidness and voidability, the arguments already presented with respect to Art. 4:101 can be recalled. As to rules regarding non-performance, a major difference from voidness can be related to the measure of damages, as Art. 9:502 could show if compared to the ‘negative interest rule’ also applying in pre-contractual liability cases under Italian law (see Art. 1338 C.C. and below, under Art. 4:117). The same can be said with respect to lack of effects, since Art. 1338 C.C. is applied also in this case (Patti-Patti (1993), p. 178). 190 – P. IAMICELI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:103: Fundamental Mistake as to Facts or Law (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) (i) the mistake was caused by information given by the other party; or (ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or (iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. (2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by it. 1. General. Art. 4:103 establishes the conditions under which a party can avoid a contract in case of mistake. The PECL say very little as to the objective characteristics of the mistake. Rather, they focus on its relational features and on the parties’ role in the occurrence of the mistake. 2. Nature of the mistake. Art. 4:103 requires the mistake to be fundamental. Beyond the title of the article, the fundamental nature of the mistake can be especially derived from the causal connection required by part (b) of the first paragraph. Indeed, according to this provision, the mistake must be such that without it the party would not have entered the contract or would have done so only on fundamentally different terms. For this reason the mistake cannot be only ‘‘material’’, as defined in Art. 1:301 as capable of influencing a party’s decision to contract or as to the terms on which to contract (Comment C). As to the object, the mistake can be related either to elements of fact or law, no other indication being given. Only in the Comment is it stated that a mistake concerning the mere value is not usually fundamental and therefore should be excluded from coverage by this provision, whereas mistakes regarding impossibility or the non-existence of the object are treated as any other mistake (Comment G) and in this sense should be considered fundamental. 3. The position of the parties. With respect to this profile, the provision is much more detailed. In particular, the first paragraph deals with the role of the party who is not trying to avoid the contract (either mistaken or not) and the second one with the position of the mistaken party (who intends to avoid the contract). P. IAMICELI – 191

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When only one party is mistaken, the contract can be avoided only in situations in which the other party could have avoided the mistake. Indeed, with respect to the circumstances which allow avoidance, this party may have: – caused the mistake by giving information, or – left the mistaken party in error in cases in which he/she knew or ought to have known of the mistake and it was contrary to good faith and fair dealing not to cure the mistake. The first hypothesis is much more serious, as it will be clear with respect to Art. 4:106, since the mistake is related to the other party’s deliberate behaviour (see Comment D). The case of common mistake is very different, because the mistake of both parties is relevant even if the other one could not in fact have prevented the mistake from occurring. In each of these three circumstances a further requirement is needed with reference to the party against which the annulment is demanded: he/she knew or ought to have known the causal connexion between the mistake and the conclusion of the contract. This condition would limit voidability to cases in which the counter-party could not reasonably rely on the validity of the contract. This is especially true in cases of unilateral mistake; it is less obvious if both parties made the same mistake. Indeed, in this latter hypothesis, the idea of causation by the counter-party can only be hypothetical. The position of the party who intends to avoid the contract also comes into account. First, his/her mistake cannot be inexcusable. However, according to the Comment, this condition cannot apply if it would have been extremely easy for the other party to detect the mistake (Comment I). Secondly, the mistaken party may not avoid the contract if he/she has assumed the risk of the mistake. This happens when it would have been very easy and even obvious for the party to get the information but he/she did not, or in speculative contracts, where the party bears the risk of uncertainty (Comments E and J). The provision is partly different from Art. 3.5 of the Unidroit Principles: indeed, Art. 3.5 does not focus on the other party’s potential or constructive knowledge of the relevance of the mistake upon consent, but on the reasonableness of such relevance. Moreover, it extends the area of relevant mistakes to cases in which, although none of the conditions described under Art. 4:103 (1)(a) occurs, the other party had not, at the time of avoidance, acted in reliance on the contract (Beale-Ko¨tz (2002), p. 427, and, in favour of the solution adopted by the PECL, Kramer (1999), p. 278; see also Art. 4:111, PECL, and its comment for a similar condition as applicable to the case of defect of consent caused by third persons).

ITALIAN LAW Art. 1428 C.C.: Relevance of mistake Mistake is cause for annulment of a contract when it is essential and recognizable by the other contracting party. 192 – P. IAMICELI

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Art. 1429 C.C.: Essential mistake Mistake is essential: (1) when it concerns the nature or the object of the contract; (2) when it concerns the identity of the object of the performance or a quality of said object which, according to common understanding or under the circumstances, should be considered determinative of consent; (3) when it concerns the identity or personal qualities of the other contracting party, so long as the one or the others were determinative of consent; (4) when the mistake was one of law and was the only or the principal reason for entering into the contract. Art. 1431 C.C.: Recognizable mistake A mistake is considered recognizable when, with respect to the content, the circumstances of the contract, or the quality of the contracting parties, it would have been detected by a person of normal diligence. 1. General. According to Italian law mistake is cause for the annulment of a contract when it is essential and recognizable by the other party (Art. 1428 C.C.). No provision requires that the mistake be inexcusable (Sacco-De Nova (2004), p. 499; Cass. 985/98, in Contratti, 1998), p. 437). 2. Nature of mistake. Essentiality is defined with respect to special categories of mistakes, relating to the nature or the object of the contract; the identity or a quality of the object of the performance; the identity or personal qualities of the other contracting party; the law. However, it is commonly stated that the list is not exhaustive (Trabucchi (1964b), p. 668; Pietrobon (1990), p. 357; Roppo (2001), p. 784). Nonessential mistakes are the ones about personal motives for entering the contract or about the economic value of the transaction (Roppo (2001), p. 790; Cass. 5139/03, in Foro it., 2003, I, 3047). Only in some cases does the definition of essentiality explicitly include a further requirement concerning causation: the mistake must be determinative of the consent if referred to the quality of the object of the performance or the identity or personal qualities of the other party and, in case of mistake about law, it should be the only or the principal reason for entering into the contract (Art. 1428 C.C.) (see Roppo (2001), p. 783). Other authors believe that determinativeness of consent, though intended in objective terms (Barcellona (1966), p. 270), is a component of essentiality as such (Trabucchi (1964b), p. 668; Barcellona (1966), p. 270; Pietrobon (1989), p. 4; Rossello (1991), p. 513; in case law: Cass. 9777/93, in Foro it., 1994, I, 429). Others include within the same provision the case of incidental mistake, in which the mistaken party would have entered the contract but under different terms and conditions (D’Amico (1996), p. 126). As to mistake of law, the restrictive approach can be explained as a way to prevent the parties from escaping the application of law by avoiding the contract. It is therefore excluded that a relevant mistake of law can regard the ‘internal rules’ of the contract (such as those concerning remedies) P. IAMICELI – 193

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(Trabucchi (1964b), p. 667; Roppo (2001), p. 796; Cass. 11032/94, in Giust. civ., 1995, I, p. 1237). 3. The position of the parties. Recognizability is referred to the possibility that a person of average diligence would have detected the mistake or, more specifically, the false representation of reality (Sacco-De Nova (2004), p. 535) or the falsity of such representation (Criscuoli (1985), p. 622). The ‘recognizability test’ makes it possible to limit the relevance of the mistake with respect to situations in which the non-mistaken party could not have reasonably relied on the validity of the contract (Trabucchi (1964b), p. 668; Pietrobon (1989), p. 5; Roppo (2001), p. 801) and, at least indirectly, to detect a lack of cooperation by the non-mistaken party, who omitted to warn the other party about the relevance of a ( possible) mistake or, even more seriously, caused the mistake by giving incorrect information (Bianca (2000), p. 650). Other authors question the link between the provision and a duty to inform according to good faith and fair dealing (Barcellona (1966), p. 279), and deny that good faith plays a role in general terms as a validity rule besides operating as a liability rule (D’Amico (1996), p. 32; on the issue, in a European perspective: Vettori (2002), p. 924; Vettori (2003), p. 10). If, as agreed, the rationale of the rule regards the protection of the other party’s reliance, no obstacle to annulment in fact exists in cases in which such party did recognize the mistake (Roppo (2001), p. 804; Sacco-De Nova (2004), p. 530; Cass. 5900/97, in Gius, 1997, p. 1897; Cass. 14539/04, in Foro it., 2004, I, 3009). In this perspective it is important to emphasize that recognizability should be tested with respect to the content, the circumstances of the contract, or the quality of the contracting parties (Art. 1431 C.C.): indeed, all these aspects can affect the parties’ ability to detect and avoid mistakes. Some authors believe that the test should be applied in objective terms (Barcellona (1966), p. 277; Rossello (1991), p. 518; Roppo (2001), p. 803). Also the nature of the mistake can be taken into account. This means that, though not relevant as such, inexcusability can determine a lower level of recognizability (Roppo (2001), p. 801). The most critical issue about recognizability is the implication that can be derived with respect to common mistake. In fact, a common mistake could never be recognized by either party, precisely because it is common to both parties. However, according to courts, in these circumstances there would be no reliance to be protected; this would suggest that the test is not required and the contract can be avoided merely because essential (Cass. 5829/79, in Rep. Foro it., 1979, under Contratto in genere, 272; Trib. Ferrara, 8 November 1990, in Giur. agr. it. (1991), p. 180; Trib. Cagliari, 20 September 1990, in Giur. it., 1993, I, 2, 622; see also Galgano (1998), p. 300). Some authors believe that recognizability should be referred to the representation of reality (which is false) and not to its falsity as such (which is in fact never recognizable) (Roppo (2001), p. 805; Sacco-De Nova (2004), p. 535), or that it should be related to the decisiveness of that representation upon the contract (Bessone (1966), p. 1582; Pietrobon (1989), p. 6). Hence, there would be no legal obstacle to the relevance of common mistake. 194 – P. IAMICELI

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COMPARISON AND EVALUATION The approaches of the PECL and of the Codice civile differ in many respects, even though they eventually converge on many conclusions. Both sets of rules deal with the objective nature of mistake and the parties’ role in its occurrence As to the first profile, whereas the PECL opt for a general definition of a relevant mistake (it must be fundamental), the Codice civile defines essential mistake with respect to specific categories. Moreover, the determinative effect of the mistake on the consent is explicitly and generally stated as a requirement in the PECL, while it only refers to certain categories of mistake in the Codice civile. A further difference is related to the restrictive Italian approach to mistake in law, which is not distinguished at all in the PECL from other types of mistakes. In fact, in many respects, these differences are narrowed down by the interpretation of courts and authors on Italian law. Indeed, the list of relevant mistakes contained in Art. 1429 C.C. is not deemed exhaustive and both systems converge in considering mistakes concerning merely economic value as irrelevant. More critical is the solution with respect to mistakes regarding personal motives for entering into a contract. They are not essential for Italian law and, in principle, might be fundamental according to the European approach. In fact such relevance is limited by the requirement regarding the recognizability of the determinativeness of the mistake on the contract by the other party (see paragraph 1, part (b)). A further consequence of the ‘generalist’ approach taken by the PECL is the coverage of mistakes regarding impossibility or non-existence of the object by the provision in question. The different solution emerging in Italian law has already been examined under Art. 4:101 (see above). A major point of comparison between the two systems is the relevance of causal connection between the mistake and the conclusion of the contract, as explicitly stated in general terms in the PECL, but not under Italian law. However, also with respect to this element, there is a wide consensus (though not unanimity) about the general relevance of causation also in the Italian system. As to the parties’ role in the occurrence of the mistake, Italian law does not focus on the behaviour of the non-mistaken party in (directly or indirectly) causing the mistake, while tending to protect his/her reliance through the ‘recognizability test’. In fact, while drawing attention to the non-mistaken party’s role in determining the mistake, the PECL do not differentiate the consequences in terms of avoidance according to that role and, even more important, do not exclude hypotheses in which this role is very limited and consists in not avoiding the mistake in circumstances in which it was recognizable. No agreement is reached under Italian law as to whether this case can be read under the general duty of good faith and fair dealing (see above) but, apart from that, the two systems tend to converge. Different approaches are taken as to the ‘recognizability test’: while the PECL explicitly refer it to the effects of the mistake upon the contract, the Codice civile relates it to the mistake as such, intended as the (false) representation of reality or as the falsity of the representation as such. Only with respect to common mistake, some authors tend to refer P. IAMICELI – 195

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the requirement to a causal connection between mistake and conclusion of the contract (see above). In fact, under ordinary circumstances, recognizability of decisiveness includes recognizability of mistake as such, while the reverse is not obvious. The difference is also significant in the case of a mutual mistake. Indeed, if recognizabilty is referred either to the determinativeness of (false) representation on the contract or also to the representation as such, notwithstanding its falsity, then the mistake can be deemed relevant. In different circumstances both provisions (the European one and the Italian one) raise some problems in terms of application. A major difference between the two approaches regards excusability of mistake. Under Italian law there is wide consensus about its irrelevance, while the PECL adopt the opposite solution. Inexcusability can affect recognizability also under Italian law and, conversely, recognizability can limit the relevance of this requirement also in the view of commentators on the PECL. Apart for this, the balance between the reliance principle and the liability principle seems to lead to different results in the two systems. Also the reference to assumption of risk does not emerge in Italian law. A similar approach is taken with respect to the law of sales, according to which the warranty against defects in things sold is not applicable if the buyer knew about them (see Art. 1491 C.C.), but this does not concern mistake. However, in fact courts recognize that if a party was warned about the mistake by the other party, than he/she cannot ask for annulment (Cass. 12784/99, in Rep. Foro it., 1999, under Contratto in genere [1740], no. 526).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:104: Inaccuracy in Communication An inaccuracy in the expression or transmission of a statement is to be treated as a mistake of the person which made or sent the statement and Art. 4:103 applies. 1. Inaccuracy and interpretation. Art. 4:104 almost replicates Art. 3.6 of Unidroit Principles. It is also strongly linked to Arts. 2:101 et seq. and Art. 5:101 of the PECL: according to these provisions a contract is concluded if the parties reach a sufficient agreement, which occurs when the terms (a) have been sufficiently defined by the parties so that the contract can be enforced, or (b) can be determined under the PECL. Moreover, the intention of a party to be legally bound by a contract is to be determined from the party’s statements or conduct as reasonably understood by the other party. This shows that an inaccuracy in the expression or transmission of a statement does not prevent the parties from having a common intention and concluding a contract (Comment B, p. 242). Furthermore, a contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words and, if it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party’s intention, the contract is to be interpreted in the way intended by the first party (Art. 5:101). Also in this case common intention can be defined despite a possible inaccuracy in the expression or transmission of a statement and there may or they may be not any avoidance due to mistake (Comment C, p. 242). 2. Inaccuracy and mistake. However, in other cases inaccuracy in the expression or transmission of a statement must be treated as a mistake made by the person who made or sent the statement, because its terms can be determined (and so a sufficient agreement again exists) only according to the apparent meaning of the statement, which is however affected by mistake. In these circumstances the PECL treat this inaccuracy as any other mistake and Art. 4:103 applies. This means that the mistake must be fundamental, may be, directly or indirectly, caused by the other party or also be common to both parties, but its effects upon the contract must be detectable by the other party. Moreover, the inaccuracy cannot be inexcusable. The same applies in cases in which the statement is not made but sent: the sender bears the risk of the means of communication (Comment I), but he/she can be protected if the conditions for annulment under Art. 4:103 occur.

ITALIAN LAW Art. 1433 C.C.: Mistake in declaration or transmission The provisions of the preceding articles also apply when the mistake occurs in P. IAMICELI – 197

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the declaration or when such declaration was inexactly transmitted by the person or office charged with it. 1. General. The Codice civile includes a provision quite similar to Art. 4:104. Indeed, according to Art. 1433 C.C., the rules stated in Arts. 1428–1432 C.C. also apply when the mistake occurs in the declaration or when such declaration was inexactly transmitted by the person or office charged with it. The content of this provision represents a major change with respect to the previous Civil Code of 1865, in which this kind of mistake caused the nullity of the contract for lack of consent. In fact, authors and courts still distinguish cases in which it is a question of mistake from cases in which a fundamental dissent occurs so that it cannot be said that a contract has been concluded because the declarations cannot address any meaningful regulation of interests (Pietrobon (1990), p. 282; Roppo (2001), p. 807; Cass. 3378/93, in Giust. civ., 1994, I, p. 1997. In other circumstances a common intention exists despite the inaccuracy in communication or expression: normally it can be solved by interpretation (Pietrobon (1990), p. 284; Roppo (2001), p. 807; Cass. 9127/93, in Rep. Foro it., 1993, under Contratto in genere [1740], no. 411). By contrast, mistake occurs when parties do agree on a regulation of their interests but the consent is affected by the inaccuracy in declaration or transmission. When the declaration is issued by a third party, he/she must have received authority from the interested party; otherwise no agreement can be said to have been concluded (Roppo (2001), p. 807). In this case, notwithstanding the mode in which the mistake occurs, the same rules stated above apply. This means that, like any other mistake, this mistake will be cause for annulment only if it is essential and recognizable according to the criteria already examined. Again, excusability of mistake is irrelevant.

COMPARISON AND EVALUATION With respect to inaccuracy in declaration and transmission, no relevant differences can be traced between the PECL and the Codice civile. Indeed, both systems refer to inaccuracy occurring in communication between the parties which causes a major misunderstanding in the conclusion of the contract and also cover the case of a declaration sent via an intermediary. This does not mean that the same rules will apply. Indeed, all the differences already detected with respect to the general pattern of mistake (see Art. 4:103) will be relevant in this respect. In particular, while inexcusable inaccuracy cannot lead to any annulment under the PECL, this might happen according to the Code, although it should be considered whether in such a case the mistake is still recognizable.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:105: Adaptation of Contract (1) If a party is entitled to avoid the contract for mistake but the other party indicates that it is willing to perform, or actually does perform, the contract as it was understood by the party entitled to avoid it, the contract is to be treated as if it had been concluded as that party understood it. The other party must indicate its willingness to perform, or render such performance, promptly after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. (2) After such indication or performance the right to avoid is lost and any earlier notice of avoidance is ineffective. (3) Where both parties have made the same mistake, the court may at the request of either party bring the contract into accordance with what might reasonably have been agreed had the mistake not occurred. 1. General. Art. 4:105 deals with adaptation of a contract affected by a fundamental mistake made by one or both of the parties in circumstances in which the party who is entitled to avoid the contract would have entered the contract under different terms and conditions had the mistake not occurred (see Comment B). In fact, the provision does not seem consistent with the situation in which such a party would not have entered into a contract without the mistake because there would never be any ‘intended’ or ‘reasonable’ meaning to which the contract could be adapted. 2. Timing of the offer. The adaptation is intended to exclude avoidance in cases in which, according to good faith, the contract can still play a role and satisfy the interests of the parties. In this perspective the timing of the offer is relevant. According to the provision, the party must indicate his/her willingness to perform, or render such performance, promptly after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. This is because adaptation may be effective only if no other corrective strategies have been implemented by the other party as a consequence of his/her mistake; by contrast the mistaken party cannot take advantage of the mistake (e.g. terminating the contract) if he/she does not suffer any loss on account of the mistake, adaptation being possible. In other words, whereas an earlier notice of avoidance does not prevent adaptation (see paragraph 2 of Art. 4:105), adaptation is excluded if, for instance, the mistaken party has already obtained the ‘intended’ performance by entering a new contract with another party. In these circumstances adaptation would be inefficient, being a redundant remedy. What excludes adaptation is reliance on an earlier notice of avoidance. This means that, in principle, any corrective measure taken before this notice would not be relevant and the contract could be adapted anyway. P. IAMICELI – 199

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3. Effects of adaptation. Once adaptive performance is offered or fulfilled, the contract cannot be avoided any longer. This is a one-shot game. Parties do not negotiate and the mistaken party cannot prevent adaptation unless he/she affirms that due conditions do not occur (e.g. the offer is not prompt but late in time). The issue concerning damages seems quite critical. In principle, Art. 4:117 does not consider the case of adaptation (although it expressly mentions Art. 4:106), whereas according to the Comment the party may claim damages for the loss suffered and not compensated by the adaptation (see Comment C). In fact it is not easy to identify such loss, given that adaptation should provide the party with the performance it would have received in the absence of mistake. 4. Unilateral v. common mistake. Adaptation applies differently to unilateral mistakes and common mistakes (it can be interesting to note that Art. 3.13 of the Unidroit Principles does not cover the latter case). With respect to the former, adaptation is referred to the meaning intended by the mistaken party; the contract itself is to be treated as if such meaning were part of the agreement and avoidance can no longer be claimed. In the latter case, adaptation is referred to a hypothetical and ‘reasonable’ agreement the parties would have reached had the mistake not occurred: in these circumstances the judge brings the contract into accordance with such agreement. The difference can be explained by focusing on the parties’ role in the adaptation process. If due conditions occur, the party entitled to adaptation can prevent avoidance while the other party can do nothing to avoid it. When only one party is mistaken (and interested in avoidance), the other has the power to opt for annulment or preservation of the contract. An equilibrium is reached because preservation occurs with reference to the meaning intended by the former party and with no reliance loss for him/her (see above). When both parties are mistaken but one is interested in avoidance and the other would opt for preservation, the latter can prevail only if adaptation passes the reasonableness test as defined by an independent actor: the judge.

ITALIAN LAW Art. 1432 C.C.: Preservation of corrected contract The mistaken party cannot demand annulment of the contract if, before he can derive injury from it, the other party offers to perform it in a manner which conforms to the substance and characteristics of the contract that the mistaken party intended to conclude. 1. General. According to Art. 1432 C.C., the mistaken party cannot demand annulment of the contract if, before he can derive injury from it, the other party offers to perform it in a manner which conforms to the substance and characteristics of the contract that the mistaken party intended to conclude. 200 – P. IAMICELI

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The rationale of the rule is exactly the same as the one considered above: on the one hand, the mistaken party cannot take advantage of the mistake by terminating a contract in situations in which he/she can still achieve the goals that the parties agreed (Pietrobon (1990), p. 235); on the other hand, adaptation cannot cause a loss to the mistaken party when annulment might be a better solution. As in the previous case, adaptation is a remedy which does not require the intervention of a judge (Sacco-De Nova (2004), p. 592) and is enacted on the basis of a simple offer by a party, to which the other one cannot object, unless a requisite is missing (Pietrobon (1990), p. 232; Rossello (1991), p. 518; D’Amico (1996), p. 130; Franzoni (1998), p. 305; Roppo (2001), p. 834). 2. Timing of the offer and absence of injury. Particularly critical is the condition concerning the absence of injury. In fact, this requisite substantially reduces the time in which the remedy can be made, although a time limit is not stated in the provision and authors deem that, in principle, the remedy can be made even after more than five years. This is the time limit stated for actions of annulment in this case (Roppo (2001), p. 834) and also the time limit within which the mistaken party’s demand for annulment can be resisted. As to the nature of injury, nothing is stated. In particular, no reference is made to a possible reliance on any measure the party may have taken to get the performance by entering into an alternative contract. In fact this seems to be the kind of injury a late adaptation could determine. However, the injury should be relevant both if the party has already sued for annulment or has not yet done so. 3. Categories of mistake. Adaptation is referred to the substance and characteristics of the contract that the mistaken party intended to conclude. This is especially tailored to the case of inaccuracy in declaration or transmission, but there are no obstacles in extending the same rule to any kind of mistake (Franzoni (1998), p. 304; Sacco-De Nova (2004), p. 592). Some authors state that the rule specifically addresses the case of ‘incidental’ mistake, in which the mistaken party would have entered the contract but on different terms had the mistake not occurred (D’Amico (1996), p. 127). 4. Common mistake. No mention is made of common mistake. Silence is not conclusive as to the exclusion of remedy, however. Indeed, once invalidity is admitted (see above), there should be no obstacle to the application of the rule concerning adaptation (Franzoni (1998), p. 302). The real issue is related to the criterion applied to define the adaptive performance, which is stated with respect to the meaning intended by the mistaken party. In fact, it seems that the subjective criterion is not appropriate, nor consistent with a good faith application of such a remedy (if ever applicable).

COMPARISON AND EVALUATION The approach taken by the PECL and the Codice civile as to the adaptation of a contract affected by mistake is quite similar in most respects: the rationale, the balance between P. IAMICELI – 201

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preservation of the contract and prevention of injuries to the mistaken party, the relevance of the ‘intended’ meaning over the terms of the agreement (if this fits the balance as prescribed by the provision). Minor differences regard the absence of a time limit for adaptation with respect to the knowledge of the intended meaning by the mistaken party in the Codice civile; however, reference to possible injuries deriving from preservation of the contract as an impediment to adaptation indirectly includes a substantial time limit in the process. Moreover, whereas the PECL require that the mistaken party has not acted in reliance on an earlier notice of avoidance (if any), the Codice civile generally refers to injuries deriving from preservation and adaptation. A more problematic divergence regards common mistake. Not only the lack of explicit rules in the Codice civile, but in particular the reference to the subjectively intended meaning as a standard for adaptation, seems quite critical under Codice civile. In this respect, the approach followed by the PECL could represent a model to be considered in studying new approaches to this issue. It is not clear whether the current rules allow an interpretation similar to Art. 4:105 (3) of the PECL.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:106: Incorrect Information A party which has concluded a contract relying on incorrect information given it by the other party may recover damages in accordance with Art. 4:117(2) and (3) even if the information does not give rise to a fundamental mistake under Art. 4:103, unless the party who gave the information had reason to believe that the information was correct. 1. General. Art. 4:106 introduces a liability rule in circumstances in which a validity rule cannot be applied. Although the provision corresponds to a solution normally adopted by domestic legislation, it is new if compared with the Unidroit Principles (see also BealeKo¨tz (2002), p. 425). The conditions for the application of the remedy are that incorrect information has been provided and the contract is not void or cannot be avoided, either because the time limit has expired or because the party entitled to avoid the contract has, expressly or impliedly, confirmed it (or does not exercise his/her right to avoid it) or because the incorrect information does not meet the requisites of Art. 4:103. When for such reasons the validity rule is not applicable, only incorrect information (and not lack of information) is relevant, but the mistake that arises does not need to be fundamental or determinant as under Art. 4:103 (see Comment A). It can be disputed whether any kind of incorrect, even minor, information entitles the party to receive damages. Moreover, a recognizability test for the non-mistaken party is not specifically requested even though it is stated that damages cannot be claimed if the party who gave the information had reason to believe that the information was correct. So, recognizability refers to incorrectness itself, not to the effects on the mistaken party’s consent. 2. Liability and duty to inform. The liability rule is specifically aimed at covering the violation of the duty to provide correct information, while a general duty to inform cannot be inferred. On the other hand, the mistaken party’s position is relevant: indeed, damages cannot be claimed if he himself/she herself could have checked and corrected the information (see Comment C). 3. Measure of damages. Given the non-application of the validity rule, also damages shall be determined accordingly. So, paragraphs (2) and (3) of Art. 4:117 come into play but not paragraph (1) which refers to the situation of the contract not having been concluded. According to the Comment, the standard measure of damages covered by Art. 4:106 refers to the difference between the party’s actual position and the position he/she would have been in had he/she known the truth (Comment E). Under Art. 4:117(3), general provisions concerning contractual damages (for non-performance) are also relevant in determining such measure: i.e. foreseeability test or reduction of the loss can apply (see Art. 9, Section 5 and relative comment). P. IAMICELI – 203

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ITALIAN LAW Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1440 C.C.: Incidental fraud If the deception was not such as to compel consent, the contract is valid, even though without the deception it would have included different terms; however, the contracting party in bad faith is liable for damages. 1. General. The violation of the duty to provide correct information can be derived from the general provision concerning good faith and fair dealing in the conclusion of contracts stated in Art. 1337 of the Codice civile. The nature of a general clause attached to this rule allows interpreters to extend its coverage to include different patterns of the duty to inform as well as other duties also relevant in the context of pre-contractual relationships. Although not expressly stated, the application of liability rules in the case of violation of such duties is also generally recognised, while authors dispute whether the relevant regime should be one of contractual liability or of torts (extra-contractual liability). As will be explained later, the two alternative solutions are not problematic since, in many respects, the two regimes overlap (see comment concerning Art. 4:117). The definition of the area covered by Art. 1337 C.C. has been quite disputed in the past. Today, however, authors and courts generally agree that so called pre-contractual liability may concern not only the unjustified withdrawal of an offer and the conclusion of invalid contracts, but also unfair dealings resulting in the conclusion of valid contracts. The independence of liability and validity rules has consequently been stated (Patti-Patti (1993), p. 95). Further confirmation is provided in Art. 1440 C.C., concerning incidental fraud as a defect (also related to breach of the duty to inform), which does not affect the validity of the contract but enables the misled party to sue for damages (Patti-Patti (1993), p. 110). 2. Liability and duty to inform. With respect to the extent of the duty to inform, there is no agreement among interpreters. In particular, what is disputed is whether some information should be disclosed at all; indeed, according to some authors, not only incorrect information but also lack of information, can be covered by pre-contractual liability, even in circumstances in which the contract is valid under Art. 1428 et seq. C.C. (PattiPatti (1993), p. 95 et seq.; Grisi (1990), p. 79 et seq.). Elements such as the other party’s ability to get or to check the information and the essentiality of the information itself in the contract are generally considered conditions for a duty to provide (correct) information to arise (Grisi (1990), p. 88, 93). It is not clear whether such a test is stricter in the case of incorrect information than in the case of lack of information. Correctness of information is evaluated according to a higher standard if provided by a professional or a party from whom it is reasonable to expect more qualified skills or knowledge (Grisi (1990), p. 93; Cafaggi (1998), p. 24). 204 – P. IAMICELI

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3. Measure of damages. When a liability rule is applied in the case of a valid contract or a contract which has not been avoided, in determining damages, regard is had to the situation in which the party would have been if the information had been correct (Luminoso (1988), p. 797; Grisi (1990), p. 349; Roppo (2001), p. 187). More specifically, it is held that damages may be evaluated with respect to the disadvantage caused by the violation of good faith or the better opportunity the party would have had if this duty had not been violated (Patti-Patti (1993), p. 121 et seq.).

COMPARISON AND EVALUATION Although the Codice civile does not expressly contain an equivalent provision, the content of Art. 4:106 can be derived from the general clause on good faith as defined in the precontractual liability regime. Hence, both the PECL and the Codice civile provide a liability rule for cases of incorrect information in circumstances in which a validity rule is not applied. While the PECL expressly focus on incorrect information, the Italian provision’s scope tends to be broader since, according to some authors, the general clause on good faith also includes lack of information. Moreover, another crucial issue concerns the nature of the mistake deriving from incorrect information. Under both systems, an express reference to the relevance of the mistake in the contract is lacking. However, the common interpretation of the Italian general clause on good faith tends to restrict its coverage to the case of essential information. It is questionable whether a broader interpretation could be inferred from the PECL. A relational approach to the evaluation of incorrect information is applied in both systems, so that a party who has the opportunity of checking the correctness of information could never claim damages from the other party who has provided the incorrect information. No substantial differences emerge with respect to the measure of damages, as determined with respect to the causal connection between the incorrectness of information and the terms of the contract, as compared with the situation in which correct information would have been provided. A minor difference is the one related to the liability regime applied in this case (contractual in the PECL, unclear under Italian law). However, provisions like those in Art. 9:503 of the PECL (foreseeability) or in Art. 9:504 (loss attributable to aggrieved party) can be easily recognised under both the contractual and extra-contractual liability regimes of Italian law.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:107: Fraud (1) A party may avoid a contract when it has been led to conclude it by the other party’s fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information which in accordance with good faith and fair dealing it should have disclosed. (2) A party’s representation or non-disclosure is fraudulent if it was intended to deceive. (3) In determining whether good faith and fair dealing required that a party disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to it of acquiring the relevant information; (c) whether the other party could reasonably acquire the information for itself; and (d) the apparent importance of the information to the other party. 1. General. Art. 4:107 deals again with a violation of the duty to inform or to provide correct information in accordance with the duty of fair dealing and good faith. What distinguishes this provision from the previous ones is the intentionality of the deceiving behaviour. 2. Ground for duty to inform. Unlike under Art. 4:103, the provision also clarifies when a duty to inform (or to provide correct information) arises and how its violation can take place (representation by words or conduct, or non-disclosure). In fact, an evaluation on the basis of all relevant circumstances is requested but some of these are spelled out, although the list is not exhaustive (Comment H, p. 254). This specification is not contained in the Unidroit Principles (see Bonell (1994), p. 253; for an application of the general rule, see however ICC Arbitral Award no. 9474, February 1999). In particular, the list includes circumstances relating to the deceiving party (special expertise, cost of acquiring relevant information) and to the deceived one (reasonable capacity for acquiring the information for him/herself, apparent importance of the information). Again, the PECL adopt a relational approach in order to define the duties according to good faith and fair dealing. Some hints are also derived from economic analysis of law, with special reference to the costs of acquiring information, although it is not clear whether these costs can ever be a ground for a right of non-disclosure in favour of the party who bore these costs, as some authors suggest (see Kronman (1979), p. 35 et seq.; Ulen (2001), p. 98 et seq.). 3. Determinant v. incidental fraud. In order to entitle the deceived party to avoid the contract, the party’s deception must have led him/her to conclude the contract. However, it is not clear whether the provision also includes the case in which, without the fraud, he/she would have concluded the contract under different terms. As seen above, this case 206 – P. IAMICELI

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is partially excluded under the rules on mistake (for which the contract may be avoided if, without the mistake, the mistaken party would have concluded the contract at least on fundamentally different terms). There being no express limit, it could be reasonably inferred that in the case of fraud the reliance interest of the fraudulent party deserves a lower level of protection; so, the validity rule would also apply to cases of incidental fraud.

ITALIAN LAW Art. 1439 C.C.: Fraud Fraud is cause for the annulment of the contract when the deception employed by one of the contracting parties was such that, without it, the other contracting party would not have entered into the contract. [...] 1. General. Also under the Codice civile fraud is cause for annulment of the contract. The provision identifies two major elements as being relevant: deceit and its determinativeness on the deceived party’s consent so that, without deceit, the party would not have entered into the contract at all (while the case of incidental fraud is exclusively covered by a liability rule, see Art. 1440 C.C.). No specification regarding the object of the misleading information is given, which can also concern the deceived parties personal motives (Bianca (2000), p. 664; Roppo (2001), p. 812; Cass. 975/95, in Foro it., 1995, I, 2502). 2. Nature of deceit. Deceit is recognised both in affirmative conduct (ranging from false information to actual scheming) and omissions (especially lack of information). However, in the latter case, authors and courts take a more restrictive approach. Although only few authors agree on the existence of a general duty to inform, which is also covered by Art. 1349 C.C. (Visintini (1972), p. 112 et seq.), there is general agreement on the relevance of silence as an indicator of deceit. It does not suffice, however. Indeed, other material circumstances are required which give evidence of a more comprehensive plot by the deceiving party to induce the counter-party to agree on the contract (Bianca (2000), p. 665; Cass. 2104/03, in Rep. Foro it., 2003, under Appello civile [0440], no. 18; Cass. 11038/91, in Rep. Foro it., 1991, under Contratto in genere [1740], no. 353). In fact some authors hold that courts only require the existence of a causal connection between silence and consent, not unlike the approach they adopt with respect to positive conduct (Gaudino (1990),p. 370). Others look at the specific circumstances or relationships in which the law could require a higher level of information, whose violation is considered fraudulent: in this case, consumer contracts and fiduciary contracts are especially taken into account (Sacco(1997), p. 255; Roppo (2001), p. 817). 3. Intentionality. More problematic is the nature of the deceiving conduct with respect to intentionality. Although the traditional view acknowledges its relevance (Trabucchi (1960), p. 180; Bianca (2000), p. 665; Gaudino (1990), p. 368; Cass. 11038/91, in Rep. Foro it., 1991, under Contratto in genere [1740], no. 353; Cass. 2104/03, in Rep. Foro it., 2003, under Appello civile [0440], no. 18), some authors hold that fraud can also be P. IAMICELI – 207

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determined by fault rather than intentionally (Sacco (1997), p. 252; Gentili (1989), p. 3). Sometime intentionality is linked to the awareness of the relevance of the deceiving party’s deceit with respect to the deceived party’s consent (Cass. 10718/93, in Foro it., 1994, I, 423). 4. Relevance of deceit and causation. As seen before, a party may sue for annulment in case of fraud only if deceit has been decisive for the conclusion of the contract, while incidental fraud only gives rise to a claim for damages. The causal connection between deceit and the consent is evaluated with reference to the concrete circumstances of the case (Bianca (2000), p. 666). In some cases a standard of ‘‘normal adequacy’’ is also applied: on this basis, the relevance of the so-called dolus bonus (consisting in alterations of information which are common in market practice) is excluded because this kind of inducement is normally capable of substantially affecting the parties’ consent (Bianca (2000), p. 666). In fact, the concept of dolus bonus is rarely considered, given the increase in information duties in market regulation and the attention paid by the courts to the actual adequacy of fraud in deceiving the party (Trabucchi (1964a), p. 151; Gaudino (1990), p. 380; Gallo (1999a), p. 462; Roppo (2001), p. 818 et seq.) and it is severely criticised by some author to the extent that it in fact leaves unpunished the actual violation of the duty of good faith (Sacco (1997), p. 256). 5. Ground for duty to inform. Art. 1439 C.C. does not specify the circumstances in which a duty to inform arises (see Ceppi (2001), p. 86 et seq.). However, some authors and courts agree on the relevance of the parties’ expertise and their ability to acquire information. In particular, some hold that a general principle exists, according to which a party could not be considered to have been deceived in circumstances in which he/she could have obtained or checked the relevant information (Visintini (1972), p. 122; Gaudino (1990), p. 375; Roppo (2001), p. 217; Cass. 9227/91, in Foro it., 1992, I, 767; Cass. 11038/91, in Rep. Foro it., 1991, under Contratto in genere [1740], no. 353; Cass. 10718/93, in Foro it., 1994, I, 423; Cass. 5166/03, under Contratto in genere [1740], no. 47; contra: Gallo (1999a), p. 469), especially if it is a professional or entrepreneur (Cass. 257/91, in Rep. Foro it., 1991, under Contratto in genere [1740], no. 355; see Sacco (1997), p. 256). In this perspective, many observe an increase in the number of legal provisions which prescribe duties to provide information in favour of consumers (Sacco (1997), p. 256; for a general view in the European perspective: Grundman et al. (2001)). Only few authors pay attention to the economic argument relating to the costs of acquiring information (Villa (1988), p. 286 et seq.; Roppo (2001), p. 817), while many courts end up excluding a duty to inform when the information regards opportunities for the informed party to make gains, rather than for the other to suffer concrete losses (see Gaudino (1990), p. 374; Grisi (1990), p. 104 et seq.). Finally, a significant reference to the fraud regime has been made by the legislator in the area of franchising (Law no. 129/04, Art. 8), which applies Art. 1439 C.C. to cases of violation of duties to provide information, as specifically determined under this law. 208 – P. IAMICELI

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COMPARISON AND EVALUATION Although structured differently, Art. 4:107 of the Principle and Art. 1349 of the Codice civile are in fact quite similar, being based on the same principle, as the link between fraud and violation of the duty of good faith and fair dealing immediately shows. Many aspects expressly spelled out in the PECL also emerge in the Italian system as seen in the interpretation given by legal scholars and courts when applying Art. 1349 C.C. In this respect the PECL can help to clarify or to reinforce trends that already exist in the national system. This is especially important with respect to the identification of the circumstances that cause duties to provide information to arise, with special (but not exclusive) reference to the case of lack of information as fundamental for fraud. In this area, some of the criteria proposed by the PECL are quite familiar to Italian case law (e.g. the party’s special expertise and the other party’s capability of acquiring information); some are less so, especially given their economic background (see the reference to the cost of acquiring information). In other respects the PECL seem to follow more traditional patterns, neglecting the most recent trends in the Italian system: this can be said with reference to the intentionality of deceit as opposed to fault in deceiving which, according to some authors, should be taken into account under Art. 1349 C.C. A major difference regards the relevance of incidental fraud which, under Italian law, is not covered by a validity rule (but only by a liability rule), while the PECL do not apparently exclude this possibility. This could be explained as a harsher penalty against fraud, if compared with (non-fraudulent) mistake, while the Italian approach would enhance stability of contracts when the defect is only incidental: a trade-off not easy to be found.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:108: Threats A party may avoid a contract when it has been led to conclude it by the other party’s imminent and serious threat of an act: (a) which is wrongful in itself, or (b) which it is wrongful to use as a means to obtain the conclusion of the contract, unless in the circumstances the first party had a reasonable alternative. 1. General. The article is intended to guarantee that a party exercises his/her freedom of contract without being bounded by actions or choices which are in fact not voluntary. Leaving aside the cases in which a party is literally forced to conclude the contract (so that an agreement does not arise in the first place), the provision regards contracts concluded by a party under the influence of a threat. According to Art. 4:108 a threat can allow a party to avoid a contract if: (1) the threat regards an act which is either wrongful in itself or a wrongful means to obtain the conclusion of a contract; (2) it is imminent and serious; (3) it has led the party to conclude the contract; and (4) the party had no reasonable alternative. The provision almost replicates Art. 3.9 of the Unidroit Principles. 2. Wrongfulness. As to the object of the threat, no reference is provided to specific interests or rights, and threats to inflict economic loss are also included (Comment A, p. 257). In fact, the impact of the provision depends on the scope of the notion of wrongfulness as applied in the circumstances. When the threatened act is wrongful in itself, the interpretation of the PECL seems to focus on cases of (threatened) torts or breach of contract (Comment A, p. 257). Less clear is the interpretation suggested for the cases in which the threatened act is a (lawful act in itself but a) wrongful means to obtain the conclusion of the contract: no criterion is provided to define wrongfulness in this case (on Unidroit Principles, see Bonell (1994), p. 254). 3. Causation. The other requirements mentioned all regard the adequacy of the threat to lead to the conclusion of the contract. The unavailability of a reasonable alternative also qualifies the causal connection between the threat and the conclusion of the contract. It is not requested that the threat be the only reason for the party to accept the offer (Comment D, p. 258), nor that the party under threat would not have concluded the contract at all, rather than on different terms. What is again not specified is whether the adequacy and seriousness test should be applied with regard to the subjective condition of the party (age, expertise, information, ...), or according to an objective standard, regardless of that condition. 210 – P. IAMICELI

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ITALIAN LAW Art. 1434 C.C.: Duress Duress is cause for annulment of a contract even if exerted by a third person. Art. 1435 C.C.: Characteristics of duress Duress must be of such a nature as to impress a reasonable person and to cause him to fear that he or his property will be exposed to an unjust and considerable injury. In this respect, the age, sex and condition of the persons shall be considered. Art. 1436 C.C.: Duress directed against third persons (1) Duress is also cause for annulment of the contract when the threatened injury is directed toward the person or property of the spouse or of an ascendant or descendant of the contracting party. (2) If the threatened injury is directed toward other persons, annulment of the contract is left to the prudent appraisal of the circumstances by the court. Art. 1437 C.C.: Reverential fear Mere reverential fear is not cause for annulment of a contract. Art. 1438 C.C.: Threat to enforce right A threat to enforce a right can be cause for annulment of a contract only when it is aimed at obtaining unjust benefits. 1. General. Also Italian law assigns duress, as a defect in consent, the meaning of threat or undue influence, while considering physical violence a case of non-agreement (SaccoDe Nova (2004), p. 575; Corsaro (1994), p. 1). A further distinction is drawn between absolute and relative duress, regardless of the physical or psychological moral nature of the means adopted: then, relative duress is considered a cause for annulment, while absolute duress prevents an agreement from arising in the first place (Trabucchi (1975), p. 943; D’Amico (1993), p. 860; see also Sacco-De Nova (2004), p. 577). In order to be considered a cause for annulment the threat needs to be extrinsic and apparent, since mere awe is not relevant under this rule (see Art. 1437 C.C.). It also needs to be serious (Trabucchi (1975), p. 944). 2. Threat. Two cases are considered: – either the threat concerns an unjust and considerable injury (involving injury to the person or assets of the party, of the party’s relatives, or of other persons whose relation to the party is evaluated by the judge); P. IAMICELI – 211

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– or the threat concerns the exercise of a right (lawful in itself but exercised) as a means to obtain unjust benefits. There is a wide debate on the meaning of unjust injury and unjust benefit. As to the former, many agree that the provision should be interpreted according to the meaning of Art. 2043 C.C. (on torts) and consequently every injury affecting the interests that are relevant according to law (either rights or other legal interests) is unjust (Gallo (1999b), p. 733; Sacco-De Nova (2004), p. 582). Intention to induce the other party to conclude the contract by threat is also a requirement for annulment (Trabucchi (1975), p. 945; see also Sacco-De Nova (2004), p. 584 et seq.; Cass. 8430/00, in Rep. Foro it., 2000, under Contratto in genere [1740], no. 555). With respect to the latter case some criteria have been proposed, in particular: the extraneousness of the benefits obtained with respect to the expectation interest covered by the right (Trabucchi (1975), p. 947; D’Amico (1993), p. 870; Corsaro (1994), p. 4; Gallo (1999b), p. 734; Cass. 7044/88, in Rep. Foro it., 1988, under Contratto in genere [1740], no. 38; Cass. 9946/96, in Rep. Foro it., 1996, under Contratto in genere [1740], no. 395); the disproportion between the value of the expected benefits and those obtained, if that right were to be exercised (Trabucchi (1975), p. 948 et seq.; D’Amico (1993), p. 870; Gallo (1999b), p. 734 et seq.; Cass. 7044/88, in Rep. Foro it., 1988, under Contratto in genere [1740], no. 38; Cass. 9946/96, in Rep. Foro it., 1996, under Contratto in genere [1740], no. 395); the violation of a legal or moral prohibition to negotiate out of the application of a right, to exercise it for value, to take advantage of someone’s difficult circumstances (Sacco-De Nova (2004), p. 582). 3. Causation. As to the effects of the threat in terms of inducement to conclude the contract, the provision does not specify that the threat should be the only reason for it (but see Sacco-De Nova (2004), p. 589 for this interpretation) and does not differentiate between the choice of concluding the contract and the choice of agreeing on a particular content, so that many agree that incidental duress is also relevant as a cause for annulment (Corsaro (1994), p. 5; Gallo (1999b), p. 734; contra Trabucchi (1975), p. 953). No specific attention is given by the law to the existence of reasonable alternative solutions for the party (but see Sacco-De Nova (2004), p. 589 and in case law, Cass. 6577/03, in Rep. Foro it., 2003, under Lavoro (rapporto) [3890], no. 206), while in more general terms it is stated that a relevant threat should be of such a nature as to impress a reasonable person. This criterion is only partially objective since it is complemented by a reference to age, sex and condition of the persons (Cass. 9946/96, in Rep. Foro it., 1996, under Contratto in genere [1740], no. 395; Trabucchi (1975), p. 946; Sacco-De Nova (2004), p. 579; D’Amico (1993), p. 868, who also holds that the evaluation should be different in the case of the exercise of a right, since in this case it should also include reference to subjective and actual circumstances, D’Amico (1993), p. 877). According to one Author a causation link can also be constructed by assessing the gravity of the injury threatened (D’Amico (1993), p. 867; contra Sacco-De Nova (2004), p. 579).

COMPARISON AND EVALUATION The two approaches do not substantially differ, although a different focus is given on various aspects of the rules. Indeed, the PECL define more carefully the causal connection 212 – P. IAMICELI

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between threat and consent, suggesting criteria which, although not expressly provided, are totally consistent with the Italian provisions (e.g., considerable weight might be given to the existence of reasonable alternative solutions for the threatened party). However, what is not stated is whether the adequacy test should be applied according to a subjective or an objective criterion; this is a point on which the Codice civile is more precise as it adopts a relatively objective criterion. Almost equivalent are the provisions regarding the object of the threat to the extent that they distinguish acts which are wrongful in themselves (this could be equivalent to being framed as torts or breach of contract) from acts which are a wrongful means to perform lawful actions. Under the PECL the lawful action would be the conclusion of the contract, so that what makes the threat a wrongful means to obtain such a result remains uncertain. Italian law provides a major clarification by considering the exercise of a right on the one hand and the unjust benefits on the other. The interpretation following this normative solution may clarify the interpretation of the PECL under this respect, although it could be quite restrictive, given the broader approach adopted by them.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:109: Excessive Benefit or Unfair Advantage (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) it was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill, and (b) the other party knew or ought to have known of this and, given the circumstances and purpose of the contract, took advantage of the first party’s situation in a way which was grossly unfair or took an excessive benefit. (2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what might have been agreed had the requirements of good faith and fair dealing been followed. (3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for excessive benefit or unfair advantage, provided that this party informs the party which gave the notice promptly after receiving it and before that party has acted in reliance on it. 1. General. Existing legal systems usually approach the question of the imbalance between parties’ reciprocal obligations in a contract in two alternative ways. The first approach is based on the comparison between the objective value of performances due by the parties as determined by the economic and social background in which they typically act. The second follows the principle of parties’ freedom and therefore restricts intervention only to those defects in consent that represent a limitation of that principle (taking into account the circumstances of the case in which the agreement was reached). Both the above-mentioned approaches have historically shared the roots and fate of an institution of ancient tradition: the laesio aenormis. Initially, such institution – which is considered the result of a Christian manipulation of the classic Roman tradition – anticipated the Aristotelian-Thomistic view of contractual balance and, in particular, the theories on iustum pretium (fair price) developed by doctrines of natural law. Such theories treat the imbalance between the parties’ contractual obligations as an arithmetic imbalance, to be evaluated under the rules of commutative justice (Gordley (1992), p. 10 et seq.). The very same institution, as rediscovered by XIXth and XXth Century codifications, shows the growing success of such views on contractual balance which are clearly compatible with traditional individualistic or utilitarian policies. This may be seen in the French Code civil of 1804 (Art. 1674) and in the Austrian Allgemeines Bu¨rgerliches Gesetzbuch of 1811 (Par. 934 et seq.). The provisions in both Codes on the one hand, formally conform to the theory which evaluates contractual imbalance in terms of an arithmetic imbalance, which being a relevant disproportion is however not subject to the rules of commutative justice. On the other hand, they seem to treat the laesio as a type of defect in consent similar to fraud. 214 – A. SOMMA

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The latter view is confirmed by the German Bu¨rgerliches Gesetzbuch of 1896 in the rules relating to usury. The only imbalance between contractual obligations relevant to usury is one accompanied by a subjective element, that is the specific intention to obtain a ‘‘pecuniary advantage, exploiting the need, carelessness or inexperience of another’’ (Par. 138 BGB). As we will shortly see, the Italian Codice civile of 1942 takes a comparable approach in the rules on rescission of the contract (Art. 1448), which were actually developed by the legislator as a remedy for a presumed defect of consent. German case-law has however gradually changed the fundamental aspects of the civil code’s mechanism to control contractual imbalance. In particular, a system of presumptions regarding the subjective element was created by accepting an objective notion of public policy ( gute Sitten) through reference to the typical economic and social context in which parties operate. Thanks to such a notion, it was possible for example to affirm that in a contract between a bank and a client, usury is presumed when the lender, though not directly aiming at exploiting its own bargaining power, nevertheless does not realise the weak position of the borrower (see the decision of the German Supreme Court BGH, 12-03-1981, in BGHZ, vol. 80 (1981), p. 153 et seq.) (Somma (2003), p. 25 et seq.). 2. The approach followed by the PECL. The German judge-made law just mentioned represents the key to a better understanding of Art. 4:109 PECL and in particular helps to highlight the fact that such a provision represents a compromise between the theories of contractual balance based on a mere comparison of exchanged performances (as in the Aristotelian-Thomistic view) and those centred on party autonomy. The latter view is expressed by the statement that contract law does not require that performances exchanged be of equal value (see Comment A), and that therefore relief should only be available when the party in the strong position can avail himself/herself of some weakness of the other party (see Comment B). More in line with a possible re-evaluation of an Aristotelian-Thomistic theory is, on the other hand, the specification that knowledge of the weaker party’s position can also be presumed. Such an approach in fact introduces elements of objective evaluation of contractual balance. Similar concessions to an alternative approach to the strengthening of party autonomy are to be found also with respect to the measure of the imbalance. In addition to excessive benefit – measured apparently in the same way as laesio enormis – the provision actually mentions the unfair advantage obtained by the stronger party. Such an advantage concerns situations in which the price is not compared to the market value of the goods but to the subjective financial position of the weaker party (see Comment E). Finally, party autonomy is restricted when it comes to the remedies granted to the weaker party. The latter actually has the right to ask for a change in the contract’s content in order to restore the balance between performances in the light of good faith and fair dealing, considered throughout the whole text of the PECL, as an implicit limitation to the principle of freedom of contract (see Arts. 1:102 and 1:201 PECL). A. SOMMA – 215

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ITALIAN LAW – COMPARISON AND EVALUATION Art. 1447 C.C.: Contract concluded in state of danger (1) A contract by which one party assumes obligations under unfair conditions because of the necessity, known to the other party, of saving himself or others from a present danger of serious personal injury, can be rescinded on demand of the party who assumes such obligations. (2) In awarding rescission the court can according to the circumstances award fair compensation to the other party for work performed. Art. 1448 C.C.: General action of rescission for lesion (1) If there is a disproportion between the performance of one party and that of the other, and such disproportion was the result of a state of need of one party, of which the other has availed himself for his advantage, the injured party can demand rescission of the contract. Art. 1815 C.C.: Interest (1) The borrower is bound to pay interest to the lender, unless otherwise agreed by the parties. The provisions of Art. 1284 are observed in determining the interest. (2) If usurious interest is stipulated, the clause is void and no interest is due. Art. 9, Act 18 June 1998, no. 192: Abuse of economic dependence (1) The abuse, by one or more firms, of the economic dependence in which its (or their) customer or supplier finds itself with regard to it (or them), is forbidden. The term ‘‘economic dependence’’ refers to the situation where a firm is able to determine an excessive imbalance of rights and duties in the commercial relationship with another firm. (...) (2) (...) (3) The agreement which causes the abuse of economic dependence is null and void. (...) [Translation by the Editors] 1. Rescission of the contract. The rules in the Codice civile on rescission of the contract are partly modelled on the German rules on usury (Art. 1448 C.C.). In particular, the latter has influenced the notion of the intention to profit from the other party’s situation of need. Such an intention, however, is not mentioned together with the other cases of exploitation of the other party’s weaker position, and this in order to coordinate the rule with criminal law on usury (see Relazione al Re, no. 125). Another difference is to be found in the description of the objective element, which is precisely indicated by the Civil Code: the imbalance must amount to more than half of the value of the performance. 216 – A. SOMMA

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It should be noted that such a precise indication does not appear in a specific type of rescission similar in a way to the rules set forth in the PECL for cases in which the contract creates an unfair advantage for the stronger party. We are referring to the rescission of a contract concluded in a situation of danger (Art. 1447 C.C.). Such a situation is however described in a way which is clearly less encompassing than the one provided for in the PECL as to the unfair advantage: it only refers to the ‘‘necessity of saving himself or others from a present danger of serious personal injury’’. The situation of danger must further be known by the other party. Therefore, there is no room for the presumptive knowledge which is introduced in the PECL by the specification that the other party ‘‘knew or ought to have known’’ of the weaker position of the counterpart. The same is true of the situation of need of Art. 1448 – described by Italian courts as ‘‘a lack of pecuniary means which was the real impulse for the conclusion of the contract’’ (see Cass. civ., 1 August 1998, no. 8200, in Mass. Giur. it.) – that is therefore not presumed taking into account the typical social and economic context at the time of conclusion of the contract (see Cass. civ., 1 March 1995, no. 2347, in Mass. Giur. it.). Other differences between the Italian rules on rescission and the PECL are to be found regarding the consequences of the contractual imbalance. The PECL consider the contract avoidable and give the weaker party the right to ask for a modification of the content of the contract on the basis of the principle of good faith. Italian law on the other hand only provides for the right of the party against whom the action is directed to ask for such a modification, and only takes that party’s proposal into account as regards the content of the agreement. 2. Usury interest rate. The Italian Codice civile has long had a provision providing that a contractual term imposing a usury interest rate in loan agreements is to be considered null and void, and the legal interest rate is to be applied instead (Art. 1815 C.C.) Such a provision is coordinated with the sanction already present in Art. 644 of the Codice penale (Criminal Code) which only applies to the situation where one party profited from the victim’s state of need and refers to the state of indigence of the same victim. The law of 7 March 1996, no. 108 modified both above-mentioned provisions. The Codice civile now states that ‘‘if usurious interest is stipulated, the clause is void and no interest is due’’. As to the Criminal Code provision, it no longer refers to the situation of indigence of the victim, nor to the intention to take advantage of a situation of need of the other party: merely exceeding the legal limit is sufficient to qualify the interest rate as usury in criminal law. The new rules have created problems insofar as it proved difficult to determine the time when illicit conduct should be considered to have full effect. The approach taken by the Corte di Cassazione which was to fix it at the time when payment of interest is requested (see Cass. Civ., 2 February 2000, no. 1126, in Giur. it., 2001, p. 31 et seq.) was followed by a legislative provision (the so-called ‘‘Bank Protective Measure – decreto salva banche), according to which the time must be the same as that of the conclusion of the loan contract (see Legislative Decree 29 December 2000, no. 394). The latter approach was substantially A. SOMMA – 217

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favoured by the Constitutional Court (see Corte Cost., 25 February 2002, no. 29, in Giur. it., 2002, p. 1125 et seq.). 3. Abuse of economic dependence. A recent legislative provision concerning subcontracting (law of 18 June 1998, no. 192) considers, among others, the contract null and void when the imbalance between the performances derives from an abuse of economic dependence. Such an abuse is defined as ‘‘the situation where a firm is able to determine an excessive imbalance of rights and duties in the relationship with another firm’’ (Art. 9). As regards this issue it must be noted that all economic agents – be they strong or less strong – do not view such a provision with favour. The strong ones object to it because they see their power to control contractual mechanisms diminished; the others fear they might be excluded from concluding contracts if suspicion arises that they are liable to make use of the new remedy. This is one of the reasons for the relatively small number of judicial decisions based on the provision at hand (see however Trib. Bari, 6 May 2002, in Danno e responsabilita`, 2002, p. 765 et seq.). 4. Causa of the contract and duty of good faith and fair dealing. A closer look at the Italian legal system shows that there are other provisions in the Codice civile dealing with the issue of contractual balance. As a matter of fact the civil code defines the causa contrattuale in terms which turn it into an instrument capable of affecting the parties’ will beyond the realm of illegality. More precisely, the causa represents the ‘‘economic-social function’’ of the contract, meaning that parties have to behave not only ‘‘in conformity with statutory law, public policy and boni mores’’, but also ‘‘following the need that the intrinsic objective of the contract be of social benefit and therefore worthy of juridical protection’’ (see Relazione al Re, no. 79). This definition has been criticized by scholars but is nonetheless often referred to in the practical application of the law, though the policies underlining such application are clearly opposite to the purposes of the legislator of 1942 (Alpa (1995), p. 1 et seq.). Case law declares ‘‘null for lack of causa the synallagmatic contract where there is no equivalence – even if only approximate or showing a trend – of the performances (see Cass. civ. 27 July 1987, no. 6492, in Mass. Foro it., 1987). A balanced distribution of contractual risks is further defended by the principle of fair dealing in the law of obligations embodied in Art. 1175 C.C. According to an obiter dictum to be found in one judicial decision such a principle would allow a reduction of interest rates in a loan agreement ‘‘when the creditor’s conduct shows bad faith in respect to the non-performance of the debtor (see Trib. Roma, 10 July 1998, in Foro it., 1999, I, 343 et seq.). It must be noted that the judicial use of the principle of fair dealing – and of the analogous principle of good faith in interpreting and performing the contract provided for in Arts. 1366 and 1375 C.C. – is far to be as large as in German case law. Nevertheless, such a principle does represent a true limitation to party autonomy founded on the duty of solidarity in interpersonal relationships stated in Art. 2 of the Italian Constitution (see Cass. civ., 20 April 1994, no. 3775, in Foro it., 1994, I, 1296 et seq.) (Somma (2004), p. 35 et seq.). The link between such a limitation and contractual balance is confirmed by a recent 218 – A. SOMMA

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decision recognising the judge’s power to reduce the amount provided in a penal clause until it is equitable even when the debtor has not asked for such a remedy – contrary to a longstanding interpretation of Art. 1284 c.c. (see Cass. civ., 24 September 1999, no. 10511, in Foro it., 2000, I, 1926 et seq.). Taking such developments into consideration we can therefore say that Italian case law (if not the legislator) seems to follow the same policy trend expressly stated in Art. 1:201 of the PECL.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:110: Unfair Terms not Individually Negotiated (1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This Article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party’s obligations compared to the value of the obligations of the other party. 1. General. Art. 4:110 PECL on unfair terms not individually negotiated is based on dir. 93/13/EC on unfair terms in consumer contracts (OJ L 95/29), although only some of its provisions have been transplanted in the PECL. A significant difference is that while dir. 93/13/EC refers only to consumer contracts, i.e. contracts concluded between a consumer and a professional, the PECL enlarge the scope of application to all contracts, including commercial contracts and government contracts. This choice is in line with both the case law and statutory law of several European systems (see notes to Art. 4.110), but is at variance with Italian law (for an analysis of the directive and its impact on the national legal systems see issue 2 of 1997, vol. 5, of the European Review of Private Law). 2. Unfair terms. Dir. 93/13/EC contains a rather long list of terms that are presumed unfair, unless the contrary is proved (so-called ‘‘grey list’’), which has not been inserted in Art. 4:110 PECL. According to Comment B this choice was due to the fact that the PECL rule also encompasses commercial contracts, which require greater flexibility. Yet the comment recognizes that this lack ‘‘does not prevent courts and arbitrators from finding inspiration in the list in the Annex to the EC directive’’, especially in the case of contracts between small and large businesses. 3. Terms not individually negotiated. Art. 4:110 adopts the choice of dir. 93/13/EC in policing only contractual terms that have not been individually negotiated, i.e. mainly standard form contracts, but also individual contracts in which terms have been imposed by one party. Although there are good reasons for not deviating from the EC model, it must be noted that the combination of standard terms and adhesion contracts sometimes leads to awkward results (see Pardolesi (1994)). 4. Significant imbalance and contrast with good faith and fair dealing. Art. 4:110 provides for control of unfair contract terms based on the general provision concerning good faith and fair dealing (see Art. 1:201 PECL), which is related in this case to the 220 – L. ANTONIOLLI

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existence of a significant imbalance between the parties’ rights and obligations, taking into consideration all contractual terms and all relevant circumstances at the time the contract was concluded. The imbalance may have both an economic or legal character. 5. Terms excluded from control. Following the EC directive, Art. 4:110 explicitly excludes from unfairness control terms which define the main subject matter of the contract and those relating to the adequacy of the value of the parties’ obligations. Again, although several arguments (among which the need to avoid the return of the canon law doctrine on iustum pretium) point at the need to keep this exclusion, this does not avoid the fact that it is difficult to make a general assessment of a term’s fairness in relation to the whole contract without taking into account the respective value of the parties’ performances and the main subject matter of the contract. Comment D underlines that the expressions referring to the main subject matter and the adequacy in value of the parties’ obligations must be interpreted strictly, in order not to limit unduly the control of unfairness. 6. Avoidability. In determining the consequences of the unfairness of a term, the PECL have deviated from dir. 93/13/EC by establishing that if a term is unfair it is merely avoidable, rather than non-binding. According to Comment C this is because there is no list of unfair terms, and consequently it is impossible to say straightaway whether or not a term is unfair. Nevertheless, according to the comment this does not lead to significant differences in practice, because under the PECL avoidance does not require a decision by a court or arbitrator (see Art. 4:112).

ITALIAN LAW Art. 1469 bis C.C.: Abusive clauses in contracts between professionals and consumers In a contract made between a consumer and a professional, clauses which, notwithstanding good faith, result in a significant unbalance to the detriment of the consumer of the rights and obligations deriving from the contract are considered abusive. [...] Art. 1469 ter C.C.: Determination of the abusive character of clauses The abusive character of a clause is evaluated taking into account the nature of the property or service which is the object of the contract and referring to the circumstances existing at the time of the making of the contract and to the other clauses of the contract or of another contract connected with it or on which the contract depends. The evaluation of the abusive character of a clause has no relation to the determination of the subject matter of the contract or to the adequacy of the compensation payable for the property and services, provided that such elements are identified in a clear and comprehensible manner. [...] L. ANTONIOLLI – 221

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The clauses or elements of a clause which have been the subject of individual negotiations are not of an abusive character. [...] Art. 1469 quinquies C.C.: Ineffectiveness Clauses considered abusive pursuant to Arts. 1469 bis and 1469 ter are ineffective, while the rest of the contract remains effective. [...] Art. 1341 C.C.: Standard conditions of contract Standard conditions prepared by one of the parties are effective as to the other, if at the time of formation of the contract the latter knew of them or should have known of them by using ordinary diligence. In any case conditions are ineffective, unless specifically approved in writing, which establish, in favor of him who has prepared them in advance, limitations on liability, the power of withdrawing from the contract or of suspending its performance, or which impose time limits involving forfeitures on the other party, limitations on the power to raise defenses, restrictions on contractual freedom in relations with third parties, tacit extension or renewal of the contract, arbitration clauses, or derogations from the competence of courts. Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. Art. 1375 C.C.: Performance according to good faith The contract shall be performed according to good faith. 1. General: dir. 93/13/EC and the Codice civile. Because of their common origin in dir. 93/13/EC, Italian law and Art. 4:110 PECL have a very close correspondence. Yet, there are some elements of divergence due to the legal context. First of all, it must be noted that the entire text of the directive (although with several amendments, which have led to an infringement procedure against Italy by the EC Commission and finally to a judgment by the European Court of Justice, and consequently to amendments to the text of the Codice civile) was implemented in Italy by the inclusion in the Codice civile of a new chapter (ch. XIV bis) on consumer contracts (Alpa (1997), pp. 181–184), which therefore also contains a list of terms provisionally deemed unfair (Art. 1469 bis § 3 C.C.), a rule on interpretation contra proferentem (Art. 1469 quater § 2 C.C.; cf. also Art. 1370 C.C. and Art. 5:103 PECL), a ‘‘black’’ list of terms conclusively considered unfair (Art. 1469 quinquies § 1 C.C.) and finally a rule on the standing of consumers’ and professional associations to take judicial action to prevent the use of unfair terms in standard contracts (Art. 1469 sexies C.C.) (for a detailed analysis see Alpa-Patti (1997)). Moreover, the Codice civile contains several rules applicable to all unfair contract terms, irrespective of whether they 222 – L. ANTONIOLLI

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are contained in consumer contracts or other kinds of contracts. This has led to the creation of a kind of double track, where some rules apply only to consumer contracts, while others apply to all contracts. 2. Unfairness as contrasted with good faith and fair dealing. a) Consumer contracts. In the field of consumer contracts, unfairness (abusivita`, a term deriving from French legal terminology) derives from an imbalance in the parties’ rights and obligations, ‘‘notwithstanding good faith’’ (see Tribunale Torino, 22 September 2000, in Giur.it., 2001, 981). The use of the term ‘‘notwithstanding’’, which is employed also in the Italian version of dir. 93/13/EC, could be read as meaning subjective good faith, i.e. the animus of the contracting party. In fact, although amending the wording when implementing the directive in the Codice civile would have been a better solution, there is total agreement that good faith in this context means objective good faith, i.e. a general standard for evaluating parties’ conduct according to fair dealing. b) Good faith in contract law. Control of unfair contract terms according to good faith for all kinds of contracts is related to pre-existing and comprehensive Codice civile provisions: Art. 1337 C.C. requires the parties to act in good faith during negotiations and the formation of contracts (see comment to Art. 2:301 PECL, Musy) and Art. 1375 C.C. requires that every contract be performed according to good faith (see comment to Art. 1:201 PECL, Antoniolli). Although the content of these rules is sweeping, their use in Italian case law has been rather limited, in contrast to the experience of other legal systems, such as for example the German one, where case law application of the general clause on good faith of § 242 of the BGB has been extensive and has determined the evolution of statutory law as well, as in the case of the Allgemeine Geschaeftsbedingungen Gesetz (ABGB) of 1976 (for a comparative overview see Koetz (1997); Hesselink (2004), p. 47 et seq.; Note 1 to art. 4:110 PECL). 3. Standard contract terms. Another relevant provision of the Codice civile which applies both to consumer and commercial contracts is that of Art. 1341 C.C., according to which terms contained in standard contracts are effective only if the party who accepts them had a sufficient chance to know their content (the rule refers to knowledge or knowability; cf. Art. 2:104 PECL), and a number of them contained in a list in § 2 (which are all amenable to an imbalance in the parties’ obligations to the detriment of the adhering party) are effective only if they are specifically approved in writing (see comment to art. 2:104, Monti). Although this rule was innovative at the time the Italian Codice civile was enacted in 1942, as it recognized the peculiarities of standard contracts and the risk that they might contain unfair terms (clausole vessatorie) for the accepting party, it must be underlined that this control is limited in two respects. First of all, it is merely a formal control, requiring separate written approval which is equated with informed acceptance: once this formal requirement has been fulfilled, there is no way of challenging imbalance in the parties’ obligations, nor even of proving that the party who has given written approval was in fact unaware of their content (Cass., 16 July 2002, no. 10285, in Rep. Foro it., 2002 [1420] no. 102; Cass., 11 October 1990, no. 9998, in Rep. Foro it., 1990 L. ANTONIOLLI – 223

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[1420] no. 86; Cass., 13 February 1988, no. 1565, in Banca, borsa, titoli di credito, 1989, II, p. 292 et seq.; all these cases concern contract terms that derogated from statutory rules concerning the territorial jurisdiction of courts). Moreover, case law has further reduced the scope of this control, by generally considering the list of unfair terms as closed, i.e. no other term could be read into the rule by analogy, although this would have been technically possible by relating Art. 1341 C.C. to the Code’s provisions on good faith (see Cass., 14 June 1990, no. 5777, in Giust civ., 1991, I, 79; Cass., 22 November 1986, no. 6887, in Rep. Foro it., [1740] no. 223).

COMPARISON AND EVALUATION Both the PECL and the Italian Codice civile contain a rule against unfair terms not individually negotiated which has its origin in the EC directive on unfair terms in consumer contracts. The main difference lies in the scope of application, because while the Codice civile sticks to the directive’s choice to apply only to consumer contracts (see Cass., 25 July 2001, no. 10127, in Giur.it., 2002, 543, note by Fiorio), Art. 4:110 PECL extends the rule to apply to all kind of contracts. The control performed by the rule is substantial, i.e. it evaluates the balance of the parties’ rights and obligations (see Cass., 4 April 2001, no. 4946, in Danno e resp., 2001, p. 915 et seq., note by Maccaboni; Tribunale Roma, 21 January 2000, in Corriere giuridico, 2000, p. 496 et seq., note by Orestano and De Majo), although terms defining the main subject matter of the contract and those relating to the adequacy of the value of the parties’ obligations are excluded. A further difference is that according to Art. 4:110 PECL if a term is unfair it may be avoided by a party (and avoidance can be obtained simply by notice), while Art. 1469 quinquies C.C. provides that the term is ineffective; this ineffectiveness works only to the benefit of the consumer and can even be declared ex officio by the court. Finally, according to Art. 4:110, after avoidance of an unfair term the contract may remain in force only if this is ‘‘possible and appropriate’’; otherwise the whole contract will be avoided (see Comment H Art. 4:110); on the other hand, according to Art. 1469 quinquies C.C., clauses considered unfair are ineffective while the rest of the contract remains effective, thus limiting the possibility of the professional party to get rid of the whole contract (but cf. Art. 4:116 PECL and Art. 1419 C.C.). A similar kind of substantive control for different kinds of contracts could be based on Arts. 1337 and 1375 C.C. on good faith in contracts, but Italian case law has not made extensive use of this possibility. In general, it must be noted that although all European legal systems contain a general standard referring to good faith, fair dealing and other related concepts, their application shows significant variations. A different kind of control of a formal nature is exercised on standard contract terms, both in consumer and commercial contracts, where clauses that determine an imbalance to the detriment of the adhering party are considered valid only if the are specifically approved in writing (Art. 1341 C.C.). This kind of control has proved insufficient and its application in case law has not led to a satisfactory degree of protection for weak parties. On the other hand, judicial application of the rules on unfair terms in consumer contracts, although 224 – L. ANTONIOLLI

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fairly recent, seems to point to a significant increase in the policing of contracts, particularly by collective actions brought by consumers’ associations, and could gradually lead to a general revival of the application of the good faith standard in contract law, although it is still too early to foresee the results of this evolving trend (see Roppo (2002)).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:111: Third Persons (1) Where a third person for whose acts a party is responsible, or who with a party’s assent is involved in the making of a contract: (a) causes a mistake by giving information, or knows of or ought to have known of a mistake, (b) gives incorrect information, (c) commits fraud, (d) makes a threat, or (e) takes excessive benefit or unfair advantage, remedies under this Chapter will be available under the same conditions as if the behaviour or knowledge had been that of the party itself. (2) Where any other third person: (a) gives incorrect information, (b) commits fraud, (c) makes a threat, or (d) takes excessive benefit or unfair advantage, remedies under this Chapter will be available if the party knew or ought to have known of the relevant facts, or at the time of avoidance it has not acted in reliance on the contract. 1. General. With respect to cases in which a defect in consent is due to a third person’s behaviour, Art. 4:111 distinguishes between (a) persons who are in a special relationship with the party whose consent is not affected, or has been involved in negotiations and (b) persons who are not in such position. 2. Special relationship between a party and a third person. The special condition mentioned above may be that the party is responsible for the third person’s acts or has assented to that person’s involvement in making the contract (this latter condition does not emerge in Art. 3.11 of the Unidroit Principles). In both cases, the party takes the risk of the third person’s behaviour with respect to defects in consent the third person may have caused, unless such party takes steps to prevent a defect. Examples include agents and employees but no specific authorisation is required, nor does the third person need to show that he/she was acting for the party (Comment A, p. 272). Once these circumstances occur, the party whose consent is vitiated can invoke the same remedies on the same conditions that would be applicable had the other party been in the place of the third person. In particular, this means that, provided that the mistake is caused by information given by the third person, or in circumstances in which he/she knew or ought to have known of the mistake, the contract is voidable only if the third person knew or ought to have known that the mistaken party would not have entered into the contract had he/she known the truth, or would have done so only on fundamentally different terms and, furthermore, if none of the conditions mentioned in Art. 4:103(2) is applicable 226 – P. IAMICELI

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(inexcusability and assumption of risk). Likewise, a contract is voidable if a third person has led a party to conclude it by means of fraud or a threat, as defined according to Arts. 4:107 and 4:108, or has enjoyed excessive benefits or unfair advantages under Arts. 4:109 and 4:110. Recovery of damages will also be available under Art. 4:106 or 4:117. 3. Mere third person. If none of the above-mentioned relationships exists, the relevance of a third person’s behaviour is more limited. First, in case of mistake, only incorrect information given by the third person is considered. Secondly, a party is allowed to avoid the contract only if the other party: – knew or ought to have known of the relevant facts; or – at the time of avoidance has not acted in reliance on the contract. In the former circumstance, the other party bears the consequences of annulment, since he/she, although knowing (or being able to know) about the relevant facts, took advantage from the conclusion of the contract. In the latter, avoidance does not cause any (reliance) damage to the other party, so a more favourable treatment for the party whose consent is vitiated is preferred (for a critique referring to the equivalent provision in the Unidroit Principles, see Kramer (1999), p. 281). Indeed, the Comment specifies that not only expenses incurred and investments made, but also by-passed opportunities, would exclude the application of the remedy (Comment D, p. 273). It is not clear whether in these circumstances damages may be claimed against the third person rather than against the other party (or against both).

ITALIAN LAW Art. 1390 C.C.: Defects in consent A contract is voidable if the consent of the representative is defective. However, if such defect concerns matters predetermined by the principal, the contract is voidable only if the consent of the latter is defective. Art. 1434 C.C.: Duress Duress is cause for annulment of a contract even if exerted by a third person. Art. 1439 C.C.: Fraud [...] When the deception was employed by a third person, the contract is voidable if it was known to the party who derived benefit from it. 1. General. The Codice civile lacks a general provision regarding applicable remedies (validity or liability rules) in cases where the defect in consent is due to a third person’s behaviour. However some rules provide some elements, though not exhaustively if compared to the PECL’s coverage. P. IAMICELI – 227

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2. Agency. A provision is stated with respect to agency: under Art. 1390 C.C., defects in consent shall be evaluated on the basis of the agent’s position; the principal’s position becomes relevant only with regard to contract terms he/she has pre-determined. This provision indirectly shows that, except for the case of pre-determination by the agent, the rules concerning defects in consent, which are generally applicable to a party of a contract, will be applicable to an agent as well. Case law applies this rule quite restrictively, considering as crucial the fact that the agent acts on behalf and in the name of the principal (direct representation) (Cass. 1552/81, in Rep. Foro it, 1981, under Mandato [4070], no. 10; Cass. 4222/81, in Rep. Foro it., 1981, Agenzia [0240], no. 19; see Gaudino (1990), p. 381). By contrast, some legal scholars tend to extend the rule stated in Art. 1390 C.C. to the party’s intermediaries or collaborators, even though they lack authority (Carresi (1987), p. 459; Stolfi (1961), p. 156). 3. Third parties. The notion of third parties comes into question only outside the scope of Art. 1390. In this case Arts. 1434 and 1439, sec. 2, will be applied in the cases of threat and of fraud, respectively. The two provisions are quite different. A third person’s fraudulent behaviour entitles a party to the annulment of the contract only if it was known to the party who derived benefit from it. By contrast, a third person’s threat is relevant in the same way as the other party’s threat, regardless of the other party’s effective or constructive knowledge or other involvement (Gaudino (1990), p. 383; Sacco-De Nova (2004), p. 577; contra Corsaro (1994), p. 3, who holds that actual knowledge should be considered, as it is in the case of fraud). The difference is mainly explained in terms of the seriousness of the threat with respect to fraud or the different possibility the other party has of ascertaining the facts related to the two kinds of defect in consent (Trabucchi, (1964b), p. 152; Sacco-De Nova (2004), p. 578; Gallo (1999a), p. 734). With respect to fraud, according to some, a third person’s silence should never be relevant (Sacco (1997), p. 255). 4. Cases not expressly covered. No provision is provided concerning mistake, excessive benefits and unfair advantage. With respect to mistake, the explanation is that the general rules contained in Arts. 1428 et seq. C.C. are broad enough also to include mistakes caused by third persons, provided that the mistake is essential to and recognizable by the other party: in this case actual knowledge by the other party is not required, unlike the case of fraud (Roppo (2001), p. 820). Legal scholars also recognise a liability rule applicable to third persons as a form of torts liability (Roppo (2001), p. 186; Patti-Patti (1993), p. 183; Gaudino (1990), p. 382). The cases of excessive benefits and unfair advantage are more problematic, unless the third person is the party’s agent (then an extension of Art. 1390 seems plausible, although the Codice civile does not consider these to be defects in consent). Indeed, the Code requires that the other party takes advantage of the unbalanced agreement. However, this seems applicable at least in the case of a contract in favour of third parties. 228 – P. IAMICELI

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COMPARISON AND EVALUATION The PECL and the Codice civile provide quite different rules concerning the relevance of the third persons’ position with respect to the validity of contracts. Both systems distinguish between persons who are linked to the parties by a special relationship and persons who are not: to the former, the same rules as those applicable to the parties apply; for the latter, different rules may be provided, characterized by a more limited relevance of the third person’s behaviour, given the higher protection afforded to the other party’s reliance interest. Many differences however emerge. First, the distinction between the two categories of third persons is drawn on the basis of significantly different criteria. According to the PECL, many more situations will fall under the first part of the provision (extension of the same conditions applicable to a party); only some legal scholars would suggest a similar interpretation of the Codice civile, which is normally more limited, being focused on direct representation, especially according to case law. Secondly, with reference to cases in which the ordinary regulation applicable to the parties does not apply because of the lack of a special relationship (second part of Art. 4:111), the PECL do not distinguish among mistake, fraud and threat, as the Codice civile does. The consequence is that: – with respect to mistake, recognizability by the other party is always relevant under the Codice civile (the same does not apply to the PECL, given the alternative reference to the lack of reliance damages); on the other side, no specific provision limits such relevance to the case of incorrect information; – with respect to fraud, the Codice civile requires actual knowledge by the party that derived benefit from it, while the PECL also include constructive knowledge (besides, alternatively, the lack of reliance damages); – with respect to threat, knowledge by the other party (either effective or potential) is not relevant for the Codice civile, while it is under the PECL; – lack of reliance damages is not considered by the Codice civile. This comparison would suggest that, while the Codice civile tends to extend the protection of the party whose consent is vitiated more broadly in the case of threat than in the case of fraud, the opposite would be the case under the PECL. The difference, already remarked with respect to incidental fraud and incidental threat, would reinforce the same conclusion. A significant difference also regards excessive benefits and unfair advantage, for which Italian law does not provide rules concerning the third persons’ position. Moreover, the comparison is fuzzy with respect to the liability rules, either applicable against the latter party or (and even more) against the third person. Because of the legal debate concerning pre-contractual liability, it might be clearer under Italian law than under the PECL that the general principle of good faith could be extended to third parties also with respect to liability rules.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:112: Notice of Avoidance Avoidance must be by notice to the other party. 1. General. According to the PECL (like the Unidroit Principles, see Art. 3.14), no court action is required to avoid a contract. A notice suffices if received by the other party. The receipt principle derives from Art. 1:303, which also specifies that a notice may be given by any means, whether in writing or otherwise, appropriate to the circumstances. The Comment makes it clear that conduct unequivocally indicating that a party no longer considers himself/herself bound by the contract can be qualified as a notice. The notion of notice also includes any declaration made by a party as a defense within an action brought against him/her by the other party (Comment, p. 274).

ITALIAN LAW Art. 1441: Eligibility The annulment of a contract can be demanded only by those persons in whose interest it is established by law. [...] 1. General. The title of Section III, Chapter XII, Title II, Book IV, C.C., makes it clear that an action for annulment is necessary in order to avoid a contract for defects in consent. More precisely, the judge’s decision is necessary in order to avoid a contract which, otherwise, would be effective, although precariously because subject to the action brought by the party entitled to do so (Roppo (2001), p. 873, 876; Sacco-De Nova, p. 573). However, a judge cannot avoid a contract for reasons concerning defects in consent in the absence of an action by the party whose consent is vitiated. The same rule applies in the case of excessive benefits as regulated by Art. 1447 et seq. C.C., while in the case of unfair terms a judge may, without the consumer’s demand, also consider a clause ineffective (see Art. 1469–quinques C.C.).

COMPARISON AND EVALUATION The two systems differ substantially with respect to this issue. Compared to the Codice civile, which requires the intervention of a judge in order to avoid a contract, under the PECL a contract is avoided by a mere notice by the party entitled to this remedy. The application of the PECL definitely reduces the administrative costs of avoidance, although the PECL do not exclude that the parties do have a dispute about the recurrence of the conditions required by the applicable provisions. On the other hand, the lack of ‘control’ by an independent third party (such as a judge) might reduce the protection of the party who suffers the annulment if he/she is not aware of the conditions required in order for the provisions to apply and his/her defences. 230 – P. IAMICELI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:113: Time Limits (1) Notice of avoidance must be given within a reasonable time, with due regard to the circumstances, after the avoiding party knew or ought to have known of the relevant facts or became capable of acting freely. (2) However, a party may avoid an individual term under Art. 4:110 if it gives notice of avoidance within a reasonable time after the other party has invoked the term. 1. General. Art. 4:113 defines time limits for avoidance by means of a reasonableness clause, rather than an exact determination of dates. Drawing attention to the circumstances of the case, this clause grants the party entitled to avoid the contract a reasonable time in which (a) to know facts and conditions which entitle him/her to avoid the contract and (b) to take a decision as to the advisability of annulling the contract. For this reason the time limit becomes effective only when the party knows or ought to have known of the relevant facts, or becomes capable of acting freely (i.e. is no longer subject to duress or fraud). The provision almost replicates Art. 3.15 of the Unidroit Principles also with respect to voidability of individual terms, where the time limit starts to run when the other party has invoked it (so, potentially, later in time than the general rule).

ITALIAN LAW Art. 1442 C.C.: Prescription (1) The action for annulment is prescribed in five years. When voidability depends on a defect in consent or legal incapacity, the time runs from the day on which the duress ceased, the mistake or fraud was discovered, the interdiction or disability ceased, or the minor attained majority. (2) In other cases the time runs from the day the contract was made. (3) Voidability can be pleaded by the defendant in an action for performance of the contract, even if the action for annulment is prescribed. Art. 1449 C.C.: Prescription The action for rescission is prescribed in one year from the formation of the contract; but if the fact upon which the action is based constitutes a criminal offense, the last paragraph of Art. 2947 applies. 1. General. Under Art. 1442 C.C., a party can demand the annulment of a contract for defects in consent within five years, starting from the day on which the duress ceased or P. IAMICELI – 231

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the mistake or fraud was discovered. Actual knowledge of relevant facts is considered, while no relevance is given to the hypothetical possibility of discovering the mistake or fraud by the party entitled to avoid the contract (see Cass. 1279/96, in Vita not., 1996, p. 872). In this respect, the rule departs from the general principle stated in Art. 2935 C.C. (whereby the limitation period starts to run when the right can be enforced), as interpreted by case law, according to which only legal possibility is relevant, while material capability is not: so normally the claimant’s lack of knowledge, although excusable, does not prevent the time limit from running (Cass. 9291/97, in Rep. Foro it., 1997, under Prescrizione e decadenza [5110], no. 1; Cass. 11451/03, in Rep. Foro it., 1997, under Prescrizione e decadenza [5110], no. 1). This time limit only applies to the action for annulment. Indeed, after the expiration of the limitation period, the party can still demand annulment as a defence in the case of an action brought by the other party for the performance of the contract (see the last section of Art. 1442 C.C.; Cass. 11182/02, in Rep. Foro it., 2002, under Contratto in genere [1740], no. 495; Cass. 6526/98, in Corriere giur., 2000. p. 93; Roppo (2001), p. 847). Differently, in the case of rescission, the time limit is much shorter (one year) and starts when the contract is concluded; the same applies to the defence in the case of an action brought by the other party. With regard to unfair terms the question is debated. Lacking a specific rule, some apply the regime of voidable contracts (Busnelli (1999), p. 43), while those who consider the effectiveness of unfair terms a case of nullity hold that this action cannot be prescribed (Bellelli (2003), p. 1052; Sacco-De Nova (2004)).

COMPARISON AND EVALUATION Both systems provide a limitation period for the annulment of the contract, in order to prevent the uncertainty as to the validity of the contract from lasting too long, thereby reducing the effectiveness of the promise also in circumstances in which, for various reasons, the contract will never be avoided. The same can be said with respect to cases of excessive benefits and unfair advantages, as regulated by the rescission regime under the Codice civile. However, two major differences emerge. First, while under the PECL the time limit is determined with respect to a general criterion (reasonableness), having regard to the circumstances of the case, under the Codice civile a fixed time limit is provided (five, one or ten years, according to the case). Secondly, according to the PECL, the time limit shall become effective already when the party can acquire information about the relevant facts (although he/she does not), while the Italian provision focuses on the actual discovery of mistake or fraud, or on the conclusion of the contract in case of rescission. Having regard to the diverse means of avoidance ( private notice vs. judge’s decision), this difference is quite critical. Indeed, the lack of a third independent actor (such as a judge) makes the party who avoids the contract the first and possibly the only one to evaluate the 232 – P. IAMICELI

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reasonableness of the time spent on realizing and deciding on the advisability of avoiding the contract. This increases uncertainty as to the validity of the agreement which is already significant given the lack of a fixed limitation period for avoidance (on this issue, although with reference to the equivalent provision of the Unidroit Principles: Kramer (1999), p. 285). The uncertainty is even greater given the relevance of the requirement that the party merely should have known of the facts which entitle him/her to avoid the contract. The latter difference is consistent with the different approach adopted by the two systems with respect to excusability of the conduct of the party whose consent is vitiated, especially in the case of mistake. Notably, the PECL seem more inclined to give this party adequate incentives to take measures in order to prevent defects in consent from occurring (see the provisions on mistake and fraud, in particular), although some converging elements are emerging in this direction also within the Italian debate on mistake and, less clearly, fraud. In this perspective, the suggestion emerging from Art. 4:113 seems quite revealing. Some problems arise with respect to the unfair terms regime, given that, in the absence of a specific provision, the Italian debate is divided between the thesis holding the application of the voidability regime (in which case everything already stated can be extended to this case also) and the one holding that the action cannot be prescribed as it is under the regime of voidness: under this latter perspective, the two systems do differ substantially, although the reference, contained in Art. 4:113, to the time in which the clause is invoked narrows in fact the gap by possibly postponing the starting point of the time limit.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:114: Confirmation If the party which is entitled to avoid a contract confirms it, expressly or impliedly, after it knows of the ground for avoidance, or becomes capable of acting freely, avoidance of the contract is excluded. 1. General. Also Art. 4:114 of the PECL limits the power to avoid a contract, thereby protecting the other party’s reliance interest with respect to the validity of the contract. In this case the limitation is not due to a lack of action (notice) by the party entitled to avoid the contract, but by positive conduct which, either explicitly or implicitly, shows that the party intends to confirm the validity of the contract even though he/she knows he/she can avoid it. Unlike Art. 4:113, actual knowledge (and not merely knowledge he/she should have had) is relevant in this case. Indeed, only in these circumstances can confirmation be inferred, especially in the case of an implied intention. However the Comment clarifies that the provision should be interpreted in conjunction with Art. 2:102, according to which the intention of a party to be legally bound by contract is to be determined from the party’s statements or conduct as they were reasonably understood by the other party (Comment, p. 277). This interpretation would lead one to see confirmation also in circumstances in which the confirming party does not have actual knowledge of the ground for avoidance.

ITALIAN LAW Art. 1444 C.C.: Validation (1) The contracting party entitled to sue for annulment can validate the voidable contract by a declaration containing a reference to the contract and to the cause for voidability thereof, and a declaration of intention to validate it. (2) A contract is likewise validated if the contacting party entitled to sue for annulment, knowing of the voidability, has voluntarily performed it. (3) The validation has no effect if the person who does it is not in a condition to validly conclude the contract. Art. 1451 C.C.: Inadmissibility of validation A rescindable contract can not be validated. 1. General. Also the Codice civile includes a provision on confirmation (called validation). Again, a contract can be validated by means of an explicit declaration or conduct which implicitly shows an intention to validate the contract. 234 – P. IAMICELI

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In the former case, the declaration shall include an express reference to the contract and the grounds for avoidance. This requirement tends to guarantee the party’s awareness of the effects of his/her declaration (Roppo (2001), p. 851). In the latter case, any conduct may be relevant, provided that it clearly shows the intention to validate (for instance, because it is inconsistent with the intention of bringing an action for annulment). In both cases the party shall be in a position to conclude a valid contract. This also means that mistake or fraud is discovered or duress no longer persists (Franzoni (1998), p. 510; Roppo (2001), p. 852), and no other ground for invalidity exists. A separate reference is made with respect to the performance of a voidable contract by the party entitled to sue for annulment. In this case, the Code requires this party to know of the voidability of the contract, but there is no full agreement as to the meaning of this provision as a case of implicit validation. According to some authors, performance by a party who, although knowing of the voidability, is not for other reasons in a position to conclude a valid contract, would anyway validate that contract (see Roppo (2001), p. 853). By contrast, the Code expressly excludes that a rescindable contracts can be validated under Arts. 1447 and 1448 C.C. In fact, the entitled party may wait for one year and avoid suing for rescission: given the short time limit, the result is not very different from validation, so that some authors hold that the provision may in fact be overruled (Sacco-De Nova (2004), p. 587). No specific reference is made to unfair terms. However, it is held that, as an unfair term is a violation of mandatory rules, no validation can be admitted on the consumer’s part (Busnelli (1999); Bellelli (2003), p. 1053).

COMPARISON AND EVALUATION The two systems seem quite similar in many respects in the area of defects in consent. Although the PECL do not expressly refer to performance as confirmation, this can easily fit the case of implicit confirmation. A problematic issue concerns the relevance of implicit but apparent confirmation given in cases in which the party does not know about the ground for annulment. While the Comment of the PECL calls for the protection of the other party’s reliance interest, Art. 2:102 being applicable, this rule would be new under current Italian law. A major difference concerns excessive benefits and unfair advantage: validation, under the rescission regime of Codice civile, is expressly excluded but admitted under the PECL. The same can be said with respect to unfair terms, since, though lacking a specific provision, the majority of scholars believes that validation cannot be admitted. In fact, at least in the case of rescission, some authors claim that there are other means of saving the contract. In this perspective, the distance between the two systems may be narrowed.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:115: Effect of Avoidance On avoidance either party may claim restitution of whatever it has supplied under the contract, provided it makes concurrent restitution of whatever it has received. If restitution cannot be made in kind for any reason, a reasonable sum must be paid for what has been received. 1. General. Almost replicating Art. 3.17 of the Unidroit Principles (which also makes the retroactive effect of avoidance clear), Art. 4:115 provides restitution remedies in case of avoidance. Once the contract is avoided, any benefit granted under the contract is no longer justified; therefore it should be returned. The article also includes a rule of reciprocity, so that no restitution can be claimed without a concurrent restitution of whatever has been received under the same contract. 2. Restitution in kind and reasonableness test. Generally, restitution should be in kind. However, if this is not possible (e.g. because the goods have been destroyed or transferred to a third party, who, by law, is the owner, or because restitution is not conceivable in the first place, as in the case of services), a reasonable sum should be granted. According to Art. 1:302, reasonableness is to be judged by what a person acting in good faith and in the same situation as the parties would consider to be reasonable. In particular, in assessing what is reasonable, the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account. What is not explicitly stated is whether attention should be given to the market value of the performance or to the costs actually borne by the party. This issue might be especially critical in cases of performance of services where this gap may be relevant. It being ( part of ) the expectation interest of the party based upon the contract, it is not obvious that this cost should be transferred to the other party. Instead of restitution, a more appropriate perspective could be the one concerning damages (see below with respect to Art. 4:117). 3. Transfer of rights. The article does not cover matters related to transfer of rights as a missed effect of the invalid contract. This means that, according to the national applicable rules, the restitution claim could be a property remedy or merely a contractual one. Again, in the various systems, this difference could be relevant, i.e. for reasons related to creditors’ rights to the debtor’s assets.

ITALIAN LAW Art. 2033 C.C.: Payment of non-existing debt Whoever has made a payment which was not owing is entitled to the return of what he has paid. He is also entitled to the fruits and interest from the day on 236 – P. IAMICELI

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which payment was made if the person who received it acted in bad faith, or from the day of demand if the person acted in good faith. Art. 2037 C.C.: Duty to return specified thing (1) A person who has received a specified thing which was not due him is under an obligation to return it. (2) If the thing is lost, even as a result of a fortuitous event, the person who received it in bad faith shall repay its value; if it has merely deteriorated, the person who gave it can demand its equivalent, or its return and a compensation for the diminished value. (3) The person who has received the thing in good faith is not answerable for its loss or deterioration, except to the extent of his enrichment, even if the loss or deterioration was caused by his own act. Art. 2038 C.C.: Transfer of thing received when not due (1) A person who has received a thing in good faith and has transferred it before becoming aware of his duty to return it, is under an obligation to return what he has been given in payment for the transfer. If the payment is still owing, the person who gave the thing for payment not due is subrogated to the rights of the person who subsequently transferred it. In the case of gratuitous transfer, the one who acquired the thing is liable, to the extent of his own enrichment, to the person who made the payment not due. (2) A person who has transferred a thing he received in bad faith, or who transferred it after becoming aware of his duty to return it, is under an obligation to return the thing in kind or to pay its corresponding value. However, the one who made the payment not due can demand what has been given as payment for the transfer and can even take direct action to collect the payment. If the transfer was made gratuitously, the person who has acquired the thing is liable, to the extent of his own enrichment, to the person who made payment not due, after the latter has unsuccessfully exhausted all remedies against the one who transferred the thing. Art. 2041 C.C.: General cause of action for unjust enrichment (1) A person who has enriched himself without cause at the expense of another shall, to the extent of the enrichment, indemnify the other for his correlative financial loss. (2) If the enrichment consists of a specified thing, the person who received it is bound to return it in kind if it is still in existence at the time of the demand. 1. General. The Codice civile does not contain a specific rule concerning restitution remedies applicable to voidable contracts, except for Art. 1443 C.C., which limits such restitution to the benefits the party has actually received in case of lack of capacity (and not P. IAMICELI – 237

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defects in consent). However, case law tends to apply the general restitution regime applicable to undue performance according to Arts. 2033 et seq. C.C. (see Cass. 11973/95, in Rep. Foro it., 1995, under Indebito [3530], no. 16; see also Bianca (2000), p. 673; Roppo (2001), p. 873; Sacco-De Nova (2004), p. 574), while some authors hold that a special regime should be recognised, given the important peculiarities related to invalid contracts (such as a different limitation period, or a different regime for third party rights, see Barcellona (1965), p. 11; Gallo (1996), p. 151; di Majo (2003), p. 354). Apart from this debate, nobody doubts that a restitution remedy may apply in the case of avoidance. A reciprocity rule, which allows a party not to grant restitution if the other party does not make his/her own concurrently, is not explicitly spelled out. However, a similar rule can be derived from Art. 1460 C.C. concerning the right to withhold performance (which is comparable to Art. 9:201 of the PECL). 2. Restitution in kind and exceptions. If Arts. 2033 et seq. C.C. come into effect, restitution in kind represents the general rule also under Italian law, provided that such restitution is feasible in the first place. The issue especially regards restitution of determined goods (see Art. 2037 C.C., according to the mainstream): if they are destroyed (also on account of a fortuitous event), restitution of value will be requested, but only if the recipient is in bad faith; if he/she is in good faith, restitution of value will be limited to his/her own benefits. Again according to the mainstream, a specific rule (Art. 2038 C.C.) will apply if the recipient transfers the goods to a third party. In this case restitution in kind will take place only if the third party has not acquired a right on it (see Art. 1445 C.C. protecting third parties who acquire in good faith and for a consideration) and the former recipient was in bad faith. However, also in this case, the claimant may ask for restitution of the mere value or (whichever is higher) the price obtained by the recipient; in the case of default and transfer not for value, the claim against the third party is limited to his/her benefits. A restitution in kind is totally excluded if the former recipient was in good faith. In this case, subject to the nature of the transfer (for value or not for value), the claimant will recover the mere price received by the former recipient or the benefits obtained by the third party. Another rule is normally referred to performance which is different from money payment or delivery of determined goods: Art. 2041 C.C. will apply (Cass. 7112/92, in Rep. Foro it., 1992, under Agenzia [0240], no. 24; Cass. 9584/98, in Rep. Foro it. (1998), under Arricchimento senza causa [0520], no. 19). Notably this remedy plays a merely subsidiary role within the legal system (see Art. 2042 C.C.) and restricts restitution of the detriment suffered by the claimant to the extent of the value of the benefits received by the other party. This regime will be especially applied where performance consists in delivery of services rather than goods.

COMPARISON AND EVALUATION The analysis shows that, although both the PECL and the Codice civile provide a restitution remedy applicable in the case of avoidance and although both systems favour restitution in kind as long as it is feasible, some relevant differences do emerge. 238 – P. IAMICELI

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Although not specifically tailored to the case of avoidance, the Italian rules are more detailed. In fact, they explicitly consider the cases of the destruction of the goods and the transfer to third parties. Apart from this, some main distinctions can be drawn: (a) also considering the effects avoidance produces towards third parties, the Codice civile limits the solution of restitution in kind in many circumstances other than material impossibility (or destruction); this outcome is not excluded by the PECL but is not explicitly taken into account, so that the area of restitution in kind could apparently seem broader; (b) again considering the position of third parties, the Codice civile draws a distinction between recipients acting in good faith and those acting in bad faith: such a distinction does not emerge in the PECL; (c) when restitution in kind is not the applicable remedy, a monetary remedy will apply under both the systems; however, while the PECL only refer to a general reasonableness principle in order to define this amount, the Codice civile provides a set of criteria, concerning the value of performance, the benefits received by the recipient (also in terms of price for transfer) or by the third party, again distinguishing between recipients acting in good faith and those acting in bad faith; what is notable is also that in some circumstances the choice of remedies and criteria is left to the claimant; (d) a major distinction regards the subsidiary rule of unjustified enrichment which, under Italian law, is applicable when no other rule comes into effect: then, the amount granted to the claimant represents the smallest of the two sums between the loss suffered (his/her own costs of the undue performance) and the recipient’s benefits. In sum, thanks to its general approach, Art. 4:115 seems compatible with Italian law. In fact, the ‘Italian’ deviation from the rule of restitution in kind can be set under the rubric ‘any reasons’, conceived by the PECL as an obstacle to that remedy and the various criteria for assessing the alternative monetary remedy can fall under the reasonableness test introduced by Art. 4:115. A problematic point is whether the need for solving the issue concerning the effects towards third parties and, more generally, questions of ownership, does not require reference to national systems in any case. In this case, the impact of the PECL seems quite limited.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:116: Partial Avoidance If a ground of avoidance affects only particular terms of a contract, the effect of an avoidance is limited to those terms unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold the remaining contract. 1. General. Again referring to reasonableness, Art. 4:116 intends to draw a divide between cases in which avoidance is limited to a particular term and does not affect the whole contract and cases in which the whole contract is avoided, although the ground for avoidance regards a specific term. The former represents the general rule. Indeed, it is up to the party interested in the application of the latter rule to prove that the former would be unreasonable, given the circumstances of the case (Comment B). Again, reasonableness should be assessed according to the standard of Art. 1:302, as already quoted. One of the criteria applicable to the reasonableness test is the new balance stemming from the avoidance of a single term (see Comment B). In this respect, reference to the nature and purpose of the contract, as mentioned in Art. 1:302, seems quite revealing. The application of this regime to contracts affected by unfair terms is not excluded (see Comment H under Art. 4:110, which expressly refers to Art. 4.116 to explain the alternative between partial and total voidability).

ITALIAN LAW Art. 1419 C.C.: Partial nullity Partial nullity of the contract or the nullity of single clauses imports the nullity of the entire contract, if it appears that the contracting parties would not have entered into it without that part of its content which is affected by nullity. [...] Art. 1469–quinques C.C.: Ineffectiveness Clauses considered abusive pursuant to Arts. 1469 bis and 1469 ter are ineffective, while the rest of the contract remains effective. 1. General. The Codice civile does not provide a specific rule concerning partial avoidance in case of defects in consent. However, Art. 1419 C.C. (concerning partial nullity) is held applicable to voidable contracts too (see Roppo (2001), p. 868; Cass. 5100/80, in Giur. agr. it., 1981, p. 479; contra: Pietrobon 1989, p. 6). According to Art. 1419 C.C., partial nullity entails nullity of the whole contract only if it is proved that the parties would not have entered into the contract without that part 240 – P. IAMICELI

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affected by nullity. The rationale is that, if a contract has been declared partially void under certain circumstances, the function of the contract would be destroyed and the equilibrium between the contractual positions totally unbalanced (Roppo (2001), p. 867). The burden of proof is on the party who is interested in having the whole contract annulled (Roppo (2001), p. 867). The same rule, with a combination of subjective criteria (relative to the parties’ hypothetical intention) and objective criteria (concerning the nature of the contract), will be referred to the case of voidability of single terms or parts of the contract. Furthermore, a specific provision prevents the ineffectiveness of unfair terms under Art. 1469-quinques C.C. from affecting the whole contract or other of its clauses. This provision is considered as providing a consumer protection, given the harm he/she would suffer by ‘losing’ the contract, and is even stricter than Art. 6 of the directive on unfair terms in consumer contracts (dir. 93/13 EEC), according to which the contract shall continue to bind the parties upon those terms only if it is capable of continuing in existence without the unfair terms (see Bellelli (2003), p. 1043; Orestano (1992), p. 492).

COMPARISON AND EVALUATION Although the Codice civile does not contain a rule specifically tailored to the case of voidability, the substantive rules applicable under the two systems seem equivalent. A possible distinction might be drawn with reference to the criteria for assessing the impact of partial avoidance upon the contract. Indeed, in defining reasonableness, Art. 1:302 seems to set aside the parties’ hypothetical intention, focusing on the objective nature of the contract as analysed by an independent party. The criteria defined in Art. 1419 of the Codice civile, on the other hand, combine subjective and objective components. A major difference arises with respect to unfair terms. Indeed, while the Italian Code adopts the partial ineffectiveness regime as the only applicable one, the PECL would abide by the same general rule set out in Art. 4:116, thereby admitting total avoidance if partial avoidance is unreasonable.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:117: Damages (1) A party which avoids a contract under this Chapter may recover from the other party damages so as to put the avoiding party as nearly as possible into the same position as if it had not concluded the contract, provided that the other party knew or ought to have known of the mistake, fraud, threat or taking of excessive benefit or unfair advantage. (2) If a party has the right to avoid a contract under this Chapter, but does not exercise its right or has lost its right under the provisions of Arts. 4:113 or 4:114, it may recover, subject to paragraph (1), damages limited to the loss caused to it by the mistake, fraud, threat or taking of excessive benefit or unfair advantage. The same measure of damages shall apply when the party was misled by incorrect information in the sense of Art. 4:106. (3) In other respects, the damages shall be in accordance with the relevant provisions of Chapter 9, Section 5, with appropriate adaptations. 1. General. Art. 4:117 provides two distinct liability rules: the first is applicable to cases in which a party avoids the contract under Chapter 4 of the PECL ( paragraph 1); the second regards cases in which, although a ground for avoidance did exist, the party has subsequently lost his/her power to avoid the contract as the limitation period has expired or because he/she has confirmed the contract under Art. 4:114 ( paragraph 2). A third rule, concerning cases of incorrect information (and only partially overlapping with the latter case), has already been analysed under Art. 4:106. In both cases damages can be claimed only if the other party knew or ought to have known of the mistake, fraud, threat or has taken excessive benefit or unfair advantage. In many circumstances such a pre-requisite occurs when a contract is voidable under Chapter 4. In a few cases, however, it may not be true, i.e. in cases of mutual mistake (on the application of Art. 4:103(1)(b) to mutual mistake, see above) or in cases of defects in consent determined by third persons when avoidance is granted although the other party has no knowledge of the relevant facts (see the final part of Art. 4:111(2)). Conclusively, while the validity rules provided by the PECL normally, but not necessarily, react to the violation by the other party of the good faith and fair dealing principle, liability rules do imply such a violation. In this respect, the provision resembles Art. 3.18 of the Unidroit Principles, which, nevertheless, does not distinguish between the two cases also with respect to assessment of damages (see also Drobnig (1992), p. 640). 2. Measure of damages. The different ground for the two types of liability rules affects the measure of damages that can be claimed. Under paragraph (1), the avoiding party should be put as nearly as possible in the same position he/she would have been in if he/she had not concluded the contract (so-called ‘negative interest’); under paragraph (2), 242 – P. IAMICELI

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the claimant may recover damages which are subject to paragraph (1), but limited to the loss caused to the party by the mistake, fraud, threat or excessive benefit or unfair advantage. The former measure includes not only all the costs borne in order to negotiate and conclude the contract, but also the missed opportunity in terms of better conditions the party might have obtained, if he/she had had the chance of seeking an alternative contract at the time of entering the voidable one (see Comment B). It is notable that this remedy applies jointly with avoidance and, normally, restitution provided under Art. 4:115. Therefore, it could be held that these three remedies all concur in putting the party as nearly as possible into the same position he/she would have been in if he/she had not concluded the contract. In the latter case, the situation is different because, although entitled to avoid the contract, the party has not exercised this power and the contract is still binding. Then, despite the reference to paragraph (1) contained in paragraph (2), it would not be reasonable to refer to a strictly ‘negative’ interest, at least in the sense mentioned in paragraph (1) (see Comment C). Given this, it is not clear what the article means by limiting damages to the loss caused by defects in consent. A causal connection between damages and the ground for avoidance must exist also under paragraph (1). What is relevant is that, unlike under paragraph (1), the party cannot maintain the contract and recover costs sustained in order to enter the contract. Moreover, he/she cannot claim any loss related to the change in value of the goods or services acquired by means of the contract, if this change is merely due to different market conditions supervening after the conclusion of the contract (see Comment C; Beale-Ko¨tz (2002), p. 426): not because this loss is not related to the defect in consent (in fact it would be if the party had decided to avoid the contract), but because the assumption is that the party does not enter the market again, so he/she never bears this cost. What he/she can recover is the loss in value (or in value as compared with market prices) due to mistake, fraud, threat, taking of excessive benefit or unfair advantage, given that non-avoidance of a contract does not imply acceptance of any loss. Moreover, mistake, fraud or other defects in consent may have caused an increase in the costs of performing the contract: they should be recovered as well under paragraph (2). 3. Reference to Chapter 9. Art. 4.117 does not cover all the regulatory aspects of damages; therefore it refers to Chapter 9, Section 5 to provide supplementary rules, thereby creating a specific (although partial) overlap between pre-contractual and contractual liability. In particular, Arts. 9:503 to 9:505 (on foreseeability, loss attributable to aggrieved party and reduction of loss) should come into play, while other provisions should not apply (e.g. the one concerning termination of contract coupled with substitute transactions).

ITALIAN LAW Art. 1337 C.C.: Negotiations and pre-contractual liability The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith. P. IAMICELI – 243

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Art. 1338 C.C.: Knowledge of reasons for invalidity A party who knows or should know the existence of a reason for invalidity of the contract and does not give notice to the other party is bound to compensate for the damage suffered by the latter in relying, without fault, on the validity of the contract. 1. General. The Codice civile provides a liability rule further to provide the avoiding party. It does not explicitly consider the hypothesis whereby the party who is entitled to do so does not sue for annulment or validates the contract. Nevertheless, there might be room for a liability rule also in this case, as will be discussed below. Art. 1338 C.C. is also normally extended to cover contracts that have been rescinded under Arts. 1447 and 1448 C.C. (see Patti-Patti (1993), p. 234 et seq.). 2. Liability in case of avoided contracts. As to the former case, a specific provision (Art. 1338 C.C.) allows the party (whose consent is vitiated) to recover damages deriving from his/her reliance on the validity of the contract in circumstances in which the other party knew or ought to have known of such invalidity and did not inform the first party whose ignorance is excusable. This means that while validity rules may disregard the case of the party who sues for annulment in preventing or curing defects in consent (see especially the rules concerning mistake), this liability rule does not. Some authors make it clear that this provision cannot apply to cases in which liability does not derive from a breach of the duty to inform (about invalidity), but from having caused the other party’s defect in consent, notwithstanding any communication, so violating the general duty of good faith and fair dealing imposed by Art. 1337 C.C. (Patti-Patti 1993, 179 et seq.; Roppo (2001), p. 187). In these cases (mainly cases of threat or duress) the defendant’s assessment of the knowledge (the party should have had) of the invalidity is irrelevant. 3. Liability in case of unavoided contracts. As seen, the Italian Code does not provide a specific rule for cases in which a (voidable) contract is not avoided or is confirmed. However, many agree that the general provision contained in Art. 1337 C.C. covers cases of unsuccessful negotiations that are not followed by the conclusion of a contract and cases of valid contracts whose negotiation or formation involved the violation of the duty of good faith and fair dealing (see Patti-Patti (1993), p. 95 et seq.). Therefore, at least in principle, it seems that the same article should apply to validated contracts or to cases in which the right to sue for avoidance is foreseen (see Patti-Patti (1993), p. 222). Some issues should be however analysed. As to validation, it does not seem that it should also entail a waiver of the right to recover damages. In fact, the party could be interested in ‘keeping’ the contract, provided that he/she can recover damages. As to a time limit, the question may be more critical, because action for avoidance and action for damages have the same limitation period, given that, according to some legal authors and the (almost unanimous) case law, pre-contractual liability is to be referred to torts liability (see below). 4. Measure of damages. Case law agrees on the measure of damages that can be recovered in the case of avoided contracts: such measure should be referred to the so-called 244 – P. IAMICELI

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negative interest, putting the party in the position he/she would have been had he/she not entered the contract (Cass. 8778/94, in Rep. Foro it., 1994, under Contratto in genere [1740], no. 286; Trib. Roma, 5 July 2000, in Foro it., 2001, I, 3721; T.a.r. Lazio, 1768/02, in Foro amm.-Tar, 2002, 893 Cass. 14539/04, in Foro it., 2004, I, 3009; Luminoso (1988), p. 795 et seq.; Turco (1990), p. 324). This means that the party may recover not only the costs of negotiating the contract but also of (even partially) performing his/her obligations under the contract (Sacco-De Nova (2004), p. 605; Grisi (1990), p. 347), as well as the opportunity costs, represented mainly by missed contracts which are as profitable as, or even preferable to, the invalid one (see Monateri (1998), p. 480 et seq.). In some circumstances this approach may lead to solutions very close to positive interest (see Cass. 6294/92, in Nuova giur. comm, 1993, I, p. 351; Monateri (1998), p. 485). Where it is awarded in cases of unavoided contracts, the remedy should allow the party to recover damages for harm that has been caused by the very facts that in principle would be grounds for avoidance, in particular all costs or losses in value of goods and services acquired which depend on mistake, duress or fraud (Patti-Patti (1993), p. 224). More problematically, it has been held that the claimant could demand the smallest amount between the damage caused by performance of the invalid contract and the damage that would have occurred had the contract been avoided (Roppo (2001), p. 880). Indeed, a different rule would ignore the duty to reduce the claimant’s loss, the claimant having had the opportunity of choosing whether or not to sue for avoidance, also considering what is more appropriate to reduce his/her loss (Roppo (2001), p. 880). 5. Regime applicable to pre-contractual liability. Case law and legal writers dispute the nature, whether contractual or extra-contractual, (and consequently the regulation) of pre-contractual liability. Although the majority agrees on the latter solution (Cass. 15172/03, in Rep. Foro it., 2003, under Contratto in genere [1740], no. 128; Cass SS.UU. 9645/01, in Foro it., 2002, I, 806; Alpa (1990), p. 149 et seq.; Patti-Patti (1993), p. 45; Roppo (2001), p. 184; Sacco-De Nova (2004), p. 260, 597; contra: Castronovo (1995); Turco (1990), p. 752), it cannot be ignored that many rules concerning contractual liability extend to torts (such as the foreseeability rule, loss attributable to aggrieved party and reduction of loss). Differences do exist with respect to the burden of proof and the limitation period, as seen.

COMPARISON AND EVALUATION Both the PECL and the Codice civile combine the validity rule concerning defects in consent with a liability rule, applicable against the party who did not sue for avoidance in the case in which it knew or ought to have known the relevant facts which are a ground for avoidance and did not disclose them to the other party. Although the reference to a duty of disclosure seems more suitable for situations in which the other party did not actively contribute to cause those facts, it cannot be doubted that to contribute actively represents an even firmer ground for liability on the basis of the good faith and fair dealing principle. Moreover, under both systems the claimant’s behaviour is relevant with respect P. IAMICELI – 245

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to possibility he/she has of discovering mistake or fraud or preventing defects in consent in general. They also converge on the determination of the measure of damages, which are assessed on the basis of the so-called ‘negative interest’. The impact of the PECL would be more problematic with respect to paragraph (2) of Art. 4:117: the article itself does not specify the components of damages which can be recovered under this provision; and the Codice civile does not explicitly include the case of validated contracts or voidable but not voided contracts among those to which a precontractual liability rule may apply. However, convergence on the availability of a liability remedy and on the measure of damages seems possible also in this respect, although some clarification might be useful under both systems. What keeps the two approaches apart is the issue related to the nature and regime applicable to pre-contractual liability. While in the Italian debate the extra-contractual thesis prevails (although relevant opinions favour the opposite solution), the PECL opt for the contractual nature of liability. In fact, an important set of common rules can still be recognised notwithstanding this divergence (e.g. the foreseeability rule, or the rules concerning loss attributable to aggrieved party and reduction of loss). However, in other respects, this choice determines new divergences. For instance, if under the Codice civile the time limit regime for torts applies, then no liability rule could normally apply in cases in which the limitation period for avoidance has already expired.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:118: Exclusion or Restriction of Remedies (1) Remedies for fraud, threats and excessive benefit or unfair advantage-taking, and the right to avoid an unfair term which has not been individually negotiated, cannot be excluded or restricted. (2) Remedies for mistake and incorrect information may be excluded or restricted unless the exclusion or restriction is contrary to good faith and fair dealing. 1. General. Restrictions and exclusions of the duty of good faith and fair dealing are already prohibited under Art. 1:201 of the PECL. In this respect, Art. 4:118 is a mere application of that provision. It also draws a distinction between fraud, threats, excessive benefit or unfair advantage-taking and unfair terms not individually negotiated, on the one side, and mistake and incorrect information, on the other. With reference to the former, the parties cannot restrict or exclude any remedy: whatever restriction on which the parties might have agreed on, is intended to be contrary to good faith or fair dealing (see Comment, p. 284). With respect to mistake or incorrect information, a specific assessment is required in order to evaluate whether limitations or exclusions by the parties comply with good faith and fair dealing. In fact, the dividing line is not always easy to draw. Also remedies applicable under Arts. 4:103 and 4:106 generally cover the duty of good faith and fair dealing, at least insofar as this includes the duty to detect the relevance of the missing information to the other party (see Art. 4:103(1)(b)), or to check the correctness of the information under Art. 4:106. In this case, it seems that these are minor violations which do not entail any intention to alter the equilibrium of the negotiation between the parties; within these limits, exclusions or restrictions of remedies can be allowed, in line with the general duty of good faith and fair dealing.

ITALIAN LAW 1. General. The question of the validity of clauses excluding or restricting remedies applicable in case of contracts which are invalid on account of defects in consent is not specifically addressed in the Codice civile. However, with respect to exchange contracts, Art. 1462 C.C. establishes that a clause providing that one of the parties cannot set up defenses for the purpose of avoiding or delaying performance due by him/her has no effect on defenses based on nullity, voidability and rescission of the contract. More generally, legal scholars hold that parties cannot validly depart from validity rules as provided by law (Tommasini (1972), p. 586; D’Amico (1996), p. 24 et seq.; see also Cass. 272/04, in Rep. Foro it., 2004, under Contratto ingenere [1740], no. 11). The same approach is held with respect to ineffectiveness of unfair terms (Bianca (2000), p. 389). A different solution can be adopted with respect to liability rules, given that Art. 1229 P. IAMICELI – 247

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C.C. allows exclusions or limitations of liability in case of breach of the debtor’s obligations, unless the breach is due to the debtor’s intention or gross negligence, or is contrary to public policy. The same rule is generally applied to torts (Bianca (1979), p. 401; Benatti (1988), p. 402; Breccia (1991), p. 622) and should be to pre-contractual liability, regardless of its contractual or extra-contractual nature (Patti-Patti (1993), p. 39). Some authors admit the validity of these clauses, provided that they do not reveal a malicious intent and are not affected by unfair dealings by the parties (Sacco-De Nova (2004), p. 248). Further limitation to their usage is provided under Art. 1469-bis C.C. with respect to unfair terms regarding professional or entrepreneurial liability.

COMPARISON AND EVALUATION The two systems show a substantially different approach to the question of exclusion or restriction of remedies in the area covered by Art. 4 of the PECL. Indeed, the PECL distinguish between different types of defects in consent, admitting exclusion or limitation of remedies only in the area of mistake and incorrect information, regardless of the nature of the (validity or liability) rule to be applied. A limitation of the use of these clauses, where admitted, is connected with the principle of good faith and fair dealing. By contrast, Italian private law distinguishes between validity and liability rules, limiting the possible use of these clauses to the latter case. In this area, the principle of public order and the criteria of intentionality and gross negligence are applied as limitation devices. In fact, good faith seems an appropriate guide in the area of pre-contractual remedies, if liability rules are taken into consideration; moreover it does not seem due to lead to substantially contradictory outcomes if compared with the criteria and principles invoked by Art. 1229 of Codice civile. What seems problematic is the exclusion or restriction of validity rules in the area of mistake, although within the limits deriving from good faith. Indeed, given the increased duties of information, especially in the area of consumers to business relationships, it would appear contradictory to release this protection.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 4:119: Remedies for Non-performance A party which is entitled to a remedy under this Chapter in circumstances which afford that party a remedy for non-performance may pursue either remedy. 1. General. Remedies provided under Chapter 4 of the PECL can often be seen as possible reactions to violations by the parties of certain duties (e.g. the duty to inform, the duty to check a given information and the like). As long as these duties also represent ‘obligations under the contract’, then remedies for non-performance are available as well (see Chapter 9). In particular, it is useful to refer to Art. 6:101, which sets out the conditions on which a statement by one party is to be treated as giving rise to a contractual obligation. Under this article remedies can be chosen alternatively or be cumulated, provided that they are not incompatible under Art. 8:102. For instance, a party cannot both avoid the contract and claim damages for non-performance (Comment, 285). This provision represents a significant departure from Art. 3.7 of the Unidroit Principles, according to which remedies for non-performance shall always be preferred over remedies related to avoidance for mistake (see also Drobnig 1992, 641 et seq., Kramer (1999), p. 273).

ITALIAN LAW 1. General. There is no general provision in the Codice civile concerning the availability of different kinds of remedies which are jointly or alternatively applicable in cases of defects in consent. However, violation of duties to inform or to check information, as well as falsity of statements or defects in qualities, or other aspects which are guaranteed under the contract, may be covered by contractual remedies, before or besides being relevant with respect to contractual validity and pre-contractual liability. At least in one case, with respect to the protection of consumers in sales of goods, Art. 1519-nonies states that the contractual remedies provided by the previous articles do not exclude or limit consumers’ rights provided by other legal provisions. Generally speaking, it is difficult to draw the line in the relationship between the different sets of rules. With respect to damages arising from breach of a contractual duty to inform, some courts have referred both to contractual and pre-contractual liability as joint remedies (see, for medical liability, Cass. 10014/94, in Foro it., 1995, I, 2913; for financial intermediary liability, Trib. Milano, 11 January 1988; see di Majo (2003), p. 207, 210); some authors tend to absorb the whole dispute under the coverage of the contractual remedy (D’Amico P. IAMICELI – 249

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(1996), p. 177), while others observe in some professional contexts a shift from precontractual to contractual liability as a set of remedies for breach of the duty to inform (Cafaggi (1998), p. 24). The idea of a different coverage provided by invalidity, on the one side, and contractual remedies, on the other, also concerns defects and quality of goods in sales or like contracts (Cass. 5313/03, in Rep. Foro it., 2003, under Contratto in genere [1740], no. 48; Barcellona (1966), p. 266; Pietrobon (1990), p. 410 et seq.; Grisi (1990), p. 237; Bianca (2000), p. 653), although, according to some authors, cases in which both sets of remedies apply do exist (Pietrobon (1990), p. 413) and Art. 1519-nonies C.C. mentioned above confirms this view in the area of consumer contracts. Otherwise, it is held that as soon as the false representation of reality has become part of negotiations, contractual remedies concerning sales will apply, excluding those provided with respect to invalidity (Rubino (1971), p. 906 et seq.; Trib. Firenze, 13.10.1992, Rep. Foro it., 1993, under Vendita, 79).

COMPARISON AND EVALUATION The PECL and the Codice civile adopt different approaches to the problem of cumulation of remedies applicable to matters covered by Chapter 4 of the PECL. Indeed, a general provision which allows the parties to pursue different sets of remedies is lacking in Italian law, apart from the case of sales of goods between consumers and professionals, where a solution similar to the one examined in the PECL, though more general, has been adopted. Provided that, under Italian law as well, circumstances covered by Art. 4 of the PECL also give rise to contractual remedies (for non-performance or warranty), the question is whether the aggrieved party can choose either remedy or both, subject to the compatibility between the two and the recurrence of relevant elements. There seems to be no substantial obstacle in this respect, although different opinions do emerge.

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Chapter 5 INTERPRETATION PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:101: General Rules of Interpretation (1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. (2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party’s intention, the contract is to be interpreted in the way intended by the first party. (3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. 1. General. The introductory article of the chapter on interpretation of contracts follows the pattern of the corresponding Art. 4.1 in the UNIDROIT Principles of International Commercial Contracts (1994). Both provisions stress the priority given to the wills of the parties: the Lando text adds more emphasis to this aspect by specifying that the intention of the parties will prevail even over the literal meaning of the words that may disagree. This addition, reinforcing the general proposition, has certain precedents in some European civil codes (starting with the model of the French Code civil, Art. 1156 – ‘‘On doit ... rechercher quelle a e´te´ la commune intention des parties ... , plutoˆt que de s’arreˆter au sens litte´ral des termes’’ –; through the Italian version of Art. 1131 in the Italian Codice civile of 1865, now transplanted in Art. 1362 of the 1942 edition; on to Art. 1281 of the Spanish Codigo civil (of 1889), where the first sentence declares that ‘‘se estara` al sentido literal’’ if ‘‘los terminos de un contrato son claros’’, but ‘‘Si la palabras pareceien contrarias a la intencio´n evidente de los contratantes, prevalecera´ e´sta sobra aque´llas’’. Cp. H. Ko¨tz (1997), p. 108). 2. Priority of intention over literal expression. The second part of the introductory sentence may be considered an explicit reply to the opposite point of view, most strongly expressed in the common law tradition by the so-called ‘‘plain or ordinary meaning rule’’ providing, in its strictest version, that ‘‘in construing wills and indeed statutes, and all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but not further ...’’ (Lord Wensleydale, in an often quoted dictum in Grey v. Pearson – 1857, VI H.L.C., 61 et seq., at p. 106, reprinted in the English Reports). Indeed in common law if the words used are ‘‘plain and unambiguous ... we are bound to construe them in their ordinary sense, even though it leads ... to an absurdity or a manifest injustice’’ (Chief Justice Jervis, in Abley v. Dale, 11 C.B. 391). S. FERRERI – 251

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There are of course exceptions to the common law principle: they may be gathered both from the interpretation chapter (e.g. for customary or commercial expressions that may deviate from the plain meaning of words) and in the closely connected subjects of estoppel, waiver and rectification ( per Lord Denning, Amalgamated Inv.’t & Prop. Co. Ltd. v. Texas Commerce Int.’l Bank Ltd, [1981] 3 All E. R. 577 (Court of Appeal), [1982] Q.B. 84; Beale, Bishop, Furmston, Contract, Cases and Materials (London, 1990), p. 316; Treitel, Law of Contract, (9th ed., London, 1995); Cheshire, Fifoot, Furmston, Law of Contract, (11th ed., London, 1986), p. 231 et seq.; Beatson (ed.), Anson’s Law of Contract, (26th ed., London, 1998), p. 496; Sir Johan Steyn, ‘‘Written Contracts: To What Extent May Evidence Control Language?’’, (1988) Current Legal Problems, p. 22 et seq., at p. 29). However the choice of pointing out, from the beginning, a clear assessment of the priority of intention over words seems deliberate and – in a way – indicates in advance that no stringent rules on ‘‘parol evidence’’ will be included in the following provisions. The general attitude more closely corresponds to the positions held by American legal realists such as A. Corbin than to the classical common places of English case-law. The drafters seem to agree with the idea that one cannot say that extrinsic evidence ‘‘varies or contradicts’’ a written document as long as, through an interpretation process, the meaning of the written document has not been established (Corbin, On Contracts (3rd ed., 1971, St. Paul, Minn.), § 572 B; Id., ‘‘The Interpretation of Words and the Parol Evidence Rule’’, (1964) 50 Cornell L. Quart., p. 161 et seq., at. p. 189). That consideration is preferred to the general proposition that ‘‘If the language of a written contract has a definite and unambiguous meaning, parol evidence is not admissible to show that the parties meant something different from what they have said’’ (Viscount Haldane, Lord Chancellor, Charrington & Co. Ltd. v. Wooder, (1914) A. C. 71, 30 T. L. R. 176, H.L.) or that ‘‘(T)he law prohibits generally, if not universally, the introduction of parol evidence to add to a written agreement, ... or to vary it’’ (Martin v. Pycroft (1852) 2 D.M.G. 785, 795, 22 L. J. Ch. 94). According to the PECL, it will only be on a subordinate hypothesis that the judge, or the person trying to understand the contract, will have to resort to the common, ordinary, average meaning that a ‘‘reasonable’’ observer would give to it (Art. 5:101(3)): only when the intention of the parties could not be established, even considering the ‘‘relevant circumstances’’ exemplified in Art. 5:102. 3. Particular meaning attached to the contract. The party who has attached a particular meaning to a contract’s clause, expression, provision, will be able to plead such meaning if the other party could not ignore the representation that was taking form in the other party’s mind. A parallel rule is included in the UNIDROIT Principles, at Art. 4.2 (Interpretation of statements and other conduct) in a slightly different drafting (‘‘if the other party knew or could not have been unaware of that intention’’): its origin can easily be traced back to a previous draft, published in 1972, on the validity of sales contracts (ULVC) (E. A. Farnsworth, Interpretation of Contract, M. Bianca, M.J. Bonell (eds.) (1987), p. 96, in 252 – S. FERRERI

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the section concerning Art. 8 of the CISG). As a matter of fact, by a succession of transplants, the rule has finally landed also in the Vienna Convention of 1980 on contracts for the international sale of goods (CISG – Art. 8). The provision will probably have only a limited range of application, since the Commentary to the PECL notes that it will not be easy for the party wishing to prove the unusual, particular meaning attached to words to find evidence of the fact that the other party was aware of his/her intention. Some common law cases, where similar situations are examined by a court, fall under the heading of ‘‘estoppel’’: if, during the negotiations, the parties developed a sort of special vocabulary, where the words took a meaning different from the ordinary one, they will be prevented from going back on that assumption (e.g. Paternreederei M. S. Karen Oltmann v. Scarsdale Shipping Co. Ltd. ( The Karen Oltmann), [1976] 2 Lloyd’s Rep. 708, at p. 712; comments by McLauchlan, ‘‘Common Assumptions and Contract Interpretation’’, (1997) 113 L.Q.R. 237 et seq.). The rationale of the rule is the prevention of fraud, a goal common to the principles governing the rectification of documents (Cheshire, Fifoot, Furmston, Law of Contract (11th ed., London, 1986), p. 232), where an agreement orally reached is imprecisely registered in writing (Treitel, Law of Contract (London, 1962), p. 194; Lawson, The Rational Strength of English Law (London, 1951), p. 55: ‘‘a party can apply in equity for a rectification of a written contract and he will succeed if he can prove by the strongest oral evidence that it does not properly reproduce the terms of an oral agreement’’). 4. The objective meaning of reasonable persons. Only after the first two approaches have failed is the interpreting person allowed to look for the ‘‘objective’’ meaning, the common sense that reasonable persons having the same experience, belonging to the same class of people as the contracting parties, would give to the words used. The traditional approach of the common law is therefore upset: instead of starting from the point of view of a neutral observer, of the normal English (French, German ...) speaker, the impression of a reasonable witness becomes relevant only at a second time, as a sort of default rule. And this imaginary character, this deus ex machina will not be asked to disregard the special circumstances in which the contract has been concluded: he/she has to imagine what he/she would have said in the same conditions as those in which the parties were at the time the contract was agreed upon. On the whole the conclusion that may be drawn from a general overview of this article is not very different from what has already been said, with some emphasis, about the UNIDROIT Principles, and stresses the ‘‘subjective test’’ that is chosen, the psychological attention, the «esprit libe´ral» that has given priority to the «volonte´ re´elle des parties sur la volonte´ de´clare´e’’, by a ‘‘victoire de l’esprit sur la lettre’’, in the French style ‘‘qui consiste a` rechercher par tous moyens la volonte´ re´elle des parties‘‘ (Kaczorowska (1991), p. 294 et seq., at p. 298). One may just add that the compromise with the common law attitude has been facilitated by the circumstance that the most strictly literal approach in the XIXth century in England S. FERRERI – 253

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has gradually given way to a more flexible approach, sometimes known as ‘‘commercial interpretation’’ that allows a number of exceptions to the priority of the ordinary meaning by carefully analysing the circumstances of the specific parties involved in the dealing and the reasonable expectations of persons sharing the same situation (cp. opinion by Lord Steyn, Mannai Investment Co. Lt. v. Eagle Star Ass. Co. Ltd [1997] 2 W.L.R. 945; [1997] A.C. 749; Mc MEEL, ‘‘The Rise of Commercial Construction in Commercial Law’’, (1998) Lloyd’s Marit. Comm. L. Q., p. 382 et seq.). Somehow the evolution has moved gradually from an appreciation in abstracto to a consideration in concreto of the presumptive will of the parties.

ITALIAN LAW Art. 1362 C.C.: Intent of contracting parties That which was the common intent of the parties, not limited to the literal meaning of the words, shall be sought in interpreting the contract. In order to ascertain the common intent of the parties, the general course of their behaviour, including that subsequent to the conclusion of the contract, shall be taken into account. 1. General. The article is divided into two provisions: the first reflects closely enough the first sentence in art. 5:101(1) PECL. In the past some emphasis has been put on the difference between the wording of this article and that of the rule governing statutory interpretation (Art. 12 of the Preliminary provisions to the 1942 Codice civile): some scholars thought that the wording of Art. 1362 C.C. stressed the fact that, when dealing with contracts, attention should be paid more to the actual intention of the author of the declaration than to a reading of a statute’s provision (the latter, speaking to everyone, should receive a more objective appreciation than an act governing a bilateral relationship between private parties: Carnelutti (1922), p. 140 et seq.). The obvious remark is that speaking of a ‘‘legislative intention’’ is a fiction, or – at best – a metaphor (Grassetti (1938), p. 69). The second sentence of the statutory provision is closer to the content of Art. 5:102 PECL as it states that it is open to the interpreter – in order to clarify the common intention of the parties – to consider the parties’ behaviour on the whole, including their behaviour after the stipulation of the contract. A rather complex case-law is contained in the law reports, trying to establish when the judge can move away from the parties’ actual verbal expressions in order to consider their previous negotiations and subsequent behaviour. A certain degree of contradiction stands between the maxim ‘‘in claris non fit interpretatio’’, sometimes quoted by the courts (Cass. 22 April 1995, n. 4563, (1995) Arch. Civ., p. 1220; Cass. 2 December 1988, n. 6514, (1989) Arch. civ., p. 1009; Cass. 30 January 1992, n. 955, (1993) Giur. it., 1993, I, 1, p. 1094) and the case-law in which one of the parties to the contract is allowed to argue 254 – S. FERRERI

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on the basis of an exchange of letters, telex messages etc. that has taken place before the signing of the contract or by asking witnesses to testify either on oral assurances that have been expressed or on practices that have settled between the parties in the performance of the original contract. The proper reading of such judge-made materials is probably that, while it is impossible to say ‘‘a priori’’ whether a clause or a sentence is ‘‘clear’’, the judge has discretionary power to discard evidence that is contradictory, unreliable, insufficiently proved: he/she has the burden of writing a motivation to his/her decision that sets aside such evidence, disclosing his/her reasoning so that a higher judge, and finally the Corte di Cassazione, can check the rationality, the careful weighing of arguments in his/her conclusions on the issue, to prevent an apodictic decision (Cass. 25 June 1991, n. 7132, (1992) Giur. it., 1992, I, 1, 1542; Cass. 23 February 1998, n. 1940, (1998) Giur. it., I, 2; Sacco (1993), pp. 382–383; Canepa, Art. 1362, in Cendon (1992); Carresi (1964), p. 552 et seq.; Id. (1987), p. 503; Bianca (1983), p. 129 et seq.; Bigliazzi Geri (1991), p. 96; Scognamiglio (1992)). 2. Limits to available evidence. When the contract is in written form, the Codice civile sets some limits to the evidence that may be brought to contradict what is written in the document. The general trend is that followed in France concerning Art. 1341 and Art. 1347 of the Code civil when dealing with the prohibition of ‘‘aucune preuve par te´moins contre et outre le contenu aux actes’’ and the exception in case of a ‘‘commencement de preuve par e´crit’’ (Zweigert-Ko¨tz (1998); Maleville (1991); Von Mehren (1982), p. 70). In Italy Arts. 2722–2725 of the Codice civile concern this subject. The main provision is that of Art. 2722 C.C., in which the legislator prohibits generally the evidence witnesses give to prove that additional or contradictory agreements were reached before or at the time when the contract was written down (and, by way of a cross-reference, Art. 2729, para. 2 C.C. also rules out, in the same circumstances, those inferences – presunzioni – that the judge could make from facts brought to light during the judicial proceedings). But the meaning of the rule has to be understood together with the prevailing interpretation of the legislative exceptions indicated in Art. 2724 C.C. (Exceptions to prohibition of proof by witness). The main exception, that has been liberally interpreted by the courts, is established in the first point of Art. 2724 C.C.: oral evidence by a witness is admissible if some written element of proof exists (‘‘principio di prova per iscritto’’), such as any writing, originating from the person against whom the claim is brought (or from someone acting on his/her behalf ) that proves the fact pleaded by the other party as likely. The courts have gradually extended the exception to include for instance any letter, message, written transcript of the answers to a judicial examination that allows a reasonable suspicion that something more has been said than has actually been written in the contract (Cass. 16 April 1993, n. 4522, in Rep. Giur. it., 1993, under the heading ‘‘Prova testimoniale’’, n. 10). Some relevant considerations may derive from the Comment to Art. 2:105 PECL concerning the so-called ‘‘merger clause’’. S. FERRERI – 255

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COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:102: Relevant Circumstances In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f ) usages; and (g) good faith and fair dealing. 1. General. The list of circumstances that may be taken into consideration by the interpreting person confirms the drafters’ more favourable attitude, already shown in the first article, to a wide overview of the overall situation in which the agreement takes place than to the strictly objective, isolated, aseptic reading of the words chosen to record the agreement. The list is not mandatory; it does not prevent us from considering further elements: it only mentions the most relevant clues that may be weighed in. Most noticeably the article includes ‘‘preliminary negotiations’’ and ‘‘successive behaviour’’: the two main exclusions of the classical common law rule of ‘‘parol evidence’’. The same choice had already been made in the 1940s by the American UCC (sect. 2-202 Final written expression: Parol or Extrinsic Evidence, including, to explain or supplement the contract’s terms: ‘‘a) ... course of dealing (Sect. 1–205) or usage of trade or ... course of performance (Sect. 2-208) and b) ... evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and conclusive statement of the terms of the agreement’’) and, more recently, by the UNDROIT Principles (Art. 4.3). (Similarly, a draft prepared by H. McGregor in the 1970s for the English Law Commission admitted (at par. 109) some contradiction, by ‘‘extraneous evidence’’, to the presumption that all the clauses of the contract had been fully written down: Id., Contract Codification (Milan, 1993)). The most striking feature of the list is the gradual move from circumstances specific to the parties to the contract (their negotiations, their behaviour, their previous interpretation of similar clauses, their practices in performing the obligations) to extrinsic considerations (the common meaning given to the terms in the business sector or the field concerned; usages; good faith and fair dealing). The last paradigm, ‘‘good faith’’, is mentioned both here and later on, in Art. 6.102 on ‘‘implied terms’’ (while the UNIDROIT instrument omits the first citation). The European text therefore stresses the dual capacity of the good faith S. FERRERI – 257

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clause: as an instrument for specifying the duties (and rights) that the parties have (maybe only roughly) decided and for adding what has not been dealt with explicitly. The meaning of the good faith clause is clarified in a reference in the commentary by Lando and Beale (eds.) (2000), p. 293 to Art. 2:201, in which good faith is connected to a ‘‘subjective concept’’ (honesty and fairness in mind): by its being linked to ‘‘fair dealing’’ the article shows that an ethical concern for what is considered appropriate in a certain milieu is probably preferable to the protection of innocent representations that a beginner in the trade concerned may nurture.

ITALIAN LAW Art. 1366 C.C.: Interpretation according to good faith The contract shall be interpreted according to good faith. Art. 1368 C.C.: General interpretative practices Ambiguous clauses are interpreted according to the general practice in the place in which the contract was concluded. In contracts in which one of the parties is an enterpriser, ambiguous clauses are interpreted according to the general practice of the place where the enterprise has its headquarters. 1. General. As already mentioned above, some of the circumstances the judge/interpreter may take into consideration are immediately pointed out in Art. 1362 of the Codice civile. Some others, such as good faith and usages are mentioned in subsequent articles (1366, 1368) because – in the code’s perspective – they are considered more pertinent to a more objective interpretation. Since the publication of a well-known book in the 1930s by C. Grassetti (Grassetti (1938); Grassetti (1936)), the dominant opinion among scholars – to some extent followed by the 1942 legislator – has been that there should be a hierarchy in the principles governing contract interpretation: the rules emphasizing the subjective element, the parties’ most likely intention, should take precedence over rules that try somehow to give some effects to the ambiguous expressions that research carried out in accordance with the previous rules has not enlightened. In case-law the Corte di Cassazione often speaks of a ‘‘gradualismo’’ (a regulated progress) of the interpretation, of an approach that should prevent the use of Arts 1366 C.C. and ff. as long as the full range of Arts 1362–1365 C.C. has not been exploited. Once more, what is probably meant by these propositions is that the judge should not resort immediately to his/her own experience, to his/her own perception of what is fair without having first explained why he/she cannot find out exactly what the parties wanted when they wrote the disputed words. The borderline between subjective and objective interpretation is commonly drawn at Art. 1366 C.C. (good faith interpretation), a provision that in the 1940s, at the threshold 258 – S. FERRERI

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of the publication of the Codice civile, has been described as the point connecting (‘‘punto di sutura’’: Relazione del Ministro Guardasigilli al Re, Libro delle obbligazioni, Rome, 1941, n. 622) the two different approaches (Cataudella (1994), p. 135 et seq.; on the good faith interpretation, generally: Bigliazzi Geri (1970); Costanza (1989)).

COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:103: Contra Proferentem Rule Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party which supplied it is to be preferred. 1. General. The PECL follow the UNIDROIT Principles (Art. 4.6) also with respect to the controversial ‘‘contra proferentem’’ rule, ‘‘a rule of some strictness and rigour’’ (according to F. Bacon, The Maxims of the Law , «Verba fortius accipiuntur contra proferentem», edited by J. Spedding: The Works of Francis Bacon, London, 1879, vol. VII, Literary and professional works, vol. II, p. 325 et seq.). The canon ‘‘against the drafter’’ is here actually promoted to a more eminent position, just after the introductory articles, subverting the traditional order (it is usually considered the last rule on interpretation to be resorted to, often classified among the ‘‘auxiliary’’ canons of interpretation: Anson, Principles of English Law of Contract (12th ed., Oxford, 1910), p. 297; as ‘‘subordinate’’: Leake, On Contracts (6th ed., London, 1911), p. 149; ‘‘a particularly weak rule’’: F. Pollock, Principles of Contract (6th ed., London, 1894), p. 243). Yet, at the same time, its scope is limited – by comparison to that of some previous commercial instruments (in the American UCC and the UNIDROIT Principles) – namely, to interpret ‘‘a contract term not individually negotiated’’. A similar choice has been made within the EEC by directive 93/13 on unfair terms in consumer contracts (Art. 5 of the directive: ‘‘In the case of contracts where all or certain terms offered to the consumer are in writing, these terms must always be drafted in plain, intelligible language. Where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail ...’’). 2. The policy suggesting the contra proferentem interpretation. The policy underlying the rule has often been illustrated. It has a remote origin in the Roman tradition, particularly in the ancient brocard ‘‘ambiguitas contra stipulatorem’’ (P. Stein, The Digest Title De diversis Regulis Iuris, Regulae juris. From Juristic Rules to Legal Maxims, (Edinburgh, 1966), p. 68; G. Gandolfi, Studi sull’interpretazione degli atti negoziali in diritto romano (Giuffre`, Milan, 1966), p. 243 et seq.): at the time the contract, concluded through a stipulatio, was drafted by the party who received the other party’s promise. The maxim therefore worked against the author of the text containing the promise: the idea that he/she should have paid more attention to the drafting did make sense; on the ground of this implicit reproach the negative effects of an ambiguous expression would fall upon himself/herself. The principle was also extended to cover contracts of lease (locatio) and sale (venditio): there it worked contra locatorem and contra venditorem (Troje, ‘Ambiguitas contra stipulatorem’, in (1961) 27 Studia et documenta historiae et juris, p. 96 et seq.; Zimmermann (1996), p. 639 et seq.). Some of the effects of the old tradition still hold in certain legal systems. In France Art. 1602 Code civil states that in case of doubt the interpretation that works against the seller will be preferred («Tout pacte obscur ou ambigu s’interpre`te contre le vendeur»). Many a scholar has tried to work out the ratio of such a 260 – S. FERRERI

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rule in relation to the modern concept of contract, where the agreement is not necessarily reached on the basis of a draft written by the seller alone (Troplong, De la vente (Bruxelles, 1844), p. 139; Laurent, Principes de droit civil franc¸ais (Bruxelles, Paris, 1893), vol. 24, p. 157; Planiol, Ripert, Traite´ pratique de dr. civ. fr., t. VI, Obligations (11th ed., Paris, 1937), n. 373; De Callatay, Etudes sur l’interpre´tation des conventions (Paris, 1967), p. 140, n. 68; Lopez Santa Maria, Les syste`mes d’interpre´tation des contrats (Paris, 1968), p. 70; Simler Ph., Juris classeur civ., Arts 1156 a` 1164, at par. n. 50).

ITALIAN LAW Art. 1370 C.C.: Interpretation against author of provision Provisions contained in the standard conditions of a contract or in forms or formularies which have been prepared by one of the contracting parties, are interpreted, in case of doubt, in favor of the other. 1. General. In Italy the special rule contra venditorem was dropped from the Codice civile of 1865, while the general provision contra stipulatorem was re-shaped in the Codice civile of 1942 and is now limited to standard contracts in which clauses included in the general terms of a contract or in printed forms drafted by one of the parties to the contract are to be interpreted, in case of ambiguity, in favour of the other party (Art. 1370 C.C.). The case considered in the PECL seems to be different: a clause may be brought into the contract not necessarily on the initiative of the party proposing a standard contract, but as a result of the incorporation of a model, in imitation of a previous contract; the main point is that the parties had not discussed the term during their negotiations. If the term turns out to be ambiguous when it has to be applied to the circumstances arising under the contract, the party who has ‘‘supplied’’ the clause (who could also be the weaker, less experienced party) has to bear the burden of an interpretation that is less favourable to him/her. In Italy, as elsewhere, the rule has been relevant in the insurance market: clauses limiting the range of risks covered by insurance have been particularly liable to scrutiny by the courts under the contra proferentem rule: on the presumption that insurance companies are very keen to safeguard their own interests, at the cost of the protection of the insured person (Gambaro (1982), p. 155 et seq.; Bigliazzi Geri (1991), p. 33; Carresi (1992)). As will later be specified (infra, final paragraph) the Italian tradition has taken a second article of the civil code from an appendix to the ‘‘contra proferentem rule’’: it is reflected in Art. 1371 C.C. containing a modern reflection of the ancient ‘‘favor debitoris’’ often linked to the rule illustrated here (as a result of the old maxims, transmitted by canon law, ‘‘in dubiis benigniora praeferenda sunt. In obscuris, quod minimum est, sequimur – secundum promissorem interpretamur’’: ‘‘De diversis regulis iuris’’ in the Sext Decretal by Bonifacio VIII, in Corpus iuris canonici, A.L. Richter (ed.), Leipzig, 1881, pp. 1122–2; Polignani, Di un’antica regola di diritto (‘‘in poenis benignior est interpretatio facienda’’, in Filangieri, 1881). According to Art. 1371 C.C., when all other means fail, the contract will be read as to be the least burdensome for the debtor (if no compensation for his/her S. FERRERI – 261

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performance is provided) and in the way that best settles the balance of the parties’ interests (if we are dealing with an exchange contract). No equivalent provision is included in the PECL.

COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:104: Preference to Negotiated Terms Terms which have been individually negotiated take preference over those which have not. 1. General. The rule provided by the PECL deals with a subject that is not regulated everywhere by a legislative provision. Difficult questions may arise when the contract includes contradictory terms, often transplanted from a model contract the parties have not examined carefully, or a final clause added by the parties that is incompatible with a previous one (this often happens in the case of choice of law clauses: the standard contract chooses the law of one country and the parties add another clause indicating a different law as the law governing the contract). Disentangling such situations is sometimes very complicated for the courts (a well-known old case is RG 20 February 1929, in IPRspr., 1929, n. 35 recalled by Lando (1974), p. 388 et seq., at p. 391: a marine insurance policy provided a printed clause choosing Italian law as applicable, while one added at the bottom chose French law). The PECL offer a way out of the puzzle by giving priority to the clause that has been specifically negotiated.

ITALIAN LAW Art. 1342 C.C.: Contracts made by means of forms or formularies In contracts made by subscribing to forms or formularies prepared for the purpose of regulating certain contractual relationships in a uniform manner, clauses added to such forms or formularies prevail over the original clauses of said forms or formularies when they are incompatible with them, even though the latter have not been stricken out. The provisions of the second paragraph of the preceding article also apply. 1. General. The rule set out in Art. 1342 of the Codice civile (in a different chapter from that on interpretation, in the introductory series of rules and definitions relevant to contracts in general) is compatible with the one provided by the PECL. The Italian Codice civile similarly provides that in case of contracts formed by signing some printed readymade documents or standard forms that have been designed to regulate in a uniform pattern contractual relationships, the clauses that have been added to the printed form are to prevail, if they are incompatible with the pre-drafted ones, even if the latter have not been struck out. The article, conceived together with Art. 1341 C.C. to cope with the subject of unfair contract terms, was at the time thought to be very innovative: the protection afforded by them has now been partly put aside by the rules (Art. 1469 bis C.C. et seq.) created to adapt Italian law to directive 93/13/EC, with a discipline of stronger effect, ruling out some terms that are particularly harsh on the consumer. The strategy S. FERRERI – 263

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devised in the 1940s may now seem outdated as it is merely aimed at attracting the adhering party’s attention to what he/she is agreeing to, and giving priority to clauses that had been bargained for. The general rule here recalled is still in force and governs relations between professionals.

COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:105: Reference to Contract as a Whole Terms are interpreted in the light of the whole contract in which they appear. 1. General. The rule incorporates one of the most classical maxims of interpretation known under the brocard ‘‘ex antecedentibus et consequentibus fit optima interpretatio’’ (Pothier mentions the rule as the sixth one on his list) or, in common law, ‘‘whole contract to be considered’’ (since the time of F. Bacon’s, Maxims of the law: cf. Beal, Cardinal Rules of Legal Interpretation (London, 1908), p. 121; Burrows, Interpretation of Documents, (London, 1946), p. 46; J. Chitty, On Contracts (15th ed., London, 1909), p. 97; F. Pollock, Principles of Contract (6th ed., London, 1894), p. 242; Anson, Principles of English Law of Contract (12th ed., Oxford, 1910), p. 297). It is also quoted routinely in the interpretation of Statutes. In the UNIDROIT Principles we find an analogous provision in Art. 4.5. (‘‘All terms to be given effect’’). The obvious caution it suggests is that any expression has to be read in its context: since the language misses the mathematical precision that would allow the observer to understand the meaning in isolation.

ITALIAN LAW Art. 1363 C.C.: Comprehensive interpretation of clauses Every clause of the contract is interpreted with reference to all the others, attributing to each the meaning resulting from the act as a whole. 1. General. The rule is set out at the beginning of the list of rules governing interpretation of contracts. That position has been worked out in the re-drafting of the 1942 Codice civile: earlier, its predecessor – Art. 1136 of the 1865 Codice civile – held the less conspicuous position inherited from the model of the French Code civil, where the rule of Art. 1161 C.C. lies between the implication in the contract of customary clauses (Art. 1160 C.C.) and the contra stipulatorem rule mentioned above (Art. 1162 C.C.). The new arrangement created in the 1930s was meant to stress the fundamental character of some proceedings that could be considered crucial for the understanding of any text at all, not only of those dealing with law.

COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:106: Terms to Be Given Effect An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not. 1. General. The principle often recorded under the Latin saying ‘‘ut res magis valeat quam pereat’’ has a long history and has always been popular in the civil law tradition (it was introduced as the second brocard on interpretation in the well-known compilation by R. Pothier: «Quoties in stipulationibus ambigua oratio est, commodissimum est id accipi quo res de qua agitur in tuto fit», probably taken from Dig. l. 80 de Verb. signif. Obligat.). The common law has its own celebrations of the Favor contractus (F. Bacon, Maxims of the Law, in Spedding (ed.), The works of Francis Bacon (London, 1879), vol. VII, Literary and professional works, vol. II, p. 325 et seq.; J. Chitty, On Contracts (15th ed., London, 1909), p. 91, at p. 97; Leake, On Contracts (6th ed., London, 1911), p. 113 et seq.). A special version of the rule points out that all the terms used should be able to have some effects: therefore one should prefer not only the interpretation that allows the contract to operate, but the one that leaves no word unemployed. But this second version of the principle is not quite as popular as it is connected with the rather unlikely idea that the parties would not express even one superfluous word (which is hard to believe, at least where contracts rather than wills are concerned, since contracts do not usually need to be drawn up in a particular form or require any particular skill, training or professional advice when being drafting). The UNIDROIT compilation of 1994 does not include a parallel provision, even though the commentary stresses that a certain ‘‘favor contractus’’ exists (M. J. Bonell, I Principi UNIDROIT dei contratti commerciali internazionali, Un ‘‘codice’’ internazionale del diritto dei contratti (Giuffre`, Milano, 1995), p. 81), for instance in upholding a contract where some detail is unspecified, as long as it is possible to detect an intention of the parties to be bound (Art. 2.14); or ruling out the risk of a contract being void in the case of a battle of forms (by rescuing the contract through the so called ‘‘knock out rule’’: Art. 2.22). The alternative between ‘‘lawful’’ or ‘‘effective’’ in Art. 5:106 is clarified by the comment which explains that not only should the interpretation which is not prohibited by law be preferred, but also the one that is not incompatible with logic, that does not ‘‘lead to an absurd result’’.

ITALIAN LAW Art. 1367 C.C.: Preservation of contract In case of doubt, the contract or the individual clauses shall be interpreted in the sense in which they can have some effect, rather than in that according to which they would have none. 266 – S. FERRERI

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1. General. The corresponding rule in the Italian Codice civile results from the French model of Art. 1157 of the Code civil. The fact may be of some interest that in the 1930s C. Grassetti praised the principle saying that it was comforting to remark that the command was shared not only by all the codifications in force, but also by ‘‘British case-law and by that of North America’’ (Grassetti (1938), p. 184: references are to Anson, Law of Contract (1929); Underhill, Strahan, Principles of the Interpretation of Wills (1927); Beal, Cardinal Rules of Legal Interpretation (1924)). The traditional example offered to students is that of the dubiousness of classifying a specific agreement as belonging to one of two different contracts that are governed by statutory provisions, one of which needs to meet some formal requirements in order to be valid. The preferred interpretation is the one that will allow the contract to have some effects, rather than one that would be void on account of lack of compliance with formal requirements.

COMPARISON AND EVALUATION See end of chapter 5.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 5:107: Linguistic Discrepancies Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up. 1. General. The concern about a contract drafted in various linguistic versions is shared both by the UNIDROIT Principles and the European Principles: they agree also on the accepted solution. The version that was drafted first will prevail: the inspiring idea being of course that the original draft is more likely to reflect the parties’ will.

ITALIAN LAW 1. General. No equivalent to this rule is included in the Codice civile, concern about multi-lingual contracts being marginal, at least when the code was written. The legal problems arising out of discrepancies in different linguistic versions of a text may surface in the case-law, especially in connection with the pleading of mistake by one of the parties who may claim to have misunderstood the content of his/her obligations (or rights) because of a wrong translation of the original text. As a general indication one should pay attention to the rules in Arts 1427 to 1431 C.C.(the contract may be avoided for mistake if the misunderstanding is an ‘‘essential mistake’’ – Art. 1429 C.C. – and the other party could detect that his/her counterpart was under the effect of a false representation, using the reasonable care of someone in the same circumstances). The reported caselaw is rather strict on the matter, denying the protection of law to anyone signing a contract without having carefully checked the meaning of what he/she was undertaking (Sacco-De Nova (2004), Vol. I).

COMPARISON AND EVALUATION 1. Differences between the PECL and the Italian Codice civile. There are a few provisions of the Italian Codice civile – descending from classical maxims -that find no equivalent in the PECL. Art. 1364 C.C. General expressions No matter how general the expressions used in a contract, they only include the objects as to which the parties intended to contract. Art. 1365 C.C. Illustrative examples When a case is mentioned in a contract in order to explain a clause, unmentioned 268 – S. FERRERI

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cases to which the same clause could reasonably be extended are not presumed to be excluded. Art. 1371 C.C. Final rules When, notwithstanding the application of the rules contained in this chapter, the contract remains obscure, it shall be understood in the sense least burdensome for the debtor, if it is gratuitous, and in the case of a non-gratuitous contract, in the sense which equitably reconciles the interests of the parties. The principle ‘‘verba generalia restringuntur ad habilitatem rei vel personae’’ – recorded by Pothier as Rule 8, received by the French Code civil in Art. 1163 C.C. – is expressed in Italy by Art. 1364 of the 1942 Codice civile: it may be considered implicit in the provision that recommends considering ‘‘the nature and purpose of the contract’’ (PECL, Art. 5:102, lett. c). Further specification was probably considered unnecessary, it being implied in general principles of grammar or syntax that allow general terms to be restricted to the subject being discussed. A second missing instruction is the one offered by Art. 1365 C.C.: exemplifications will not limit the effect of a contractual provision. Following its predecessors (Pothier, Rule 10, in Oeuvres, II, 50; Art. 1164 of the French Code civil), the Italian Codice civile records the maxim that is often cited in contrast to the brocard ‘‘expressio unius est exclusio alterius’’, or ‘‘expressum facit cessare tacitum’’ (R. Burrows, Interpretation of Documents (London, 1943), p. 78). According to Art. 1365 C.C. if the parties have mentioned a case by way of illustration, no inference that other similar cases are excluded should be drawn. The rule is not crystal-clear: the main objection is, of course, that there is no way of knowing if the parties are giving an example or limiting their undertakings (in the common law some presumptions have been worked out by the courts that have been recorded for instance by Dawson, Harvey, Burnett, Contracts (2nd ed., Mineola, 1967), p. 485: ‘‘if certain specifics falling into a general class are expressly mentioned and no language of broader inclusion is used, the proper inference may be that other specifics in the same class are to be excluded’’; and Anson, Law of Contract (22nd ed., London, 1964), p. 141). Uncertainty, ultimately left to the judge to cope with, has probably suggested that this principle be left out of the European project. Similarly the often quoted maxim ‘‘falsa demonstratio non nocet cum de corpore constat’’ has also been omitted (cp. F. Bacon, Maxims of the Law, cit., Regula XIII, p. 361: ‘‘Non accipi debent verba in demonstrationem falsam, quae competunt in limitationem veram’’; Leake, On Contracts (6th ed., London, 1911), p. 147: in case of doubt between a wrong description and a limitation of a previous notion ‘‘the law will never intend error or falsehood’’: therefore the ambiguous expression will be read rather as limiting the previous sentence). As mentioned above, the old brocard ‘‘contra stipulatorem’’, has given rise in Italy to two different rules: one received by Art. 1370 C.C. (for standard contracts) and a second expressed in Art. 1371 (if one party’s performance under the contract is gratuitous the least burdensome interpretation for him/her should be sought – ‘‘secundum promissorem’’, S. FERRERI – 269

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according to the ‘‘favor debitoris’’; if the contract creates an exchange bargain, the best balance between performances should be sought). The provisions expressed in some other articles such as Art. 1366 C.C. (Interpretation according to good faith), Art. 1368 C.C. (General interpretative practices), Art. 1369 C.C. (Expressions with several possible meanings) are incorporated in the PECL’s list of ‘‘relevant circumstances’’: notably under letter (c) (the nature and purpose of the contract), (e)(the meaning commonly given to terms and expressions in the branch of activity ...), (f ) usages, (g) (good faith). They are all set together, in no hierarchic order, as concurring elements in deciding the sense of the ambiguous expression. As already mentioned above (in the Comment to Art. 5:102), the criteria followed by the Italian Codice civile are different, as the various elements are supposed to come into play in successive moments: in the first range are situated the rules that are a guide to discovering the subjective intention of the parties; in a second tier are the principles that allow the judge ‘‘objectively’’ to enforce the contract, to construct it, that is to draw from the contract the effects that in law are most compatible with its extrinsic appearance. The borderline between the two activities is of course rather shadowy: for instance the rule according to which the contract is to be read altogether, without severing one term from another, is said to belong to subjective interpretation, but it is really a general precaution to be taken when approaching any written text, a suggestion of a rather grammatical order. 2. Critical annotations concerning the drafting of the Italian rules. Many critical annotations have been published in the long period since 1942. In addition to what has already been said in the previous pages, one could recall for instance the fact that Art. 1364 C.C., mentioning the case of an exemplification included in a contract, does not clarify how the interpreter is to find out whether he/she is dealing with an exemplification: except for the case in which the parties themselves use expressions such as ‘‘exempli gratia’’, ‘‘for instance’’, or similar phrases, the question is very doubtful. Therefore, the omission of a corresponding rule in the PECL is not to be regretted. Also the drafting of Art. 1368 of the Codice civile, concerning the help of ‘‘interpreting practices’’, has often been questioned: the provision states that regard is to be had to ‘‘what is generally done in the place where the contract was concluded’’ (following the French model of Art. 1159: ‘‘usage du pays ou` le contrat est passe´’’). But many scholars have observed that it would make a lot more sense to consider the standard practice in the place where the contract is to be performed. The contract could have been agreed upon in a far away place, and signed anywhere, just by mere chance, while the place of performance of the contract is more strictly connected with the content of the contract (and with the extent of the debtor’s duties). In the Comment to the PECL by O. Lando and H. Beale (eds.), (Kluwer Law International, The Hague, 2000, p. 293) a point of view similar to that adopted by the French and Italian codes is evidenced where they state that ‘‘(T)he article refers in principle to usages which are current at the place the contract is made, although there may be difficulty in establishing this place’’. As far as Art. 1366 C.C. (Interpretation according to good faith) is concerned, the law reports do not show a very rich case-law proving this tool to have been of great help 270 – S. FERRERI

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(contrary to what was expected in the 1940s when it was first approved). Its scope is partly covered by Art. 1362 C.C. that, speaking of ‘‘comune intenzione’’, prevents the parties from pleading extravagant, unusual, bizarre meanings of the words used. If an omission has to be remedied, if the parties have forgotten to specify something that should probably be implied, it is rather Art. 1374 C.C. that comes into play (governing ‘‘integration of the contract’’ through statutory provisions, usages or equity). When one of the parties is trying to go too far in the exercise of his/her rights, the judge is more likely to quote the principle that the contract should be performed in good faith (Art. 1375 C.C.). And if the unforeseen situation that has to be dealt with is connected to changes of circumstances, the applicable rules are set out in Art. 1463 C.C. (‘‘impossibilita` sopravvenuta’’) and Art. 1467 C.C. (‘‘eccessiva onerosita`’’). So the few instances in which Art. 1366 is mentioned are often quotations ad abundantiam, to reinforce the conclusions that could be drawn from other sources (Sacco (1993), p. 391). Some authors have attached a further goal to Art. 1366 C.C.: when the contract is unbalanced, or unfair, the judge should be granted a wider power to balance – by interpretation according to good faith – the proportion of duties between the parties (Rodota` (1969); Bigliazzi Geri (1991); Costanza (1989)). But this proposal has not been fully accepted by the courts: they feel bound by the specific provisions provided by the code in case of fraud, mistake, temporary incapacity of the contracting party, supervening excessive disproportion and they do not seem confident that they have a wider equitable role to re-arrange contractual relationships, somewhat along the lines of the new provisions of the Dutch Civil code (A. Hartkamp, Judicial Discretion under the New Civil Code of the Netherlands, Centro di studi e ricerche di diritto comparato e straniero (M. Bonell dir., Rome, 1992)): cf., in Italy, on this controversial subject, Nanni (1986), p. 501 et seq.; Id. (1988); Bianca (1983a), p. 205; Irti (2000).

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Chapter 6 CONTENTS AND EFFECTS PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:101: Statements Giving Rise to Contractual Obligations (1) A statement made by one party before or when the contract is concluded is to be treated as giving rise to a contractual obligation if that is how the other party reasonably understood it in the circumstances, taking into account: (a) the apparent importance of the statement to the other party; (b) whether the party was making the statement in the course of business; and (c) the relative expertise of the parties. (2) If one of the parties is a professional supplier who gives information about the quality or use of services or goods or other property when marketing or advertising them or otherwise before the contract for them is concluded, the statement is to be treated as giving rise to a contractual obligation unless it is shown that the other party knew or could not have been unaware that the statement was incorrect. (3) Such information and other undertakings given by a person advertising or marketing services, goods or other property for the professional supplier, or by a person in earlier links of the business chain, are to be treated as giving rise to a contractual obligation on the part of the professional supplier unless it did not know and had no reason to know of the information or undertaking. 1. General. Considering the subject matter it regulates, Art. 6:101 PECL is, notwithstanding its location in Chapter 6, a rule on contract formation. This Art. deals with precontractual statements that influence a party’s decision to enter into a contract (see Comment D) but that will not be converted into contractual terms subsequently. Therefore the position of Art. 6:101 in Chapter 6 is mainly due to the remedy it provides, namely that these statements (made during pre-contractual negotiations or when marketing or advertising) are considered part of the contract and, consequently, sources of contractual obligations (see Comments A and C). Thus such statements, though not formally incorporated in the contractual document, bind the declaring party and grant the other party the right to invoke remedies for non-performance if the information is incorrect or the promises are broken (also when the contract contains a merger clause: see Art. 2:105(4) PECL). It is not clear whether the rule applies also when the statements and information considered in paragraph (1) conflict with one or more express contractual clauses, especially in the case of clauses that have not been negotiated by the parties (but see Comment G with regard to information given by professional suppliers). A. FICI – 273

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The situation described in Art. 6:101 also entitles the aggrieved party to avoid the contract for mistake (Art. 4:103) or fraud (Art. 4:107) as well to recover damages for incorrect information under Art. 4:106 (see Comment E). According to paragraph (1), the rule will apply only if the aggrieved party has reasonably perceived the statement to be a contractual obligation the declaring party intended to assume. This requirement is to be proved taking into account the criteria mentioned in lit. (a), (b) and (c) of paragraph (1). As Comment D explains, the aggrieved party may invoke the rule only if the information or the undertaking ‘‘have influenced its decision to conclude the contract’’. Thus neither ‘‘statements or promises which are mere sales talk’’, nor ‘‘information or promises which the other party considered irrelevant’’ (for example see Comment D) become part of the contract according to Art. 6:101(1). Ultimately it seems correct to infer from the rule’s purpose and nature the weight of one party’s reliance on the other’s (also pre-contractual) statements in determining the exact content of the contract, i.e. the contractual obligations. 2. Professional suppliers. Paragraph (2) regards pre-contractual ‘‘information about the quality or use of services or goods or other property’’ (as concerns other kinds of information see Comment B) given by a professional supplier also ‘‘when marketing or advertising them’’. These statements always give rise to contractual obligations unless it is shown that the other party (not necessarily a ‘‘consumer’’ according to Art. 1469–bis, paragraph 2, C.C. and European Directive no. 93/13EC on Unfair Terms in Consumer Contracts, nor only an ‘‘end user’’, but also middlemen supplied by a ‘‘professional supplier’’: see Comment F) ‘‘knew or could not have been unaware that the statement was incorrect’’. Thus, paragraph (2) provides a particularly severe rule for the declaring party, inasmuch as it requires this party to prove that it had actual knowledge of the real content of the statement received or simply that it could have known it. Paragraph (3) regulates the case in which the pre-contractual information indicated in paragraph (2) does not come directly from the professional supplier but from a person ‘‘advertising or marketing services, goods or other property for the professional supplier’’ or ‘‘in earlier links of the business chain’’ (for their identification see Comment F). In this case, the information is binding unless the professional supplier ‘‘did not know and had no reason to know of the information or undertaking’’. It seems reasonable to hold that the negative requirement in paragraph (2), i.e. that the other party knew or could not have been unaware of the correct information, applies also to the situation regulated in paragraph (3). The rules in paragraphs (2) and (3) will not apply when the information has been corrected and the correction made clear and accessible to the buyer before the contract is concluded (see Comment G). 274 – A. FICI

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ITALIAN LAW 1. General. Italian law does not contain a general provision that statements made by one party before or at the time of the conclusion of the contract become part of the contract if they have influenced the other party’s decision to enter the contract. There are however several rules of Italian law for the protection of a party’s interest in not becoming involved in a contract only on the basis of pre-contractual statements that are incorrect or have not subsequently been reproduced in the contractual document. Firstly, the Codice civile obliges parties to act in good faith during negotiation and formation of the contract (Art. 1337 C.C.). When a loss occurs in consequence of a breach of the duty of good faith the aggrieved party may obtain damages ( pre-contractual liability). Even though the Italian C.C. does not contain an explicit provision along the lines of Art. 4:106 PECL, some Italian courts and scholars explicitly consider the provision of incorrect information a case of the breach of the duty of good faith under Art. 1337 C.C. (see Roppo (2001), p. 179). Secondly, a (false) pre-contractual statement affecting one party’s decision to enter a contract might cause the annulment of the contract on the ground of fraud or mistake (see Art. 1427 et seq. C.C.; for a deeper analysis of fraud and mistake in Italian law see Chapter 4 of this Commentary). If neither fraud nor mistake occurs, the aggrieved party may recover damages under Art. 1337 or Art. 2043 C.C. Damages under Articles 1440 (‘‘incidental’’ fraud) and 1337 C.C. protect the aggrieved party also when the pre-contractual statements have not been determinant to its decision to enter into a contract, given that the aggrieved party would have concluded the contract anyhow, though on different terms or under different conditions. 2. Commercial advertising. Italian law does not contain a general provision such as that of paragraphs (2) and (3) PECL. Furthermore, according to the more traditional theory, statements made by a seller to induce a person to buy its products are to be considered ‘‘dolus bonus’’ (‘‘good’’ fraud, and, therefore irrelevant) if they appear usual in a certain kind of pre-contractual relation and incapable of impressing a reasonable person in its choice (see Cass. 1 Apr. 1996, no. 3001, in Vita not., 1996, 848 et seq.). This doctrine (criticised by some scholars on account of the objective standard adopted: see Roppo (2001), p. 819) could seem to be an inappropriate way to protect potential buyers, especially consumers, against commercial advertising in the mass media as it limits the scope of fraud. By legislative decree no. 74 of 25 Jan. 1992, Italy enacted European Directive no. 84/450/EEC on misleading advertising, i.e. ‘‘any advertising which in any way, including its presentation, deceives or is likely to deceive the persons to whom it is addressed or whom it reaches and which, by reason of its deceptive nature, is likely to affect their economic behaviour or which, for those reasons, injures or is likely to injure a competitor’’ (Art. 2, par. 1, lit. b). Buyers (and competitors) are mainly protected by an administrative A. FICI – 275

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legal regime implemented by the Italian Antitrust Authority (see Art. 7). Nevertheless, the evaluation of the misleadingness in accordance with the decree may also affect the application of remedies available under contract law. The Authority’s assessment of misleadingness is enough to create the presumption that the contract had been concluded under mistake (see Pret. Bologna, 8 Apr. 1997, in Foro it., 1997, I. 3064 et seq.). In any case, the decree on misleading advertising does not expressly provide that the information given by professional suppliers becomes part of the content of the contract, nor does it seem possible – as seen above – to reach this result on the basis of a systematic analysis of the Codice civile (but see Cafaggi (1995), pp. 481–2). More direct is the solution offered by the legislation on banking contracts: Art. 117, para. 6 of Legislative Decree no. 385 of 1 Sept. 1993 prescribes that contract terms containing prices and conditions more onerous for the customer than those indicated in advertisements are null and must not be considered part of the contract. 3. Consumer contracts. Rules strictly resembling that of Art. 6:101 PECL can on the other hand be found in the legislation on consumer contracts. Let us consider first the recent regulation of consumer sales contracts under Art. 1519–bis et seq. C.C. which implements European directive no. 1999/44/EC on the sale of consumer goods and associated guarantees. The professional supplier is obliged to deliver to the consumer goods which are ‘‘in conformity with the contract’’ under Art. 1519–ter para. 1). There is a presumption that goods are ‘‘in conformity with the contract’’ if they ‘‘comply with the description made by the seller’’ (Art. 1519–ter para. 2, lit. b) and ‘‘show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling’’ (see Art. 1519–ter para. 2, lit. c). Art. 1519–ter para. 4 states: ‘‘the seller shall not be bound by public statements, as referred to in paragraph 2, lett. c), if he shows: a) that he was not, and could not reasonably have been, aware of the statement in question, or b) that by the time of conclusion of the contract the statement had been corrected and made accessible to the consumer, or c) that the decision to buy the consumer goods could not have been influenced by the statement’’. These provisions show that the description of the goods, or more generally of the debtor’s obligation, in the contract as well as in the pre-contractual negotiations, represent the standard for evaluating the correct performance of the contract, regardless of whether these descriptions are formally part of the content of the contract (for this perspective in Italian law, see Gabrielli (2001), p. 5 et seq.) According to Art. 9, para. 2 of Legislative Decree no. 111 of 17 March 1995, implementing European Directive no. 90/314/EEC on Package Travel, Package Holidays and Package Tours, information included in a brochure binds the organizer and/or retailer, unless the changes in it have been communicated to the consumer before the conclusion of the contract or following a specific written agreement between the parties to the contract. 276 – A. FICI

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COMPARISON AND EVALUATION Italian law, except for the legislation on consumer contracts considered above, does not contain general provisions along the lines of Art. 6:101 PECL. One party’s reliance on the other’s pre-contractual statements and information is generally protected under the rules on mistake and fraud which lead to the annulment of the contract and by liability for violation of the duty of good faith. Current Italian legal remedies do not therefore satisfy the aggrieved party’s interest in maintaining the contract whose content takes into account pre-contractual statements made by the other party. From this point of view the PECL offer a more complete, sophisticated solution to the questions raised by the need to protect reliance and to prevent unlawful acts in the pre-contractual negotiations stage.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:102: Implied Terms In addition to the express terms, a contract may contain implied terms which stem from (a) the intention of the parties, (b) the nature and purpose of the contract, and (c) good faith and fair dealing. 1. General. Art. 6:102 PECL as well as Articles 6:104 to 6:108 (but as regards the special kind of incompleteness considered in Articles 6:105 to 6:107 see under these Articles in this commentary) deal with the problem of contractual incompleteness which, in a strictly legal sense, refers to contracts whose express content has a lacuna and fails to regulate one or more aspects of the relationship (in this view, the concept of incomplete contract partially diverges from that adopted by scholars of law and economics as long as the latter concept focuses on the ‘‘insufficiently state contingent’’ contract: for the distinction see Ayres-Gertner (1992), pp. 730–731; Schwartz (1998), p. 277; Bellantuono (2000), pp. 71–72). In the wording of the PECL (in accordance with the way Common law treats this issue: see note 1), the contract is made up not only of its express terms but also ‘‘implied terms’’ which stem from (a) the intention of the parties, (b) the nature and purpose of the contract, and (c) good faith and fair dealing. Indeed, the ‘‘implied terms’’ approach to contractual lacunae risks leading the question of contractual incompleteness to a different field, that of the identification of the parties’ intention and interpretation of contract, overlooking the fact that a contract is incomplete and a real, not merely apparent, lacuna exists inasmuch as no contractual clause provides for a certain situation. The rule to be applied to complete the contract could not therefore stem from a contractual term, even though such a term might be ‘‘implied’’ from the parties’ intention, but from the intention of the legislator or of the court, even though their rule may try to reflect what parties would have wanted if they had regulated the circumstance. Thus, it seems less ambiguous to handle the problem of contractual incompleteness from the objective perspective of ‘‘gap filling’’. This view also makes it possible to distinguish more accurately, among the acts of contractual content determination, ‘‘gap filling’’ (according to Articles 6:102 et seq.) from contract interpretation (see Chapter 5 PECL). The latter solves problems arising from ‘‘apparently’’ (but not ‘‘really’’) incomplete contracts and, for this reason, should be considered the act that logically precedes the former. 2. Sources. Art. 6:102 PECL mentions the sources of implied terms, namely how the authority applying the PECL must fill gaps in the contract or where it can find the rule to solve a problem in the absence of an express clause doing so. Art. 6:102 identifies three specific sources, but whether other sources might be invoked should be discussed (see Comment C: ‘‘The provision also gives an indication as to where an implied term may arise from’’). 278 – A. FICI

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The first factor is clearly subjective and refers ‘‘to the presumed intention of the parties’’, to ‘‘what the parties, acting in accordance with good faith and fair dealing, would reasonably have agreed if they had discussed the question’’ (Comment C). Presumably the intention has to be ‘‘common’’ as indicated also in Art. 5:101(1) and (2). The reference to the parties’ intention, if justified in regulating contract interpretation, is not completely accurate when gap filing is at issue, considering that a lacuna exists to the extent that parties have not provided for the situation (as Comment A expressly admits). If it is possible to identify the common intention of the parties, then the contract has no (‘‘real’’) lacuna and the problem is solved by interpretation (see van Schaick (2002), p. 263 with regard to the first illustration in Comment C). This factor may also give the court too wide a discretionary power in determining the content of the contract. The other two factors are of an objective nature. The ‘‘nature and purpose of the contract’’ formula is also used in Art. 1:302 on the concept of reasonableness and in Art. 5:102(c) on contract interpretation. It seems reasonable to hold (also considering the explanation in Comment C) that the formula refers to what is commonly provided in contracts regulating the same or an analogous economic transaction, thus focusing on the substantive transaction and not on its legal form (for the relevance of the ‘‘economic transaction’’ as a means of understanding and interpreting contract law, see Gabrielli (2003a)). In the Codice civile, the nature and purpose of the contract are relevant to interpretation (see Art. 1369 C.C.). The third factor ‘‘requires the court to look in an objective fashion at what good faith and fair dealing would require’’ (Comment C). The reference to good faith as a source of implied terms appears to be redundant since it is a general duty for parties to act in accordance with good faith and fair dealing (Art. 1:201(1)). Given that the requirement of good faith and fair dealing is a general clause (broadly used in the PECL: see Articles 1:102(1); 1:106(1); 1:201; 1:302; 1:305(b); 2:301; etc.), it gives courts the power to specify what the reference to good faith implies in the context of gap filling (see Illustration 2 in Comment C). Art. 6:102 does not clarify the relation among the three sources of implied terms, that is whether the first prevails on account of its subjective nature or the third, considering the mandatory nature of the principle of good faith in the PECL (see Articles 1:102(1) and 1:201(2)). 3. Hierarchy. As Comment A explains, Art. 6:102 is subordinated to other rules in the PECL. First of all, Art. 6:102 does not apply when the situation is directly regulated by provisions of the PECL, also referring to other external sources of content determination such as usages and practices (Art. 1:105). Secondly, Art. 6:102 does not apply when the problem can be solved by interpretation of the contract on the basis of Articles 5:101 et seq.: the reason lies in the fact that in this case, as said above, there is no lacuna in the contract. Finally, Art. 6:102 does not apply when a specific Art. of the PECL provides for the case in which a certain contract term is not specified as concerns price (Art. 6:104) or quality (Art. 6:108) or when parties do not define a term at the time of contact conclusion but agree on a method of determining it afterwards (Articles 6:105 and 6:106). A. FICI – 279

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4. Obligation de re´sultat and obligation de moyens. The distinction between the two types of obligation, discussed in Comment D, is well known also to Italian courts and scholars (see, above all, Mengoni, 1954 and, among others, Cass. 18 May 1988, no. 3463, in Corr. giur. 1988, p. 989). It is not clear why this matter is specifically pointed out in the Comment on the implied terms rule and not addressed in a specific rule (as, for example, in Articles 5.4 and 5.5 of the Unidroit Principles of International Commercial Contracts) or in comments to other Articles. Presumably the reason lies in the fact that parties normally do not specify when an obligation to do something also includes the obligation to achieve a result. Therefore, addressing this point has been considered an incentive for parties to make provision in this sense. Anyway, the distinction between obligation de re´sultat and obligation de moyens is mainly relevant from the point of view of contract interpretation, non-performance and its excuse (see di Majo (2002), pp. 49–50).

ITALIAN LAW Art. 1374 C.C.: Integration of contract A contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. 1. Content determination. Italian contract law makes no reference to implied terms and their sources. Nevertheless, also the C.C. is faced with the problem of contractual gaps though from a different perspective. In the Italian debate as to how the exact content of a contract is to be determined, the current common belief (starting from Rodota` (1969)) is that such content stems from several sources (see, for example, Roppo (2001), pp. 455–456). The parties’ agreement, as interpreted by courts according to Articles 1362 et seq. C.C. is the primary, ‘‘internal’’ source, subject only to the mandatory rules of contract law. Then there are several ‘‘external’’ sources: the law (non-mandatory or default rules), usages, equity, good faith. Considering the external (with respect to contract structure) nature of these sources, the act of deriving a rule from law, usages, equity or good faith is called ‘‘contract integration’’. Hence, references to lacunae, gaps or implied terms are not easily found in Italian legal writings (furthermore, the mere use of these terms has been criticised by some scholars: see for example Messineo (1961), p. 936), attention being paid especially to the act of contract integration and its effects, a procedure that is carried out partially regardless of gaps or lacunae (but see Bianca (2000), p. 412, who argues that integration presupposes a contractual lacuna). This view reflects the approach taken in the Civil Code. Art. 1374 C.C. on ‘‘Integration of Contract’’ states: ‘‘A contract binds the parties not only to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity’’. Nevertheless, the existence of gaps or lacunae in the parties’ agreement is, in order for contract integration to come into play, the logical consequence of the hierarchical system of contractual content sources. 280 – A. FICI

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Art. 1375 C.C. states: ‘‘The contract shall be performed according to good faith’’. Whereas some Italian authors have not considered good faith a source of contract integration, but the standard for evaluating the parties’ conduct when performing the contract (even against the strictum jus: see Natoli (1974); Bigliazzi Geri (1988b)) the notion of good faith as a source of contractual obligations is generally accepted by Italian courts (see, among others, Cass. 20 Apr. 1994, no. 3775, in Giust. civ., 1994, I, p. 2159, and in Foro it., 1995, I, 1296). 2. Integrative interpretation. The content of a contract results both from contract interpretation and contract integration. It is commonly held that contract interpretation, insofar as its purpose is to identify the common intention of the parties, has no integrative function. Rather, a more sophisticated way to view the relation between contract interpretation and contract integration, and to establish the real function of the former, appears to be – according to the more traditional theory – to distinguish the subjective from the objective criteria in the rules on contract interpretation. The objective criteria are those in Articles 1366 et seq. C.C. which apply only when interpretation under Articles 1362–1365 C.C. fails. In Articles 1366 et seq. there is no connection between the solution to the ambiguities and the common intention of the parties. Thus it seems correct to affirm that in this case interpretation is ‘‘integrative’’, in the sense that the law provides a rule when the common intention of the parties is not identifiable. From this point of view, contract interpretation, when ‘‘integrative’’, should be considered to a certain extent a gap filling procedure lying midway between ‘‘subjective’’ interpretation of the contract and contract integration (see Gazzoni (2003), p. 1054). 3. Sources and hierarchy. As emerging from Art. 1374 C.C. the law (non-mandatory or default rules) occupies the first place in the hierarchy of the sources of contract integration. It regulates the aspects of the contractual relationships not having been the subject of regulation by the parties. Thus the parties’ agreement, as interpreted by the courts with reference to their common intention, is – within the boundaries fixed by mandatory rules – the first source of the contractual content (but see Gazzoni (2004), p. 772, where it is pointed out that parties may regulate their relation contrary to law and usages from time to time, but may not exclude tout court the application of Art. 1374 C.C.). Since in the Italian legal system, as mentioned above, the perspective is not that of filling the gaps that prevent the contract from working (see Comment A, PECL), but only that of contract integration in the absence of the parties’ agreement, non-mandatory legal rules also apply when the lacuna regards secondary aspects of the relation. For the purpose of contract integration through non-mandatory rules a fundamental role is played by the act of contract ‘‘qualification’’, i.e. the act of subsuming the concrete contract in a legal type of contract (for example, the sale of goods: Art. 1470 C.C., or the sale of consumer goods: Art. 1519bis C.C.), in order to apply to the former the specific rules governing the latter. It is selfevident that the identification of the legal rules to apply depends largely on the previous qualification of the contract (for these aspects see Gabrielli (2000)). Secondly, Art. 1374 C.C. refers to ‘‘normative’’ (i.e. generally applicable) usages in the A. FICI – 281

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Italian legal system (see Articles 1 and 8 Prel.) one of the general sources of the law. In conformity with Art. 8, the reference to usages in Art. 1374 C.C. generally permits usages to regulate contracts but only if the parties’ agreement and the law do not do so. Under Italian law the usages indicated in Art. 1374 are distinct from ‘‘contractual’’ usages, i.e. those adopted in a certain place (for instance a firm) or for a certain kind of contract (for instance labour contracts within a firm). The latter are regulated by Art. 1340 C.C., according to which they are part of the contract, unless their refusal by the parties is proved. Thus since contractual usages are considered to be strongly linked to the parties’ intention, for the purpose of regulating contracts they prevail over non-mandatory law (see Cass. 19 Apr. 1980, no. 2583, in Riv. giur. lav., 1981, II, p. 119). Since contractual usages are to a certain extent general, they do not correspond to the ‘‘practices’’ referred to in the PECL (see Articles 1:105(1), 1:302, 2:205(3), etc.). For ‘‘interpretive’’ usages, see Art. 1368 C.C. The third mentioned source is judicial equity. Where no parties’ agreement, no law and no usages exist, courts may fill the gap taking into account the circumstances of the case and trying to balance the conflicting interests of parties having regard to the nature and purpose of the contract (Bianca (2000), p. 518). For the function, force and effects of good faith in Italian contract law see under Art. 1:201 PECL in this Commentary. 4. The limits of contract integration. Contract integration presupposes the existence of a valid contract, namely a contract that has a gap but not such a one to influence the contract’s existence or determine its invalidity. According to Italian law contract integration cannot save either a contract that does not yet exist because the phase of contract conclusion cannot be considered finished (as, for instance, when the parties to a contract have provided for subsequent negotiations for the definition of a term and have not manifested otherwise their intention to be bound) or a contract which is null because its object is undetermined (Articles 1325 (3) 1346 and 1418, (2) C.C.) unless a specific provision (also stemming from usages and equity: see Cass. 16 June 1989, no. 2908, in Foro it., 1989, I, 2447) provides for the determination of the undetermined object, as for instance Art. 1474 (1) C.C.

COMPARISON AND EVALUATION Italian law takes into account the possibility that a contract may not regulate one or more aspects of the contractual relationship. Once verified that the parties’ agreement does not provide for a certain situation, contract integration by the law, usages, equity and good faith is automatic and operates regardless of the real intention of the parties. The PECL solution to the problem of contractual gaps is partially subjective, inasmuch as the parties’ common intention may be involved in the search for the ‘‘implied’’ term. This latter approach to contractual gaps may determine the overlap between contract interpretation and gap filling, thereby making the results of content determination by courts more uncertain and discretionary. 282 – A. FICI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:103: Simulation When the parties have concluded an apparent contract which was not intended to reflect their true agreement, as between the parties the true agreement prevails. 1. General. Any legal system has to take a position on simulation of contracts, facing in this regard two main questions: first, whether simulation is to be admitted; secondly, how the conflict between an apparent contract and true agreement should be regulated, taking into account the parties’ interests in the contract on one hand and the third persons’ interests on the other. Art. 6:103 PECL makes it possible for parties to conclude an apparent contract, which is not intended to reflect their true agreement, and states that, in this case, as between them the true agreement prevails. 2. Simulation. Simulation is the situation in which the parties – according to their intention – stipulate a contract intended to produce no effects as between each other (absolute simulation) or to produce the effects of a different agreement (relative simulation). Simulation may also occur when one person appears as a party to the agreement, whereas the parties have agreed that the contract will substantially bind a different person (subjective simulation). The contract is thus composed of two layers: a sham transaction unable to bind the parties and a covert agreement which, expressing the parties’ true intention, is valid and produces effects as between them. The covert agreement is sometimes described as a counter-letter (see Comment A). 2. Effects of simulation as between the parties. According to Art. 6:103 PECL, in the case of simulation, as between the parties, the true agreement prevails over the apparent contract. Therefore, although the parties have made an absolute simulation, their mutual legal relationship will not change at all as a consequence of the simulated contract. On the contrary, in the case of relative simulation, the parties will be allowed to invoke the covert contract which expresses their true intention (unless this different contract is unlawful) and will therefore be subject to the (different) legal effects stemming from the true agreement. In this perspective, the simulated contract’s lack of legal effects is related to the parties’ intention. The parties cannot therefore use the sham agreement as a defence against each other. 3. Effects of simulation as against third parties. The PECL do not regulate the consequences of simulation as against third parties or creditors. Note that, as between the contracting parties, PECL’s applicability depends on whether they chose to invoke them. Therefore, it is reasonable that PECL do not regulate the effects of a contract with respect to persons who – being third parties to the agreement – had not chosen to be bound by A. BONITO OLIVA – 283

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the PECL provisions (but see Comment C where the gross divergence among national legal systems is considered the reason for this choice). The deficiency of a legal provision makes it necessary to solve the matter by applying domestic law.

ITALIAN LAW Art. 1414 C.C.: Effects of simulation between parties (1) A simulated contract does not produce effects between the parties. (2) If the parties intended to make a contract different from the simulated contract, the former is binding between them, provided that the requisites of form and substance are present. (3) The preceding provisions also apply to unilateral acts directed towards a special person, when such acts have been simulated by agreement between the author and the person to whom they are directed. Art. 1415 C.C.: Effects of simulation on third persons (1) Simulation cannot be used as a defence by the contracting parties, by their successors in interest, or by the creditors of the simulating transferor, against third parties who, in good faith, have acquired rights from the apparent owner of the right, subject to the effects of transcription of a judicial petition concerning simulation. (2) Third persons can plead simulation against the contracting parties, when it is prejudicial to their rights. Art. 1416 C.C.: Relationship with creditors (1) Simulation cannot be set up as a defence by the contracting parties against creditors of the apparent owner of the right who have, in good faith, levied execution on the property which was the object of the simulated contract. (2) The creditors of the simulated transferor can plead simulation when it is prejudicial to their rights, and in conflict with unpreferred creditors of the simulated transferee, they are preferred if their claim is prior in time to the simulated contract. Art. 1417 C.C.: Proof of simulation Evidence of simulation is admissible in the form of testimony, without limitation, in the action is brought by creditors or third person and when it is directed toward proof, even by the parties, of the unlawfulness of the underlying contract. 1. General. Articles 1414–1417 of the Italian Civil Code regulate simulation of contracts. The general principle is that simulation is not unlawful in itself. Therefore, under Italian 284 – A. BONITO OLIVA

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law parties are allowed to conclude a contract which does not reflect their true agreement. The effects of the simulated contract are as follows. 2. Effects as between the parties. Under Italian law, a simulated contract does not produce any effects as between the parties (absolute simulation: Art. 1414, para. 1, C.C.). If the parties have intended to make a contract different from the simulated one (relative simulation: Art. 1414, para. 2, C.C,), the former (the ‘‘dissimulated’’ contract) binds them as long as the latter meets the requirements as to form and substance for the validity of the dissimulated contract. For example, the simulated contract has to be concluded in writing if the parties intend to be bound by a dissimulated contract whose validity is subject to its being in written form (see Cass. 10 Aug. 1997, no. 7682, in Giur. it. (1998), p. 1342; Gazzoni (2004), pp. 949–950; see also Roppo (2001), pp. 702–704, who makes a distinction between requirements as to form and requirements as to substance). These provisions also apply to unilateral acts directed toward a specified person, when such acts have been simulated by an agreement between the author and the person to whom they are directed (Art. 1414, par. 3, C.C.). Being an expression of the parties’ real intention, the covert agreement prevails over the sham transaction. The parties are therefore bound by the underlying agreement and cannot invoke the simulated agreement against one another. As mentioned above, the covert agreement may result from a counter-letter. The counterletter is not required in order for the underlying contract to be valid and binding but it is an important means, especially for the parties, of proving simulation. In the case of a legal action brought by creditors or third persons, there is no limit to the evidence of simulation that can be adduced by them. On the contrary, if an action is brought by the parties, the possibility for them to prove simulation is strongly limited according to Articles 1417 and 2722 C.C. ( parties cannot in general prove simulation in the form of testimony unless the dissimulated contract is unlawful), and the counter-letter becomes therefore decisive. 3. Effects of simulation on third parties. The Italian Civil Code makes provision with regard to the effects of simulation on third persons. Simulation of contract may prejudice in different ways the interests of third persons. According to Italian law, a distinction has to be made. If the sham transaction is prejudicial to the rights of third persons (for example, those buying from the simulating seller), simulation can be pleaded against the contracting parties and the true agreement will therefore prevail (Art. 1415, par. 2, C.C.). On the contrary, the simulated contract prevails if third persons have relied in good faith on it. Moreover, simulation cannot be raised as a defence by the contracting parties and by the transferees or creditors of the simulating transferor against third parties who, in good faith (see Art. 1147 C.C.), acquired rights from the apparent owner (Art. 1415, par. 1, C.C.). However, when the dispute regards immovables or registered movable goods, since their circulation is governed by the rules on transcription (or registration) in public registries, it is necessary that the legal action be transcribed prior to the transcription of the act of acquisition: if that is the case, the true agreement prevails. A. BONITO OLIVA – 285

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4. Effects of simulation on creditors. Creditors are a particular category of third persons particularly exposed to the prejudicial effects of simulation. The Italian Civil Code provides specific rules concerning the effects of simulation on creditors. According to the Italian Civil Code, creditors of the simulating transferor can plead the simulation against the parties when the sham transaction is prejudicial to their rights (Art. 1416, par. 2, C.C.). Notwithstanding the above, simulation cannot be used as a defence by the creditors of the simulating transferor against third parties who, in good faith (Art. 1147 C.C.), acquired rights from the apparent owner, before – in the case of immovables or registered movable goods – any judicial petition concerning simulation had been transcribed (Art. 1415, par. 1, C.C.). On the contrary, simulation cannot be used as a defence by the contracting parties against creditors of the apparent owner, who have, in good faith, levied execution (Articles 2910 C.C. et seq.) on the property which was the object of the simulated contract (Art. 1416, par. 1, C.C.). Finally, Art. 1416, par. 2, C.C. governs the conflict which occasionally arises between the creditors of the simulating transferor and the chirographic creditors of the simulating transferee by stating that the former are preferred if their claim is prior to the simulated contract (Art. 1416, par. 2, C.C.).

COMPARISON AND EVALUATION Both the PECL and the Italian Civil Code contain rules governing simulation based on the common assumption that simulation is not unlawful in itself unless it has a fraudulent purpose. Therefore, the apparent contract is neither void nor invalid but simply unable to bind the parties whose legal relationship is regulated according to their true agreement. Nevertheless, simulation may have concrete effects on third persons who did not enter the contract. The PECL do not regulate the consequences of simulation with respect to third persons whereas the Italian Civil Code provides a specific rule with regard to third persons and to the creditors of the contracting parties. From this point of view, Italian law offers a complete and sophisticated solution to the questions raised by the need to protect third persons against the negative consequences of simulation.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:104: Determination of Price Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price. 1. General. Art. 6:104 PECL provides for the case where the contract does not fix the price or the manner for determining it. When this situation occurs courts have to charge the reasonable price. The primary consideration stemming from the analysis of Art. 6:104 is that the PECL recognise that contracts may be incomplete not because the parties intended not to be bound but because they were incapable or unwilling at the time the contract was concluded to define the exact content of the obligations they wanted to assume. Therefore it would be improper (with respect to the parties’ intention) to consider invalid, with no exceptions, contracts whose terms were not defined at the time of their conclusion (see Comments A and B). Secondly, the reference in Art. 6:104 (as well as those in Articles 6:105 to 6:107) to the method of determining the price reveals that, in order for a contract to be concluded and valid, it is sufficient that the parties fix at the time of its conclusion the method of determining ex post the initially undefined content. Thus the content of the contract under the PECL may be determined or determinable. Thirdly, and consequently, it will be interesting to define the relation between Art. 6:104 and Articles 2:101 to 2:103 on the conclusion of a contract. Surely, as Comment A explains, Art. 6:104 presupposes the parties’ intention to conclude the contract and be bound by it (Art. 2:102). With regard to Art. 2:103, one could point out that Art. 6:104 might greatly enlarge the extent of the ‘‘sufficient agreement’’ inasmuch as the ‘‘method of determining’’ formula might allow every manner of subsequent content determination (not only that provided in Articles 6:105 to 6:107 but also, for example, the subsequent agreement of the parties) and the provision in Art. 6:104 might be considered applicable also to non-pecuniary performances (by analogy to Articles 6:105 to 6:107 which all refer to the price or any other contractual term). 2. Application. With regard to the parties’ intention to be bound as a condition for the application of Art. 6:104, Comment C specifies first that the price does not have to be fixed, directly or indirectly, explicitly or implicitly, by the parties (also taking into account usages and any practices established between the parties); second, that courts are not allowed to complete the contract when the parties have failed to agree on the price after negotiation, unless their behaviour shows that they intend to conclude a contract. 3. What price? In applying Art. 6:104, courts have to refer to the reasonable price, namely the price that would be considered reasonable by persons acting in good faith and in the same situation as the parties, taking into account the nature and purpose of the A. FICI – 287

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contract, the circumstances of the case and the usages and practices of the trades or professions involved (see Art. 1:302 PECL). In this regard Art. 6:104 PECL seems less precise than Art. 5.7(1) of the Unidroit Principles of International Commercial Contracts which consider two possibilities: ‘‘the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, [a] reasonable price’’. Thus Art. 5.7(1) of the Unidroit Principles tries to capture both the price of the ordinary market transactions and that of specific or unique transactions. On the other side remains the solution of Art. 55 of CISG whereby the supplementary price is the one generally charged. Nevertheless the broad notion of reasonableness in Art. 1:302 PECL appears adequately to take into account the need to establish the price according to the common market or unique-specific nature of the contractual transaction involved.

ITALIAN LAW Art. 1474 C.C.: Lack of express determination of price (1) If a contract price has as its subject matter things habitually sold by the seller and the parties have neither determined the price nor agreed on the manner of determining it, and such price is not established by provision of a public authority or corporatives norms, it is presumed that the parties intended to refer to the price normally set by the seller. (2) In the case of property having an exchange or market price, the price is taken from the quotations or price lists of the place in which delivery is to be made, or those of the nearest market. (3) Whenever the parties have intended to refer to a fair price, the provisions of the preceding paragraphs apply; in cases not provided for by said paragraphs, the price, in the absence of agreement, is determined by a third person appointed according to the second paragraph of the preceding article. 1. General. Under Italian law, since payment of a price is the typical counter-performance of a sale of goods and other contracts and, moreover, as specified below, the object of a contract has to be determined or determinable, provisions such as that in Art. 6:104 PECL are not contained in the law of contract in general (Title II, Book 4 C.C.) but in that of individual types of contracts (Title III, ibidem). For example, according to Art. 1474, para. 1 C.C., if the price of the goods normally sold by the seller has not been determined and the contract does not fix the method for determining the price, it is presumed that the parties intended to refer to the price generally charged by the seller. Other Articles provide more generally that the undetermined remuneration has to be determined with reference to professional tariffs or usages or, in their absence, by the judge (see, for instance, Art. 1657 on construction contracts, Art. 1709 on mandate and Art. 2233 on professional services). It is seldom prescribed that the judge must determine the remuneration on the basis of equity (see Art. 1733 on commission; but in this regard see Bianca (2000), p. 519 288 – A. FICI

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footnote 67, who argues that the judge is always obliged to determine the price according to equity). 2. Object as an essential element of the contract. According to Art. 1325, n. 3, C.C. the object is one of the requisites of the contract. The object must be possible, lawful, determined or determinable (Art. 1346). The object is considered ‘‘determinable’’ when parties have provided the manner in which it is to be determined subsequently (see, clearly, Scognamiglio (1970), p. 360; Cass. 12 July 2000, in Giur. it., 2001, p. 706; and the comment to Art. 6:105 PECL). If the contract has no object or the object is not determined or determinable, the contract is null (Art. 1418, para. 2 C.C.). Several Italian scholars identify the ‘‘object’’ of Art. 1325, no. 3, with the content of the contract (see Irti (1965), p. 804; Bianca (2000), pp. 320–321; Sacco-De Nova (2004), pp. 3–6), others with the performance of the contract which is, at any rate, part of the content (see, among others, Cataudella (2000), pp. 27–28; Roppo (2001), p. 330; Gazzoni (2004), p. 875; for a more complex view of the notion of object, see Gabrielli (2001), p. 5 et seq. and Gabrielli (2004)). Accordingly, in order for a contract to be valid, performances must be determined or at least determinable at the time of conclusion of the contract. The above cited Articles on the determination of the price or remuneration should therefore be considered as exceptions to the general rule expressed in Articles 1346 and 1418, para. 2, C.C. (but see van Schaick (2002), p. 269, who, as regards Dutch law, comes to different conclusions). For this reason, they might not apply in analogous situations, for instance in the case of a sale of goods not normally sold by the seller. Such a sale will be null if the price is undetermined or not determinable. In other cases Italian contract law requires a more accurate determination of the price in order to protect the (assumed) weaker party in a certain economic relationship (see Art. 2, paragraphs 4 and 5, Law no. 192 of 18 June 1998 on ‘‘subfornitura’’; Gabrielli (2003a), p. 105 et seq.).

COMPARISON AND EVALUATION Italian contract law does not have a general provision such as Art. 6:104 PECL. Although it is possible to find in the rules on individual types of contracts solutions analogous to that of Art. 6:104, they do not seem to express a general rule. This outcome coheres with a contractual system in which it is provided that the object of the contract (i.e. the performances) must be determined or at least determinable. When the gap in the parties’ agreement regards performances, recourse to external sources of contract integration is not generally permitted unless otherwise provided by the legislator. The PECL adopted a different view (see Comment A). Art. 6:104 is a general rule which permits completion of the incomplete contract with regard to pecuniary performance (but, as said above, it is possible to argue that Art. 6:104 may apply to other kinds of undetermined performance).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:105: Unilateral Determination by a Party Where the price or any other contractual term is to be determined by one party and that party’s determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted.

Art. 6:106: Determination by a Third Person (1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it. (2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted.

Art. 6:107: Reference to a Non-Existent Factor Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted. 1. General. Open-terms contracts and subsequent content determination. Articles 6:105, 6:106 and 6:107 PECL can be the subject of a unitary comment since they deal with the same matter, that is, the subsequent determination of an initially (and intentionally) incomplete (or ‘‘open-terms’’) contract. These Articles presuppose the freedom of the parties to a contract to leave a term (the price or any other term) undetermined, providing a method of determining it subsequently. Therefore, while Articles 6:102 and 6:104 (and also 6:108) PECL deal with contracts that are incomplete merely because of the inadequacy of the parties’ agreement, Articles 6:105, 6:106 and 6:107 deal with a contract that is incomplete as a consequence of the parties’ intention and strategy. This choice of the parties can be justified by several reasons such as the initial impossibility or difficulty of determining the contractual content or the intention to manage the economic effects of supervening events in a subsequent phase of the contractual relationship, especially when those events actually occur (see Hart (1987), p. 753; Gergen (1992), p. 1005). The parties’ freedom to leave a term open needs to be put in relation to the requirement of ‘‘sufficient agreement’’ for the conclusion of the contract (Articles 2:101 and 2:103 PECL). It seems that (as already argued in commenting on Art. 6:104) the provision of a method of subsequent determination makes the agreement ‘‘sufficient’’ so that the contract can be considered concluded. When the parties exercise their freedom to leave a term undetermined, contractual lacunae 290 – A. FICI

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might not be filled by legal integration, that is by applying Art. 6:102 or Art. 6:104 (or Art. 6:108), which presupposes not only that there is a gap in the contract but also that the parties did not provide for filling it subsequently. Articles 6:105 to 6:107 also set out the methods of content determination. The subsequent determination can be a material, automatic act (reference to an index, price, cost or, more generally, in the wording of Art. 6:107, a factor). The PECL do not instead consider the case of parties leaving determination to a subsequent agreement between them (this topic is also not dealt with by the Codice civile and Italian scholars, but envisaged by the Unidroit Principles (see Art. 2.14). As we will see, the objective of the PECL is not only to recognise the practice of intentionally leaving contracts incomplete and subsequent determination, but also to safeguard the contract in the case of failure in the subsequent determination phase, applying to this matter the general principle of contract conservation widely used in the PECL. 2. Unilateral determination. Art. 6:105 PECL contains an extremely significant provision for the Italian scholars who – as said better below – have to deal with the issue of the general legitimacy of unilateral determination of contract terms in their own legal system. Indeed, Art. 6:105 generally admits the unilateral determination of contractual content with regard to the price or any other term. Nevertheless, if the determination by one party turns out to be grossly (‘‘manifestly’’ in Art. 5.7(2) Unidroit Principles) unreasonable (for the concept of reasonableness, see Art. 1:302), the other party is entitled to obtain the revision of the determination. Moreover, the right to revision may not be excluded by agreement of the parties. The revision may be invoked only when the determination is ‘‘grossly’’ unreasonable (the Comment clarifies that the ‘‘grossly’’ unreasonable condition is intended to avoid abuse in the application of the rule). Art. 6:105 clearly intends to prevent the abuse of power both in the formation and the performance of the contract. The revision of a grossly unreasonable unilateral determination should lead to a reasonable price or term. 3. Determination by a third person. According to Art. 6:106(1) PECL, parties to a contract may confer the power to determine the price or any other term on a third person (Comment A explains that, inasmuch as he/she is required to act independently, the third person is also the party that is in a contractual relationship with one of the parties). In this case, where the third person neither could nor would determine the term, the parties are presumed to have empowered the court to appoint another person. However, given that this is only a presumption, the parties may prove that they were contrary to the court’s intervention (as in the case where the parties have chosen a third party on the basis of his/her personal characteristics, i.e. intuitu personae: see Comment A), or that they intended to fill the open-term by their subsequent agreement or other methods of subsequent content determination. If this is the case and subsequent determination fails, the contract does not come into existence or should be considered void (see Comment A according to which ‘‘there is no contract’’). A. FICI – 291

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Where the term fixed by the third person is grossly unreasonable, it will be substituted by a reasonable one. Art. 6:106, contrary to Art. 6:105, does not expressly consider the agreement void when the agreement excludes recourse to the court in case of an unreasonable determination. It therefore raises the question whether such an agreement would be null by analogy to the solution in Art. 6:105 (van Schaick (2002), p. 272) or valid given that in the case of a third person’s determination, there are no analogous reasons for protecting one party against the other’s abuse (as in the case of unilateral determination). 4. Reference to a (non-existent) factor. The third case regulated by the PECL is that of subsequent determination by reference to an external factor such as an index of prices, the price of a type of goods, a production cost, etc. Where the parties have agreed upon this method of content determination, given that it works automatically, they do not face the problem of a possible unreasonable determination. Nonetheless, also this mode of contract determination can fail if the external factor turns out to be inaccessible ex post because it no longer exists or is no longer available. If this is the case, applying the principle of contract conservation (and following the solution provided in Art. 5.7 (4) Unidroit Principles), Art. 6:107 PECL states that ‘‘the nearest equivalent factor shall be substituted’’. Thus the applying factor must be, for instance, the index of prices published by another authority if the chosen authority no longer exists or the cost of a similar type of goods if the chosen type is no longer on the market. The rule in Art. 6:107 does not seem to be mandatory. Therefore parties may provide a different solution to the inaccessibility of the factor fixed in the contract.

ITALIAN LAW Art. 1349: Determination of object (1) If determination of the performance provided for in a contract is referred to as a third person and it does not appear that the contracting parties intended to rely merely on such third person’s discretion, the latter shall proceed on an equitable basis. If the third person fails to make the determination or if his determination is manifestly inequitable or erroneous, the determination is made by the court. (2) A determination left to the mere discretion of the third person cannot be impugned except by proving his bad faith. In the absence of a determination by a third person, and if the parties do not agree to appoint a substitute, the contract is void. (3) In determining the performance, the third person shall also take into account the general conditions of production to which the contract may relate. Art. 1473 C.C.: Determination of price entrusted to third person (1) The parties can entrust the determination of price to a third person designated in the contract or to be designated at a later date. 292 – A. FICI

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(2) If the third person is unwilling or unable to accept said charge, or if the parties do not agree on his appointment or substitution, the appointment is made by the president of the tribunal of the place in which the contract was made. 1. General. Content determinability and incomplete contracts. According to Articles 1346 and 1418, para. 2, C.C., a contract is valid if its object (i.e. its content: for the identification of object and content, see Irti (1965), p. 804; Bianca (2000), pp. 320–321; Sacco-De Nova (2004), pp. 18–20; for the distinction between object and content, Cataudella (1966), pp. 3–6; Gabrielli (2004); for a more structured opinion as regards the relation between the two notions and parties’ agreement, Gabrielli (2001), p. 5 et seq.) is determined or at least determinable. The object is determinable when the parties’ agreement fixes the criteria, modes, procedures or acts whereby the object will subsequently be determined (see, for this broad definition, Scognamiglio (1970), pp. 359–360). Therefore, the reference to determinability implies the parties’ freedom to conclude an incomplete contract, providing that its content is to be determined at a subsequent stage. It is more difficult to understand which methods of content determination are permitted by Italian law. The only method expressly envisaged by contract law in general is determination by a third person, hypothesis commonly named ‘‘arbitraggio’’ (see Art. 1349 C.C.). It is also undisputed that parties may refer to objective external factors such as lists, indexes, costs, prices, documents, etc. Contrasting opinions concern the question as to whether unilateral determination by a party may be considered generally admissible, beyond the express provisions in the regulation of some individual types of contracts. Partially ignored by Italian scholars (but see Gabrielli (2001), p. 103 et seq.; Fici (2001)) is the fascinating topic of content determination by subsequent agreement of the parties. It will not however be examined in this comment given that the PECL – as stated above – did not consider it. 2. Determination by a third person (‘‘arbitraggio’’). The Codice civile admits and regulates determination by a third person. This act is named ‘‘arbitraggio’’ and the third person ‘‘arbitratore’’ (thus, the arbitratore is not to be confused with the arbiter, a private judge who – in the framework of an alternative dispute resolution (so called, ‘‘ADR’’) procedure – settles a dispute between the parties: see Cass. 28 July 1995, n. 8289, in Mass. Foro it., 1995, in Arbitrato, no. 83; Gabrielli (2003), pp. 125–129). The C.C. provides two forms of arbitraggio: the determination following the equitable evaluation of the third person (arbitrium boni viri) and the mere arbitrary determination by the third person (arbitrium merum). Parties to a contract are free to choose between the two forms, but in the absence of an indication they are presumed to have made reference to the arbitrium boni viri (Art. 1349, para. 1, C.C.). Arbitrium boni viri and arbitrium merum are alternative criteria for decision-making the third person must follow when making his/her determination. The more recent theory makes a distinction between the two criteria on the ground that the former implies an objective determination taking into account objective, common parameters in the pursuit of an objective outcome, namely the price or the other term commonly applied with respect to that kind of transaction. On the other hand A. FICI – 293

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the latter is based on the third person’s freedom to select the parameters for his/her determination. Consequently, his/her determination will necessarily be subjective (see, clearly in this sense, Cass. 2 Feb. 1999, n. 858, in Rep. Foro it. 1999, in Contratto in genere, n. 417; for the distinction and other references, see Gabrielli (2003b), pp. 138–140). The distinction between arbitrium boni viri and arbitrium merum has important effects on the regulation of arbitraggio. In the case of arbitrium boni viri, when the third person does not make the determination or when the determination is manifestly erroneous or unfair, the determination is made by the court (Art. 1349, para. 1, C.C.). In the case of arbitrium merum, firstly, the determination may be opposed only in the case of ‘‘bad faith’’ on the part of the third person, that is when it has been proved that the third person acted in the knowledge that his/her determination was erroneous or unfair; secondly, when there is no determination by the third person and the parties do not agree upon his/her substitution, the contract is null (Art. 1349, para. 2, C.C.). This latter solution is probably justifiable on the ground of the particular position assumed by the third person determining on the basis of arbitrium merum. Indeed, as the third person deciding on the basis of arbitrium merum has more freedom in making his/her determination than does the person deciding on the basis of arbitrium boni viri, the common perception is that that the relationship of the former with the parties is more trustful than the latter’s. In other words, he/she is a selected intuitu personae and therefore a person that cannot be substituted by a judge or another third person without the consent of the parties. In the regulation of individual types of contracts, different solutions can be found. For example, Art. 1473 C.C. on sales contracts provides that, when the parties have appointed a third person to determine the price, and that third person does not want to accept the task or cannot accept the task or the parties do not agree on the choice of the third person or of his/her substitute, then the court chooses the third person. 3. Unilateral determination ( jus variandi). In Italian general contract law, it is not expressly provided that the contract may confer on one party the power to determine the price or any other contractual term. Nevertheless, in the regulation of individual types of contracts provisions can be found that grant one party the power to determine the content of the obligations (see Articles 1560, para. 2 C.C. on supply contracts; Art. 1661 C.C. on construction contracts; Art. 2103 C.C. on labour contracts). The absence of a general provision has stimulated the debate among Italian scholars and courts on the legitimacy of unilateral determination conferred by agreement of the parties (although the debate has in effect regarded the analogous, but not exactly coincident, hypothesis of unilateral modification, the so-called jus variandi). Some scholars assert that unilateral determination is not admissible because it is contrary to the general principle of bilateral consent, the ‘‘agreement’’, which is one of the requisites of a contract (see Articles 1321, 1325, 1372 C.C.). In other words, following this opinion, the content of a contract cannot be the result of the will of only one party. Furthermore, the same scholars cite Art. 1349 C.C. on determination by a third person as evidence of the fact that the Italian legislator did not want to permit unilateral determination (on the 294 – A. FICI

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contrary, the legislator would have envisaged the latter as well as the former) (see Bussoletti (1994), p. 465). To this theory it is however possible to reply, on the one hand, that in the case of provision in a contract for unilateral determination, bilateral consent is in re ipsa as both parties have accepted this mechanism for content determination. On the other hand, the law itself assigns, in several cases, this power to one of the parties (see Schlesinger, 1992, 18 et seq.; on the relationship between Art. 1349 C.C. and the legitimacy of unilateral determination in Italian contract law, see Dalbosco (1987), p. 321 et seq.; Barenghi (2001), p. 99 et seq.). Other scholars affirm that a contract may confer on one party the power to determine unilaterally the contractual content, although they underline that this power might not be unlimited to the extent that it is necessary to safeguard the party exposed to the other’s power. Therefore, as shown by the legal provisions admitting it, the legitimacy of unilateral determination should depend on the existence of quantitative limits to the exercise of the power (see Art. 1560, para. 2, C.C.), or on the fact that the equilibrium between the obligations of the parties is safeguarded (see Art. 1661 or Art. 2103 C.C.), or on the fact that the party is aware in advance of the potential effect of the determination (and therefore of the risk) which it is subject to (see Art. 1286 C.C. on alternative obligations; Rescio (1987), p. 98 et seq.). Moving towards this theory is a significant decision of the Italian Supreme Court stating that a contractual clause conferring the jus variandi is to be considered valid if the exercise of power is limited, or objective criteria have been fixed in order to exercise it, or the degree of modification is determinable ex ante; on the contrary, if it gives a party unlimited power of determination, the clause must be considered invalid because the content of the contract is not determinable as required by Art. 1346 C.C. (see Cass., 8 Nov. 1997, no. 11003, in Nuova giur. comm., 1999, p. 338, and in Giust. civ., 1998, I, p. 2889). Other scholars hold unilateral determination generally to be admissible, firstly on account of freedom of contract and secondly because it satisfies the valuable interest of the parties in the initial incompleteness and flexibility of the contract. Nonetheless, according to this theory, the efficiency of unilateral determination as a means of contract flexibility also depends on the protection of the other party against abuse of the power of determination. This protection, however, does not need to be ensured by excluding or limiting ex ante the power of unilateral determination since it is possible and more adequate to verify ex post how the power has been exercised, whether in conformity with the rule requiring the contract to be performed according to good faith (Art. 1375 C.C.) or not. In other words, the exercise of the power conforms to good faith if it aims to satisfy the interests for which it has been conferred. In conclusion, it is not the exercise of the power that is (and should be) prohibited but its abuse is subject to a penalty. Penalties for abuse are damages and/or the invalidity of the unilateral determination (Fici (2002), p. 389 et seq.; see also Roppo (2001), p. 558; Nivarra (2000), p. 471). The latter thesis leads to solutions more similar to those adopted by the PECL in regulating unilateral determination. A. FICI – 295

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Furthermore, in the analysis of unilateral determination and jus variandi it seems useful to consider separately the case in which one party is entitled to terminate the contract if and when the other exercises its right to unilateral determination (or modification) of contract (see, for example, Art. 118 of Legislative Decree no. 385 of 1 Sept. 1993 on banking contracts). Indeed, when the power of unilateral termination can be exercised in consequence of the exercise of the power of unilateral determination, not only is the need for the protection of the party non-existent, but there is a change in the legal classification of the case. A legal power is such if the person exercising it can by himself/herself cause legal effects, and if whoever is exposed to its exercise cannot react to the correct use of power (but possibly only abusive exercise). Therefore, unilateral determination and unilateral termination are in effect to be considered elements of a particular procedure of contract conclusion where the expression of the intention to determine (or modify) the contract by one party is the proposal, and termination or continuation by the other is, respectively, refusal and acceptance of the proposal (see Fici (2002), pp. 412–414; Trib. Milano, 18 Apr. 1985, in Banca, borsa, 1987, II, p. 94; Art. 12 of Legislative Decree no. 11/1995 on package travel, etc.). 4. Reference to a non-existent factor. Italian law does not contain a general provision such as the one in Art. 6:107 PECL. Generally, when the situation described in Art. 6:107 occurs, the contract should be considered null because its object is neither determined and nor determinable (as required by Art. 1346 C.C.). The possible alternative is to consider applicable – given that the contract turns out to have a lacuna – the rules stemming from law, usages and equity, that is Art. 1374 C.C. on contract integration (with regard to judicial equity and invoking also Art. 1349 on the substitution of the court in case of arbitrium boni viri determination, see Trib. Roma, 10 Apr. 1995, in Rass. dir. civ., 1996, p. 460). But, as said above, in our opinion, for contract integration to operate, it should be necessary to prove not only the existence of the contractual gap but also that the parties did not provide a method of subsequent content determination.

COMPARISON AND EVALUATION The PECL provisions on content determination are really significant for Italian scholars. They encourage a theoretical approach to the subject of incomplete contracts and their subsequent determination, that in Italy has been difficult to undertake since the only general rule available is Art. 1349 on determination by a third person. Especially as regards unilateral determination, the PECL may be useful for those Italian scholars wanting to show that this method of content determination is not unfair in itself, so that it is not its use but its abuse that needs to be opposed by adopting the ex post standard of good faith and reasonableness. As regards determination by a third person, Italian law provides a more detailed solution whose concrete advantages with respect to the easier solution in the PECL should be pondered. 296 – A. FICI

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The PECL rule on the non-existent factor is clear, whereas under Italian law the solution depends on which systematic view of the relationship between contractual gaps and contract integration one considers more correct.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:108: Quality of Performance If the contract does not specify the quality, a party must tender performance of at least average quality. 1. General. Art 6:108 PECL provides a general rule to supplement the parties’ agreement on the quality of the performance due by the debtor. According to the article, if the contract does not specify the quality, the debtor is bound to render a performance of at least average quality. 2. A subsidiary provision. In the absence of any indication by the parties, Art. 6:108 provides a subsidiary criterion for determining the quality of the due performance, which is applicable to obligations both to supply goods and to render services. Art. 6:108 therefore deals with problems arising from contractual incompleteness (as well as Arts. 6:102, 6:104–6:107 do) and provides a rule to fill a (real) lacuna in the contract (for the concept of real lacuna, see Comment to Art. 6:102). In order to confirm that a (real) lacuna exists, the quality of the performance does not have to be fixed by the parties, directly or indirectly, explicitly or implicitly, also taking into account usages and any practice established between them (Art. 1:105 and see Comment C to Art. 6:104). On the contrary, Art. 6:108 PECL excludes the application of Art. 6:102 PECL, the former being a specific provision which operates in the particular case in which the lacuna affects the contractual term concerning the quality of the performance (see Comment to Art. 6:102 PECL). 3. What quality? Art. 6:108 PECL states that if the contract does not specify the quality, a party must render a performance of at least average quality. The PECL thus determine the minimum requirement of the performance due by the debtor. The average quality normally corresponds to that which is available on the relevant market at the time of performance and in similar circumstances. In determining the average quality, the circumstances (such as for example the debtor’s profession) thus play a fundamental role. However, when a transaction is specific, and does not therefore have an equivalent on the market, the average quality needs to be determined considering only the circumstances of the case in accordance with the canon of reasonableness laid down by Art. 1:302 PECL. From this point of view, Art. 6:108 PECL seems less precise than Art. 5.6 of the Unidroit Principles which, in defining the quality of the due performance, expressly refers to ‘‘a quality that is reasonable and not less than average in the circumstances’’. 298 – A. BONITO OLIVA

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ITALIAN LAW Art. 1178 C.C.: Generic obligation When the object of an obligation is the delivery of things specified only as to kind, the debtor shall deliver things not below average in quality. 1. General. The Italian Civil Code does not include a general provision for determining the quality of the due performance in the absence of an agreement by the parties in that regard. However, a specific rule is set out in Art. 1178 C.C. with regard to obligations of delivering goods. As far as performance of services is concerned, particular attention has to be given to Art. 1176 C.C. 2. Obligation to deliver goods. According to Art. 1178 of the Italian Civil Code if the things due to the creditor are only determined as to their kind, the debtor is bound to tender things of at least average quality. The legal provision is subsidiary and not mandatory since the parties may deviate from it, determining the quality directly or indirectly, explicitly or implicitly. Moreover, in conformity with the general rules and principles of Italian Law, Art. 1178 C.C. does not apply when the quality of the performance is fixed according to a ‘‘contractual usage’’ or practice (see Art. 1340 C.C. and the Comment to Art. 6:102 PECL). The provision in Art. 1178 C.C. focuses on the quality of goods delivered by the debtor, requiring that it be of at least average level. In determining the average quality, one should refer to goods of the same kind available on the market at the time of performance and in certain circumstances. The Italian Courts have also applied the principle set out in Art. 1178 C.C. to transactions concerning specific goods belonging to a narrow genus of things (for example, the sale of a non-specified piece of land that belongs to an allotment identified in the contract. See Cass., 4 February 1992, no. 1194, in Rep. Foro it. (1992), v. obbligazioni in generale, no. 17). 3. Obligation to render services. As far as performance of services is concerned, the Italian Civil Code does not provide any rule for determining the quality of the performance due by the debtor if the contract does not indicate it. One should wonder if the rule expressed by Art. 1178 C.C. may be considered general and thus applicable not only to obligations to deliver things but also to obligations to render services. The clear reference in Art. 1178 C.C. to ‘‘goods’’ seems to have prevented the Courts from applying the rule also to performance of services. With respect to obligations to perform services, particular attention has to be given to Art. 1176 of the Italian Civil Code. According to this provision in performing her obligation the debtor has to exercise the care of a ‘‘buon padre di famiglia’’, i.e. the care a person A. BONITO OLIVA – 299

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acting in good faith and in the same situation as the debtor would take. That is a ‘‘medium’’ level of diligence (Art. 1176, par.1, C.C.). The second paragraph of Art. 1176 C.C. specifies that in professional relationships, the duty of care imposed to the debtor has to be appropriate with respect to the nature of the activity. Of course, parties are free to agree on an higher level of care. The article provides a standard for evaluating whether the debtor has correctly performed the contract. It should therefore relate to a moment ( performance of the contractual agreement) which logically and chronologically proceeds the activity of determining the content of the contractual obligation. Nevertheless, the parameter of care has been also intended as a means for determining the content of the obligation by saying that – in the absence of a specific provision – the performance due is the performance which corresponds to diligent behaviour. This is especially true of obligations concerning professional relationships (which represents a typical hypothesis of obligation de moyens) where the debtor’s obligation is exactly to act by employing the degree of skill and care normally required to a competent member of her profession, i.e. to act in a diligent way (see Bianca (1994), 5, p. 28). Although this approach appears to provide a useful means of solving the problems arising from contractual lacunae as regards the quality of the services due, both the prevalent doctrine and the Courts have refused to read the provision set out in Art. 1176 C.C. in a determinative perspective (see, among others, Cass., 13 February 1998, no. 1560, in Rep. Foro it. (1998), v. obbligazioni in genere, no. 32). Some scholars maintain that this integrative purpose would be better achieved through Art. 1175 C.C. according to which ‘‘the parties have to behave according to the rules of fairness’’. The criterion of care expressed by Art. 1176 C.C. is at any rate a rule of average care as long as the required level of performance has to be defined taking into account the average skill of a member of the debtor’s category.

COMPARISON AND EVALUATION If the parties do not specify the quality of the performance due by the debtor, the Italian Civil Code does not contain a general rule, similar to that of Art. 6:108 PECL, for determining it. Notwithstanding the lack of a general provision, a specific rule arises from Art. 1178 C.C. with regard to obligations to deliver generic goods; in this case the debtor’s obligation is to tender things of at least average quality. As long as an obligation to perform services is concerned, some authors refer to Art. 1176 C.C. as a means of determining the content of the obligation. They argue that – lacking a specific provision – the performance due by the debtor is the one which corresponds to diligent behaviour. However, the Courts generally refused to apply the article in this direction.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:109: Contract for an Indefinite Period A contract for an indefinite period may be ended by either party by giving notice of reasonable length. 1. General. On the assumption that nobody can be contractually bound to an other person eternally, Art. 6:109 PECL provides a general rule according to which both parties to a contract for an indefinite period of time may end the contract by giving notice a reasonable time in advance. 2. Sphere of application. The rule in Art. 6:109 PECL applies to contracts whose duration has not been defined by the parties as well as to contracts the parties consider to have no end. According to Art. 6:109 PECL, a contract for an indefinite period of time is – first of all – an agreement which does not provide any indication either as to its duration or as to the way in which it can be terminated. With respect to those contracts, the article is – primarily – a gap-filling rule which operates whenever the parties have failed to specify, directly or indirectly, explicitly or implicitly, the length of the contract or the way to terminate it. However, since the rule stated in Art. 6:109 PECL derives from the general assumption that a legal tie cannot be eternal, the parties may not agree to exclude the application of Art. 6:109 PECL whenever they failed to provide either an expiry date for the contract or a provision on the way to withdraw unilaterally from the agreement. From this different perspective, we should hold that the rule is also a mandatory provision. Secondly, parties are free to insert a provision which expressly makes the contract last for an indefinite period of time (i.e. for an unlimited time) or a provision according to which the contract purports to be everlasting (e.g. ‘‘at all times hereafter’’). In these cases there is no lacuna but an express provision on the duration of the agreement. However, as stated in Comment A to Art. 6:109 PECL, any contractual agreement that purports to be everlasting is to be treated as a contract for an indefinite period of time and can therefore be ended by giving notice a reasonable time in advance. In this regard, the rule operates as a mandatory provision and any agreement intended to exclude the party’s freedom to end the contract by giving notice would be void. Finally, it should be observed that Art. 6:109 also applies to contracts for a definite period of time upon which, after the original date had expired, parties continued to refer without having expressly agreed to renew them for another definite period. 3. Reasonable notice. Art. 6:109 PECL states that a contract for an indefinite period may be ended by giving notice of reasonable length. According to Art. 1:303 PECL, the notice purporting to end the contract will not be effective until it reaches the person to whom it is sent. A. BONITO OLIVA – 301

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It is possible to maintain that whenever the length of the given notice is not reasonably long the contract will still be in force until a reasonable time has expired. For the purpose of defining what a reasonable length of notice will be, one should refer to the notion of reasonableness in Art. 1:302 PECL. In determining the reasonableness of the length, Comment C specifies that the length of time the contract has lasted, the efforts and investments which the other party has undertaken in performing the contract, the time it may take the other party to obtain another contract with another party and what is customary in the debtor’s branch of business are relevant circumstances.

ITALIAN LAW 1. General. Although the Italian Civil Code does not contain a general provision such as the one in Art. 6:109 PECL, similar rules are provided in the general law of contracts (Title II, book 4 C.C.) and by provisions that apply to specific type of contract (Title III, ibidem). For example, Art. 1569 C.C. states that, in a contract to supply services or goods stipulated for an indefinite period of time, both parties may end the contract by giving notice in advance as required by a contractual clause or, in the absence of a clause, in the time required by usages or in a reasonable time according to the nature of the agreement. Similar provisions are stated in relation to leases (Art. 1596 C.C.), mandates (Arts. 1725, 1727 C.C.), agency (Art. 1750 C.C.), employment contracts (Art. 2118, 2119 C.C.), perpetual annuities (Art. 1865 C.C.), deposit (Art. 1771 C.C.). Moreover, nowadays many legal rules provide the power to unilaterally withdraw from the contract (see, among others, d.lgs. 15 January 1992, no. 50 on consumer sales contracts concluded out of commercial places; d.lgs. 1 September 1993, no. 385 on financial and bank contracts). These rules derive from the idea that a contractual tie which purports to be eternal contrasts with the basic principles of the Italian legal system (see Cass., 14 April 1993, n. 4507, in Giust. Civ. (1993), I, p. 2689). It is thus possible to held that they express a general precept, which informs the whole system, according to which each party to a contract for an indefinite period of time may terminate the agreement by giving notice in advance (See Galgano (1990), II, 1, p. 412). This precept also applies to contracts which do not belong to a specific contractual type (See De Nova (2002), p. 697). 2. Sphere of application. The Italian legislator (as well as the drafters of the PECL) seems to refer to contracts for an indefinite period of time both as agreements without any contractual provision regarding their duration (see Art. 1569 C.C. on contracts for the supply of goods and services, Art. 1596 C.C. on contracts of lease) and as contracts expressly concluded for an unlimited period of time (see Arts. 1725, 1727 C.C. on mandates, Art. 1750 C.C. on agency, Arts. 2118, 2119 C.C. on employment contracts). A contract for a definite period of time to which the parties continue to refer after the original date has expired without having expressly agreed to renew it is considered a contract for an indefinite period of time (see App. Napoli, 23 December 1989, in Rep. Foro it. (1991), v. contratto in genere, no. 300). 302 – A. BONITO OLIVA

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As mentioned above, with regard to both cases, the general principle according to which each party can terminate the contract by giving notice in advance operates. However, notwithstanding the linguistic homogeneity, a distinction has to be made. 3. Contracts for an unlimited time and everlasting contracts. Since the parties have expressly stipulated a contract for an unlimited period of time or an everlasting contract, there is no lacuna with respect to the duration of the contractual agreement but an express provision. In this regard, the legal power to withdraw unilaterally from the contract appears to be a means the legislator provided in order to free the system from eternal contractual ties (see Mancini (1962), p. 242). Therefore the rules set out in the Italian Civil Code are mandatory provisions as long as any contractual clause, simply intended to exclude the power of withdrawal from a contract expressly concluded for an indefinite period of time, would be void (see, Art. 1418 C.C. and Art. 1865 C.C. on the perpetual annuity). In exercising their contractual freedom (see Art. 1373 C.C.), the parties are free to provide a contractual clause which determines the time of notice (according to the principle of good faith, the length of notice has to be reasonable, see Bianca (1994), 3, p. 794) and are also free to require a longer term than the one fixed by law (for example, with respect to the agency contract, Art. 1750 C.C. establishes a minimum time of notice from which the parties can contractually derogate only by requiring a longer term). Moreover, the legal rules do not operate if a different statutory provision on the duration of the contract applies (for example, Art. 1575 C.C. states that a contract of lease stipulated for longer than thirty years or forever has to be treated as a contract stipulated for thirty years). 4. Contracts without any indication of time. It is possible that the duration of a contract is not determined by the parties, directly or indirectly, explicitly or implicitly. In this case, a (real) lacuna affects the agreement and the legal provision on the power of unilateral withdrawal from a contract for an indefinite period of time applies. The provision operates as a gap-filling rule – first of all – intended to determine the duration of the agreement (see Gabrielli-Padovini (1988), p. 27). As a consequence, it applies unless other gap-filling rules are able to fill the lacuna. For example, it may happen that the lacuna is filled by a statutory legal provision which, in the absence of a contractual clause, provides a time limit for the contract (see Art. 1574 C.C. which states a time limit for some kind of contracts of lease stipulated without any provision as to time). When a different statutory provision is missing, the general principle according to which a contract without an indication as to time may be ended by giving notice in advance operates (see Cass., 1 July 1998, no. 6427, in Rep. Foro it. (1998), v. Lavoro (contratto), no. 22). In fact, a contract whose duration is not determinable is – concretely – a contract which purports to last forever (Mancini (1962), p. 242; for a different perspective according to which the legal power of unilateral withdrawal from the contract is just one of many legal means provided by the legislator to determine the length of the contract in the absence of any contractual provision on its duration, see Gabrielli-Padovini (1988), p. 27). A. BONITO OLIVA – 303

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In this regard, the rule also operates as a mandatory rule and any agreement intending to deny one or both of the parties the legal power of unilateral withdrawal from the contract would be void. 5. The length of the notice and its effectiveness. Whenever a legal provision on unilateral withdrawal from contracts for an indefinite period of time operates, the Code generally requires that the party give notice in advance. Almost all legal systems provide a time of notice defined according to the contractual agreement (Art. 1373 C.C.) or, in the absence of a contractual clause, to usages or practices or a time notice of reasonable length. In determining what a reasonable length will be, circumstances such as the period of time the parties have been cooperating, the importance of their relative investments in the relationship, the time needed to find new partners are to be taken into account. A notice which purports to end the contract will not be effective until it reaches the person to whom it is sent. Whenever the length of the notice does not comply with the legal provisions, the Italian Civil Code provides different solutions. Sometimes the notice ends the contract but the party that withdrew from the contract is obliged to pay damages unless a just cause occured (for example, see Art. 1725, c. 2., C.C.). In other cases, the notice is not able to end the contract before a reasonable time has passed (for example, see Art. 1569 C.C.; Gazzoni (2004), p. 1010).

COMPARISON AND EVALUATION Unlike Art. 6:109 PECL, the Italian Civil Code does not contain a general provision concerning the ending of a contract for an indefinite period of time. Although the general law of contracts does not provide such a provision, a general principle according to which each party to a contract for an indefinite period of time may end the contract by giving notice in advance can be derived from the rules regulating the single contractual types (see, among the others, Arts. 1596 C.C., 1725, 1727 C.C., 1750 C.C., 2118, 2119 C.C.). The outcome coheres with the idea that no one can be eternally bound to a contract without having the opportunity to free herself from the contractual tie. As a consequence, the principle also applies to contracts which do not belong to specific type. In conclusion, it is possible to maintain that the PECL solution and the one supplied by the Italian law are strictly similar.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:110: Stipulation in Favour of a Third Party (1) A third party may require performance of a contractual obligation when its right to do so has been expressly agreed upon between the promisor and the promisee, or when such agreement is to be inferred from the purpose of the contract or the circumstances of the case. The third party need not be identified at the time the agreement is concluded. (2) If the third party renounces the right to performance the right is treated as never having accrued to it. (3) The promisee may by notice to the promisor deprive the third party of the right to performance unless: (a) the third party has received notice from the promisee that the right has been made irrevocable, or (b) the promisor or the promisee has received notice from the third party that the latter accepts the right. 1. General. The traditional position of someone who is not a party to the contract is that the contract is, from his or her standpoint, res inter alios acta. Thus, one of the tenets of contract law has traditionally been privity. That word identifies the principle according to which a contract only affects the relationship between the parties to it. The best known formulation of this dogma was traditionally Art. 1168 of the Code Napole´on, according to which ‘Les conventions n’ont effet qu’entre les parties contractantes; elles ne nuisent point aux tiers’. 2. Exceptions to privity of contracts. The PECL provision responds to the need perceived by many European legal systems to recognize exceptions to this principle. Its content reflects the efforts undertaken at a national level either through the creation of new legislation, or by judicial interpretation, or through scholarly interpretation. Such initiatives have enjoyed mixed success, as is most prominently shown by recent English legislative history. Whilst the Contracts (Rights of Third Parties) Act 1999 cannot claim to have abolished the doctrine of privity of contract, it has been criticized for having left English law in an incoherent state, especially in view of the effects of the reform on the doctrine of consideration (R. Stevens, ‘The Contracts (Rights of Third Parties) Act 1999, in (2004) 120 Law Quarterly Review 292, 320–323). The common ratio underlying the PECL enterprise cannot be detected in terms more precise than the general economic and social interest inherent in the protection of third parties (Alpa-Fusaro (2001), pp. 30–31). The reasons for making a stipulation in favour of a third party range from the generic wish of the promisee to support or benefit the third party, to the promisee’s being indebted to the third party and wishing to discharge the debt by means of a single transaction ( promisor pays promisee’s debt to third party) instead of two transactions ( promisor pays promisee A. PRETTO – 305

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and promisee subsequently pays third party). However, such arrangements as trusts and contracts of agency do not fall within the scope of the provision. Contracts for the carriage of goods, by contrast, seemingly do: here the carrier ( promisor) promises the consignor ( promisee) to deliver the goods to the consignee (beneficiary). 3. Enforcement of third party’s right. The right to enforce the promise is normally vested in the promisee, unless an independent right of the third party to enforce the contract has been agreed (Art. 6:110 (1) PECL). One such instance is a transport insurance contract, where a promise by the insurance company ( promisor) to the policy holder ( promisee) to indemnify the owner of any insured goods which are lost or damaged (third party beneficiary) may be enforced by the latter. Another instance is the right of a consignee under a contract for the carriage of goods to claim delivery of the goods. The conditions for the exercise of such right are set out in international conventions (see CIM, CMR, and Warsaw Convention on the International Carriage by Air). 4. Revocation. Even where the beneficiary has acquired a right to claim performance, the promisor and the promisee may modify or revoke such right (Art. 6:110 (3) PECL). For instance, a bank ( promisor) may have promised to an account holder ( promisee) that it will pay a certain sum to the account holder’s son (third party beneficiary) on a monthly basis and upon demand by the son. The account holder may subsequently inform the bank that he intends to use part of that monthly sum for his own benefit, in which case the son’s claim will be correspondingly reduced. However, no modification of the third party’s right will be possible where he or she has accepted performance of that right, as in the case where the son claims the monthly sum from the bank before the bank is notified of the account holder’s new wishes. The third party’s acting in reliance on the right constitutes sufficient acceptance where he or she has learnt about the right from one of the parties and his or her acting in reliance is known to either the promisor or the promisee (Lando-Beale (2000), pp. 317–322).

ITALIAN LAW Art. 1411 C.C.: Contract in favor of third persons A stipulation in favor of a third person is valid when the stipulator has an interest therein. The third person acquires a right against the promisor as a result of such stipulation, unless otherwise agreed. The stipulation, however, can be revoked or modified by the stipulator until the third party declares to the promisor, that he intends to avail himself of the stipulation. In case of revocation of the stipulation or refusal of the third person to avail himself of it, the obligation of performance for the benefit of the stipulator remains, unless it appears otherwise from the intention of the parties or the nature of the contract. 306 – A. PRETTO

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Art. 1413 C.C.: Defenses which may be raised by promisor against third person The promisor can raise against the third person defenses based on the contract from which the third person derives his right, but not those based on other relationships between the promisor and the stipulator. 1. General. The statement that a contract has effects only as between its parties may appear obvious to a civil lawyer. So widely accepted was the dogma in Italian law that 19th century jurists, believing they were dealing with an axiom, spent virtually no time commenting on it. The proposition was insisted upon until it became apparent that some allowance had to be made for the fact that a person’s position is sometimes affected by the actions of others (Graziadei (2001), pp. 154–155). The ground rule for privity of contract is provided by Art. 1372 C.C., according to which ‘the contract has force of law between its parties’ and ‘does not produce any effect upon third parties except when established by law’. It has been recently pointed out that this proposition is false as a normative statement and incorrect as a description of the natural state of things. A contract normally produces negative or positive externalities in respect of third parties, neutrality being rarely the case. Art. 1411 C.C. now deals precisely with the situation where third parties are permitted to benefit from the positive externalities deriving from a contract concluded between others (Gambaro (2001), p. 342). 2. Agreement. The contract under examination deals with the case where the parties have the intention, tacitly or expressly, to confer a right upon a third party. The right must arise directly and immediately from the contract. The provision is not concerned with the mere empirical enjoyment by the third party of some economic benefit deriving from a contract concluded between others (Cass. 19 August 1997, no. 7693, in Giust. civ. Mass., 1997, 1445). Hence it is not concerned with the corresponding negative consequences of the third party incurring liability for interfering with the effects of a contract existing between others; that situation being taken care of by the rules on extra-contractual or Aquilian liability (Art. 2043 C.C.) (di Majo (2001), pp. 109–117). The additional advantage arising for the third party from a contract stipulated in his or her favour is the availability of contractual protection in the event that one of the contractual parties causes him or her to suffer damage. The protection awarded to the third person is then conceived as an extension of the primary obligation of the party bound to perform in the third person’s favour, or as an expression of that party’s proximity to the third person. 3. Promisee’s interest. The stipulator ( promisee) must have an interest in the stipulation for the third party in order for the right to be valid (Art. 1411.1 C.C.). Thus, the agreement between a City Council and a private builder under which the latter, in order to obtain a building permit, undertakes certain obligations towards the former, such as that of building a parking area, is simply a stage in the administrative process of obtaining the permit and does not confer any rights upon the future purchasers of the immovable. Such agreement A. PRETTO – 307

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is not a contratto in favore di terzi, since only a general public interest can be detected in the stipulating Council. An interest for the purposes of the provision is rather understood as a ‘private’ interest, or an interest protected by private law (Cass. Sez. II, 1 August 2001, no. 10459, in Riv. giur. edilizia, 2002, I, 152). 4. Third party’s acceptance. The third party is creditor of the performance promised in his or her favour. This does not make him or her a party to the contract. Acceptance by the third party of the performance does not cause the right to accrue upon him or her, that being the effect of the contract between the stipulator ( promisee) and the promisor. Acceptance is only necessary to make the benefit arising from the contract irrevocable. It does not impose any obligation on the third person. It merely obliges the contractual parties to perform in his or her favour (Cass. 9 August 1996, no. 7398, in Giust. civ. Mass., 1996, 1155). Acceptance is not necessary where intrinsically advantageous rights either in rem or in personam entailing no burden are conferred upon the third party. However, not even advantageous positions may be conferred on the third party against his or her will. This is the significance of the third party’s refusal (Art. 1411.3 C.C.). As a consequence the right will now benefit the stipulator ( promisee) (Roppo (2001), pp. 579–581, 584–585). 5. Revocation. Until the third party has notified the promisor of his or her acceptance the right remains vulnerable to revocation by the promisee. If the third party’s right is revoked by the promisee (Art. 1411.2 C.C.), then, as with rejection by the third party himself, the corresponding right will accrue to the promisee. Such a revocation affects both the third party, who will be deprived of the enjoyment of his or her right, and the promisor, who will have to offer his or her performance to a different creditor. It is advisable, therefore, that it be communicated to both (Roppo (2001), pp. 585–86). If performance is to be made to the third person after the death of the stipulator ( promisee), the latter can revoke the benefit even by a testamentary provision and notwithstanding that the third person has declared that he or she intends to avail himself or herself of it (Art. 1412 C.C.). 6. Insurance. The principle of stipulation in favour of a third party is well known to insurance law (recently, Cass. Sez. III, 15 January 2002, no. 375, in Giust. civ. Mass., 2002, 63). Art. 1920 C.C. deals with the designation – whether by contract, subsequent written declaration, or will – of a third party as the beneficiary of insurance, especially life insurance. As a result of the designation, even if generic, the third person acquires a direct right in the benefits deriving from the insurance. Art. 1921 C.C. deals with the revocation of such designation according to the same formalities. Revocation is not possible when attempted by heirs after the death of the contracting party, when it would challenge the beneficiary’s vested interest following the 308 – A. PRETTO

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occurrence of the event covered by the insurance, or after the beneficiary has notified the contracting party of his or her intention to avail himself or herself of the beneficial interest.

COMPARISON AND EVALUATION Although Art. 6:110 PECL and Art. 1411 C.C. are similar provisions, the terminology which they employ is slightly different. The Italian text (as translated in English by Beltramo) envisages a stipulator, a promisor, and a third person, whereas the PECL text speaks of a promisee, a promisor, and a third party. This can be confusing. The confusion is easily dissipated by noting that the stipulator and the promisee are one and the same person, as is confirmed by the fact that they can, in both texts (Art. 6:110 (3) PECL and Art. 1411 (2) C.C.), deprive the third party of the right to performance. The terminology adopted by PECL is preferable for its symmetry. Two other differences stand out, whose momentum can hardly be guessed given the impossibility, at least for the time being, of comparing case law applying each of the two texts. First, the requirement that the stipulator have an interest remains alien to the PECL provision, whereas it is vigorously insisted upon in doctrinal commentaries and judicial applications of the Italian equivalent (for discussion and criticism, see Moscati (2003), pp. 362–363 and footnotes thereto). Secondly, according to Art. 1411.2 C.C. the irrevocability of the third party’s right appears to be triggered by his or her acceptance of the same as communicated to the promisor, whereas Art. 6:110 PECL seems to conceive irrevocability in broader terms.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 6:111: Change of circumstances (1) A party is bound to fulfill its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or ending it, provided that: (a) the change of circumstances occurred after the time of conclusion of the contract, (b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and (c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear. (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) end the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and the gains resulting from the change of circumstances. In either case, the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing. 1. General. The provision in Art. 6:111 corresponds to the general principle, recognized in most EU legal systems, of the reaction of contract law to the unjust results (i.e., modification of the original balance of performances in a contract) of supervening events the parties did not foresee nor reasonably could have foreseen. A compromise between the ancient ‘‘pacta sunt servanda’’ rule (which embodies the idea of the binding force of the contract) and the (more recent and apparently opposite) ‘‘clausula rebus sic stantibus’’ principle has been found in this case by a complex remedy entitling both parties to enter into negotiations for the purpose of adapting or ending the contract. The above rule as well as the corresponding domestic provisions on this matter have their roots in the studies of some great 19th Century German scholars, such as Bernard Windscheid (with his extensive investigation of the Voraussetzung, i.e., the parties’ implied intention which becomes a condition of the contract from a subjective point of view) being of undisputed prominence; on the other side, an evolution, specifically in the German cultural area, of the ‘‘rebus sic stantibus’’ doctrine, determined a trend toward a more objective consideration of the intention of the parties, also as a consequence of a famous book published at the beginning of the 20th century in which Paul Oertmann introduced the concept of Gescha¨ftsgrundlage (foundation of the transaction). 310 – F. MACARIO

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2. Onerousness of the performance. The general assumption is that the onerousness of the performance as such does not entitle the party to refuse to fulfill his/her obligations. Excessive onerousness may be directly linked to the increase in performance costs (as in the worldwide well known example concerning the ‘‘Suez cases’’) or may result in the loss of value as far as the expected counterper-formance is concerned (e.g., as an effect of inflation). The change in circumstances must have occurred after the conclusion of the contract. 3. Contractual risk. The supervening onerousness does not affect the agreement if it does not exceed the usual risk involved in the contract (i.e., the risk of the change does not have to be one which, according to the contract, the party affected should be required to bear, as is the case with respect to stock exchange transactions: futures, swaps, etc.). The possibility of a change in circumstances must not be one which could reasonably have been taken into account at the time of the conclusion of the contract (the standard is that of a reasonable man). 4. Judicial adaptation. The remedy is basically intended to keep the contractual relationship alive; therefore, the parties have a duty to renegotiate the terms and conditions of the contract if one of them decides to enter into such negotiations, and they both must do so in good faith. The new solution introduced by the PECL according to the widespread modern idea of contractual justice concerns the powers of the court to intervene if the parties fail to reach an agreement within a reasonable period. The court may in fact either end the contract at a date and on terms it determines or adapt the contract in order to distribute the losses and the gains resulting from the change in circumstances between the parties in a just and reasonable manner. It is clear enough that the courts do not make the contract in place of the parties; however, the courts have very wide powers to find the best solution in the interests of both parties (e.g., a mediator may also be appointed to help the parties find an equitable modification of the agreement). Finally, it must be said that the violation of the duty to negotiate in good faith gives the court the power to award damages for the loss suffered on account of a party’s refusal to negotiate or a party’s breaking off negotiations contrary to good faith and fair dealing (as to the important role of the good faith in the PECL, Hesselink (2004)).

ITALIAN LAW Art. 1467 C.C.: Contract for mutual counterperformances In contracts for continuous or periodic performance or for deferred performance, if extraordinary and unforeseeable events make the performance of one of the parties excessively onerous, the party who owes such performance can demand dissolution of the contract, with the effects set forth in article 1458. F. MACARIO – 311

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Dissolution cannot be demanded if the supervening onerousness is part of the normal risk of the contract. A party against whom dissolution is demanded can avoid it by offering to modify equitably the conditions of the contract. Art. 1468 C.C.: Contracts with obligations of one party only In the case contemplated in the preceding article, if the contract is one in which only one of the parties has assumed obligations, he can demand a reduction in his performance or a modification of the manner of performance, sufficient to restore it to an equitable basis. Art. 1469 C.C.: Aleatory contracts The provisions of the preceding articles do not apply to contracts which are aleatory by their nature or by the intention of the parties. Art. 1664 C.C.: Supervening hardship or difficulty in performance If, as a result of unforeseeable circumstances, there have occurred such increases or reductions in the cost of the materials or of labor as to cause an increase or reduction by more than one-tenth of the total price agreed upon, the independent contractor or the customer can request that the price be revised. The revision can only be granted for that part of the difference which exceeds onetenth. If in the course of the work difficulties are revealed deriving from geological conditions, water, or other similar causes not foreseen by the parties, which made the performance of the contractor considerably more onerous, he is entitled to just compensation therefore. 1. General. A general principle to correct the unjust result of supervening events is not provided in the Italian Codice civile by the general rules of contract law. The influence of the 19th Century German scholars, specifically Bernard Windscheid with the doctrine of the Voraussetzung, has already been mentioned. This doctrine was imported into Italy by translating ad litteram the original German word into the Italian presupposizione. Together with such developments in the theoretical analysis of the individual’s intention, which found in the presupposizione doctrine a fundamental point of reference, the devastating effects of both world wars on the economics of contracts induced, as a matter of fact, the Italian legislator to codify definitely this doctrine. The result was obtained by inserting in the Codice civile a new (with respect to both the Civil and Commercial Codes of 1865 and 1882, respectively, which had in meantime been unified), specific Section dedicated to risoluzione per eccessiva onerosita`. Unknown in the previous Codice civile (1865), such rules consider a change in circumstances to be a reason for lawfully dissolving or terminating (risoluzione) the contract, provided that strict requirements are met (see hereinafter). 312 – F. MACARIO

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2. Conditions to be met. A) Contracts for continuous or periodic performance or for deferred performance – Long term contracts (e.g., supply or construction contracts, hereinafter LTCs) are subject to the above mentioned general rules, although the risk of extraordinary, unforeseeable events which might have an impact on the contractual balance is much higher than in instant (or spot) transactions (sometimes Italian law provides special rules, as it is the case of Art. 1664 C.C. which applies to building contracts). Italian case law has discussed (and admitted) a remedy where the parties, in the case of the sale of the real estate have deferred the main performance (the consignment and/or the formal conveyance deed), even partially, without having deciding anything about the risk of supervening events. Italian courts have often applied Art. 1467 C.C. to sales of apartments before they have been built, in which the balance between the agreed price and the building costs actually sustained by the builder/seller have been materially affected (e.g., by inflation: Cass. 15 December 1984, no. 6574). The obligation which the party assumes that has become excessively onerous must be not yet performed (Cass. 9 January 1980, no. 166; Cass. 13 December 1980, no. 6470); consequently, if the buyer has already received full payment of the agreed price, the remedy to the inflation increased after payment may not be invoked (Cass. 13 May 1982, no. 3005). Furthermore, relief may not be obtained if the requesting party is in breach of contract, i.e., the supervening event could have been avoided if performance had been rendered at the time agreed upon (Cass. 13 December 1980, no. 6464; Cass. 15 December 1984, no. 6582). The relevant change in circumstances must occur after the conclusion of the contract; otherwise, in the case of events that did not ‘‘supervene’’ but already existed, unknown to the parties, at the date of the agreement, other rules will apply (e.g., those on mistake, according to the requirements set out in the Codice civile). B) Excessive onerousness of the performance – Art. 1467 C.C. is a very general rule and cannot therefore better specify when the performance may be deemed ‘‘excessively onerous’’ (unlike the (more specific) similar rule set out in Art. 1464 C.C. regarding supervening hardship or difficulty in performing building contracts). Needless to say, however, the imbalance must be remarkable with regard to the kind of agreement (Cass. 13 July 1984, no. 4114; Cass. 14 December 1982, no. 6867). The Court may evaluate the alteration of the balance between performances which may be due to the increase in the cost of the performance as well as to the decrease in the value of the agreed counter-performance (Cass. 16 March 1981, no. 1465). Dealing with the concept of excessive onerousness, it should be said that Italian law recognizes the legal doctrine of laesio enormis. The relief given to the obligee is the right to ask for a rescission of the disproportionate agreement (rescissione, Arts 1447–1452 C.C.), but laesio enormis is relevant only if the contractual obligations were disproportionate right from the outset. C) Supervening onerousness exceeding the normal risk of the contract. Exclusion of aleatory contracts by their nature or by the intention of the parties. – Dissolution cannot be demanded if the supervening onerousness is part of the ‘‘normal’’ risk of the contract. F. MACARIO – 313

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The above rule can be explained with the fact that each party assumes a risk and this assumption of risk should be considered implicit within the limits that the law puts with respect to any remedy aimed at modifying or setting aside a contract following a distortion of the contractual balance due to supervening events (see Nicolo` (1958); later, Bessone (1970), p. 343 et seq., who underlines the role of the general clause of good faith in this context; more recently, developing this latter perspective, Roppo (2001), p. 1037). Any application of the said rule and/or the doctrine of the normal risk of the contract is linked to the further requirement given by the extraordinary and unforeseeable character of the events producing the onerousness. Art. 1469 refers to aleatory contracts and states that the provision of the preceding articles do not apply to contracts which are aleatory by their nature or by the intention of the parties (such as in the case of insurance contracts as well as speculative transactions such as swaps, options, futures and other similar contracts concluded on the stock market). D) Extraordinary and unforeseeable events – The test of the ‘‘extraordinary and unforeseeable’’ character of the event may be conducted only on a case by case basis: regular inflation does not generally represent the disrupting event or the circumstance provided for by the mentioned rule; however, the rate of inflation (rather than inflation itself ) could be extraordinary and unforeseeable (Cass. 8 June 1982, no. 3464; Cass. 16 November 1984, no. 5827; Cass. 5 February 1982, no. 670). The limits fixed by the legislator determine a rather strict application of the said rule by Italian courts: a workers’ strike could not be considered either extraordinary or unforeseeable, taking into account that the supplier bears the risk of the organization of the enterprise (i.e., the strike could not exceed the usual contractual risk). As a matter of fact, many supply contracts, particularly LTCs, have hardship clauses which usually provide for usual contractual risks; however, pursuant to Italian case law, even a complex indexation clause agreed upon in an LTC could not exclude the application of the rules at issue (and therefore the dissolution of the contract) if the supervening events were so exceptional and unforeseeable that they frustrated the agreed clause (Cass. 29 June 1981, no. 4249; Cass. 28 November 1958, no. 1373). E) Equitable modification of the conditions of the contract – Art. 1467(3) C.C. provides that only the party against whom dissolution has been demanded can decide whether or not to ask for the equitable modification of the contract, by offering to modify equitably the conditions in order to avoid dissolution of the contract (Cass. 29 October 1958, no. 3470; Cass. 30 April 1953, no. 1199). As already seen, a different rule is provided in Art. 1664 C.C. (supervening events during performance of a building contract) which seems to reflect more closely the rationale of the rule established in the PECL. The requesting party may exactly indicate the equitable modification which will be subject to the court’s evaluation with regard to the situation existing at the time of the decision (Cass. 13 January 1984, no. 275). However, pursuant to Italian case law, the party may also ask the court to determine the equitable modification if the court considers the indication given by the same party not to be equitable. As far as the content of the adaptation is concerned, the equitable modification shall take into account the normal risk of the 314 – F. MACARIO

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contract and the court should therefore not exclude the consequence of the risk of the change in circumstances that the parties could reasonably have considered at the time of the conclusion of the contract. Although Art. 1467(3) C.C. does not expressly provide an obligation to renegotiate with a view to adapting/modifying equitably the affected contractual terms, it could be argued that, once the interest to avoid dissolution has been declared, each party is entitled to propose to the other party to enter into negotiations. In this case, if a party refuses to negotiate or if a party breaks off negotiations contrary to good faith and to the rules of fair dealing, the court could, in addition to modifying equitably the contractual terms, award damages for the loss suffered. This conclusion could be grounded on the general duty to perform in good faith (Arts 1175 and 1375 C.C.) (see Macario (1996), p. 290 et seq.).

COMPARISON AND EVALUATION 1. Similarities. The requirements to be met in order to ask for the remedy to hardship, clearly indicated by Art. 6:111 PECL, basically correspond to the interpretation of the general rules of the Codice civile by courts and scholars. 2. Divergences. The most significant divergence lies in the revision of contractual terms and conditions, considered in the PECL as a prior remedy in the case of hardship. This means that the party suffering hardship should not be entitled to refuse to render performance (which has become excessively onerous) and demand the dissolution of the contract since his/her prominent right (and the other party’s duty) is to enter into (re)negotiations aiming at the adaptation or dissolution of the contract. Both solutions should preferably be reached by means of an agreement. The power of the courts to adapt the contract upon the demand of each party, if their negotiations do not succeed within a reasonable period, is also a provision which does not have a corresponding rule in Italian law in the case of hardship. In the Italian system the traditional idea that the courts do not make contracts (they can modify terms and conditions within strict limits but can never redraft the contract) could prevent courts from intervening with the imposition of (new or simply modified/adapted) contractual terms. 3. Concluding remarks. A general principle which states the preference of the Italian law for keeping the contract in force by means of the modification of its terms and conditions could probably be recognized and it could be said that such a principle prevails over those rules which lead to the complete dissolution of the agreement. In this context, some rules in the area of impossibility (e.g., partial impossibility, Art. 1464 C.C.) and mistake (e.g., maintenance of the rectified contract, Art. 1432 C.C.) seem to confirm this underlying principle in the Codice civile, as far as the general part of the rules on contracts is concerned. Furthermore, if we consider the rules set forth (within or outside the Codice civile, e.g., in statutes) with respect to specific contracts, this approach taken by Italian law appears even clearer and hardly disputable. A meaningful example of the Italian legislator’s approach mentioned above is given by Art. 1664 C.C. mentioned above, which is applicable to F. MACARIO – 315

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cases of hardship during the performance of building contracts (allowing both parties to ask for a revision of the agreed price of the work if, due to unforeseeable circumstances, the costs of raw materials or labour increases or decreases by more than 10% of the agreed cost). Even if Italian law does not provide primarily for the adaptation of the contract, the legal means for pursuing the equitable adjustment of the contract, in order to have the contract performed (after its modification) instead of dissolved, play a significant role in different situations, either through the various adaptation (and/or renegotiations) clauses used in the commercial practice or through the legislative rules aiming at the same purpose. This perspective has recently been developed by some scholars with reference in particular to LTCs. If the parties agree upon an LTC but fail to include an express provision for the impact of inflation and such a contractual term cannot be implied, i.e., inferred by way of interpretation of the contract on the basis of the hypothetical intention of the parties (Cass. 16 March 1984), one could say that, in principle, under Italian law, the creditor of a monetary claim bears the risk of ‘normal’ depreciation (unless otherwise provided in the contractual terms, as already said), and a further obstacle to obtaining relief could be the so-called ‘‘nominal value’’ principle, pursuant to which the value of a monetary obligation is to be determined on the basis of its nominal, instead of its real, value. It should be considered, however, that, according to Art. 1366 C.C. (interpretation of contractual clauses in good faith), one could maintain that the long time from the beginning of the contractual relationship implies the right to an adjustment/increase in the price even if the parties would never have thought of it at the time of the formation of their consent. With a similar way of reasoning, either Art. 1374 C.C. (integration of the contractual effects) providing for additional contractual terms, beyond the parties’ express declarations, by means of ‘‘mandatory rules, usage and equity‘‘, or Art. 1375 C.C. ( performance in good faith), could in principle lead to a duty to renegotiate in good faith the agreed price, which has become after many years inadequate (see Macario (1996), p. 290 et seq.; Id. (2002), p. 63 et seq.). Recent comparative legal studies have underlined the European trend to harmonize different countries’ solutions to hardship in the direction of maintaining the contract (so called favor contractus) through the adaptation of the relevant clauses, also in the light of the results of the economic analysis of law applied to this specific matter (see Gallo (1992), p. 409 et seq.; more recently Traisci (2003), p. 327).

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Chapter 7 PERFORMANCE PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:101: Place of Performance (1) If the place of performance of a contractual obligation is not fixed by or determinable from the contract it shall be: (a) in the case of an obligation to pay money, the creditor’s place of business at the time of the conclusion of the contract; (b) in the case of an obligation other than to pay money, the debtor’s place of business at the time of conclusion of the contract. (2) If a party has more than one place of business, the place of business for the purpose of the preceding paragraph is that which has the closest relationship to the contract, having regard to the circumstances known to or contemplated by the parties at the time of conclusion of the contract. (3) If a party does not have a place of business its habitual residence is to be treated as its place of business. 1. General. Place is a very significant aspect of the performance of an obligation (LandoBeale (2000), pp. 329–32). Performance at a wrong place will normally be considered a non-performance. Likewise, a creditor who is unable to receive performance because he/she expected to receive it at the wrong place will be liable for non-performance or bear the risk of the other party’s non-performance. The place of performance will normally be determinable from the contract. Usages (Art. 1:105 PECL), such as for instance the banking practice, will sometimes suggest a certain place of performance. However, where that is not the case, the place of performance of an obligation to pay money will be the creditor’s place of business, in accordance with the principle that the debtor must seek the creditor. All other obligations will be performed at the debtor’s place of business, in accordance with the principle that no unduly burdensome obligation must be placed on the debtor. The place of business is a party’s permanent place for the transaction of regular business rather than a temporary place of sojourn during negotiations. Where more than one place of business exists, the obligation will be performed at the place which has the closest connection with the contract having regard to the circumstances as contemplated by the parties at the time of the conclusion. In the absence of a place of business, performance will be rendered at the party’s habitual residence, factually understood as the place where the party actually lives (Council of Europe, Resolution 72(1) (18 January 1972)). A. PRETTO – 317

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The time for determining the place of performance is the conclusion of the contract. A party may change this unless unreasonable inconvenience is thereby caused to the other party, but good faith (Art. 1:201) will require sufficient notice. Additional risks and expenses brought about by the change will be borne by the party effecting the change.

ITALIAN LAW Art. 1182 C.C.: Place of Performance If the place in which the performance is to be carried out is not specified by the agreement or by usage and cannot be inferred from the nature of the performance or from other circumstances, the following rules apply. The obligation to deliver a certain specified thing shall be performed in the place where the thing was situated when the obligation arose. The obligation having as its subject matter a sum of money shall be performed at the domicile of the creditor at the time the obligation matures. If such domicile is different from that of the creditor at the time the obligation arose and this makes the performance more burdensome, the debtor, having previously so notified the creditor, has the right to make payment at his own domicile. In all other cases the obligation shall be performed at the domicile of the debtor at the time the obligation matures. 1. General. ‘Place’ is an important component of the performance (adempimento) of an obligation. The article provides for a default rule for the case where neither the parties’ agreement nor usage specify a place for the performance. The usage referred to in Art. 1182 (1) C.C. is the normative usage, which can be counted in the Italian hierarchy of the sources of law. However, agreement as to the place of performance may also be inferred from constant individual usage, namely, the habits of the parties (F. Gazzoni, Manuale di diritto privato (9th edn, ESI, Napoli, 2001) p. 572). 2. Delivery of a specific thing. A distinction is made between obligations to deliver a certain thing and pecuniary obligations. Art. 1182 (2) C.C. prescribing the place of delivery of a certain thing has special applications in Art. 1510 C.C. on sales, according to which delivery of the movable takes place where the thing was found at the time of the sale, if such place was known to the parties, otherwise at the domicile of the seller or where his enterprise had its headquarters. 3. Pecuniary obligations. Art. 1182 (3) C.C. applies to obligations to pay a sum of money the amount of which is either exactly determined or can easily be evaluated or mathematically calculated (Cass. Sez. III, sent. 26 July 2001, no. 10226, in Giust. civ. Mass., 2001, 1474). Only such pecuniary obligations are performed at the domicile of the creditor. Hence they are sometimes called portables, since the debtor is in a way expected to ‘take them’ to the creditor’s place. 318 – A. PRETTO

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The proposition in Art. 1182 (3) C.C. also applies to the assignment of debts, provided the assigned debtor is aware that the place of payment has been moved and the burden upon him/her is not thereby increased (Cass. Sez. III, ord. 22 November 2001, no. 14852, in Giust. civ. Mass., 2001, 1999). The criterion of the creditor’s domicile also applies to the obligations of restitution of unjust enrichment, provided the debt is liquido and esigibile (i.e., the amount has been ascertained and it is due). This includes debts the amount of which is easily determinable from the agreement or by a judge (Cass. 15 December 2000, no. 15849, in Foro padano, 2001, I, 65). 4. Other cases. By ‘all other cases’ Art. 1182 (4) refers, on the one hand, to cases where the obligation was not a pecuniary obligation from the outset, such as in the case where the realization of compensation for a tort or of damages for breach of contract is involved, and, on the other hand, to obligations to do or not to do something, which are distinguished from obligations to pay money. In all these cases the obligation is not portable but que´rable. It will therefore be performed at the domicile of the debtor when it becomes due (F.Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) p. 573).

COMPARISON AND EVALUATION With respect to pecuniary obligations, the Italian text refers to the creditor’s or debtor’s domicile, understood as the place in which these persons have the majority of their business interests (Art. 43 (1) C.C.). This differs from the PECL which refer to place of business and, in the absence of a place of business, residence. The difference between the two versions should not, however, be excessively emphasized since both may in the end be read to favour a ‘factual’ rather than a legalistic approach which looks at the party’s place of business. In the case of obligations to deliver things, according to the PECL, the place of performance is the debtor’s residence or place of business, whereas Art. 1182 (3) prescribes the situs (i.e. location) of specified goods. In the case of money obligations the place of payment according to the Italian Codice civile is the creditor’s place of business at the time of payment rather than at the time of the conclusion of the contract as in the PECL text. However, protection of the debtor is ensured in the event that the place of payment is different from that of conclusion of the contract.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:102: Time of Performance A party has to effect its performance: (1) if a time is fixed by or determinable from the contract, at that time; (2) if a period of time is fixed by or determinable from the contract, at any time within that period unless the circumstances of the case indicate that the other party is to choose the time; (3) in any other case, within a reasonable time after the conclusion of the contract. 1. General. Timely performance of an obligation is of the essence (Lando-Beale (2000), pp. 332–33). Early or late performance may be taken to constitute non-performance, with the remedial consequences announced in Art. 8:101 PECL. Where performances are to be rendered simultaneously, performance of one obligation may be withheld as long as the other has not been fully performed (Art. 9:102 PECL). The time of performance will either be fixed by or determinable from the contract or will be at any point within a time span fixed by or determinable from the contract. Unless otherwise indicated, it is up to the performing party to choose the time. Where no time has been fixed by or is determinable from the contract, performance must be made within a reasonable time after the conclusion of the contract. Reasonableness is measured objectively, according to what a person acting in good faith and in the same circumstances as the parties would consider reasonable (Art. 1:302 PECL).

ITALIAN LAW Art. 1183 C.C.: Time of performance If the time for performance is not specified, the creditor can demand it immediately. However, when by usage or the nature, manner or place of performance, a time is necessary, it is fixed by the judge, in the absence of agreement between the parties. If the time of performance is left to the discretion of the debtor, it is also for the court to establish it according to the circumstances; if it is left to the discretion of the creditor, it can be fixed by the judge at the request of the debtor who wishes to free himself of the obligation. 1. General. Time, like place, is a central element of adempimento ( performance). Failure on the part of the debtor to perform within the time allocated creates the situation known in Italian law as mora del debitore (debtor’s delay in paying). The corresponding situation 320 – A. PRETTO

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from the creditor’s perspective is known as mora del creditore (creditor’s delay in performing his/her side of the obligation). The Italian provision is, not unlike the corresponding provision concerning place, a default rule as it applies when a time for the performance has not been specified. Scholars distinguish between the time fixed by the parties for performance (termine di adempimento) and the time during which the contract exists between the parties (termine di efficacia) (F.Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) p. 573). 2. Demand of performance by creditor. The rule that the creditor may demand immediate performance encounters some limits. One is that the creditor must exercise his/her power in good faith (buona fede). Other limits may be imposed by the courts. The Italian Codice civile contains special applications of the general rule of Art. 1183 (1) C.C. to specific types of contract. Thus, Art. 1810 C.C. provides that in the event of a loan of a certain thing for an unlimited time (comodato precario), when a term cannot be inferred from the usage envisaged for the thing, the borrower (comodatario) is expected to return it as soon as the lender (comodante) asks to have it back. However, the possibility for the creditor to demand performance does not exclude the application of Art. 1183(2) C.C. Hence, failing the parties’ agreement, the judge may fix a time for the restitution of the thing. This is especially advisable in the case where the thing lent is an immovable, with the consequence that the borrower who inhabits it is likely to need extra time to vacate the immovable and find alternative accommodation (Cass. Sez. III, sent. 17 October 2001, no. 12655, in Arch. Locazioni, 2002, 295). 3. Fixing of a time by the court. Uncertainty as to the time of performance is often dissipated by the court. A codified application of the court’s intervention in the case of the repayment of a loan of money or fungibles (mutuo) is found in Art 1817 (1) C.C. When the term for performance is sine die, as in the case where the payment of a price depends on the contribution of a third party, the judge will ascertain whether, in view of the nature of the performance and the position of the parties, a time needs to be fixed. However, uncertainty as to the time of performance will not make the contract invalid, since time is not normally one of the essential elements of a contract pursuant to Art. 1325 C.C. (Cass. II, sent. 21 May 2001, no. 6909, in Giust. civ. Mass., 2001, 1019). However, the debtor will be deemed to have failed to perform (inadempiente) regardless of the time fixed by the court or even prior to expiry of the term, when his/her delay is incompatible with the nature of the performance. This is the case where the delay reveals a lack of intention to perform or where the debtor has unequivocally shown that he/she does not intend to perform (F.Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) p. 573).

COMPARISON AND EVALUATION The concise drafting of the PECL is preferable to the lengthy Italian formulation. In particular, it is to be commended for not indulging in the identification of the debtor and creditor each time. A. PRETTO – 321

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The first PECL rule, relating to the inference of a time for performance from the contract, is not expressed in the Italian provision. However, it is implicit in the fact that Art. 1183 C.C. is a default provision applicable in the situation where no agreement as to time of performance can be reached. The second rule, concerning the circumstances of the case indicating that the other party is to choose the time for performance, is often mirrored in Italian judicial practice. Circumstances will indeed often guide the judge in fixing a time for performance according to Art. 1183 C.C. The third rule remotely echoes the possibility the creditor has to demand immediate performance (Art. 1183.1 C.C.). However, it should not be thought that the reasonableness suggested by the PECL is alien to Italian practice since usage, the nature of contract and the circumstances of the case will often mitigate the immediacy of the creditor’s request. The Italian insistence on the court’s fixing a time may be read as an aspect thereof.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:103: Early Performance (1) A party may decline a tender of performance made before it is due except where acceptance of the tender would not unreasonably prejudice its interests. (2) A party’s acceptance of early performance does not affect the time fixed for the performance of its own obligation. 1. General. Early performance may not be desirable for the creditor who is entitled to decline it where inconvenient (Lando-Beale (2000), pp. 334–35). Where, however, early performance is not prejudicial to the creditor, he/she will not be able to reject it where rejection would be contrary to good faith. Rejection of early performance of a monetary obligation is unlikely to be justified, except in the case in which early payment would affect the interest due. The party who accepts early performance will not be affected in his/her right to perform at the time originally fixed for the performance of his/her own obligation.

ITALIAN LAW Art. 1184 C.C.: Time limit If a time limit is established for performance, it is presumed to be in favor of the debtor unless it appears to have been established in favor of the creditor or of both. Art. 1185 C.C.: Pendency of time limit The creditor cannot demand performance before the expiration of the time limit, unless such time limit be set exclusively for his benefit. However, the debtor cannot seek reimbursement for payments which he has made in advance, even if he was not aware of the existence of the time limit. But in this case the debtor can seek reimbursement, within the limits of the loss incurred, of the amount by which the creditor has been enriched by reason of such anticipated payment. Art. 1186 C.C.: Loss of benefit of time limit Even if the time limit is established in favor of the debtor, the creditor can immediately demand performance if the debtor has become insolvent or has, by his own act, reduced the security which he had furnished or has failed to furnish the security which he had promised. A. PRETTO – 323

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1. Favor debitoris. Statements of this principle are frequent in Italian case law. Hence a claim for performance in the case in which a time for performance has been fixed but has not yet arrived at the time the judicial decision is rendered, may be rejected on the principle that the deadline for payment is fixed in favour of the debtor and the debt cannot therefore be collected before it becomes due (Cass. Sez. II, sent. 16 November 2001, no. 14429, in Giust. civ. Mass., 2001, 1945). 2. Early performance. If the time is fixed in favour of the creditor he/she may demand performance before it becomes due, provided that the principle of correttezza (fairness) in demanding the performance is observed. A debtor’s early performance will not prejudice the time allocated to the creditor for his/her performance. If the time limit was envisaged to favour both parties, they will have to await its expiry unless they agree to waive the deadline, (F.Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) pp. 573–574).

COMPARISON AND EVALUATION The content of the first PECL rule can be inferred from the favor debitoris rule. Hence a creditor may refuse early performance, except in the case where a time was fixed in the sole interests of the debtor. The second rule of the PECL has no codified equivalent, but the courts have affirmed that a debtor’s early performance will not prejudice the time allocated to the creditor for his/her performance. Emphasis in the PECL appears to be on the acceptance of performance, a concern being expressed about its unjustified rejection. By contrast, emphasis in the Italian Civil Code appears to be on the demand for performance, a concern being expressed about the debtor’s freedom to take advantage of the entire period of time at his/her disposal. The bulk of Art. 1184 C.C., concerning favour towards the debtor, is not included in the PECL which adopt a much more balanced approach towards the parties’ interests.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:104: Order of Performance To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise. 1. General. Where simultaneous performance is practicable, performances should be rendered simultaneously (Lando-Beale (2000), pp. 335–37). Where simultaneous performance is impracticable, such as in the case of the payment of a sum for work carried out over a period of time, payment will either be made in advance or upon completion of some or all of the work. Sometimes simultaneous performance is possible but unusual. An example is payment of the bill after consumption of the meal at some restaurants. The Art. does not answer the question as to who should perform first in the event that simultaneous performance is impracticable. The matter will often be settled by usages or previous practices between the parties (Art. 1:105 PECL). If there are none, implied terms such as the intention of the parties, the nature and purpose of the contract, good faith and fair dealing will assist.

ITALIAN LAW Art. 1460 C.C.: Defence based upon non-performance In contracts providing for mutual counter-performance, each party can refuse to perform his obligation if the other party does not perform or offer to perform his own at the same time, unless different times for performance have been established by the parties or appear from the nature of the contract. However, performance cannot be rejected if, considering the circumstances, such rejection is contrary to good faith. 1. General. In contracts other than unilateral contracts, the mutual obligations of the parties balance one another. The one is a function of the other. Their mutuality, known in Italian law as sinallagma (from the Greek for ‘bond’ or ‘tie’ and the prefix indicating ‘together’), is compromised if one party fails to perform. In that case the other party, provided that he or she has not yet performed, may raise the defence under examination (more exactly, eccezione) and refuse to perform. In Roman law this was called the exceptio non adimpleti contractus. If, by contrast, the other party has already performed, another route is followed which typically leads to termination of the contract (risoluzione del contratto) (F.Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) pp. 991–992). Art. 1460 C.C. codifies the Latin maxim ‘inadimplenti non est adimplendum’ (no performance is due to him who fails to perform). That the performances are supposed to be A. PRETTO – 325

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simultaneous is merely a rebuttable presumption. Art. 1460.1 C.C. indicates that either the parties’ agreement to a different effect or the nature of the contract may rebut this presumption. From a procedural perspective, this is a defence (eccezione). If the defendant raises it, the claimant will have the burden of proving that he/she has indeed performed. This happens both where the claimant is suing for performance of the contract by the defendant, who is resisting, and where the claimant is demanding that the contract be terminated (risoluzione) (P. Rescigno (ed.) Codice Civile (4th ed., Giuffre`, Milano, 2001) p. 1526). 2. Sales. Countless applications of this provision are found in litigation arising in connection with sales. Thus, the presence of defects in the thing which is the object of the sale entitles the buyer to suspend payment (Cass., Sez. II, sent. 8 March 2001, no. 3425, in Giust. civ. Mass., 2001, 449). In the case of the sale of an immovable, the administrative certification to the effect that the immovable could be inhabited has been held to be a fundamental feature of the building in that it directly affected its enjoyment and alienability. Therefore, the seller’s failure to supply the buyer with the certificate of habitability of the immovable was held to constitute a delivery of ‘aliud pro alio’ and, as such, a failure on the part of the seller to perform his side of the contract. The buyer was therefore entitled to the defence based on Art. 1460 C.C. Alternatively, it was held that the buyer could claim damages for the reduced alienability of the building, unless he had expressly declined to inhabit the immovable or exempted the seller from the obligation to obtain the said certificate (Cass. Sez. II, sent. 25 February 2002, no. 2729, in Giust. civ. Mass., 2002, 301). 3. Fault is unilateral. The rule in Art. 1460 C.C. establishes a defence (eccezione). The underlying assumption is that fault for failing to perform lies with one party only. In contracts involving mutual counterperformances ( prestazioni corrispettive) the court is not permitted to hold both parties’ refusal to perform legitimate. As a matter of law, fault for non-performance lies exclusively with the contracting party whose behaviour has been predominantly at fault, thereby altering the relationship of reciprocity between the contractual performances and justifying non-performance by the other party (Cass. Sez. II, sent. 3 January 2002, no. 27, in Giur. it., 2002, 920). 4. Chronology and proportion. The courts have stressed that the emphasis on the simultaneity of the performances is not compelling if their proportionality is not ensured at the same time. This remark is potentially applicable to the PECL text. Thus, where the tenant of a building used to exhibit wares for sale refused to pay the rent on the ground that the landlord had failed to take good care of the heating system, thus causing a leakage which impeded the use of the building, the court held that refusal to be legitimate. The principle is that in cases of contracts involving mutual counterperformances, when one of the parties attempts to justify its failure to perform on the ground of the other party’s failure to perform, the court must make a comparative evaluation of their 326 – A. PRETTO

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respective behaviour, having regard not only to the chronological aspect but especially to the relationship of causality and proportionality between the obligations that were not performed and how non-performance affects the contract’s socio-economic function (Cass. Sez. III, sent. 18 April 2001, no. 5682, in Giust. civ. Mass., 2001, 814). 5. Good faith. The right to refuse performance is governed by good faith (Art. 1460 (2) C.C.). Good faith is assessed with regard to the proportion between the performance requested and the performance that has not been rendered. Hence refusal is only justified where the other party’s failure to perform is of a serious nature (inadempimento grave, Art. 1455 C.C.) (Cass. sent. 4743/1998, in Giust. civ. Mass., 1998, 998). Mistake or unintentional omission are not sufficient grounds for ‘serious’ non-performance.

COMPARISON AND EVALUATION There is no express equivalent to the PECL’s provision on the order of performance in the Italian Codice civile. However, the exceptio non adimpleti contractus rule contained in Art. 1460 C.C. appears to be in line with Art. 7:104 PECL. On the face of the two texts the perspective is slightly different. While the PECL rule appears to be merely concerned with the simultaneity of the performances, the Italian rule envisages the consequences of failure to respect that simultaneity. Hence its procedural flavour and its bearing on the termination of the contract (risoluzione del contratto).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:105: Alternative Performance (1) Where an obligation may be discharged by one of alternative performances, the choice belongs to the party who is to perform, unless the circumstances indicate otherwise. (2) If the party who is to make the choice fails to do so by the time required by the contract, then: (a) if the delay in choosing is fundamental, the right to choose passes to the other party; (b) if the delay is not fundamental, the other party may give a notice fixing an additional period of reasonable length in which the party to choose must do so. If the latter fails to do so, the right to choose passes to the other party. 1. General. As a rule, the party who is to perform will be able to choose the mode of performance of the obligation amongst alternative ones (Lando-Beale (2000), pp. 337–38). There are a number of exceptions to the rule. First, the contract may provide differently, thus assigning the choice to the other party. Secondly, the choice may be made by the PECL. Thus, special rules are laid down in Art. 7:108 as regards the choice of currency of payment. Art. 7:109 enables the creditor to appropriate the performance of one of a series of obligations of the same nature to such obligation as he/she chooses. Thirdly, usages may determine who is to choose (Art. 1:105 PECL). The choosing party should exercise his/her right within a reasonable time. Failure to do so may cause the right to pass to the other. Sometimes the time for exercising the choice will be fundamental or the other party will have made it fundamental by serving a notice to that effect, in which case the right to choose will pass promptly to the other party.

ITALIAN LAW Art. 1285 C.C.: Alternative obligations The debtor of an alternative obligation is discharged by making one of the two performances contemplated in the obligation, but he cannot require the creditor to take a part of one and a part of the other. Art. 1286 C.C.: Power of election The election is for the debtor, unless it has been attributed to the creditor or to a third person. The election becomes irrevocable on the rendering of one of the two performances, or by a declaration of election communicated to the other party, or to both parties if the election is made by a third person. 328 – A. PRETTO

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If the election is to be made by more than one person, the court can fix a time limit. If the election is not made within such time limit, it is made by the court. Art. 1287 C.C.: Loss of power of election When a debtor, adjudged alternatively bound to two performances, fails to perform either within the time fixed by the court, the election belongs to the creditor. If the power of election belongs to the creditor and he fails to exercise it within the established time or within the time fixed by the debtor, the election passes to the latter. If the election is referred to a third person and he fails to exercise it within the allotted time, it is made by the court. 1. General. The situation envisaged is that in which the contract provides for two or more (Art. 1291 C.C.) possible performances, any one of which will serve to discharge the debtor. Two partial performances do not discharge the obligation (Art. 1285 C.C.). This can be read as an application of the rule to the effect that a creditor may always refuse partial performance (Art. 1181 C.C.). An obligation which may be carried out in a variety of ways is not necessarily alternative. Thus, the obligation to provide support (alimenti) (Art. 443 C.C.), which may be discharged either by periodic payments or in kind, by taking the person entitled to support into one’s house thereby providing for his maintenance, is ‘single’ rather than alternative. Likewise, provision for a default performance in the event that the one agreed upon becomes impossible is also not a case of obbligazione alternativa (F. Gazzoni, Manuale di diritto privato (9th ed., ESI, Napoli, 2001) p. 597), for the latter presupposes the existence of two or more possible performances from the outset, each being unconditionally possible (Cass. sent. 6 December 1995, no. 12576, in Giust. civ. Mass., 1995, fasc. 12). 2. Election and irrevocability. The election between the alternatives is made by any unilateral declaration which has the effect of identifying which performance is due. That process, called concentrazione, is governed by the rules set out in Arts. 1286–1287 C.C. No performance may be rendered prior to the election, which is therefore necessary (Cass. sent. 16 August 2000, no. 10853, in Giust. civ. Mass., 2000, 1802). The choice becomes irrevocable either by the actual rendering of one of the performances or the communication of the debtor’s election to the other party (Cass. sent. 28 March 1988, no. 2616, in Giust. civ., 1988, I, 1689). The time fixed for the choice may be different from the time fixed for the performance. Where only the time of the performance is fixed, it will be deemed to coincide with that of the choice. If the parties fail to agree on a time then the court will fix one, to be understood as the time of the performance and not simply that of the choice. A. PRETTO – 329

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3. Choice and impossibility. The Italian Civil Code provides in significant detail for the event that one of a series alternative performances becomes impossible. A summary of the relevant provisions will suffice, since their content exceeds the scope of the PECL rule under examination. Art. 1288 C.C. deals with the situation where the impossibility is nobody’s fault, whereas Art. 1289 C.C. deals with the situation where the impossibility is the parties’ fault. In the former case, as also in the case where one of the performances could not lawfully be the subject-matter of an obligation from the outset, the obligation is considered to be ‘single’ rather than alternative. In the latter case the rules are rather complicated. First, where the choice is the debtor’s and the impossibility is his/her fault the obligation ceases to be alternative. Secondly, regardless of who was to choose, if the impossibility is the creditor’s fault, the debtor is discharged from the obligation, unless he/she prefers to render, or the creditor demands, the other performance. In these cases the debtor will be compensated. Thirdly, if the choice is the creditor’s and the debtor is responsible for the impossibility, the creditor may choose between the other performance and compensation in the form of damages. Finally, what happens when a third party’s choice falls upon an impossible performance is open to interpretation. Further provision is made in Art. 1290 C.C. with regard to the supervening impossibility of both performances, whether due to hazard (caso fortuito) or to the fault of the parties. The solution is normally in the sense that the party who was entitled to choose will be liable to supply (in the case of the debtor), or entitled to demand (in the case of the creditor), the value of the chosen performance.

COMPARISON AND EVALUATION A terminological remark may be made to the effect that the Italian rule speaks of ‘alternative obligations’ rather than ‘alternative performance’. The reason might be that the Italian text is concerned with obligations in general, rather the performance of obligations arising from contract. The brevity of the PECL text, which stands alone against a corresponding set of as many as six Italian provisions, is to be applauded. Thus, PECL Rule 1 expresses the same idea as Art. 1286 (1) C.C. in fewer words. Reference to ‘the party which is to perform’, rather than ‘the debtor’, shows a commendable effort to reduce the prolixity inherent in countless Italian mentions of ‘the debtor’ and ‘the creditor’. The same result is attained in Rule 2 through the mention of ‘the party which is to make the choice’. No express mention of fundamental delay in the choice is made in the Italian provisions under examination, differently from PECL Rule 2. However, the judicial interpretation of Art. 1287 C.C. is to the same effect, namely that excessive delay in choosing is not tolerated. 330 – A. PRETTO

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The PECL avoid the Italian complication of distinguishing obligations involving two alternative performances (Art. 1285 C.C.) from those involving more than two (Art. 1291 C.C.). Speaking more simply of ‘one of alternative performances’ is another sign of the aspiration to brevity.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:106: Performance by a Third Person (1) Except where the contract requires personal performance the creditor cannot refuse performance by a third person if: (a) the third person acts with the assent of the debtor; or (b) the third person has a legitimate interest in performance and the debtor has failed to perform or it is clear that it will not perform at the time performance is due. (2) Performance by the third person in accordance with paragraph (1) discharges the debtor. 1. General. The rule set forth in Art. 7:106 provides an exception to the general rule according to which the contract requires personal performance. According to Art. 7:106, an obligation may be performed by a person other than the debtor; moreover, under certain circumstances the creditor is not entitled to refuse performance by a third person. Questions concerning assignment or subrogation are not covered by this Article. 2. Assent of the debtor. The creditor may not refuse performance when the third person acts with the assent of the debtor or on his direction (Art. 7:106(1)(a)). It means that when agents or sub-contractors are entrusted to perform the contract, the creditor is bound to accept performance, unless the contract requires personal performance, as provided by Art. 7:106(1). 3. Legitimate interest of the third person. Performance by a third person however may be carried out also without the assent of the debtor, if the third person has a legitimate interest in doing so, and the debtor has failed to perform or it is clear that it will not perform at the time when performance is due. This is the case, for instance, of the wife paying the debt of her husband, even if she is not liable for it. 4. Discharge of the debtor. According to Art. 7:106(2), the debtor is discharged by performance by a third person. However, if the third person does not perform, or its performance is defective (on this point see Art. 8:107), the debtor remains responsible either in the case when he/she had expressed his/her assent to performance by a third party, or when the third person had a legitimate interest in performing. Nevertheless, if the third person failed to perform because of an unexpected and unavoidable impediment, which would also have excused the debtor under Art. 8:108, the third party’s non-performance is excused. Applicable law will decide whether the debtor is responsible for a defective performance by the third person, which has caused a greater loss to the creditor than the expected nonperformance by the debtor. 332 – V.M. DONINI

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5. Refusal. If the creditor refuses performance by a third person carried out under Art. 7:106(1), provisions relevant to the default of the creditor will apply (Arts. 7:110 and 7:111), and he/she will not be entitled to any remedy for non-performance set forth in chapter 9. Under certain circumstances however the creditor is entitled to refuse performance by a third person: for instance when the contract expressly excludes this possibility, or this exclusion can be inferred from the language of the contract. Moreover it may happen that the nature or the purpose of the contract does not allow a performance by a third person; for instance in the case of contracts for the performance of personal services, if the debtor has been selected because of his/her personal skill and competence, unless it is usual in that kind of contract to allow delegation of performance. Obviously, when the third person cannot prove an own legitimate interest, or any assent of the debtor, the creditor is entitled to refuse performance. If however the creditor decides to accept anyway performance by a third person, Art. 7:106 does not specify which consequences it has for the debtor.

ITALIAN LAW Art. 1180 C.C.: Performance by third person (1) The obligation can be performed by a third person, even against the will of the creditor, if the latter has no interest in having the debtor perform the obligation personally. (2) However, the creditor can refuse the performance offered by a third person, if the debtor has notified him of his objection. 1. General. The Italian Codice civile regulates the performance by third person at Art. 1180, stating that an obligation may be performed by a third party even against the will of the creditor. The third party may act either for a own initiative, or on the base of an agreement with the debtor (for instance in the case of an internal assumption of debt, which does not give rise to any right of the creditor, on this point see Cantillo (1992), p. 307). It is important to stress that the performance by a third person is an autonomous performance, since the third party does not perform in name of the debtor, for instance as an agent or representative of the debtor (see Cass. 7 July 1980, no. 4340, in Giust. civ., 1981, I, p. 111). Moreover, anyone can perform somebody’s else obligation, since the Codice civile does not provide any limitation in this sense, as set forth by the old civil code of 1865, according to which the obligation could be performed only by a person having interest such as a co-debtor or a guarantor. It must be added however that also in the actual code the third party has a mere power to perform, not a right. 2. Power of refusal. The general rule according to which an obligation may be performed by a third party, even against the will of the creditor, finds two important exceptions: performance by a third party may be rejected when the creditor has an actual interest V.M. DONINI – 333

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in having the debtor perform the obligation personally, and when the debtor has notified his/her objection to the creditor. These two situations receive however a different degree of protection: in the hypothesis laid down at the first paragraph of Art. 1180, once ascertained the interest of the creditor, he/she is entitled to reject performance, irrespective of any contrary will of the debtor or of the third party. On the contrary, as far as the second paragraph is concerned, the debtor has a mere power to declare his/her opposition and the creditor therefore is not obliged to reject performance by a third party: since this paragraph is a further expression of the favor creditoris principle, according to which the creditor’s interest to receive performance prevails over the debtor’s interest to perform personally (on this point see Cantillo (1992), p. 302), the creditor may decide to accept the performance, irrespective of the debtor’s opposition. Therefore, the only possibility of the debtor to prevent performance by a third person, is to perform personally (Breccia (1991), p. 436). However, if the creditor decides to reject performance by the third person, the provisions relevant to the default of creditor (Arts. 1206 et seq.) will not be applicable. As far as the creditor’s interest to reject performance by a third person is concerned, it must be added that while the code of 1865 limited the possibility to reject performance only to the case of an obligation to do something (Art. 1239), the actual Codice civile has a wider approach, including theoretically every kind of performance, even if the obligation to do something is still the more frequent case. Obviously the creditor’s interest must be evaluated according to objective criteria such as the personal character of performance, or the possibility of a concrete detriment to the creditor (see Bianca (1994), p. 284: the appraisable interest of the creditor is relevant not only when performance has a personal character, but more generally, in every case when the third party does not present the requisite needed to obtain the final result, i.e. performance). According to the prevailing case law, it is required a certain, concrete and actual interest, and personal reasons are not sufficient to justify the refusal of performance (see for instance as leading case App. Roma, 8 March 1952, in Temi romana, 1952, 164, but also more recent decisions such as Cass. 14 May 1983, no. 3323, in Giur. it. Mass., 1983; Cass. 22 April 1982, no. 2651, in Giur. it. Mass., 1982) while legal writers discuss whether the creditor is allowed to reject performance by a third person for moral reasons (according to Di Majo, (1994), p. 68 in the case of an obligation to do something, the creditor could be justified to reject performance offered by a morally despicable person). Finally, it must be added that the evaluation of the creditor’s interest must be carried out by the court, and this assessment cannot be challenged (Cass. 20 October 1976, no. 3661, in Giur. it., Mass. 1976). Effects. Performance by a third person discharges the debtor, but in case of defective performance by the third person, the debtor remains responsible, since only the debtor is obliged towards the creditor. In case of partial performance, the creditor’s acceptance does not extinguish the debt, but it simply reduces it, therefore the creditor that does not obtain full performance may resort 334 – V.M. DONINI

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to the available remedies against the debtor (Cass. 12 December 1988, no. 6728, in Giust. civ., Mass. 1988, p. 1643). If the creditor consents, the debtor may be discharged also by a performance (made by the third party), different from that which is due, according to the provisions relevant to the so called datio in solutum contained in Art. 1197 C.C. (see Cass. 23 March 1973, no. 811, in Giur. it., 1974, I, 1, 1420). The creditor must issue a release (as set forth by Art. 1199) to the third person, and not to the debtor, but the release must contain the express appropriation of performance to the obligation performed by the third person.

COMPARISON AND EVALUATION The rule laid down in Art. 7:106 is not incompatible with the provisions set forth in the Italian Codice civile, at Art. 1180, even if the approach is different. As a matter of fact the Italian code is more focused on the positions of creditor and debtor, rather than on the third person. Nothing is said in Art. 1180 C.C. concerning the legitimate interest of the third person (while a similar provision was set forth in the abrogated civil code of 1865, at Art. 1238), even if case law and legal writing have outlined a power or a faculty of the third person (on this point see Turco (2002), p. 137) to perform. Another difference attains at the role of the debtor: according to the PECL the debtor’s assent obliges the creditor to accept performance by a third person, while in the Codice civile the debtor’s assent is not required: the debtor however is entitled to notify his/her opposition to the performance by a third party, but the creditor may decide to accept performance in spite of the debtor’s opposition.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:107: Form of Payment (1) Payment of money due may be made in any form used in the ordinary course of business. (2) A creditor who, pursuant to the contract or voluntarily, accepts a cheque or other order to pay or a promise to pay is presumed to do so only on condition that it will be honoured. The creditor may not enforce the original obligation to pay unless the order or promise is not honoured. 1. General. Art. 7:107 lays down a general principle of freedom to choose the most appropriate form of payment, considering the fact that payment may be made in many different ways, such as by legal tender, bank transfer, cheque, or otherwise. Therefore debtor can choose without special permission the means of payment, as long as it is easy, quick and reliable. Moreover, since the information technologies are developing new techniques for payment, the PECL do not provide a detailed enumeration of possible manners of payment, in order to be applicable also to the future developments which cannot be forecasted. 2. Means of payment. The freedom to choose the most appropriate means of payment set forth in Art. 7:107 is not shared by national laws which often require that payment must be made by legal tender, and that creditor is not entitled to demand any other method of payment, unless there is a specific contractual provision allowing it. Since the debtor may prefer another manner of payment, and provided this is in conformity with the ordinary course of business, Art. 7:107 PECL admits a wider choice of means of payment. Nevertheless, even if the creditor cannot require or refuse unilaterally any particular manner, he/she must be protected against a surprising, unusual or burdensome method of payment, and the evaluation of what is usual or appropriate depends on both the nature of the transaction involved, and on the usages prevailing at the place of performance for the payment, as established by Art. 7:101. 3. Conditional acceptance. If the creditor, either conforming to the contractual provisions, or voluntarily, in order to accommodate the debtor, accepts instead of cash, a cheque, a bill of exchange, a claim for the payment of money (transferred by way of assignment) or even an instruction to a third party to pay, he/she must not be exposed to the risk that the alternative means of payment will not be honoured. For this reason, the second paragraph of Art. 7:107 states that the original claim subsists until satisfaction of the substituted performance has in fact been achieved. Otherwise the creditor may enforce the underlying claim, but cannot proceed therewith until the substituted performance becomes due and remains unperformed. It must be stressed that the first part of Art. 7:107(2) (which can be expressly or impliedly derogated by the parties), applies only to an assignment as payment and not to an ordinary assignment of debt. 336 – V.M. DONINI

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4. Consequences. In the case that the claim created or assigned as a substitute to the original claim should not be honoured, the creditor is entitled to proceed with the underlying claim for payment as if no substituted performance had been accepted, and due interest is recoverable. However, if the creditor took a promissory note or another negotiable instrument in substitution for the original promise of payment, he/she will probably prefer to ignore this promise and sue on the instrument. On the other side, if the creditor does not take any steps necessary to enforce the claim received by it as a substitute, it cannot revert to the original remedies for non-performance except to enforce the payment due.

ITALIAN LAW Art. 1277 C.C.: Debt of a sum of money (1) Pecuniary debts are paid with money which is legal tender in the State at the time of payment, at its face value. (2) If the sum due was indicated in money which is no longer legal tender at the time of payment, such payment shall be made with legal money equal in value to the former. Art. 1278 C.C.: Debts payable with money which is not legal tender If the sum due is indicated in money which is not legal tender in the State, the debtor has the power to pay in legal money at the rate of exchange of the day when the sum is due and at the place agreed for payment. Art. 1279 C.C.: Clause providing for actual payment in money which is not legal tender The provision of the preceding Article does not apply if money which is not legal tender in the State is indicated by ‘‘actual’’ or other equivalent term, unless it be impossible to procure such money when the debt becomes due. Art. 1281 C.C.: Special laws (1) The preceding rules apply to the extent that they do not violate the principles deriving from special laws. (2) The particular provisions concerning payments to be made outside the territory of the State are excepted. Art. 1197(1) C.C.: Performance different from that which is due A debtor cannot free himself from the obligation by a performance different from that which is due, even if of equal or greater value, unless the creditor consents. In this case, the obligation is extinguished when the different performance is carried out. V.M. DONINI – 337

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1. General. Italian law has specific rules concerning pecuniary obligations in Arts. 1277 C.C. et seq. (see Comment to Art. 7:108 PECL). The general principle set forth by these provisions is that pecuniary debt should be paid by legal tender. However, since acceptance of a means of payment other than legal tender is considered a substitute payment, it is regulated by the first paragraph of Art. 1197, concerning the datio in solutum. According to this provision, if the creditor consents, a debtor is allowed to carry out a performance different from what had been provided by the contract in origin. As a matter of fact, in a pecuniary obligation, performance by a bank cheque (or by bill of exchange, banker’s draft, etc.) instead of cash constitutes a different performance (on this point see Bianca (1994), 431 et seq.). Nevertheless, the original claim subsists until satisfaction of the substituted performance is achieved, therefore if the substituted performance is not possible, the original performance is due.

COMPARISON AND EVALUATION The Italian Codice civile does not share the approach followed by the PECL as far as the freedom of choosing a form of payment is concerned, since Art. 1277(1) C.C. expressly requires that pecuniary debt must be paid by legal tender. For a further comparison of these provisions, and of the relevant provisions of the UNIDROIT Principles, see Comment to Art. 7:108.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:108: Currency of Payment (1) The parties may agree that payment shall be made only in a specified currency. (2) In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due. (3) If, in a case falling within the preceding paragraph, the debtor has not paid at the time when payment is due, the creditor may require payment in the currency of the place where payment is due according to the rate of exchange prevailing there either at the time when payment is due or at the time of actual payment. 1. General. The rule set forth in Art. 7:108 aims at identifying the currencies involved in an international contract, i.e. the currency of account, the agreed currency of payment and the currency of the place where payment is due. It may be interesting to underline that this rule is quite similar to that set forth in Art. 6.1.9. UNIDROIT Principles (but see also Art. 6.1.7. and 6.1.8, and, for the case law, the arbitral award of the International Court of Arbitration, July 1995, no. 8240, in www.unilex.info). Usually, either the parties or the circumstances indicate the currency in which the primary obligation – normally the price – must be paid. The parties may however agree on a different currency, as provided in the first paragraph of Art. 7:108. If the parties do not agree on a currency, and if the pecuniary obligation is expressed in a currency other than that of the place where payment is due, the debtor is entitled to pay in the currency of that place. Moreover, if the debtor has not paid in time, the creditor is entitled to require payment in that currency (i.e. the currency of the place where payment is due). 2. Right of conversion. The choice of currency granted to the debtor is functional for both parties, but it may happen that the creditor wants to avoid this result, i.e. that the debtor has the option of effecting payment in the currency of the due place of payment, rather than in the currency of payment. Consequently, according to paragraph (1), the parties may stipulate that payment must be made only in the currency of account or in the agreed currency of payment. 3. Rate of exchange. The debtor’s right of conversion may not be used in order to reduce the monetary obligation; therefore, according to paragraph (2), the rate of exchange must be that prevailing at the place where payment is due at the expiry date. However, if payment is late and the agreed currency is depreciated after the date of maturity of the monetary obligation, the defaulting debtor (and not the creditor) must bear the risk. The creditor therefore has the right to choose the date for the rate of conversion, and he may choose between the date of maturity and the date of actual payment. V.M. DONINI – 339

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Otherwise, the parties may agree on a fixed rate of conversion, and in this case the parties’ agreement prevails over the provisions of Art. 7:108.

ITALIAN LAW Art. 1277 C.C.: Debt of a sum of money (1) Pecuniary debts are paid with money which is legal tender in the State at the time of payment, at its face value. (2) If the sum due was indicated in money which is no longer legal tender at the time of payment, such payment shall be made with legal money equal in value to the former. Art. 1278 C.C.: Debts payable with money which is not legal tender If the sum due is indicated in money which is not legal tender in the State, the debtor has the power to pay in legal money at the rate of exchange of the day when the sum is due and at the place agreed for payment. Art. 1279 C.C.: Clause providing for actual payment in money which is not legal tender The provision of the preceding Art. does not apply if money which is not legal tender in the State is indicated by ‘‘actual’’ or other equivalent term, unless it be impossible to procure such money when the debt becomes due. Art. 1281 C.C.: Special laws (1) The preceding rules apply to the extent that they do not violate the principles deriving from special laws. (2) The particular provisions concerning payments to be made outside the territory of the State are excepted. 1. General. The Italian Codice civile regulates the currency of payment in Arts. 1277, 1278 and 1279. According to Art. 1277 C.C., an obligation to pay a sum of money must be performed with money which is legal tender in the State at the time of payment, at its face value; however, according to Art. 1278 C.C., the parties may agree that the obligation be performed in foreign money. In this case, the debtor is entitled to pay in legal money at the rate of exchange on the day when the sum is due and at the place agreed for payment. 2. Legal tender. Legal money is considered to be only that which the State law qualifies as such: this money can be granted value and warranty only by State authority. According to a formalistic approach, a pecuniary obligation can be performed only by delivering money in cash; any other means of payment – such as cheque, money order, or bank draft 340 – V.M. DONINI

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– even if accepted in practice, would constitute something different from the determined object of the obligation. Therefore, it could not enable the debtor to extinguish his/her obligation, without the consent of the creditor (see for instance Corte di Cassazione 13 October 1954, no. 3644, in Banca, borsa, 1955, II, 465). On this point, see also the rules governing the so-called datio in solutum: according to Art. 1197(1), a debtor cannot free himself from an obligation by rendering a performance different from that which is due, even if it is of equal or greater value, unless the creditor consents. In this case, the obligation is extinguished when the different performance has been carried out. (See Candian (1996), p. 262). When bank cheques are concerned, legal writers speak of datio pro solvendo and the debtor’s release depends on the creditor’s acceptance (see Cannata (1999), p. 85, and also Cass. 3 July1980, no. 4205, in Giur.It., 1981, I, I, 95). However, taking into consideration social reality, case law has gradually overcome this principle by asserting a sort of implicit consent by the creditor for every action which might arise reliance on the creditor’s availability to accept means of payment other than money. Moreover, the creditor’s refusal to accept a typical means of payment instead of money is considered contrary to the general principle of good faith and fair dealing. (See Bianca (2002), p. 171). 3. Nominal principle. The rule set forth in Art. 1277(1) C.C. asserts the so-called nominal principle, fixing the object of the pecuniary obligation at its nominal value, i.e. at a certain amount of money irrespective of any fluctuations in currency that may occur in the period between the origin and payment of the obligation (see Cass. 26 October 1974, no. 3168, in G.Civ., 1975, I, 799). If money tends to decrease in value, the creditor must bear the risk of fluctuations. Therefore, lacking a general rule allowing the derogation from this principle every time its application could be unjust, special laws, according to Art. 1281 C.C., may prevent the application of the nominal principle. Furthermore, in certain cases the amount of a pecuniary obligation may vary according to the fluctuations of selected indexes, such as the price of some specific goods ( price index), market costs in general (for instance the ISTAT clause, i.e. an indexation clause whose index is – as a whole or in percentage – the one provided by the National Institute of Statistics making reference to the cost of living), or the exchange in general (currency clause, or foreign exchange clause). These clauses, called indexation clauses, constitute a way to adjust the nominal value of a debt to possible changes in a currency’s purchasing power, in order to protect creditors against monetary devaluation. In this way the indexation clause makes it possible to stabilize the real value of a pecuniary performance with regard to an index determined beforehand by the parties. 4. Other currency. When payment is due in a currency which is not legal tender, the debtor is entitled to pay in legal money at the rate of exchange of the day when the sum is due and at the place agreed for payment (Art. 1278 C.C.). Furthermore, it must be pointed out that the debt is always subject to the general rules applicable to pecuniary obligations as far as the nominal principle (Art. 1277 C.C.), place of payment (Art. 1182 C.C.) and interest (Art. 1282 C.C.) are concerned. V.M. DONINI – 341

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5. Right of conversion. The debtor may convert the debt expressed in a foreign currency into a debt in Italian currency (Art. 1278 C.C.), but the parties may derogate from this rule if they decide to limit the right of conversion by indicating as ‘‘actual’’ the foreign currency (Art. 1279 C.C.). This derogation is nevertheless ineffective if it is impossible to procure such money when the debt becomes due.

COMPARISON AND EVALUATION The rule laid down in Art. 7:108 PECL is not incompatible with the provisions set forth in the Italian Codice civile in Arts. 1277–1279. However, on one side the PECL seem to underline the role of the parties’ agreement in specifying the currency of payment, while Italian law initially stresses the necessity to pay pecuniary debts in money which is legal tender and only in Art. 1278 C.C. gives the parties the possibility to agree on a different currency. On the other side the PECL do not make any reference to the notion of legal tender in the particular State at the time of payment or to the nominal principle, as established in Art. 1277(1) C.C. It is interesting to note that the Vienna Convention on Contracts for the International Sale of Goods (CISG) does not contain a rule concerning the currency of payment while the UNIDROIT Principles provide, in Art. 6.1.9, a corresponding rule.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:109: Appropriation of Performance (1) Where a party has to perform several obligations of the same nature and the performance tendered does not suffice to discharge all of the obligations, then subject to paragraph (4) the party may at the time of its performance declare to which obligation the performance is to be appropriated. (2) If the performing party does not make such a declaration, the other party may within a reasonable time appropriate the performance to such obligation as it chooses. It shall inform the performing party of the choice. However, any such appropriation to an obligation which: (a) is not due, or (b) is illegal, or (c) is disputed, is invalid. (3) In the absence of an appropriation by either party, and subject to paragraph (4), the performance is appropriated to that obligation which satisfies one of the following criteria in the sequence indicated: (a) the obligation which is due or is the first to fall due; (b) the obligation for which the creditor has the least security; (c) the obligation which is the most burdensome for the debtor; (d) the obligation which has arisen first. If none of the preceding criteria applies, the performance is appropriated proportionally to all obligations. (4) In the case of a monetary obligation, a payment by the debtor is to be appropriated, first, to expenses, secondly, to interest, and thirdly, to principal, unless the creditor makes a different appropriation. 1. General. Debtors and creditors do not usually need expressly to identify the obligation to which performance is referred, but when they are bound together by different legal relationships – which are different in their legal fundament, but homogenous in nature – a problem of identification may arise. This situation refers more specifically to pecuniary obligations. 2. Right to appropriate performance. The general rule set forth in Art. 7:109 provides that the debtor is entitled to declare at the time of payment the obligation to which performance is to be appropriated. This declaration may be either express or implicit. However, if the contract contains various provisions, the agreement prevails over the debtor’s right of appropriation by virtue of the primacy of the parties’ autonomy over the PECL. Furthermore, the debtor’s right of appropriation is also limited by Art. 7:109(4), stating that the debtor must appropriate the payment first to expenses, secondly to interest and thirdly to principal. V.M. DONINI – 343

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A similar provision is provided in Art. 6.1.12 UNIDROIT Principles dealing with imputation of payments and in Art. 6.1.13 dealing with the imputation of non-monetary obligations. 3. Subsidiary right to appropriate. Lacking both an express provision in the contract and a debtor’s declaration of appropriation, Art. 7:109(2) states that the creditor is entitled to declare to which obligation the performance is to be appropriated. The creditor however must appropriate the performance within a reasonable time and inform the performing party thereof. Such a notice is however merely declaratory and its absence (though not sufficient to invalidate the appropriation), may give rise to a claim for damages. If the obligation is not yet due, is illegal or is disputed, the creditor’s right to appropriation is excluded and any appropriation is invalid. The creditor may appropriate performance to an obligation that is already barred by a statute of limitation. 4. Appropriation by law. When paragraph (2) is not applicable in account of the absence of an express provision of the contract or a debtor’s or creditor’s declaration of appropriation, paragraph (3) lays down the legal criteria according to which performance is appropriated. If none of these criteria leads to appropriation, performance is appropriated proportionally to all obligations. 5. Single obligation. Even if Art. 7:109 assumes the existence of several obligations, some rules may nevertheless apply to the case of partial payment of a single debt.

ITALIAN LAW Art. 1193 C.C.: Imputation of payment (1) A person who owes several debts of the same kind to the same person can declare, at the time of payment, which debt he intends to satisfy. (2) In the absence of such declaration, the payment shall be imputed to the matured debt; among several matured debts to that having the least security; among equally secured debts to the one which is most burdensome to the debtor; among equally burdensome debts to the oldest. If these criteria do not help, imputation is made proportionately to the various debts. Art. 1194 C.C.: Imputation of payment to interest (1) The debtor can not impute the payment to the principal of a debt rather than to the interest and costs thereof, without the consent of the creditor. (2) The payment made on principal and interest shall be imputed to interest before principal. 344 – V.M. DONINI

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Art. 1195 C.C.: Release with imputation Whoever, having more than one debt, accepts a release in which the creditor declares that he has imputed the payment to one of them, cannot demand that the payment be otherwise imputed, unless there has been fraud or surprise on the part of the creditor. 1. General. Art. 1193 C.C. deals with the not infrequent case of the existence of several debts of the same kind (i.e. usually money debts). The Italian civil code does not expressly require that the performance tendered does not suffice to discharge all of the obligations, as set forth in Art. 7:109, however this requisite can be presumed (Breccia (1991), p. 563; see also Cass. 29 December 1993, no. 12938, in Giust. civ. Mass., 1993, fasc. 12). 2. Right to appropriate performance. In order to identify the obligation to which performance must be appropriated, two different criteria are used: the first is voluntary (the intention of the parties) and the other is legal in nature (set forth in Art. 1193 C.C.); the latter comes into play as a subsidiary criterion in the absence of a declaration by the parties. Similar to the rules of PECL, the conventional criterion prevails over the legal one: the debtor is entitled to choose which debts he intends to pay first, without the consent of the creditor. This freedom is however limited by Art. 1194 C.C., according to which the debtor is not allowed to appropriate the payment to capital, instead of to interest and expenses, without the creditor’s consent. 3. Appropriation by law. If the debtor does not declare the obligation to which the performance is to be appropriated, Art. 1193 C.C. lays down the legal criteria: payment shall be imputed first to the obligation which is already due, or else to that having the least security. This rule has been established in order to protect the creditor who is entitled to obtain what he/she is most likely to lose (cfr. Cass. 1 June 1974, no. 1572, in Giur.it., 1975, I, 1, 266). On the other side, the third criterion aims at protecting the debtor, by indicating the debt which is most burdensome. If none of these three criteria are applied, performance is to be appropriated to the oldest debt, i.e. the debt which was due first (Art. 1193(2) C.C.). In these cases, a late declaration made by the debtor, after payment, is ineffective (see Cass. 10 May 1996, no. 4435, in Giur.it., 1997, I, 1, 40). If none of the criteria mentioned is applicable, in the case that all debts are equally due, secured, burdensome and old, a further criterion comes into play: performance must be appropriated proportionately to all debts (see also Art. 7:109, 3). 4. Release with imputation. In the absence of the debtor’s declaration, the creditor may choose the obligation to which performance is to be appropriated. In this case, however, the creditor must release a quittance, as provided in Art. 1195, and this quittance is subject to the debtor’s acceptance. If the debtor accepts the release, it means that he V.M. DONINI – 345

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accepts the appropriation made by the creditor. Therefore, the debtor cannot demand that the payment be otherwise imputed, unless the creditor has used fraud or surprise to force the debtor to accept (see Bianca (2002), p. 342). 5. Evidence of appropriation. Case law usually places on the creditor the burden of proving the existence of the debt and the conditions of the applicability of appropriation. On this point see for instance Cass. 13 April 1987, no. 3655, and more recently Cass. 18 December 1999, no. 14282, in Giust. civ. Mass., 1999, 2575; Cass. 15 December 1999, no. 14071, in Giust. civ. Mass., 1999, 2537; Cass. 12 February 2000, no. 1571, in Giust. civ. Mass., 2000, 311. A different approach is followed by Cass. 29 October 1982, no. 5707, in Giust. civ., 1983, I, 849, placing the burden of proof on the debtor in case of lack of any express declaration of appropriation.

COMPARISON AND EVALUATION The discipline set forth by the PECL is similar to Italian law, in which both systems provide a regulation aiming at favouring the debtor. Moreover, neither PECL nor Italian law require any particular requisite of form as to the act of appropriation, which can also be tacit. Nevertheless both provide a temporal limit: according to Art. 7:109 the performing party must declare to which obligation the performance is to be appropriated at the time of performance. The same is provided by Art. 1193 C.C. which requires appropriation at the time of payment, otherwise the legal criteria apply; however, according to certain legal writing (see for instance Bellelli (1989), p. 59) and case law (Cass. 7 February 1975, no. 474, in FI, 1975, I, 2287) appropriation may also precede payment. It is interesting to stress that, on one hand according to a recent decision of the Italian Corte di Cassazione, Art. 1194 is applicable also to payments made by the Public Administration (see Cass. 27 July 2001, no. 10281). On the other hand, it must be added that the legal notion of appropriation both in the PECL and in Italian law, is not applicable to bankruptcy and execution of a judgement, since in these cases other criteria apply (for instance the right of pre-emption of the creditors: on this point see Cass. 1 June 1974, no. 1572, in Giur.it., 1975, I, 1, 266).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:110: Property not Accepted (1) A party which is left in possession of tangible property other than money because of the other party’s failure to accept or retake the property must take reasonable steps to protect and preserve the property. (2) The party left in possession may discharge its duty to deliver or return: (a) by depositing the property on reasonable terms with a third person to be held to the order of the other party, and notifying the other party of this; or (b) by selling the property on reasonable terms after notice to the other party, and paying the net proceeds to that party. (3) Where, however, the property is liable to rapid deterioration or its preservation is unreasonably expensive, the party must take reasonable steps to dispose of it. It may discharge its duty to deliver or return by paying the net proceeds to the other party. (4) The party left in possession is entitled to be reimbursed or to retain out of the proceeds of sale any expenses reasonably incurred. 1. General. Art. 7:110 provides an accurate regulation for several situations relevant in case of refusal of performance. While Art. 7:110 deals exclusively with tangible property not accepted, Art. 7:111 regulates the case of pecuniary obligations in which money is not accepted. The two situations concern respectively the case in which the party has made a tender in conformity with the contract, but the other party refuses to take delivery, and the case in which the party, after receiving the goods, has lawfully rejected the goods after having received them and the other party fails to retake them. Art. 7:110 applies also when, after lawful termination of the contract, a party who had received property has to return it to the other party and the other party refuses to accept it (Art. 9:308). Art. 7:110 applies irrespective of whether the refusal to accept property constitutes a nonperformance or not. Reference must be made also to the Vienna Convention. As a matter of fact, Art. 53 CISG includes among the buyer’s obligations, the obligation to take delivery of the goods (for an application of this Article, see Arrondissementsrechtbank Amsterdam, 15 June 1994, no. H 92.3572 and the arbitral award no. 11/96, 12 February 1998, of the Bulgarian Chamber of Commerce and Industry, both available in www.unilex.info). Furthermore, Art. 60 CISG specifies that the buyer’s obligation to take delivery consists in performing all the acts which can reasonably be expected of him/her that will enable the seller to make delivery and taking over the goods. Likewise, Arts. 85 and 87 set forth the seller’s obligation to take steps to preserve the goods by depositing them in a warehouse (of a third person) at the expense of the buyer, provided V.M. DONINI – 347

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that the expense incurred is not unreasonable (see for instance Tribunal Cantonal de Vaud, 17 May 1994, no. 01 93 1308, in www.unilex.info). 2. Protection and preservation of the property. According to Art. 7:110 (2), the party which is unwillingly left in possession of property, must take reasonable steps to protect the goods. However, in the case of perishables or goods expensive to preserve, the protection encompasses sale as well, and the reasonable steps for protection must take into account both the value of the goods, and the trouble and expense of finding a favourable opportunity for sale. 3. Discharge of the party left in possession. The party which is left in possession of the goods is not discharged from the obligation to deliver or return them. In order to be relieved from this duty, the party must make the property or its substitute available to the other party. According to Art. 7:110 (2)(a) and (b), the debtor may deposit the property on reasonable terms with a third person to be held to the order of the creditor, or he/she may sell the goods (always on reasonable terms). In both cases, the other party must be notified, but the notice is not necessary when perishables are involved. 4. Other remedies unaffected. Even if Art. 7:110 applies irrespective of the fact that the refusal to accept property constitutes a non-performance or not, if the refusal amounts to a breach of contract, the debtor is entitled to exercise any of the remedies available for non-performance, including damages or termination of contract. If after an initial refusal, the creditor finally accepts the goods, the debtor is entitled to withhold them (according to Art. 9:201) until the creditor reimburses the debtor of the expenses occurred in preserving the goods.

ITALIAN LAW Art. 1206 C.C.: Default of the creditor. Conditions The creditor is in default when, without legitimate cause, he does not accept the payment offered to him in the manner provided by the following Articles or fails to do what is necessary in order that the debtor may perform the obligation. Art. 1207 C.C.: Effects (1) Supervening impossibility of performance for a cause which cannot be imputed to the debtor is at the risk of the creditor, when he is in default. The interest and the fruits of the thing that have not been taken by the debtor are no longer due. (2) The creditor is also liable for the damages deriving from his default and for expenses for the custody and conservation of the thing which is due. 348 – V.M. DONINI

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(3) The default takes effect from the day of the tender if this is subsequently declared valid by a final judgement or if it is accepted by the creditor. Art. 1208 C.C.: Requisites for validity of tender (1) In order for the tender to be valid, it is necessary: (a) that it be made to a creditor legally capable of accepting or to a person who has the authority to accept for him; (b) that it be made by a person who can validly perform; (c) that it include the totality of the sum or the things due, of the fruits or interest and liquidated expenses, with a supplementary reserve, if necessary; (d) that the time limit have expired, if established in favor of the creditor; (e) that the condition to which the obligation was subject have occurred; (f ) that the tender be made to the creditor in person or at his domicile; (g) that the tender be made by a duly authorized public official. (2) The debtor can make the tender conditional upon such consent of the creditor as is necessary to release the property from real guarantees or from other encumbrances which in any way restrict the right to dispose of the property. Art. 1209 C.C.: Actual tender and tender by notice (1) If the obligation has as its object money, negotiable instruments, or movables to be delivered at the domicile of the creditor, the tender must be actual. (2) If movables to be delivered in a different place are instead involved, the tender consists of notice to the creditor to receive them, served on him in the form prescribed for the summons. Art. 1210 C.C.: Power of deposit and its discharging effects (1) If the creditor refuses to accept the actual tender or does not present himself to receive the things tendered to him by notice, the debtor can effect a deposit. (2) A deposit being effected, when it has been accepted by the creditor or has been declared valid by a final judgement, the debtor can no longer withdraw it and is discharged from his obligation. Art. 1211 C.C.: Perishable things or things whose custody is expensive If the things cannot be preserved or are perishable, or if the expenses of their custody are excessive, the debtor, after the actual tender or the notice to receive them, can be authorized by the judge to sell them in the manner established for the sale of seized goods and to deposit the price. V.M. DONINI – 349

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Art. 1212.: Requisites of deposit (1) For validity of the deposit it is necessary: (a) that it have been preceded by a notice served on the creditor stating the day, hour and place on which the tendered thing will be deposited; (b) that the debtor have delivered the thing, together with the interest and fruits due until the day of the tender, in the place designated by the law or, in the absence thereof, by the judge; (c) that a report made by a public official, showing the nature of the tendered things, the refusal of the creditor to accept them or his failure to appear, and finally the fact of the deposit; (d) that, in the case of non-appearance of the creditor, the memorandum of the deposit be served on him with the request that the things deposited be withdrawn. (2) The deposit having a sum of money as its object can also be made with a banking institution. Art. 1215 C.C.: Expenses When the actual tender and the deposit are valid, the expenses incurred are chargeable to the creditor. 1. General. The creditor is entitled to receive a conforming performance and the debtor cannot be discharged from the obligation by a performance different from what is due, unless the creditor agrees to it (Art. 1197 C.C.). Therefore, the creditor is normally allowed to refuse a non-conforming performance (both from the qualitative and quantitative point of view, see Arts. 1181 and 1197 C.C.), but when performance is exact and accurate, he/she is obliged to receive it and to co-operate. Such an obligation does not arise if a legitimate reason justifies the creditor’s refusal; otherwise, the creditor is bound to a general obligation of collaboration towards the debtor. This co-operation consists in the activities directed at making possible the debtor’s performance easier and not heavier. The existence of such an obligation is further evidenced by the fact that in case of unjustified refusal to receive performance, the debtor is released from his/her obligation by depositing the mobile goods, or by seizure in case of immovables (see Art. 1210 and Art. 1216 C.C.). Legal writers discuss whether the creditor’s duty to co-operate is a legal obligation (based on the more general obligation of good faith and fair dealing set forth in Art. 1175 C.C.), a burden or an instrumental duty. On this point see Cass. 5 June 1954, no. 1828, in Giust. civ., 1954, I, 1303; Cass. 8 February 1986, no. 809, in Giust. civ.,1986, I, 1928. See also Bianca (2002), p. 375, who states that since the creditor’s co-operation is always directed towards the fulfilment of his/her own right, co-operation cannot be considered an obligation in the same way as the debtor’s performance. On the other hand, it has been alleged that the creditor is not under a proper obligation to co-operate, and his/her unjustified refusal to accept performance simply constitutes an abuse of right. In any case, there is no doubt that the debtor has a right to perform: the debtor is granted such a protection in 350 – V.M. DONINI

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order to prevent the creditor from illegitimately extending the contractual tie, by hindering the debtor’s performance. 2. Mora creditoris. The mora creditoris, the creditor’s default preventing the performance of the obligation by the other party, is regulated by Arts. 1206–1217 of the Codice civile. When the creditor, without any legitimate cause, does not accept performance (Arts.1207–1209 C.C.), or fails to do what is necessary in order that the debtor may perform his/her obligation, the debtor is released from his/her obligation by simply depositing the mobile goods, or by seizure in case of immovables (Art. 1210 and Art. 1216 C.C.). An example of what is considered a legitimate cause, justifying the creditor’s default, is a non-conforming performance (see again Cass. 809/1986). Such a legitimate cause could even be a subjective reason, but must be evaluated objectively. Also in this issue the general principles of good faith and fair dealing come into account. Default takes effect from the day of the tender, if this is subsequently declared valid by a final judgement, or if it is accepted by the creditor. 3. Transfer of risk. Art. 1207(1) C.C. states that the creditor in default must bear the passing of risk: in case of supervening impossibility of performance, for which the debtor is not accountable, the creditor in default bears the risk. This means that the creditor is bound to perform his/her obligation even if the debtor is discharged. Normally, when performance becomes impossible for a reason which is not accountable to the debtor, the creditor is discharged of his/her obligation because supervening impossibility would cause avoidance of the contract (Art. 1463 C.C.). However, if the creditor is in default, he/she must bear totally the risk of deterioration of the thing, and must therefore perform his/her own obligation. 4. Interest and damages. According to Art. 1207(1) C.C., interest and fruits are no longer due. Moreover, the creditor is bound to pay damages deriving from default, i.e. the economic detriments strictly connected to the obligation, including the actual damage and the loss of profits: creditor must also bear the costs of custody (Art. 1207 (2) C.C.) of the thing held by the debtor. 5. Offer. In order to produce mora creditoris effects, a perfectly valid tender is necessary as a means of proof of the debtor’s intention to be discharged. The offer may be legal – actual or by notice (Art. 1209 C.C.) – or according to usage (Art. 1214 C.C.). If the creditor refuses to accept the actual tender or a tender by notice, the debtor, in order to be discharged, can deposit the goods or money which are the object of the obligation (Art. 1207(3) C.C.). Nevertheless, the tender is not effective until the creditor accepts it, or a final judgement – having this decision a constitutive effect – declares its validity. V.M. DONINI – 351

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6. Deposit. The deposit of a thing is made by depositing it at a public warehouse, as provided by Art. 77 (1) disp. att., if possible, or otherwise at another suitable place determined by the judge. The creditor must be informed of the deposit in order to allow him/her to accept performance. If the creditor does not accept the deposit, the debtor is released only after the validation of deposit by a final judgement. Going into detail, Art. 1212 C.C. provides a comprehensive set of rules of the deposit, applying either to the case of property not accepted, or to money not accepted. Notice must precede deposit and must contain the day, hour and place on which the tendered thing (or money) will be deposited. Thereafter the debtor must deliver the goods, together with interest and fruits due until the day of the tender, and a public official must release a report acknowledging the nature of the tendered goods, the creditor’s refusal and the deposit. Moreover, if the creditor fails to appear, the report must be served on him with an invitation to withdraw the deposited things. In case of immovables, where deposit is obviously not possible, Art. 1216 C.C., providing for the possibility of a discharging seizure of the goods, is applicable. 7. Expenses. As far as the costs of the unaccepted tender, deposit and seizure are concerned, the relevant rule is provided in Art. 1215 C.C., which invert the general rule placing the expenses upon the debtor (see Art. 1196 C.C.). Therefore, the expenses incurred are chargeable to the creditor, if the actual tender (Art. 1209 C.C.) and deposit are valid. 8. Obligation of buyer. In a sales contract, the seller is granted wider protection as to the possibility of being released from his/her obligation. According to Art. 1514 C.C., the seller can deposit the goods without either a prior tender or a declaration of validity issued by the judge.

COMPARISON AND EVALUATION It is interesting to note that the solution set forth in Art. 7:110 is quite original since in a single Art. it makes provisions for different cases in which performance may be refused. Italian law is more articulated, regulating several situations in different Articles. Nevertheless, nothing is stated in the Italian Codice civile relevant to the duty to take all reasonable steps to protect and preserve the goods. This duty however may be presumed by the general principle of good faith and fair dealing set forth in Art. 1175 C.C., a general provision which states that debtor and creditor shall behave according to rules of fairness. The good faith principle therefore implies the existence of further duties of debtor and creditor such as for instance the duty to protect and preserve the goods (see Cannata (1999), p. 43 et seq.). Moreover, reference must be made also to Art. 1176 and 1177 C.C., concerning diligence in performance and the obligation to safeguard. 352 – V.M. DONINI

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Finally, it must be added that unlike Italian law (Art. 1207(3) C.C.), the PECL do not require the intervention of the judge with a constitutive decision, declaring the tender valid in order to achieve the effects of the mora creditoris.

V.M. DONINI – 353

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:111: Money not Accepted Where a party fails to accept money properly tendered by other party, that party may after notice to the first party discharge its obligation to pay by depositing the money to the order of the first party in accordance with the law of the place where payment is due. 1. General. This Art. lays down the rule corresponding to Art. 7:110, when the subject is money not accepted. If the creditor refuses payment, the debtor is entitled to discharge his/her obligation to pay by depositing the money in any manner authorised by the law of the place where payment is due. 2. Effects. The effects of this provision concern both debtor and creditor: the latter obtains the right to dispose of the money deposited (as set forth in the similar case of property which has not been accepted regulated by Art. 7:110 (2)(a)), whereas the former is discharged of his/her obligation. 3. Notice. As far as notice is concerned, the comment to the PECL (making reference to good faith, as provided by Art. 1:201) stresses that it must be reasonable both with respect to the method of transmission and to the time given the first party in which to reply. 4. Payment by a third person. A wider reading of the Art. (combined with Art. 7:106) may equate a third person with the notion of ‘‘other party’’ since payment of a sum of money does not require personal performance.

ITALIAN LAW See Arts. at the comment to Art. 7:110 1. General. The Italian Codice civile regulates the creditor’s refusal to accept money in Arts. 1206–1215, which lay down the general rules concerning the so-called mora creditoris. For the notion of mora creditoris and relevant requisites, see comment to Art. 7.110. The only difference between the two situations concerns the deposit having a sum of money as its object, which can also be made at a banking institution, as provided by Art. 1212(5) C.C. and Art. 76 disp. att. (see also Cass. 9 March 2001, no. 3481, in Giur.it., 2001, 2581, dealing with the deadlines of Art. 1212 C.C.).

COMPARISON AND EVALUATION See comment to Art. 7:110. 354 – V.M. DONINI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 7:112: Costs of Performance Each party shall bear the costs of performance of its obligations. 1. General. This rule, identical to Art. 6.1.11 UNIDROIT Principles, aims at distributing equally the costs of any commercial obligation (such as money transfers, government licenses, risk insurance, etc.): each party shall bear the costs of his/her own obligation.

ITALIAN LAW Art. 1196. Expenses of payment The expenses of payment are charged to the debtor. Art. 1199 (1) C.C.: Right of the debtor to release The creditor who receives payment shall upon request and at the expense of the debtor, issue a release and make a notation of it on the instrument, unless it is returned to the debtor. 1. General. The Italian Codice civile has taken an approach similar to that of the PECL concerning costs of performance: the debtor shall bear the expenses because the creditor must receive performance without the detraction of expenses. The costs of performance include both material and legal expenses such as the costs relating to release, taxes, fiscal charges as well as accessory costs, such as those for the cancellation of guarantees (see for instance Cass. 25 November 1975, no. 3938, in Giust. civ., 1976, I, 408, dealing with the cancellation of a mortgage). Furthermore, the approach taken in Art. 1196 C.C. is confirmed by Art. 1199 C.C., stating that the costs of release are borne by the person in whose favour it is issued, i.e. the debtor. Art. 1196 C.C., contained in the part concerning obligations in general, however must be harmonised with the rules governing contracts, which may contain some exceptions to the general rule. For instance, in the case of deposit, the expenses of restitution (Art. 1774 C.C.) and the costs of preservation of the thing (Art. 1181 C.C.) are borne by the depositor, who is a creditor and not a debtor. In the contract of sale, the buyer must bear the expenses of the sale, the accessory costs (Art. 1475 C.C.) and the costs of transportation as well (Art. 1510(2) C.C.). Also in the contract of mandate (Art. 1720 C.C.) there is a similar inversion of costs, as the expenses are on the principal (creditor). Finally, the parties may agree to a different distribution of expenses and costs, derogating thereby from the legal criteria provided in Art. 1196 of the Codice civile. V.M. DONINI – 355

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COMPARISON AND EVALUATION Italian law and the PECL are quite similar in this context, even if Italian law stresses the status of debtor of the performing party. As a matter of fact, the legal basis of Art. 1196 C.C. is the need to satisfy entirely the creditor’s interest, and this could not be obtained if the economic content of the performance was reduced by charging the expenses connected to performance to the creditor (on this point see Bianca (2002), p. 272). Moreover, Italian law is more thorough, as it has a special rule concerning the costs of release, and it provides some exceptions to the general rule set forth in the Codice civile at Art. 1196. It is interesting to note that the rule contained in Art. 7.112 PECL is exactly the same as that set forth in Art. 6.1.11 of the UNIDROIT Principles.

356 – V.M. DONINI

Chapter 8 NON-PERFORMANCE AND REMEDIES IN GENERAL PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:101: Remedies Available (1) Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Art. 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9. (2) Where a party’s non-performance is excused under Art. 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9 except claiming performance and damages. (3) A party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party’s non-performance. 1. General. This Art. represents the introductory provision to the following Chapters on non-performance and remedies. In the first para. a unitary notion of non-performance is implied and reference to the whole range of remedies set out in Chapter 9 is made for the case when the failure to perform is not excused. The second para. deals with excused nonperformance under Art. 8.108 PECL, which also entitles the creditor to some of the remedies provided for in the Principles. Finally, the last para. embodies the rule according to which the creditor is barred from exercising any of the remedies to the extent he/she is responsible for the non-performance of the other party. 2. Unitary notion of non-performance. Art. 8:101 PECL implies the adoption of a unitary notion of non-performance, which covers all kinds of failure to perform any of the obligations under the contract (complete failure to perform, late or defective performance, violation of any other duty implied or expressly set forth in the contract, be it a primary or an accessory one). In this respect, the PECL follow the lead of other international instruments such as CISG (see Arts. 45 and 61, respectively, for the buyer’s and the seller’s remedies) and the UNIDROIT Principles (see Art. 7.1.1 and related Comment). When performance is not excused under Art. 8:108 PECL, the aggrieved party may exercise any of the remedies provided for in Chapter 9, namely right to performance (including substitute performance and repair), withholding of performance, termination of the contract, reduction of price and right to damages (for the specific requirements and consequences of each remedy see infra, Arts. 9.101–9.102; 9:201; 9:301et seq.; 9.401; 9:501 et seq.). 3. Excused non-performance. According to the provision in comment, when performance is excused due to an impediment in the sense of Art. 8:108 PECL, the aggrieved party cannot claim specific performance or ask for damages (see Comment Gardella A. VENEZIANO – 357

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Tedeschi). He/she may nevertheless be entitled to exercise other remedies such as termination of the contract or reduction of the price (as made clear by the Illustrations under Comment B (ii)). In other words, the unitary concept of non-performance includes also cases of force majeure. 4. Non-performance wholly or partially caused by creditor. The rule set forth in para. 3, which is a well established one in European legal systems, prevents the creditor who has caused the non-performance of the other party from exercising any of the remedies which would have otherwise been at his/her disposal (see also Art. 7.1.2 UNIDROIT Principles, first part). In order to justify curtailing the creditor’s rights, the Comment refers to the principle of good faith and fairness that prevents a party from having a remedy for the non-performance for which he/she is responsible. While the Comment cites as a typical example the mora creditoris (i.e. when the creditor does not accept tender of performance without good reason), it expressly states that there might be other relevant situations, such as for example the breach of a duty to inform the other party which causes non-performance. This shows that the present provision must be linked with Arts. 1:201 on good faith and especially 1:202 PECL on the duty to cooperate. When the creditor’s act (or omission) does not depend on an impediment which could qualify as force majeure, the other party will have a remedy against the creditor. This rule applies with proper adaptations to the cases where the creditor’s behaviour concurs with the debtor’s non-performance. The creditor is barred from resorting to any remedy ‘‘to the extent that the failure to perform is caused by its own act or omission’’. Thus, there might be either a total, or just a partial loss of the right to exercise the remedies in Chapter 9.

ITALIAN LAW Art. 1218 C.C.: Liability of debtor The debtor who does not exactly render due performance is liable for damages unless he proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him. Art. 1453 C.C.: Dissolution of contract for non-performance (1) In contracts providing for mutual counter-performance, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. (...) Art. 1490 C.C.: Warranty against defects in thing sold (1) A seller is bound to warrant that the thing sold is free of defects which render it unfit for the use for which it was intended or which appreciably diminish its value. (2) (...) 358 – A. VENEZIANO

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Art. 1492 C.C.: Effects of warranty (1) In the cases indicated by Art. 1490, the buyer can at his choice demand dissolution of the contract or reduction of the price, unless, for certain defects, usage bars resolution. (2) (...) Art. 1206 C.C.: Default of the creditor. Conditions The creditor is in default when, without legitimate cause, he does not accept the payment offered to him in the manner provided by the following articles or fails to do what is necessary in order that the debtor may perform the obligation. 1. General. The Codice civile addresses the question of non-performance of a (contractual) obligation both in the part on obligations in general and in the part on contracts with mutual counter-performances. Art. 1218 C.C. contains the general rule regarding the debtor’s liability, according to which the debtor has to render due performance exactly in order not to incur liability for damages, unless he/she proves that performance was impossible for a cause ‘‘not imputable to him’’ (impossibilita` non imputabile). This rule does not refer to other possible remedies which are however mentioned in the provisions on contracts in general. Thus, Art. 1453 C.C., on contracts with mutual counter-performances, adds specific performance and termination to the right to damages provided for the aggrieved party. Withholding of performance is also found in the general part on contracts with mutual counter-performances, as a defence against the other party’s nonperformance (Art. 1460 C.C.). On the other hand, the right to reduction of price is not contained in any general rule. It is only mentioned in the special provisions on warranty for defects of the things sold (Art. 1492 (1) and (3) C.C.) and on warranty for defects of the work in independent contracts (Art. 1668 (1) C.C.). It must be noted, however, that a similar result may be achieved by asking compensation for damages amounting to the difference between the value of the contractual performance and the value of the rendered performance, or by applying the rules on set-off. Moreover, scholars have suggested ways of extending the application of the right to reduction of price beyond the special rules on sales, by referring to the Code’s provisions on supervening impossibility of performance (for instance Luminoso (1990), p. 35 et seq.; for further details see Art. 9:401 PECL, Comments Mancaleoni). The right to repair is explicitly mentioned only in the context of work contracts (Art. 1668 (1) C.C.; see also Art. 2226 (3) C.C.). Case law excludes it in other situations, as in the sales contract (Cass. 19 July 1983, no. 4980, in Foro it., 1984, I, 780, with a note by Troiano), while scholars are inclined to admit it, either because it is qualified as a kind of specific performance (Giorgianni (1970), p. 74 et seq.) or because it is seen as a kind of specific redress under Art. 2058 C.C. (Bianca (1993), p. 108; Luminoso (2003), p. 210). Finally, replacement of defective performance is not provided for in the Codice civile, though scholars admit it as a kind of specific performance (Giorgianni (1970), ibidem; for a different opinion see Bianca (1994), p. 243 et seq.). It must be noted that as a result of the implementation of European Directive no. 44/1999/EC on certain aspects of consumer goods and associated guarantees, the Codice A. VENEZIANO – 359

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civile now contains special rules on consumer sales, according to which in case of nonconformity of the goods the buyer may ask for repair or replacement (and as secondary remedies termination or reduction of price) as well as damages (Arts. 1519 bis et seq. C.C.). The rules on non-consumer sales are therefore different in this respect to those on consumer sales. 2. Unitary notion of non-performance. Art. 1218 C.C. implies a notion of nonperformance which extends to all kinds of violation of the debtor’s obligation, since the latter has to render ‘‘exact’’ performance. Therefore, liability arises for late, partial or incorrect performance alike, and gives rise to essentially the same remedies. An exception is however found in sales and work contracts, where defective performance (i.e. delivery of defective goods) is treated as a different kind of contractual violation, which is more similar to an implied term for a warranty by the seller or contractor (see Arts. 1490 and 1668 C.C.; Luminoso (2003), p. 214). 2. Excused non-performance. Unlike the PECL, Italian law does not include in the general notion of ‘‘non-performance’’ the failure to perform when the debtor is excused (Roppo (2001), p. 960; on the notion of ‘‘impossibility which cannot be imputed to the debtor’’ as limitation to the debtor’s liability see infra, Comment Gardella Tedeschi, under Art. 8:108 PECL). There are however specific remedies set forth in Arts. 1256 et seq. and 1463 et seq. concerning the supervening impossibility of performance not imputable to any of the parties (impossibilita` sopravvenuta della prestazione). The creditor is automatically released from his/her obligations and the contract is terminated with the effects provided for in Arts. 1463–1464. This is justified by the need to protect the creditor even when non-performance is excused (Bianca (1994), p. 2 et seq.). 3. Creditor’s behaviour. The Codice civile does not contain a general rule according to which the aggrieved party is barred from exercising any remedy if he/she played a role in determining the other party’s non-performance. As in other legal systems of the civil law tradition, there are specific provisions on the mora creditoris (Arts. 1206 et seq. C.C.), which are to be found in the general part on obligations together with other rules on performance. These rules apply when the creditor refuses performance without a legitimate reason or fails to do what is necessary to enable the debtor to perform. The emphasis of such provisions is not on excluding remedies for non-performance if the creditor does not cooperate (see Cass 8 February 1986, no. 809, in Giust.civ., 1986, I, p. 1928 with a note by Costanza), but on shifting to the latter the risk of supervening impossibility of performance, curtailing his/her right to interest and awarding damages to the other party, though such consequences arise only if the debtor makes formal tender of performance. The debtor is freed from the duty to perform only if he/she complies with the strict formalities set forth in Arts. 1208 et seq. (for further details see Comments under Arts. 7:110–7:111 PECL, Donini). Interestingly, both scholars and case law have developed other ways to punish the uncooperative creditor’s behaviour. Courts for example have qualified the debtor’s failure to 360 – A. VENEZIANO

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perform as excused under Art. 1218 when the creditor has not offered him/her the necessary cooperation (i.e. when the creditor failed to notify his/her change of address or has made it too difficult for the debtor to perform or to cure a defective performance: Cass. 15 September 1970, n. 1441, in Giur.it. 1971, I, 1480; Cass. 26 August 1975, in Foro it. 1976, I, 1053; Sacco in Sacco-De Nova (2004), p. 628; Visintini (1987), p. 269 et seq.). The creditor’s refusal to cooperate has been further seen as a violation of the principle of fair dealing (Arts. 1175, 1375 C.C.; see Breccia (1990), p. 414 et seq. and also Art. 1:201, Comment Antoniolli). This makes it possible to include other situations such as the role played by the creditor’s tolerant behaviour in the case of the debtor’s partial non-performance (especially in long-term contracts). Such question is better solved, according to some scholars, by the use of the general principle of good faith (Roppo (2001), p. 959). Finally, the creditor’s behaviour may be relevant as a contributory negligence which may limit the measure of the damages due or even exclude them completely (Art. 1227 (1) C.C.).

COMPARISON AND EVALUATION Though there is no general provision in the Codice civile referring to all the remedies available to the creditor analogous to the one that we find in the PECL, Italian law does adopt a unitary notion of non-performance. Such an approach clearly prevails in European domestic laws as well as in international instruments such as CISG and the UNIDROIT Principles (Lando (2004), p. 505 et seq. and supra, p. 357, para 2). The latter instruments as well as the PECL go even further in treating non-conformity of performance as part of the general concept of non-performance, giving rise to substantially the same remedies, while the Codice civile still retains a more traditional classification of the seller’s defective performance in sales contracts and of the contractor’s in work contracts. As to the available remedies, while the Codice civile limits the application of reduction of price and repair and does not mention replacement, scholars have included them in the range of general remedies for non-performance. Such remedies are now expressly provided for the buyer in consumer sales due to the recent implementation of European Directive no. 44/1999. Moreover, Italian law tends to exclude remedies for non-performance when the debtor is excused and applies specific rules on supervening impossibility. As to para. (3) of the commented Article, though the Codice civile does not contain a general provision to this effect, both scholars and courts have found ways of limiting the debtor’s liability when the creditor’s behaviour is uncooperative by excusing the debtor’s non-performance and resorting to the general clauses of fair dealing and good faith.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:102: Cumulation of Remedies Remedies which are not incompatible may be cumulated. In particular, a party is not deprived of its right to damages by exercising its right to any other remedy. 1. General. The PECL spell out in the commented Art. the general rule that when the requirements for the exercise of more than one remedy for non-performance are fully met, the aggrieved party may resort to all of them, with the only limit of logical inconsistency. In other words, the remedies provided for in the PECL are not mutually exclusive, unless their effects are objectively incompatible with each other. The only example which is singled out in the black letter rule is the right to damages, in order to clarify that such a remedy is never excluded by the exercise of any other claim. The particular emphasis on damages is justified by the different approach traditionally taken in codified German law as well as interpretative problems found in other European jurisdictions (but for the recent BGB reform see infra, Comparison and Evaluation). It must be noted, however, that Chapter 9 of the PECL limits the measure of damages to ‘‘full compensation’’ of the loss (Art. 9: 502 PECL, see Comment Mari), thereby rendering it impossible to claim damages if full compensation is obtained by means of another claim such as, for example, reduction of price in sales contracts (see also Comment B). 2. Incompatibility of remedies as a limit. The Comment helps to clarify the meaning of ‘‘incompatibility’’ by giving a series of examples of consistent and inconsistent remedies. Thus, while withholding of performance (Art. 9:201 PECL) may precede termination (Art. 9:301 et seq.), the latter cannot be logically cumulated with specific performance of the contract (Art. 9:201 et seq.) or, in the case of acceptance of a non-conforming tender, with the aggrieved party’s right to reduce his/her own performance. 3. Change of remedies. The black letter rule of the commented Art. does not expressly address the question of the right to change from one remedy to another when they cannot be cumulated. As a general rule, the Comment (see limb C) allows such a change, except when the aggrieved party’s declaration of intention has caused the other party to act in reliance on it. Thus, while in principle a party claiming specific performance may shift to termination if he/she learns that the other party is not likely to perform within a reasonable time, he/she may be barred from doing so if the defaulting party has acted in reliance on the claim for specific performance, because he/she has received notice fixing an additional time for performance. At the same time, notice of termination may have caused the other party to rely on the exercise of such a remedy and thereby preclude a change to specific performance. According to the Comment this follows from the general principle of fair dealing (Art. 1:201 PECL, see Comment Antoniolli).

ITALIAN LAW Art. 1453 CC: Dissolution of contract for non-performance (1) In contracts providing for mutual counter-performance, when one of the 362 – A. VENEZIANO

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parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. (2) Dissolution can be demanded even when an action has been brought to demand performance; but performance can no longer be demanded after an action for dissolution has been brought. (3) The defaulting party can no longer perform his obligation after the date of the action for termination. Art. 1492 C.C.: Effects of warranty (1) In the cases indicated in Art. 1490, the buyer can at his choice demand dissolution of the contract or reduction of the price, unless, for certain defects, usage bars resolution. (2) The choice is irrevocable when it is made in a judicial action. (3) (...) Art. 1494 C.C.: Compensation for damage (1) In all cases, the seller is bound to compensate the buyer for damage unless he proves that, without his fault, he had no knowledge of the defects. (2) (...) Art. 1668 C.C.: Contents of warranty against defects in work (1) The customer can demand that the non-conformity or defects be eliminated at the expense of the contractor or that the price be reduced proportionately, without affecting compensation for damages in case of fault of the contractor. (2) However, if the non-conformity or defects in the work are such as to render the work completely inadequate for its purpose, the customer can demand the dissolution of the contract. 1. General. The issue of cumulation of remedies is expressly addressed, with regard to contracts with mutual counter-performance, in Art. 1453 c.c. Its para. 1 offers the aggrieved party the choice between specific performance and termination, and at the same time states that compensation for damages can always be demanded as an addition to the chosen remedy. Thus, a substantial incompatibility between specific performance and termination is implied, while damages are considered to be consistent with either of the two main remedies (for the latter compatibility see also Arts. 1494 (1) C.C. on sales and 1668 (1) on work contracts). Reduction of price is mentioned in the specific rules on warranty for the defects of the things sold as an alternative to termination (Art. 1492 C.C.) and on warranty for defects of the work in work contracts as an alternative to cure of defects by the contractor and – implicitly – to termination (Art. 1668 C.C.). 2. Change of remedy. This question is specifically dealt with in Art. 1453, para. 2, as regards the relationship between a claim for performance and termination. The latter can A. VENEZIANO – 363

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always be asked even if a previous demand for performance has been lodged; on the contrary, a claim for termination bars the aggrieved party from the right to claim performance. This result is justified in legal scholarship by making reference to the other party’s reasonable reliance on not having to render performance any longer since the aggrieved party has shown his/her lack of interest in maintaining the contract (U. Carnevali, in Bessone (1998), p. 770). A stricter rule is found in Art. 1492 (2) regarding warranty for defects of the things sold, where the choice between reduction of price and termination is irrevocable when made in a judicial action.

COMPARISON AND EVALUATION Italian law and the PECL appear to be in accordance as regards the rule which grants the aggrieved party the possibility of exercising more than one remedy if their effects are not logically incompatible with each other (and provided of course that their requirements are fully satisfied). Such a rule, though not clearly spelt out in the same way as in the PECL, is well recognized also in other international instruments. See for example Arts. 45(1)(2) and 61 CISG (regarding buyer’s and seller’s obligations respectively), where the right to damages is expressly added to the other available remedies and a choice between remedies which have mutually inconsistent legal consequences is implied (U. Huber and G. Hager, in Schlechtriem (1998), p. 362 et seq. and p. 481 et seq.). See further the UNIDROIT Principles, where no general provision on the issue is to be found – not even for damages – on the assumption that the solution mentioned follows as a matter of fact (Comment under Art. 7.1.1 UNIDROIT Principles). The rule on cumulation appears to be the prevailing solution in the law of the Member States as well (now expressly stated, with particular regard to damages, also in the German Civil Code after the recent reform, see §§ 346, 280 et seq. BGB). As to the right to change remedy, Italian law expressly deals with the question in Art. 1453 c.c. on contracts with reciprocal obligations as well as in provisions for specific contracts (sales and work contracts), while the PECL leave it to the general principle of reliance on the other party’s declaration. The practical result, however, appears to be the same.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:103: Fundamental Non-performance A non-performance of an obligation is fundamental to the contract if: (a) strict compliance with the obligation is of the essence of the contract; or (b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or (c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance. 1. General. This Art. contains the definition of fundamental non-performance which is pivotal within the set of remedies provided for in the Principles since it enables the aggrieved party to exercise a wider number of rights than in the case of less serious kinds of non-performance. In particular, the contract can be terminated by giving notice to the defaulting party (Art. 9:301 PECL, Comment Antoniolli), while in the case of a nonfundamental breach there is no right to termination, except for a non-fundamental delay when the aggrieved party has set an additional period of time for performance and such a time has elapsed without any result (Art. 8:106 (3), Comment Gardella Tedeschi). The nondefaulting party can furthermore decline the offer of cure by the other party when the delay constitutes a fundamental non-performance (Art. 8:104). Finally, an adequate assurance of due performance can be demanded when a party believes that there will be a fundamental non-performance by the other party, and withholding of performance is justified as long as the reasonable belief continues (Art. 8:105). The PECL thus follow the trend of recent international (and European) instruments relating to the law of contract such as CISG and the UNIDROIT Principles as well as European Directive 1999/44/EC (for further comparative treatment see infra and under Comparison and Evaluation). 2. Importance of the agreement between the parties. Limb (a) of the Art. in comment (which does not appear in Art. 25 CISG but corresponds to Art. 7.3.1 UNIDROIT Principles) highlights the relevance of the parties’ agreement in order to decide whether a non-performance is ‘‘fundamental’’. The contract must show that strict compliance with the non-fulfilled obligation is ‘‘of the essence’’ for the parties. This may expressly result from a contractual term giving the aggrieved party a right to terminate in the event of any breach (or a specific one), or else may be impliedly by looking at the nature of the obligation, as well as the circumstances of the case, usages or course of dealings between the parties and, according to the Comment, even domestic law. A typical case is late performance which might constitute fundamental non-performance when delivery within a specific time appears to be of special interest to the non-defaulting party, or in the case of commercial contracts such as sale of commodities or documentary credit transactions. A. VENEZIANO – 365

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3. Substantial detriment of contractual expectations and reasonable foreseeability. Limb (b) reproduces in substance the language of Art. 25 CISG (the same formulation is to be found in Art. 7.3.1, (2)(a) UNIDROIT Principles). It is certainly a general criterion and leaves room for the judges’ appreciation of the circumstances of each case. The gist of this provision is to look at the aggrieved party’s position: if he/she is fundamentally deprived of his/her interest in performing the contract, because the other party’s breach substantially cancelled any benefit from the bargain, then the aggrieved party is entitled to free his/herself from the contract. Those consequences should however be known by the non-performing party, or foreseen by him/her by exercising reasonable diligence at the time of conclusion of the contract. The Illustrations in Comment C show, on the one hand, that the breaching party’s professional skills are to be taken into account in determining whether the consequences of the non-performance should have been foreseen; on the other hand, they highlight the importance of correct and proper information given by the aggrieved party when certain consequences might not otherwise be reasonably foreseeable. 4. Intentional non-performance. The last element to be evaluated is the bad faith of the defaulting party, as shown by intentional non-performance. It is again an additional criterion which does not appear in Art. 25 CISG but is envisaged in Art. 7.3.1, limb (c), UNIDROIT Principles (though the latter consider also the debtor’s reckless behaviour, see infra, Comparison and Evaluation). In this case, though the consequences of the breach are minor, the aggrieved party may nevertheless rely on a fundamental non-performance. The Illustrations in the Comment make it clear that the term ‘‘intentional’’ covers a series of situations ranging from the simple actual knowledge that a breach will be committed to the fraudulent or malicious behaviour on the part of the debtor. It must be noted, however, that the subjective element is relevant only insofar as it is linked with the reasonable belief of the aggrieved party regarding future non-performance by the debtor. This limitation makes it impossible to qualify the non-performance as fundamental if there is no reasonable expectation of future breach, i.e. where no future performance is due by the defaulting party or where under the circumstances there is no reason to foresee a future nonperformance. Such a specification marks a further difference to Art. 7.1.3 UNIDROIT Principles, where the reasonable expectancy of future non-performance is listed as an autonomous factor to be considered (see infra, Comparison and Evaluation).

ITALIAN LAW Art. 1455 C.C.: Importance of non-performance A contract cannot be dissolved if the non-performance of one of the parties has slight importance with respect to the interest of the other. 1. Codified rules. At a first glance, the Codice civile seems to contain a different rule than the PECL regarding the relationship between the importance of the non-performance and the availability of the remedy of termination for the aggrieved party. According to the very 366 – A. VENEZIANO

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short provision of Art. 1455 C.C., termination is not justified for a non-performance which has only ‘‘slight’’ importance with respect to the interest of the other party. The negative formulation of the rule as well as the reference to the other party’s interest seem to suggest the choice of a subjective test which would warrant exclusion of termination only in exceptional cases. There are however special provisions for certain types of contract, which are more explicit in limiting termination by reference to clearly objective criteria: Art. 1522 (2) C.C. on sales based on a sample, where termination is granted only if the goods are significantly different from the sample; Art. 1564 C.C. on supply contracts, where termination of the contract is justified only in case the non-performance of one instalment has a significant importance (this provision is seen as a derogation to Art. 1455 C.C., Cass.civ., Sez. III, 17 March 1998, no. 2842; Cass. Civ. Sez. III, 11 October 2000, no. 13533). See also Art. 1668 (2) C.C. for non-conformity in work contracts, where termination can occur only when the defects render the work completely unsuited to its intended use (also this provision is qualified as a derogation from Art. 1455, see Cass.civ., Sez. II, 15 March 2004, no. 5250). As to non-conformity in sales contracts, the recent implementation of European Directive 1999/44/EC has introduced a change in the Codice civile, limited to consumer sales, whereby termination cannot be granted if the non-performance is a ‘‘minor’’ one. The old rule however survives for all other sales: see Art. 1490 C.C., where the defects have to diminish significantly the value of the goods (Cass. 25 March 1988, no. 2565; Cass. 11 April 1996, no. 3398, which however makes it clear that such a limitation is applicable both to termination and reduction of price). 2. Law in action. When we turn to consider how Art. 1455 C.C. has been applied by courts and interpreted by scholars, then the picture changes. The reported Massime of the Corte di cassazione tend to repeat that this provision represents a compromise between the objective evaluation of contractual balance, on the one hand, and the subjective interest of the aggrieved party in obtaining performance, on the other (see the analysis of M. Spallarossa, in Alpa-Bessone (1991b), p. 871). Equally common is the recognition of the factual character of the evaluation made by judges with respect to the importance of the non-performance. Such a factual character allows the Supreme Court often to deny its power to reconsider the issue and in practice leaves ample discretion to the judges of the preceding instances. This does not mean, however, that case law shows no common trend. Though courts often adopt language which is far from coherent and clear on the question, one can nevertheless detect a trend towards the application of a criterion based on the parties’ agreement and on a global and comparative evaluation of the impact of the non-performance on the contractual balance. Thus, instead of defining ‘‘slight importance’’, courts talk of a ‘‘significant’’ or ‘‘serious’’ non-performance. This position is found for example in Cass.Sez.Un. 23 October 1984, no. 5384, which is often cited by following decisions (Cass. 26 October 1985, no. 5277; Cass.civ., Sez. II, 28 June 1986, no. 4311, in Giur.it., A. VENEZIANO – 367

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1987, I, 1, 1451: non-performance in a work contract; Cass.civ.Sez.lav., 13 February 1990, no. 1046: agency contract; more recently Cass.civ. Sez. III, 19 August 2003, no. 12112, regarding a lease contract). While the monetary value of a non-performance, though significant, cannot, in itself, justify termination (Cass.civ, Sez. II, 28 March 1995, no. 3669; Cass.civ., Sez. III, 5 November 1997, no. 10844: leasing contract), and similarly, the mere fact that repair is possible does not exclude the right to termination (Cass.civ., Sez. II, 5 September 1997, no. 8578: non-conformity in a sales contract), a violation of a primary and essential obligation of the contract at hand implies that the non-performance is sufficiently serious (Cass.civ., Sez. III, 6 November 2002, no. 15553: maintenance duty in a work contract; Cass.civ., Sez. II, 28 January 2000, no. 984: failed delivery in a work contract); however, also a violation of a non-essential term may warrant termination if it has a significant impact on the parties’ reciprocal obligations (Cass.civ., Sez. II, 3 June 1991, no. 6244; Cass.civ., Sez. II, 27 June 1992, no. 8064). See also Cass.civ., Sez. I, 28 March 1997, no. 2799, regarding non-performance of a work contract, where continued or failed reliance on future performance is mentioned as an additional element to be considered, as well as Cass.civ., Sez. II, 4 May 1994, no. 4275, which even considers the debtor’s intentional non-performance as a significant factor (though in the case at hand the debtor did not show such an intention). This approach is in substance favoured by legal scholarship, which links it to the function of termination for non-performance (which warrants the balance between a party’s economic sacrifice and the fulfilment of his/her expectations, see Sacco in Sacco-De Nova (2004), 611; Belfiore (1989), p. 1321; for greater emphasis on the importance of the creditor’s motives Roppo (2001), p. 962) as well as for a systematic interpretation of all codified provisions on limitations to the right to terminate the contract (Mirabelli (1967), p. .. and see also for a clear statement in this sense Cass.civ., Sez. II, 28 June 1986, no. 4311, in Giur.it., 1987, I, 1, 1451). 3. Importance of the non-performance and automatic termination. When a contract contains an express clause providing for termination upon the occurrence of certain specified facts (clausola risolutiva espressa), courts do not have to evaluate the importance of the non-performance since the parties themselves have shown that correct performance was of the essence: see among others Cass.civ., Sez.lav., 16 May 1997, no. 4369: agency contract; Cass.civ., Sez. II, 26 November 1994, no. 10102: sales contract.

COMPARISON AND EVALUATION The rule that a fundamental non-performance be a pre-requisite for the exercise of certain remedies by the aggrieved party seems to have become a well-established one in a number of international instruments relating to the law of contracts. Arts. 49(1)(a) and 64(1)(a) CISG introduced the necessity of a ‘‘fundamental breach’’ as a condition for ‘‘avoidance’’ (i.e. termination) of international commercial sale contracts by buyer and seller respectively. A ‘‘fundamental breach’’ is also required in order to obtain substitution of defective goods (Art. 46(2)). The concise and complex wording of the definition of fundamental 368 – A. VENEZIANO

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breach contained in Art. 25 CISG has been however criticized by scholars (see among others P. Schlechtriem in Schlechtriem (1998), p. 177 et seq.; Bonell (1997), p. 76, who refers to the possibility of using the UNIDROIT Principles as a means of interpreting CISG, according to the Preamble of the UNIDROIT Principles), while case law on CISG has shown uncertainties in interpreting it (for a recent ample overview L. Graffi in Ferrari (2003), p. 310 et seq.). In this respect, the PECL offer a more comprehensive definition intended to facilitate the practical application of the provision. Along the same lines see also Art. 7.3.1 of the UNIDROIT Principles, which is however more detailed than Art. 8:103 PECL (the former lists as additional factors the recklessness of the defaulting party’s conduct – added to the intentional conduct in limb (c) – and the fact that the defaulting party would suffer disproportionate loss as a result of having started performance if the contract is terminated; furthermore, the fact that the aggrieved party has reason to believe that it cannot rely on the other party’s future performance is considered as an autonomous circumstance to be taken into account; finally, the words ‘‘in particular’’ in para. (2) show that the list is an open one). As to the relationship with Italian law, at first glance the Codice civile appears not to embody the same rule since, in the context of termination, it only refers to the irrelevance of a ‘‘slight’’ non-performance and takes the creditor’s interest as a yardstick. A better look at the law in action, however, makes it clear that Italian law and PECL are actually not too distant in this respect. When courts say that they intend to strike a balance between an objective and a subjective evaluation they are actually taking the parties’ agreement into account. The creditor’s interest has therefore to be objectively defined and the nonperformance has to be weighed by looking globally at the contractual balance. Moreover, the implementation of European Directive no. 44/1999/EC has introduced in the Codice civile, though only for buyer’s rights with respect to non-conformity of goods in consumer sales, the notion of ‘‘minor’’ non-performance as a limitation to termination of the contract. Attention should be further drawn to a very recent Italian decision regarding an international sales contract, where the judge underlines the substantial coincidence between the CISG provision of Art. 25 on the notion of fundamental breach and the limitation of the ‘‘slight importance’’ of the breach in Art. 1455 C.C. (Trib. Padova, Sez. Este, 11 January 2005, Abstract in English and original full-text to be found at www.unilex.info). On the whole, the PECL are to be preferred because they explicitly draw attention to the need for an objective evaluation of the contractual balance based on the terms of the parties’ agreement and they list supplemental criteria which are designed to help judges to come to a fair solution in each concrete case.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:104: Cure by Non-Performing Party A party whose tender of performance is not accepted by the other party because it does not conform to the contract may make a new and conforming tender where the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance. The Art. addresses the case of a debtor, whose tender does not conform to the contract and who is willing to cure the non-conforming tender. According to this Article, the debtor has the right to cure the non-conforming tender in two defined hypotheses. First, if she/he performs the contract before the due date of performance agreed in the contract. In this case, he/she can make a new tender to amend the non-conforming tender before the due date. Secondly, he/she can make a new tender in those cases where a delay will not constitute a fundamental non-performance, as per Art. 8:103 PECL. Therefore, it will not be possible to cure a non-conforming tender when time is of the essence, or has become of the essence after the creditor notifies the debtor an additional period of time for performance, as indicated in Art. 8:106 PECL. Art. 48 CISG provides for a general right of the seller to cure even after the date of delivery, as long as the buyer has not terminated the contract. However, the wording of CISG is slightly different, for the seller cannot cure in cases where this would lead to unreasonable inconvenience to, or uncertainty of reimbursement by, the aggrieved party. A parallel rule on the cure of the non-conforming tender is included in the UNIDROIT Principles, Art. 7.1.4.

ITALIAN LAW Art. 1175 C.C.: Fair behavior The debtor and the creditor shall behave according to rules of fairness. Art. 1192 C.C.: Payment made with property of another (1) The debtor cannot impugn a payment made with property he had no right to dispose of, unless he offers to make payment with the property of which he is entitled to dispose. (2) The creditor who has received the payment in good faith can impugn it, without prejudice to the right to damages. Art. 1512 C.C.: Warranty of proper functioning (1) If the seller has warranted the proper functioning of the thing for a specified time, unless otherwise agreed, the buyer shall notify the seller of the defect 370 – B. GARDELLA TEDESCHI

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in functioning within thirty days after discovering it, or he shall forfeit his remedy. The action is prescribed within six months from discovery. (2) Depending on the circumstances, the court grant the seller a certain time to substitute or repair the thing to assure its proper functioning, without prejudice to compensation for damages. 1. General. The Codice Civile does not contain provisions explicitly regulating the cure of non-conforming tenders. It is however possible to indicate a few Arts. that are relevant to this issue. 2. Relevance of fair dealing. Art. 1175 C.C. contains the general and broad principle that debtor and creditor should fulfil their obligations according to fair dealing. This is the most relevant provision for the cure of non-conforming tenders. This Art. is read by some scholars as imposing on both parties (creditor and debtor) the duty to cooperate in the fulfilment of their obligations. In particular, each party should behave in a way favourable to the other party every time this does not constitute a relevant sacrifice of his/her own interests and is apt to preserve the other party’s interests (Cass. 9 March 1991, no. 2503, in Foro. It., 1991, I, 2077 and in Nuova. Giur. Comm. 1992, I, 325; Visintini (1987)). 3. Payment made with property of another. Art. 1192 of the Codice Civile envisages the case where the debtor fulfils her/his obligation with goods he/she has no right to dispose of. The provision states that, when this occurs, the debtor is considered as having fulfilled the obligation and cannot claim the goods back unless he/she offers to cure the non-conforming tender by a tender of goods he/she can dispose of. At the same time, it provided that the creditor who received in good faith goods that the debtor cannot dispose of, can claim payment back, without prejudice to the right to damages. 4. Warranty of proper functioning in sales. Art. 1512 of the Codice Civile concerns the contract of sale. If the seller has guaranteed that the goods would operate correctly for a certain period of time, she/he is given by law extra time, the length of which is decided by the judge, to repair or replace defective goods. The action for damages is however not barred. If the contract of sale is a consumer contract, Art. 1519 septies C.C. on guarantees applies (Art. 1519 bis to Art. 1519 nonies have been added to the Codice Civile upon the transposition of directive 99/44/EC on certain aspects of the sale of consumer goods and associated guarantees). While the legislative texts are silent on the question of the cure of a non-conforming tender, some scholars and case law have tackled this issue: if the creditor does not accept a performance because he/she considers it non conforming, the debtor can make a new, conforming tender as long as the aggrieved party has not brought an action for termination of the contract (Giorgianni (1975a), p. 80; Cass. 31 July 1987, no. 6643, in Foro it. 1988, I, 138). For the cases where time is of the essence and therefore cure is not possible, see Art. 1453 C.C. and the comment to Art. 9.301 PECL, Antoniolli. B. GARDELLA TEDESCHI – 371

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COMPARISON AND EVALUATION PECL and Italian law differ on the right to cure at a legislative level, but we can see a convergence if regard is given to the interpretations of scholars and courts. The Codice Civile does not establish the non-performing party’s right to cure. The offer to cure will however certainly be taken into account under Art. 1175 C.C. (fair behaviour), which is traditionally interpreted as imposing on debtor and creditor the effort of cooperating in the performance of their reciprocal obligations. At the same time, scholars and case law suggest the existence of a rule on the cure of non-conforming tenders, according to which the debtor can always make a new, conforming tender if the creditor has not brought an action for termination of the contract. Finally, PECL can be said to improve on the CISG provision on cure by the seller (Art. 48 CISG), which is difficult to interpret especially in connection with the buyer’s right to cure (Art. 46 CISG).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:105: Assurance of Performance (1) A party which reasonably believes that there will be a fundamental nonperformance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues. (2) Where the assurance is not provided within a reasonable time, the party demanding it may terminate the contract if he still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay. 1. General. This Art. is in favour of the creditor that has reasonable grounds to believe that the debtor will not perform. The direct antecedent of this provision is not to be found in any European legislation but in § 2-609 UCC – Right to Adequate Assurance of Performance. This principle is also well established at the international level, where Art. 71 CISG, like Art. 8:105, entitles the party to withhold his/her performance when, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his/her obligations. The first party has to give notice of the suspension to the other party and must continue with the performance if the other party provides adequate assurance of his/her performance. CISG applies, but not only, to cases of insolvency. PECL creates two different sets of rules for two different cases: ‘‘it is clear that the debtor will not perform’’ and ‘‘the creditor reasonably believes that there will be a fundamental non-performance’’. If it is already clear to the creditor that the debtor will not perform, Art. 9:201(2) and Art. 9:304 PECL will come into play. These Arts. give the creditor the possibility of an anticipatory breach if it is evident that the debtor will not perform; the creditor can therefore withhold performance or terminate the contract without waiting for the due date. If it is not clear that the debtor will not perform, the creditor might be reluctant to avail himself/herself of the instruments provided for in Ch. 9 PECL, because this may affect the possibility of receiving performance at all. It is at this point that the remedy of Art. 8:105 PECL may come into action. Thus, in all cases where it is not clear that the debtor will fail to perform, but the creditor has reasonable grounds to believe that the creditor will not perform, Art. 8:105 gives the creditor the right to withhold performance and to demand adequate assurance of due performance. If the debtor does not give the requested assurance, the creditor has the right to terminate the contract. The Comment to this Art. indicates that failure to give the requested assurance is considered in itself a fundamental non-performance. 2. Adequate assurance. For a correct application of the rule it is important to ascertain the exact meaning of ‘‘adequate assurance’’. Comment D provides some guidelines: the adequacy of assurance depends on circumstances such as the debtor’s standing and integrity, his/her previous conduct in relation to the contract, the nature of the event that creates B. GARDELLA TEDESCHI – 373

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uncertainty, the debtor’s ability and willingness to perform. A simple declaration of intention to perform made to the creditor may suffice in a particular setting; in others, the debtor may have to give evidence of his/her ability to perform. Illustration 3 is more detailed: if a seller has reasonable grounds to believe that the debtor will not pay because he/she has not paid previous debts owed to the seller, he/she may demand a bank guarantee, without being obliged to rely only on the debtor’s promise.

ITALIAN LAW Art. 1186 C.C.: Loss of benefit of time limit Even if the time limit is established in favor of the debtor, the creditor can immediately demand performance if the debtor has become insolvent or has, by his own act, reduced the security which he had furnished or has failed to furnish the security which he had promised. Art. 1461 C.C.: Change in patrimonial conditions of contracting parties Each party can withhold the performance due by him, if the patrimonial conditions of the other party have become such as obviously to endanger fulfilment of the counterperformance, unless adequate security is given. 1. General. Italian law provides for a rule that gives the creditor a right to request assurance of performance, if it is not clear that the debtor is able to perform; such provision, however, has a different wording and slightly different requirements and consequences than the PECL provisions. The main difference between Italian law and the PECL rests in the relevant circumstances entitling a party to withhold performance: while the PECL refer to any circumstance, Italian law only provides for the withholding of performance in case of the debtor’s insolvency or changed patrimonial conditions. 2. Circumstances which entitle a party to withhold performance. Art. 1461 of the Codice Civile envisages the change of the debtor’s patrimonial conditions after conclusion of the contract as a circumstance entitling the other party to withhold performance. This Art. allows the aggrieved party to withhold performance when it is evident that the change in patrimonial circumstances imperils the debtor’s performance (‘evidente pericolo’). This strategy of ‘‘self-defence’’ by the creditor (the so-called ‘autotutela privata’), will be neutralized if the debtor provides adequate assurance. Art. 1186 C.C. concerns the case of the debtor’s insolvency. It provides that the creditor can demand performance before the date agreed upon in the contract, if the debtor has become insolvent or has reduced the guarantees on his/her performance. The relation between these two Arts. has been controversial. It is widely accepted that the ‘‘change in patrimonial conditions’’ of Art. 1461 is different from the ‘insolvency’ of Art. 1186 C.C. The former allows the creditor to withhold performance in circumstances 374 – B. GARDELLA TEDESCHI

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where the debtor’s patrimonial conditions have changed, but in settings different from the situation of strict insolvency provided for in Art. 1186 C.C., or the even stricter rules on bankruptcy (Sacco (2003), p. 1484; this interpretation was already suggested in the previous editions of the book). A recent interpretation of Art. 1461 C.C. seems to mark a convergence between Italian law and the PECL. According to one author, the rule in the Codice Civile should be read even more extensively. While the traditional view gives relevance exclusively to monetary obligations – therefore to the patrimonial conditions of the debtor of a monetary obligation – a modern reading of the Art. should also consider the obligations which entail a facere by the debtor or which impose on it a duty to provide the other party with unique goods. Moreover, the provision should be interpreted giving adequate consideration to a wider spectrum of difficulties experienced by the debtor – for example in his/her economic organization – that imperil the creditor’s right to performance (Roppo (2001), p. 990).

COMPARISON AND EVALUATION The PECL and Italian law differ on the identification/selection of the relevant circumstances that give the creditor the right to withhold performance. Whereas the PECL consider relevant any circumstance that induces the creditor ‘‘reasonably’’ to believe that the debtor will not perform, Italian law takes into account only the change in patrimonial conditions (Art. 1461 C.C.) or the debtor’s insolvency (Art. 1186 C.C.). Greater convergence of the PECL and Italian law may ensue from a broader interpretation of Art. 1461 C.C., which suggests that a wider spectrum of circumstances affecting the possibility of performance by the debtor should be relevant to evaluate the ‘changed economic conditions’ that allow the creditor to withhold performance. Another difference rests in the kind of obligation traditionally taken into account by Art. 1461 C.C. Whereas the traditional view encompassed only monetary obligations, the PECL do not make this distinction. However, as suggested earlier, a recent re-reading of Art. 1461 C.C. advocates the relevance of obligations which entail a facere by the debtor or which impose on it the duty to provide the other party with unique goods. A further difference consists in the relevance of the risk of non-performance: the PECL require that the creditor reasonably believe the debtor will not perform; Italian law on the other hand requires that there be an evident danger of non-performance. As to the consequences, they seem to be similar: the right to withhold performance and the right to ask for new security. A further remedy is provided by Art. 1186 C.C.: in the case of the debtor’s insolvency, the creditor has the right to immediate performance (‘decadenza dal beneficio del termine’). Under Italian law, however, termination of contract is not an automatic consequence in those cases where it is reasonable to believe that the debtor will not perform. In order to terminate the contract, recourse to the ordinary remedies for termination is required (Art. 1453 et seq. C.C.; see comment to PECL 9:301 et seq., Antoniolli). B. GARDELLA TEDESCHI – 375

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:106: Notice Fixing Additional Period for Performance (1) In any case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance. (2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but it may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under Chapter 9. (3) If in a case of delay in performance which is not fundamental the aggrieved party has given a notice fixing an additional period of time of reasonable length, it may terminate the contract at the end of the period of notice. The aggrieved party may in its notice provide that if the other party does not perform within the period fixed by the notice the contract shall terminate automatically. If the period stated is too short, the aggrieved party may terminate, or, as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice. 1. General. This Art. applies to those contracts which have not been performed at the due date, but where time is not of the essence. Art. 8:106(1) allows, as a general rule, the aggrieved party to fix for the debtor an additional time for performance. If the time elapses without the performance being offered, the creditor can terminate the contract. This is why it is commonly understood that this Art. gives the creditor a chance to terminate automatically the contract in those cases where there is delay in performance and time is not ‘of the essence’. Such Art. defines also the rights and duties of the parties during the additional time fixed for performance. The purpose of this Art. is to keep the contract alive if this is still in the interest of both parties, giving the debtor and the creditor the possibility of performing where delay does not constitute a fundamental breach. The same rule is well established in international instruments: both Art. 47 CISG and Art. 7.1.5 of the UNIDROIT Principles (Additional Period for Performance) provide, with similar wording, for the possibility of the creditor to fix an additional time for performance. The creditor has to give notice to the other party of the additional time fixed for performance. When notice of additional time has been given, the aggrieved party cannot terminate the contract or ask for specific performance until the time fixed has expired without performance. The debtor’s statement that he/she will not perform is equivalent to non-performance. The creditor can, however, withhold performance of his/her own reciprocal obligations and claim damages for the delay before the time expires. 2. Time of reasonable length. In case of non-fundamental delay in performance the time fixed by the aggrieved party shall be of a reasonable length. If the time is too short, 376 – B. GARDELLA TEDESCHI

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the aggrieved party cannot terminate the contract or, when applicable, the contract cannot terminate automatically, but only after a reasonable time from the notice. The Comments to the PECL provide some details: the time should be clearly fixed, a clause such as ‘as soon as possible’ not being sufficient. The additional time cannot be couched in ambiguous terms such as ‘we hope that you will be able to perform before July 1’. As to the meaning of ‘a reasonable time’, the following are the elements that should be taken into account by the courts in deciding the reasonableness of the additional period of time: (a) The need of the aggrieved party for quick performance, provided that this is apparent to the defaulting party (b) The nature of the goods, services or rights to be performed or conveyed. A complex performance may require a longer period of time than a simple one. (c) The event that caused the delay. A party that has been prevented from performance by bad weather should be granted a longer respite than a party that merely forgot his/her duties. 3. Termination of contract. Termination of the contract, according to the PECL, is not only an act of the judge, but can be an act of the aggrieved party. Provided that all the requirements for termination are met (see Arts. 8:103 and 8:105), the aggrieved party may terminate the contract by giving notice to the non-performing party (see Art. 9:303; see PECL, Comment to Art. 8:106). This procedure allows the aggrieved party to terminate automatically the contract where there is delay in performance but time is not ‘of the essence’.

ITALIAN LAW Art. 1454 C.C.: Notice to perform (1) The other party can serve a written notice on the defaulting party to perform within an appropriate time, declaring that, unless performance takes place within such time, the contract shall be deemed dissolved. (2) The time cannot be less than fifteen days, unless the parties have agreed otherwise or unless a shorter period appears justified by the nature of the contract or by usage. (3) If the time elapses without performance having been made, the contract is dissolved by operation of law. Art. 1460 C.C.: Defense based upon non-performance (1) In contracts providing for mutual counter-performance, each party can refuse to perform his obligation if the other party does not perform or does not offer to perform his own at the same time, unless different times for performance have been established by the parties or appear from the nature of the contract. B. GARDELLA TEDESCHI – 377

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(2) However, performance cannot be rejected if, considering the circumstances, such rejection is contrary to good faith. 1. General. The Codice Civile tackles the very same issue of additional time for performance, placing more emphasis on the automatic termination of contract. Art. 1454 lays down the mechanism of ‘diffida ad adempiere’ (notice to perform). The aggrieved party can ask the debtor to perform within an adequate (‘congruo’) period of time. If the time elapses without the debtor having performed, the contract will be automatically terminated. The creditor has to give notice to the debtor both of the additional time and of the fact that non-performance within the new deadline will result in automatic termination of the contract. The same Art. provides that the additional time should not be less than a fortnight, but allows a shorter period if the parties have already agreed on a shorter time or if the nature of the contract or trade usage can show that a shorter period of time is more adequate. The notice must be made in writing and is not effective if the debtor does not receive it or has no knowledge of it (‘atto recettizio’). The time that the creditor allows for performance must be clearly determined and unambiguous; the same requirements are applied to the declaration of the creditor that the contract will automatically terminate after the time elapses. This is because the debtor needs to know the precise intentions of the creditor: he/she needs to know that he/she received a ‘diffida’ and not a mere ‘sollecito’ (request for performance). The mechanism of ‘diffida’ can operate only for cases of non-performance and is ineffective in cases of incorrect performance. If the act of the aggrieved party does not fulfil all the requirements of Art. 1454 C.C. – formal requirements, knowledge by the debtor and requirements on the fixing of additional time – a ‘diffida’ cannot produce the automatic termination of the contract (Sacco-De Nova (2004), p. 1456; Roppo (2001), p. 964). When Art. 1454 C.C. operates, termination of the contract is automatic and does not need a judicial decision. 2. Withholding of performance. Italian law provides that in any case, even in cases where no additional time for performance has been allowed, if the other party does not perform, the aggrieved party has the right to withhold performance until the non-performing party performs or offers performance. 3. Other forms of termination of contract under Italian law. It might be useful to recall that under Italian law termination of contract is usually declared by the judge, except in three cases where automatic termination of the contract by operation of law (‘risoluzione di diritto’) is possible: one is the case just examined (‘diffida ad adempiere’); another is regulated by Art. 1456 under the heading ‘express resolutive clause’ (‘clausola risolutiva espressa’), where the parties agree that the contract will automatically terminate if a specified obligation is not performed in the designated way. A third way of automatic dissolution of the contract is regulated by Art. 1457, that operates when time is of the essence for the aggrieved party, even when automatic dissolution is not explicitly stated in the contract. 378 – B. GARDELLA TEDESCHI

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The general rule for termination of contract is otherwise provided for by Art. 1453: if there is a fundamental breach – which has to be ascertained by the judge – the creditor has the right to sue the debtor for performance or termination of contract. The law relating to sales contracts envisages particular cases of automatic termination: dissolution takes place by operation of law in favour of a contracting party who, before the expiry of the established time, tenders in the customary manner the thing or the purchase price, if the other party fails to fulfil his/her obligation (Art. 1517 C.C.) Dissolution by operation of law also takes place in favour of the seller if, at the expiry of the time fixed for delivery, the buyer – whose obligation to pay the price has not yet fallen due – either does not take delivery of the thing previously offered or refuses to accept it. A contracting party who intends to avail himself/herself of termination as provided in this Art. shall notify the other party of such an intention within eight days after the expiry of the time limit; in the absence of such a notice the general provisions covering termination for non-performance will apply.

COMPARISON AND EVALUATION The PECL and Italian law converge on allowing additional time for performance by notice. In both cases, the aim of the rules is to keep the contract afoot in all cases where there is non-performance, giving the debtor the possibility of a late performance. At the same time, the PECL and Italian law give the possibility to the creditor, that did not receive such late performance to automatically terminate the contract once the time indicated in the notice has elapsed. In must be noted that in both the PECL and Italian law the aggrieved party has the right to withhold performance (see Art. 9:201 PECL, Sartori). The main differences consists in the style of the provisions: the rules set forth in the PECL are more detailed as compared to Art. 1454 C.C. On the other hand, well established case law regulates most aspects of this subject in Italian law. Another difference is the length of time allowed for performance: at least fifteen days under Italian law and a ‘reasonable’ time under the PECL.

B. GARDELLA TEDESCHI – 379

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:107: Performance Entrusted to Another A party who entrusts performance of the contract to another person remains responsible for performance. 1. General. The basic principle of this Art. is that the only person responsible for performance is the contractual party. Any internal aspects of the debtor’s organisation are, therefore, irrelevant as regards the creditor of the contractual obligation. Other Arts. of the PECL deal with problems that arise in connection with auxiliaries of the debtor. Art. 1:305 PECL concerns the imputation of actual or constructive knowledge and of any other state of mind of persons assisting in the performance of the contract. Art. 8:108 PECL explains when an impediment of a third person, assisting the party in his/her performance, may excuse the contracting party.

ITALIAN LAW Art. 1228 C.C.: Liability for acts of auxiliaries The debtor who avails himself of the services of third persons in the performance of the obligation is also liable for their malicious, fraudulent or negligent acts, unless otherwise intended by the parties. 1. General. The Codice Civile contains Art. 1228, which is equivalent to Art. 8:107 PECL.

COMPARISON AND EVALUATION The almost identical formulation of the two articles shows the convergence of the sets of rules on this subject.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:108: Excuse Due to an Impediment (1) A party’s non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences. (2) Where the impediment is only temporary the excuse provided by this Art. has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the creditor may treat it as such. (3) The non-performing party must ensure that notice of the impediment and of its effect on its ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of these circumstances. The other party is entitled to damages for any loss resulting from the non-receipt of such notice. 1. General. This Art. governs the case in which an event outside the performing party’s sphere of control – so-called force majeure – prevents the debtor’s performance. The impediment can be either temporary or permanent; the consequences attached thereto will accordingly be different. Another Art. in the PECL deals with supervening circumstances that alter the contractual equilibrium. It is Art. 6:111 PECL, governing the consequences of unforeseen circumstances that render performance excessively onerous (so called hardship, see Comment under Art. 6:111 PECL, Somma). Art. 8:108 PECL, therefore, only deals with circumstances that actually prevent performance. The parties may derogate from the application of Art. 8:108 PECL and allocate the risk of non-performance in a different way, either in general or in relation to a particular impediment. The PECL, on this issue, follow the pattern of Arts. 79 CISG and 7.1.7 of the UNIDROIT Principles. 2. Requisites of force majeure. The Comment enumerates the requisites of force majeure and specifies that it is up to the party invoking the excuse of force majeure to show that the conditions are fulfilled. (a) The fact must be outside of the debtor’s control. The circumstance preventing performance must be outside the debtor’s control, according to a general principle that assigns the debtor the risk of his/her own activities and organization. The comment to the PECL provides a clarifying example: ‘‘the breakdown of a machine, even if unforeseeable B. GARDELLA TEDESCHI – 381

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and unpreventable, cannot be an impediment within the Art. and this avoids investigation of whether the breakdown was really unforeseeable and the consequences unpreventable.’’ If the debtor entrusts performance to a subcontractor, the relevant impediment should be outside of the subcontractor’s control; on the other hand, the fact that the subcontractor’s action is out of the debtor’s control is not relevant (see Art. 8:107 PECL). (b) The impediment could not have been taken into account at the time the contract was made. If the parties could have taken into account the circumstances that prevent performance, it can be inferred that the parties accepted such a risk allocation, or else that the affected party negligently did not foresee the impediment and therefore has to bear its consequences. (It should be noted that the same rule applies in the case of Art. 6:111 PECL.) Foreseeability is objectively defined according to the ‘‘reasonableness’’ test. Reasonable foreseeability occurs, according to Comment C (ii), when ‘‘a normal person, placed in the same situation, could have foreseen it without either undue optimism or undue pessimism.’’ (c) Insurmountable impediment. Art. 8:108 PECL is relevant only when the impediment is insurmountable or irresistible. In order for this Art. to be applicable, it is therefore necessary that the debtor could not avoid the impediment nor overcome it. Both conditions are needed according to Comment C (iii). The possibility for the party to overcome or avoid the impediment depends on the facts of the given contract. On the other hand, the debtor is not asked to take precautions disproportionate to the risk or to adopt illegal means to avoid the risk. 3. Effects. According to this Article, when an event of force majeure occurs the nonperforming party is excused and relieved of liability. This means that specific performance becomes impossible and no damages, including liquidated damages or penalties, can be awarded. It is more difficult to outline what happens to the contract. The PECL have chosen the easiest way out, addressing such cases as instances of non-performance. The aggrieved party may terminate the contract with a unilateral declaration (Art. 9:303 PECL) if the non-performance is fundamental. In case of impossibility of the whole performance, a declaration of the creditor is not necessary and the contract will be terminated automatically, because it would be pointless for the creditor to keep in force a contract that is impossible to perform. If partial performance is still possible, the existence of the contract depends on whether or not non-performance is fundamental. If the aggrieved party prefers to receive partial performance, his/her own obligation can be proportionally reduced, as prescribed by Art. 9:104 PECL (Reduction of price, see Comment by Mancaleoni). 4. Temporary impediment. Para. 2 addresses the question of a temporary impediment, stating that a temporary impediment gives rise to a temporary excuse. When the impediment comes to an end and performance becomes possible again, the creditor’s nonperformance is no longer excused. If, however, the delay results in a fundamental nonperformance (see Comment to Art. 8:103 PECL, Veneziano), the aggrieved party may terminate the contract. 382 – B. GARDELLA TEDESCHI

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5. Notice. The non-performing party has to warn the other party of the occurrence of the impediment within a reasonable time. Notice is necessary for the creditor to adapt as soon as possible his/her organization to the event of non-performance. Comment F specifies that the reasonable time is a very short time, and that in many circumstances notice has to be immediate. The sanction for failure to give notice is an aggrieved liability for the extra losses suffered by the creditor because he/she did not know of the impossibility of the performance.

ITALIAN LAW Art. 1218 C.C.: Liability of debtor The debtor who does not exactly render due performance is liable for damages, unless he proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him. Art. 1256 C.C.: Definitive impossibility and temporary impossibility (1) An obligation is extinguished when its performance becomes impossible for a cause not imputable to the debtor. (2) If the impossibility is only temporary the debtor is not liable for delay in performance as long as it continues to exist. However, the obligation is extinguished if the impossibility continues until, depending on the source of the obligation or the nature of its subject matter, the debtor can no longer be held bound to perform the obligation or the creditor is no longer interested in the performance. Art. 1463 C.C.: Total impossibility In contracts providing mutual counter-performance, the party released for supervening impossibility of the performance due cannot demand performance by the other party, and he is bound to restore that which he has already received, in accordance with the rules concerning restitution of payments not due. Art. 1258 C.C.: Partial impossibility (1) If the performance has become impossible only in part, the debtor is discharged from the obligation by performing that part which is still possible. (2) The same provision applies when a specified thing is owed and it has suffered damage, or when something remains after the total destruction of the thing. Art. 1464 C.C.: Partial impossibility When the performance of one party has become impossible only in part, the other party has a right to a corresponding reduction of the performance due by B. GARDELLA TEDESCHI – 383

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him, and he can also withdraw from the contract if he lacks an appreciable interest in partial performance. Art. 1465 C.C.: Contracts with translative or constitutive effects (1) In contracts which transfer ownership of a specified thing or constitute or transfer real rights, destruction of the thing by a cause not imputable to the transferor does not release the transferee from the obligation of performance, even though the thing was not delivered to him. (2) The same provision applies if the translative or constitutive effect is deferred until the expiration of a time limit. (3) Whenever the object of the transfer is a thing specified only as to kind, and the transferor has made delivery or the thing has been identified, the transferee is not released from the obligation of counter-performance. (4) In all cases the transferee is released from his obligation if the transfer was subject to a suspensive condition and impossibility intervened before fulfilment of the condition. 1. General. In Italian law three Arts. govern the impediment that renders performance impossible. Art. 1218 C.C. is part of the general law on obligations. It sets forth the limits of the debtor’s liability: the debtor is liable for non-performance unless non-performance is due to a cause not imputable to him (‘causa a lui non imputabile’). This expression, which was introduced for the first time in the Codice Civile of 1942, is interpreted by scholars and by judges as referring to an event that does not depend on the debtor’s negligence (‘colpa’), therefore something that is entirely out of the sphere of control of the debtor and that he/she cannot avoid. This event needs to be causally linked to the real impossibility of performing (Visintini (1987), p. 353). If the performance of the obligation becomes impossible for some cause imputable to the debtor, the latter cannot be asked to perform, because performance is impossible, but will be liable for non-performance. Art. 1256 C.C., which is also part of the general rules on obligations, addresses more specifically the question of the impossibility of performance and the problem of temporary impossibility. Art. 1463 C.C. addresses the question of the effect of the impossibility of performance of an obligation in a contract where both parties are obliged to perform. According to this provision, the party that cannot perform because performance has become impossible is freed of the duty to perform and has to give back what has already been received from the other party. 2. Which is the relevant impossibility? This question is an important one for Italian taxonomy: it is considered part of the general study of obligations and represents one of the most interesting points where the law of obligations and of contracts concur to shape the applicable rules (Sacco-De Nova (2004); Roppo (2001)). Scholars’ views differ with regard to the definition of the impossibility that can free the debtor of the duty to perform. 384 – B. GARDELLA TEDESCHI

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The prevailing standard is an objective one: an obligation that someone else, though not the debtor, can still perform is not an impossible one. Thus, the fact that the debtor has no money to pay (‘insolvenza del debitore’) is not relevant because, from an objective point of view, money always exists, even though it is not to be found in the debtor’s pockets, and, objectively speaking again, it is always possible to pay. There is however another view, according to which an obligation requiring efforts that go beyond the ordinary diligence to perform has to be considered as already being impossible. This opinion rests on the reading of the mentioned provisions combined with the general principles of good faith and fair behaviour, so that efforts that exceed ordinary efforts for the specific type of contract involved should not be imposed on the other party (see Visintini (1987), p. 355). The impossibility should be supervening: if the performance was impossible at the time the contract was made, the contract would be void for lack of its object (Art. 1418 C.C.). 3. Temporary impossibility. Art. 1256 C.C., para. 2, deals with temporary impossibility. If the impossibility is only temporary, the debtor is not liable for delay in performance. The temporary impossibility can however also result in the extinction of the obligation if, considering the nature of contract or its subject matter, the debtor cannot be considered bound to perform or, alternatively, if the creditor is no longer interested in a delayed performance. If the obligation becomes impossible, the effects will reverberate on the contract that will be terminated, and restitution will follow accordingly. 4. Effects of impossibility on the contract. Once performance becomes impossible, the contract terminates at the moment when the impediment occurs. Termination is automatic and operates by law. This means that there is no need for a judicial decision to terminate the effects of the contract. The debtor whose obligation has become impossible is not bound to perform and the other party is obliged to give back what has already been received. 5. Partial impossibility. The provisions dealing with partial impossibility are situated in both the part on the general law of obligations and in the part dealing with contracts. Art. 1258 C.C. sets out the effects of partial impossibility on the debtor and Art. 1464 C.C. in turn governs the effects produced on the contract by a partial impossibility of performance. According to Art. 1258 C.C., the debtor of an obligation that is partially impossible is liberated by performing that part of the obligation that is still possible. The other party has a choice: if still interested in performance, he/she can obtain a reduction of the price of his/her own obligation; if no longer interested in performance, the other party can withdraw from the contract and restitution will follow accordingly. 6. The rule ‘res perit domino’ and contracts that transfer the ownership of goods. A different allocation of risk operates for the contract that transfers the ownership of goods to one party to another. Under Italian law, ownership of specific goods is transferred by B. GARDELLA TEDESCHI – 385

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the mere consent of the parties (Art. 1376 C.C., ‘principio consensualistico’), any other element, such as for example the traditio, being unnecessary. This means that a party may have already concluded a contract for the transfer of the ownership of goods but, even though the ownership has already been transferred, that goods is not under his/her control. Art. 1465 C.C. states that the new owner bears the risk and has still to render the counterperformance to the creditor. If the goods have not yet been identified, the rule ‘res perit domino’ does not apply and the risk of destruction of the goods rests on the transferor (i.e. seller). As this rule is considered a default rule, parties can allocate the risk in a different way (Sacco (2004), p. 1470).

COMPARISON AND EVALUATION Despite some differences in style and wording, the PECL and Italian law adopt the same rules for non-performance due to an impediment. Italian law scatters the regulation in the general law on obligations and in contract law, thereby complicating the decision concerning the relevant sources of law. On the other hand, Italian law contains a clear rule on ‘res perit domino’. This derives from the fact that the transfer of ownership is not addressed by the PECL, nor is the question of the passing of risk (which is regulated in CISG). These are however minor differences compared to the convergence on an important principle such as that of force majeure.

386 – B. GARDELLA TEDESCHI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 8:109: Clause Excluding or Restricting Remedies Remedies for non-performance may be excluded or restricted unless it would be contrary to good faith and fair dealing to invoke the exclusion or restriction. 1. General. According to the PECL, the parties are free to determine the content of their contract as well as to determine the consequences of non-performance. They can therefore limit or exclude remedies otherwise available, to the extent permitted by the context in which the exclusion or limitation clause is called into operation. Art. 8:109 PECL sets a limit to those clauses, preventing reliance on exclusion or restriction of liability clauses where this would be contrary to good faith and fair dealing. According to Comment A, the aim of this Art. is to prevent a party from being allowed to undertake performance and at the same time to exclude all penalties resulting from non-performance. In general, the clauses that will fall within the scope of this Art. are penalty and liquidated damages clauses and clauses providing for limitation of damages (see Comment to Art. 9.509 PECL, Mari), but it is possible to include clauses regarding other remedies for non-performance such as, for example, termination or reduction of price. 2. Role of good faith and fair dealing. The criterion set forth in Art. 8:109 PECL does not concern the content of the exoneration clauses, but the behaviour of the party invoking the clause in a particular set of circumstances in order to limit his/her liability. Illustration 1 gives a clear example of the functioning of Art. 8:109 PECL. In a construction contract, it is possible to determine the liability for delay at [Euro] 10,000 per week; but if the constructor delays this job because he/she is more interested in completing another job, and the employer’s losses amount to [Euro] 20,000 per week, the constructor cannot invoke, in these particular circumstances, the exclusion clause because he/she has deliberately disregarded the contract. Art. 8:109 PECL has a more restricted scope than Art. 4:110 PECL (see Comment Antoniolli), since it applies only to clauses that exclude or limit liability. On the other hand, Art. 8:109 PECL applies to clauses that have been individually negotiated and that may be, as such, fair in their content but are to be considered differently according to the circumstances of the case.

ITALIAN LAW Art. 1229 C.C.: Exoneration of liability clauses (1) Any agreement which, in advance, excludes or limits liability of the debtor for fraud or gross negligence is void. (2) Any agreement which, in advance, exonerates from or limits liability in cases B. GARDELLA TEDESCHI – 387

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in which the act of the debtor or his auxiliaries constitutes a violation of a duty arising from rules of public policy is also void. Art. 1382 C.C.: Effects of penal clause A clause by which it is agreed that in case of non-performance or delay of performance one of the contracting parties is liable for a specified penalty, has the effect of limiting the compensation to the promised penalty, unless compensation was agreed for additional damages. The penalty is due regardless of proof of damage. 1. Exoneration clauses and penalty and liquidated damages clauses. The debate in Italian law has traditionally focused on the content of the clauses of limitation of liability rather than on the context in which parties may invoke them. Art. 1229 C.C. states that clauses limiting liability for fraud or gross negligence on the part of the debtor are void. The legislator’s intent is to avoid the situation where a debtor can decide whether to perform or not without having to pay damages in case of non-performance. A classic scholarly contribution on this subject roots this Art. in the need to protect the creditor (see Benatti (1971)). On the other hand, Art. 1382 C.C. affirms the validity of penalty clauses aiming to predetermine the measure of damages, provided that the quantification of the harm is reasonable. It is therefore important for the interpreter not to allow an exclusion clause to circulate under the heading of ‘‘penalty clause’’ (Ceccherini (2003), p. 194; Mazzarese (1999), p. 613; Ponzanelli (1998), p. 852). The Court of Cassation intervened on this subject clarifying that, in order to ascertain whether a penalty clause provides for a nugatory liquidation of damages, thereby infringing the provision of Art. 1229 C.C. on exoneration of liability, the interpreter has to look at the time when the contract was concluded (genetic moment) and not at the measure of the damage that actually occurred (Cass. 28 July 1997, no. 7061, in Foro it. Rep. 1997, 421; Cass. 3 December 1993, no. 1201, in Giust. Civ., 1994, I, 1247). Most cases on this subject deal with transportation contracts (both by sea and on land), bank contracts for safe-deposit boxes (concerning the diligence that should be used in these types of contracts in connection with events such as floods) and insurance contracts. A detailed review of the most important Italian case law can be found in Ceccherini (2003), pp. 212–246. 2. Standard terms. Art. 1229 C.C. has to be read in connection with Art. 1341 C.C., which deals with clauses that are imposed by one party on the other without being negotiated (so-called standard terms), and in general with the branch of contract law concerning consumer protection. According to mainstream scholarship, Art. 1229 C.C. provides protection for those contracts where the parties actually negotiate each of the contract’s clauses, so that the contract is not unbalanced. If the limitation clause is included in a standard contract, Art. 1229 does not apply and the contract will be governed by Arts. 1341 and 1342 C.C. More recently, Directive 93/13/EC on Unfair Terms in Consumer 388 – B. GARDELLA TEDESCHI

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Contracts, implemented in Italy by Art. 25 of Law 25 February 1996, no. 52, modified the Italian regime governing unfair terms in consumer contracts. The result is the addition to the Codice Civile of Arts. 1496 bis – 1496 sexies. Exclusion of liability clauses has to be deemed unfair under art. 1469 bis, n. 3, where the list of ‘‘unfair terms’’ is to be found. For a more detailed treatment of the impact of the implementation of the European Directive on Italian Law see Comment to Art. 4:110 PECL, Antoniolli.

COMPARISON AND EVALUATION The PECL focus on the situation in which one of the parties invokes the exclusion or limitation of remedies for non-performance. Italian law has, on the other hand, traditionally concentrated its attention on the content of clauses that limit or exclude liability for one of the parties. Clauses that exclude or limit liability for fraud or gross negligence are void under Italian law. Despite this diversity of approach, the principle that a party that does not behave in good faith should not invoke clauses that limit or exclude liability is deeply engrained in Italian law where constant reference to ‘‘good faith’’ is made in the provisions dealing with the life of the contract (see Art. 1337 C.C. on formation of the contract, Art. 1366 C.C. on interpretation and Art. 1375 C.C. on performance, as well as the Comment to Art. 1:201 PECL, Antoniolli).

B. GARDELLA TEDESCHI – 389

Chapter 9 PARTICULAR REMEDIES FOR NON-PERFORMANCE Section 1: Right to Performance PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:101: Monetary Obligations (1) The creditor is entitled to recover money which is due. (2) Where the creditor has not yet performed its obligation and it is clear that the debtor will be unwilling to receive performance, the creditor may nonetheless proceed with its performance and may recover any sum due under the contract unless: (a) it could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances. 1. General. This Art. contains a specific provision on the right to enforce a monetary obligation as a remedy for non performance. A monetary obligation is every obligation to make a payment of money, regardless of the form of payment and the currency in which it is to be paid, and regardless of the nature of the obligation. The right to performance stems directly from the well-known principle of pacta sunt servanda. However, to be enforceable a monetary obligation must have been earned by the creditor (i.e. it must be due), and it must be clear that the debtor will refuse to receive the creditor’s future performance. This is the situation regulated by paragraph (2). 2. Exceptions. Paragraph (2) provides for two situations in which the principle pacta sunt servanda does not apply. Indeed, if it is clear that the debtor will be unwilling to receive performance, the creditor of the monetary obligation cannot proceed with his/her own performance and claim the performance of the monetary obligation if: (a) he/she could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances. (a) Cover transaction. The first exception is when the creditor can make a reasonable cover transaction without involving him/herself in significant effort or expense. Consequently a substitute transaction is possible where there is a market for the performance. For example, if another customer would be willing to conclude the transaction for the same price and at the same conditions, paragraph (2) can be invoked. (b) Unreasonable performance. The second exception to the creditor’s right to enforce the monetary obligation under Art. 9:101 (2) PECL is when the creditor’s performance of his/her own obligation would be unreasonable given the circumstances of the case. A F. SARTORI – 391

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typical situation is where, before performance has begun, the debtor makes it clear that he/she no longer wants it and the creditor has no legitimate interest in performing his/her obligation. 3. Notes. According to paragraph (2) the debtor is at risk of being forced to accept a performance which he/she no longer wants. Consequently the burden of proving that one of the exceptions applies is on the debtor. If either one of the exceptions applies, the creditor may not demand the money owed under the contract for the counterperformance, in particular the price. However, damages for non-performance may be claimed, as stated in Art. 9:103.

ITALIAN LAW Art. 1453 C.C.: Dissolution of contract for non-performance 1. In bilateral contracts involving mutual consideration, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving in any case, compensation for damages. Art. 1210 C.C.: Power of deposit and its discharging effects If the creditor refuses to accept the actual tender or does not present himself to receive the things tendered to him by notice, the debtor can effect a deposit. A deposit being effected, when it has been accepted by the creditor or has been declared valid by a final judgment, the debtor can non longer withdraw it and is discharged from his obligation. 1. General. The Civil Code contains no specific provision on the right to enforce a monetary obligation as a remedy for non-performance. Nevertheless, Art. 1453 C.C. provides a general remedy for non-performance of bilateral contracts involving mutual consideration, by granting the creditor the right to enforce any obligation or duty where the debtor fails to perform his/her obligation. The mechanism allowing the creditor to enforce his/her right (in addition to being entitled to damages), is based upon the general principle that a debtor is liable for his/her debts, obligations and duties. The relationship between the creditor and the debtor’s assets does not give the creditor a right to or ownership of the debtor’s assets, but rather to a procedural power consisting of the right to initiate an enforcement proceeding (azione esecutiva). The debtor’s assets may only be seized after a court decision awarding the money due. The judge’s decision is title to initiate an enforcement proceeding (titolo esecutivo). Exceptionally, the creditor may acquire title to initiate the enforcement proceeding by accepting payment by check, or upon issuance of a bill of exchange: bills and check will constitute title to initiate the enforcement proceeding. In addition, for debts in money the parties may acknowledge the existence of the debt 392 – F. SARTORI

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before a notary or other civil servants holding authority to certify a debt (Art. 474 C.P.C., Code of civil procedure), and the certification will serve as a title to proceed (Grasso, ED, XLIV, 685). Enforcement proceedings are complex procedures aimed at enforcing debt collection or securing the performance of a duty (Giorgianni (1975b); Mazzarella, ED, XV, 448). There are two forms of enforcement: enforcement of specific performance and levy execution. Enforcement of specific performance occurs whenever the right claimed by the debtor coincides with the right being enforced and may be found in the debtor’s assets (Monteleone (1977)). The action is based upon different grounds according to whether the right being enforced regards failure to perform an obligation to do something, a duty to abstain from doing something, a duty to give consent or a duty to pay (Arts 2930, 2931, 2932 C. C.). Levy execution occurs when the right claimed by the debtor does not coincide with the right being enforced or may not be found in the debtor’s assets. Also in the case of money due, although the right claimed by the debtor coincides with the right being enforced, it may not be found in the debtor’s asset, which is mainly composed of chattels. Through levy execution the creditor is awarded only sums of money. 2. Overdue amounts. Under Italian law creditors may require payment of a debt only if the debt is collectable. The Civil Code does not provide a general solution for cases when the debt is not collectable because the debtor is not willing to accept performance by the creditor. Since there is not a general duty to cooperate under Italian law, the debtor normally cannot be forced to accept any such performance (Cattaneo, D, XI, 433). Besides, the debtor could theoretically be entitled to a right to perform his/her duty, and thus the creditor would be bound to accept performance thereof, but the law provides no specific enforcement remedy for such situations (D’Amico, EDA, II, 501; contra, Cicala (1968), p. 247). Art. 1206 et seq. C. C. regulate all situations where the creditor fails to make every endeavor to let the debtor perform his/her duty (Cass. 2232/1997, Giust.civ., 97, I, 2480). This set of rules, encompassed under Section III, Chapter II, Title I of Book IV of the Civil Code, is entitled Default of Creditor (or mora accipiendi) (Stella, La nuova giurisprudenza civile commentata – NGCC 93, II, 107). Placing the creditor in default (mora creditoris) may imply several consequences for the benefit of the debtor’s position, and may lead to the debtor being discharged of any duty to the creditor (Cass, Giust.it., 97, I, 1, 1086). The debtor is discharged by delivering the object of performance to a bailee; the object of performance is thus made available to the creditor, who is thereafter entitled to require the object of performance from the bailee. Delivery of the object of performance to a bailee not only extinguishes the debt for the debtor, but also constitutes full performance thereof. Thus, if the debtor was to perform a contractual duty for good and valuable consideration, the discharged debtor will still be entitled to payment (Cattaneo, D, XI, 441). F. SARTORI – 393

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COMPARISON AND EVALUATION Both the Civil Code and the PECL grant the creditor a ‘‘right’’ to require payment if the debt is collectible. This rule is inferable from Art. 1453 para. 1 C.C. However, the Italian code provides no remedy for the case in which the debtor’s obligation only becomes due after performance by the creditor of his/her own obligation, and the debtor refuses to receive performance. On the other hand, Art. 9:101, para. 2 PECL contains a solution to this problem: the creditor is allowed to proceed with his/her own performance, and consequently to claim payment thereof. The solution in the PECL is made possible by the fact that under Art. 1:202 PECL, the debtor has a duty to cooperate in order to give full effect to the contract. Failure to comply with that duty amounts to non-performance under Art. 1:301 PECL, which entitles the creditor to require performance of the duty to cooperate under Art. 9:101 PECL. On the contrary, Italian law provides no specific duty of the creditor to accept or receive performance of the debtor’s obligation. The rules on mora creditoris and on bank deposits may help to fill such gaps by allowing the debtor to be discharged from his/her performance duty and consequently be entitled to payment of consideration.

394 – F. SARTORI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:102: Non-monetary Obligations (1) The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance. (2) Specific performance cannot, however, be obtained where: (a) performance would be unlawful or impossible; or (b) performance would cause the obligor unreasonable effort or expense; or (c) the performance consists in the provision of services or work of a personal character or depends upon a personal relationship, or (d) the aggrieved party may reasonably obtain performance from another source. (3) The aggrieved party will lose the right to specific performance if it fails to seek it within a reasonable time after it has or ought to have become aware of the non-performance. 1. General. This article contains a specific provision on the right to require performance of a contractual obligation other than the payment of money by the non-performing party. The term ‘‘specific performance’’ indicates the obligations, which are not covered by Art. 9:101, to do or not to do an act, to make a declaration or to deliver something. Obviously the aggrieved party has not only the right to demand the other party’s performance as spelt out in the contract, but also a remedy in order to enforce his/her right, by applying for an order or decision of the court. Paragraph (1) clarifies that as a rule: i) the creditor is entitled to performance as a remedy for an earlier non-performance; ii) the remedy is open to the creditor if the original performance was in some way defective. This principle is explicitly mentioned in Art. 1:301 PECL, where it is provided that ‘‘non-performance (...) includes defective performance (...)’’. 2. Exceptions and general remarks. Paragraph (2) introduces many exceptions to the remedy of specific performance. Thus, a non-performing party cannot be forced to perform the contract in circumstances when performance would be unlawful or impossible; would cause the obligor unreasonable effort or expense; consists of the provision of services or work of a personal character or depends upon a personal relationship; can be reasonably obtained by the aggrieved party from another source. Paragraph (3) further states another exception that can be seen as a sanction against unreasonable delay on the side of the creditor in seeking specific performance. The creditor loses the right to claim specific performance if he has not invoked that right within a reasonable time after he/she has or ought to have become aware of the non-performance. 3. Impossibility and illegality. Obviously there is no right to require performance if this is impossible. This is true in case of factual impossibility or if an act is prohibited by law; nevertheless the contract cannot to be avoided because the performance may be F. SARTORI – 395

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illegal. If an impossibility is only temporary, the right to require specific performance will revive if the source of the impossibility disappears. Enforcement of performance is excluded only during that time. Last but not least specific performance is not available when a third party has acquired priority over the plaintiff to the subject matter of the contract. 4. Unreasonable effort or expense. The right to specific performance is excluded if it would require unreasonable effort or expense by the non-performing party. It is not clear when effort or expense is to be considedered unreasonable. However in such a situation it is supposed that the creditor requiring performance would act contrary to good faith and fair dealing. 5. Personal nature of obligation or relationship. The right to specific performance is explicitly excluded where the debtor is bound by an obligation of a personal nature. In this situation specific performance is deemed too restrictive of the debtor’s personal liberty, and, on the other hand, it is considered to be useless: if a debtor is forced to provide a service or work of a personal nature, and he does not want do it, the quality of the work will probably not satisfy the creditor’s requirement. Moreover, para. (2) sub-para. (c) excludes the right to require performance where the obligation itself is not personal, but the relationship is based on mutual and personal trust. A typical example would be the lawyer-client relationship. If the client does not believe in the skill of his/her lawyer, he/she cannot be forced to continue their relationship, even if the service he/she provides would not be considered to be of a personal nature. 6. Substitute transaction. Para. (2) sub-para. (d) excludes a right to require performance if the creditor can more easily obtain performance from other sources. As in Art. 9:102, para. 2, under (d) PECL, the burden is on the debtor of proving that such a cover transaction was possible, subject to reasonable terms and that the substitute transaction would not burden the creditor with additional effort or expense applies. 7. Reasonable time. A request for performance of a non-monetary obligation must be made within a reasonable time. The reasonable period of time is flexible and it has to be determined in view of the situation. In certain cases it may be very short because, for instance, the nature of the merchandise; in other cases, it may be longer. Also in this case, the burden of proving that the delay in requesting performance was unreasonably long is on the debtor.

ITALIAN LAW Art. 1453: Dissolution of contract for non-performance In bilateral contracts involving mutual consideration, when one of the parties fails to perform his obligations, the other party can choose to demand either 396 – F. SARTORI

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performance or dissolution of the contract, saving in any case, compensation for damages. Art. 2930 C.C.: Enforcement by delivery or release In the case of non performance of an obligation to deliver a specified movable or immovable thing, the person entitled thereto can obtain forced delivery or release of it, in accordance with the provisions of the civil procedure code. Art. 2931 C.C.: Enforcement of obligations to do something In the case of non performance of an obligation to do something, the person entitled thereto can have performance made at the expense of the obligor with the formalities set out in the civil procedure code. Art. 2932 C.C.: Specific enforcement of obligation to make contract If a person who is bound to make a contract does not perform his obligation, the other party, when possible and unless he is barred by the instrument, can obtain a judgment producing the same effects as the contract which has not been made In the case of contracts for the transfer of ownership of a specified thing or the establishment or transfer of another right it does not carry out his performance or does not offer to do so with the formalities prescribed by law, unless such performance cannot yet be demanded. Art. 2933 C.C.: Enforcement of obligations not to do something In the case of non performance of an obligation not to do something, the person entitled thereto can obtain the destruction, at the obligor’s expense, of that which was done in violation of such obligation. If the destruction of the thing is prejudicial to the national economy, such destruction cannot be ordered and the person entitled can only recover damages. 1. General. As a general remedy for any bilateral contract involving mutual consideration, under Art. 1453 C.C. the creditor has the right to enforce any obligation or duty when the debtor is not performing. The Codice civile differs from the PECL in that it does not specify that the creditor may bring an action in order to modify incorrect performance. However, incorrect performance coincides with non performance (Art. 1218 C.C.). An action for specific performance will have different requirements according to whether the right being enforced regards failure to abide to a duty to perform, a duty to abstain, a duty to give consent or a duty to pay. a) Duty of delivery. In case of failure to abide to a duty to deliver something (i.e. goods), the goods must already be specifically identified, i.e. the goods must be already specified or ascertained in detail; furthermore, the goods must still be part of the debtor’s assets. If these requirements are met, the creditor may ask the court to order delivery of the goods (if we are dealing with chattels), or may file an action for F. SARTORI – 397

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the recovery of land (if we are dealing with real property), and may achieve his/her purpose with the aid of bailiffs (Art. 2940 C.C.). b) Duty to perform. If the debtor’s obligation consisted in doing something, since the debtor may not be forced to perform such duty (nemo ad factum cogi potest), under Art. 2931 C.C. the creditor may seek someone else to do the job and any related costs will be borne by the debtor, as established in the Codice di procedura civile (Code of Civil Procedure). This may happen as long as the debtor’s obligation is a fungible task, i.e. it may be equally performed by others and consequently does not require performance to be personally carried out by the debtor. For instance, if the debtor was entrusted to paint the walls of a warehouse, the job can be performed by another person without this affecting the performance, whilst a well renowned painter personally entrusted to paint a picture may not be replaced by another painter. In cases such as the latter, the creditor may only sue for damages and be awarded a sum of money. c) Duty to abstain. If the debtor’s duty consists in abstaining from doing something, the creditor may seek a court decision ordering that anything that was actually done by the debtor in violation of his/her duty be destroyed, and that any costs for destruction be entirely borne by the debtor. However, if destruction causes ‘‘any detriment to the economy of the nation’’, the creditor will only be entitled to damages (Art. 2933 C.C.). d) Duty to enter into an agreement. If the debtor’s duty consisted in entering into an agreement, in case of non-performance the creditor may seek to obtain a court decision establishing the rights and duties connected to the agreement which was not concluded (Art. 2932 C.C.). This rule applies both to preliminary agreements (Art. 1351 C.C.) and to any other duty to enter into a contract, whether provided by the law (such as under Arts 849, 1032, 2597 C.C.), or arising out of mutual agreement of the parties. 2. Exceptions. (a) Illegality. A general and self-evident restriction to the right to claim specific performance derives from Art. 1418 C.C. Under this rule, a contract is void if it is in violation of mandatory rules, if the contract was agreed for an unlawful causa (Art. 1343 C.C.) or purpose (Art. 1345 C.C.), or if the object of the agreement is unlawful (Art. 1346 C.C.). In all such cases, the creditor may not seek performance of a ‘due’ obligation, because the contract is void. (b) Absolute impossibility. If performance is absolutely impossible, a claim for performance will of course fail. In all such cases, the debtor is discharged from performing any obligation, his/her only duty being to return any money received in accordance with the provisions regulating the action for money had and received (Art. 1463 C.C.). This rule applies only when performance has become impossible for reasons not reconducting to the debtor. (c) Relative impossibility. If performance by one party is only partially impossible, the other party is entitled to reduce performance of his/her own obligation, and may also withdraw from the agreement if he/she is not interested in receiving partial performance (Art. 1464 C.C.). A party ‘interest’ to partial performance is to be evaluated objectively according the importance test provided under Art. 1455 C.C. (Dalmartello (1969)). 398 – F. SARTORI

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(d) Supervening unconscionability (hardship). If performance for one of the parties has become excessively burdensome due to the occurrence of extraordinary and unpredictable events, the party bound to perform may require termination of contract for hardship, as long as the supervened unconscionability does not fall within the ordinary risks connected with the contract (Art. 1476 C.C.). In such cases, the creditor may not claim performance. The purpose of this rule is to provide a remedy for the occurrence of situations not predicable and not connected with the ordinary contingencies typical of any agreement (G.B. Ferri, Q, 88, 54). (e) The nature of the obligation. If we are dealing with duties to perform which are not fungible, the creditor may only claim damages, asking the court to order specific performance by the debtor, with all related costs to be entirely borne by the latter, as provided by the Code of Civil Procedure.

1. Limitation period and debarment from action for forfeiture of right. Under Italian law, the right to claim performance of contractual obligations is subject to the statute of limitation and to debarment from action for forfeiture of right. Indeed, any right is subject to the statute of limitation if the person entitled to the right fails to enforce it within a time limit set forth by the law; nevertheless, inalienable, non-transferable rights and other rights expressly mentioned by the law are not subject to the statute of limitation. The time limit may vary according to the right at issue. When the statute of limitation has run out, the person entitled to the right may take legal steps to enforce such right, but the defendant or any summoned party may interrupt legal proceedings by claiming that limitation period has run out; however, if no such claim is made, the right at issue may be lawfully enforced. As a general rule, the statute of limitation runs out after ten years (Art. 2946 C.C.). It runs out after one year for certain kinds of contracts such as broker’s rights, forwarding agency and transportation matters, and insurance policies (Arts 2950, 2951, 2952 C.C.). The law also provides several presumptions (set forth in Arts 2954–2956 C.C.), e.g. cases where the limitation period is presumed having run out after a certain time has elapsed, i.e. there is a presumption that consideration for a certain performance has been fully given. It is a rebuttable presumption, which may be disproved by providing suitable evidence. Italian law also encompasses rules on debarment from action for forfeiture of right. Debarment from action differs from the statute of limitation in that a) debarment from action occurs after the expiry of terms which are generally shorter than time limits provided in the statute of limitation; b) the purpose of the statute of limitation is to remedy uncertainty caused by ongoing failure to exercise or enforce a right, whilst debarment from action may have several purposes, all connected to the requirement that a right be exercised within a mandatory term which may not be delayed, otherwise it is considered forfeited; c) the statute of limitation only applies to the exercise of a right, whilst debarment of action applies to any measure taken for the purpose of exercising a right. F. SARTORI – 399

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COMPARISON AND EVALUATION Both the Italian system and the PECL recognize the right to claim specific performance, and both systems recognize exceptions to such right for situations where specific performance is impossible or where another remedy – especially damages or termination – is considered more adequate. There are several differences between the Italian system and the PECL system as regards the exceptions which may be raised to bar the creditor from claiming specific performance. For instance, the concept of impossibility is more specific in the Italian system, which distinguishes between absolute impossibility and relative impossibility. Relative impossibility, i.e. when performance is only partially impossible, implies that the other party is entitled to a reduction of consideration (or of his/her counter-performance), and may also terminate contract if it lacks appreciable interest in partial performance. The most relevant difference lies in the ‘‘deadline’’ for the creditor to claim performance: on this point Art. 9:102 PECL introduces the concept of ‘reasonableness’, which is quite vague, and is totally absent in the Italian system. On the contrary, the Italian Codice civile provides for a system of rules (regarding the statute of limitation and debarment from action for forfeiture of right) with a detailed regulation of the expiry terms after which the injured party may no longer exercise the right to claim performance.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:103: Damages not Precluded The fact that a right to performance is excluded under this Section does not preclude a claim for damages. 1. General. According to this Article, damages are always available where a creditor cannot get performance. More specifically, it clarifies that in the cases where the remedy of specific performance is not available, because one of the exceptions of Art. 9:101 or Art. 9: 102 PECL applies, the aggrieved party may ask for the monetary equivalent.

ITALIAN LAW Art. 1218 C.C.: Liability of debtor The debtor who does not exactly render due performance is liable for damages unless he proves that the non performance or delay was due to impossibility of performance for a cause not imputable to him. Art. 1453 C.C.: Dissolution of contract for non-performance In bilateral contracts involving mutual consideration, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving in any case, compensation for damages. 1. General. The debtor is bound to perform his/her obligation as due. In case of non performance, the creditor may react either by claiming performance (if performance is still possible) and by claiming damages. Should the creditor be unable to claim specific performance (see comment to article 9:102, Sartori) or should he/she choose not to do so, he/she will be entitled to seek an equivalent form of protection, unless the debtor succeeds in proving that failure to perform is due to supervening impossibility of performance, and this impossibility derives from upon an event not ascribable to the debtor, i.e. an event which the debtor could not predict and avoid using reasonable care (literally, as a ‘person of reasonable prudence’ would have done). By providing full proof of supervening impossibility to perform not ascribable to him/her, the debtor is not only discharged of any liability for non-performance, but he/she is considered as having duly fulfilled performance of his obligation (Art. 1256 C.C.) (Giorgianni (1959); Bianca (1975)).

COMPARISON AND EVALUATION Both under the PECL and Italian law the exclusion of the right to claim specific performance does not automatically lead to the exclusion of other remedies. For instance, in the F. SARTORI – 401

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case of a non-fungible contractual obligation to do something, the creditor is not entitled to claim specific performance. However, this does not bar the creditor from claiming damages for any detriment incurred.

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Section 2: Withholding Performance PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:201: Right to Withhold Performance (1) A party who is to perform simultaneously with or after the other party may withhold performance until the other has tendered performance or has performed. The first party may withhold the whole of its performance or a part of it as may be reasonable in the circumstances. (2) A party may similarly withhold performance for as long as it is clear that there will be a non-performance by the other party when the other party’s performance becomes due. 1. General. This Article introduces the well known princple of exceptio non adimpleti contractus. The party that is supposed to perform simultaneously with or after the other party is given a general right to withhold performance. The goal of the rule is to protect the withholding party from having to advance credit to the other party and further gives the latter an incentive to perform. Nevertheless a party whose conduct causes the other party’s non-performance cannot invoke this Art. to withhold his/her performance. Indeed, according to Art. 8:101 para. (3) PECL a ‘‘Party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party’s non-performance’’. Comment B clarifies that the obligation which has not been performed and the obligation of which performance is to be witheld are parts of the same contract and, moreover, that the text does not clarify whether the performance can be withheld because of the non-performance of another contract between the same parties. The exceptio non adimpleti contractus is a form of self-protection based upon a defence which must be pleaded. The order of performance is determined by the contract itself. The parties have to agree upon the order of performance, otherwise it must be determined in accordance with the principle of Article. 7:104 PECL, which states that performance should be rendered simultaneously unless the circumstances indicate otherwise. 2. Reasonableness. According to Para. (1) a party may withhold the whole of his/her performance or a part of it only when this is reasonable in the circumstances. The term ‘‘reasonable’’ must be read together with Art. 1:201 PECL (Good faith and Fair dealing). As a consequence, it is a matter of reasonableness (rectius good faith) the withholding of performance should be related to the extent of the non-performance of the other party. 3. Anticipatory withholding of performance. As mentionated above, this article gives a general right to withhold (or suspend) performance to the party that is supposed to perform simultaneously with or after the other party. Nevertheless, para. (2) gives the right F. SARTORI – 403

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to withhold performance also to a party that has to perform first. This is possible for the party which is to perform first if it is clear that there will be a fundamental non-performance by the other party when the counter-performance will be due. In this situation the first party has two possibilities: de may terminate for anticipatory non-performance under Art. 9:304; or he has the right to hold the contract open for performance.

ITALIAN LAW Art. 1460 C.C.: Defense based upon non-performance In bilateral contracts involving mutual consideration, each party can refuse to perform his obligation if the other party does not perform or offer to perform his own at the same time, unless different times for performance have been established by the parties or appear from the nature of the contract. However, performance cannot be rejected if, considering the circumstances, such rejection is contrary to good faith. Art. 1461 C.C.: Change in patrimonial conditions of contracting parties Each party can withhold the performance due by him, if the patrimonial conditions of the other party have become such as obviously to endanger fulfillment of the counterperformance, unless adequate security is given. 1. General. Italian law provides a remedy for synallagmatic contracts (bilateral or multilateral) involving mutual consideration: in such cases each party can request simultaneous performance of both sides, unless the parties had mutually agreed upon different times for performance, or different times for performance are customary according to the nature of the contract. In this way, one party avoids potential damages derving from future nonperformance by the other party who has already received the counter-performance. This is a form of self-protection based upon an exception to be raised by the party, without the court having to decide the matter ex officio. The exception may also be raised to block a claim for termination of contract; this kind of exception may be raised both judicially and out of court (Dalmartello, ND, XVI, 138). 2. Good faith. A contracting party may not refuse to perform if in the circumstances refusal would be contrary to good faith (Art. 1460, para. 2, C.C.). Based upon this rule, the grounds for any defence raised will be judged by comparing the equivalence and proportionality between the requested performance and what was not performed (Cass. 1537/1996, Giur.it., 96, I, 1, 1480). Thus, theoretically a party cannot raise the exception for slight, negligible non-performance, or for non-performance due to the first party’s non-performance (Cass. 4565/1990, Archivio civile, 90, 899). 3. Interruption of performance. Art. 1461 C.C. entitles a contracting party to interrupt performance if the other contracting party’s solvency is such as to clearly jeopardize performance of the latter’s obligation, whether ascribable to the latter or not, whether 404 – F. SARTORI

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or not the obligation has expired, and whether or not it is detected (Cass. 1574/1999, Giust.civ., 99, 1259), unless suitable security is given (Massone, NGCC, 90, II, 40). This rule fits within the general framework of self-protection and defenses which may be raised by a contracting party in order to be indemnified in case of future non-performance by the other party. Thus, the rule is strictly connected with Art. 1460 C.C. Interruption of performance may be invoked whenever the other party’s performance is to take place at a later stage, while a non performance exception may be raised only when performance of both parties is to take place simultaneously. A non-performance defence may also be raised if the other party’s performance is to take place at a later stage, but the debtor has already declared that he/she will not perform, or his/her non-performance appears likely (Biagliazzi Geri (1988a), p. 34), or when the time for subsequent performance has already expired. Given that the same grounds is implied in the rules, Art. 1460(2) C.C. also applies in cases of interruption, which will thus be subject to the good faith test (Cass. 3713/1996, Foro it., 96, I, 2389).

COMPARISON AND EVALUATION The rules encompassed in the two systems are similar. Both under the Italian system and the PECL a contracting party is granted the right to refuse to perform his/her contractual obligation if the other party fails to perform his/her own, or does not offer to perform his/her own obligation simultaneously. Although the Civil Code, differently than article 9:201, does not expressly provide for the applicability of this rule if the obligation is to be performed at a later stage, case law has filled this gap by extending the scope of the statutory rule. The Civil Code prefers the good faith approach to the ‘reasonableness’ test; however, both views seem to be based on criteria of economy and efficiency based upon equivalence and proportionality between the requested performance and what was not performed. Also Italian law seems to accept the rule that a contracting party may interrupt performance of his/her obligation even if the counter-performance is to be performed at a later stage, but the debtor has already declared that he/she will not perform, or the latter’s non-performance appears likely. The Italian Civil Code differs from the PECL in that it provides a specific rule in case the economic situation of the contracting parties should change, establishing that in case of insolvency by one party the other party may interrupt performance of his/her obligation. Although not expressly encompassed in the PECL, this rule could be inferred by extensively construing the rule of article 9:201. In conclusion, the two models have a similar structure and present only slight, negligible differences.

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Section 3: Termination of the Contract PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:301: Right to Terminate the Contract (1) A party may terminate the contract if the other party’s non-performance is fundamental. (2) In the case of delay the aggrieved party may also terminate the contract under Art. 8:106(3). 1. General. A contract can be terminated according to Art. 9:301 PECL in two instances: if the other party’s non-performance is fundamental; if, in the case of a non-fundamental delay, the party has fixed a reasonable additional period of time for performance, and the other party has not performed within this time (Art. 8:106(3)). Termination of a contract releases both parties from their obligations (see Art. 9:305), and the decision whether or not to grant such a remedy to the aggrieved party depends on a weighing of conflicting considerations concerning the two parties (see comment A Art. 9:301 PECL), namely the interest in receiving exactly the performance that was bargained for (both in terms of content and timing) and the interest in keeping the contractual relationship alive. The rule on termination is unified both for cases of excused and non-excused non-performance, similarly to Art. 79 CISG, Art. 7.3.1. of the Unidroit Principles and Art. 74 ULIS (see a comparative analysis in Schlechtriem (1997), pp. 245–269). 2. Fundamental non-performance. The notion of fundamental non-performance is defined in Art. 8.103 PECL, where three situations are listed: 1) strict compliance with the obligation is of the essence of the contract; 2) the non-performance substantially deprives one of the parties of what he/she could have expected of the contract, unless the other party did not forsee and could not reasonably have forseen that result; 3) the nonperformance is intentional and the aggrieved party cannot rely on the other party’s performance. If the other party’s non-performance is substantially due to the aggrieved party’s conduct, this can lead to the non-performance as not being considered fundamental and consequently to the denial of termination. Non-fundamental delay is equated to fundamental non-performance only if the aggrieved party has fixed an additional period of time for performance of reasonable length, and performance does not take place within that time. According to Art. 8:106(3) automatic termination follows if the aggrieved party has explicitly so provided in his/her notice. 3. Action in court not required. The general rule of the PECL is that once the aggrieved party has given notice of termination to the other party, termination follows automatically (see Art. 9:303). As a consequence, he/she will not have to bring an action in court to have the contract terminated, nor is he/she compelled to provide for a period 406 – L. ANTONIOLLI

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of grace. This is not the case in several national legal systems, among which also the Italian one (see Hesselink (2001), p. 56).

ITALIAN LAW Art. 1453 C.C.: Dissolution of contract for non-performance In contracts providing for mutual counterperformance, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. Dissolution can be demanded even when an action has been brought to demand performance; but performance can no longer be demanded after an action for dissolution has been brought. The defaulting party can no longer perform his obligation after the date of the action for dissolution. Art. 1454 C.C.: Notice to perform The other party can serve a written notice on the defaulting party to perform within an appropriate time, declaring that, unless performance takes place within such time, the contract shall be deemed dissolved. The time can not be less than fifteen days, unless the parties have agreed otherwise or unless a shorter period appears justified by the nature of the contract of by usage. If the time elapses without performance having been made, the contract is dissolved by operation of law. Art. 1455 C.C.: Importance of non-performance A contract cannot be dissolved if the non-performance of one of the parties has slight importance with respect to the interest of the other. Art. 1457 C.C.: Time essential to one party If the time fixed for performance by one of the parties must be considered essential in the interest of the other, the latter, if he intends to demand performance of the obligation notwithstanding the expiration of the time, must so notify the former within three days, unless there is an agreement or usage to the contrary. In the absence of such notice, the contract is deemed dissolved by operation of law, even if dissolution was not expressly agreed upon. L. ANTONIOLLI – 407

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1. General. According to the Italian Codice civile the effects of a contract can be eliminated through risoluzione, i.e. termination, in three cases: fundamental non-performance (Art. 1453 C.C.); supervening impossibility (Art. 1463), which corresponds to the concept of force majeure, i.e. excuse due to an impediment in the language of the PECL (Art. 8:108); excessive onerousness (Art. 1467 C.C.), which is related (although with a more limited scope) to the idea of change of circumstances regulated by Art. 6:111 PECL (for a comparative analysis of the relationship between termination and hardship see Schlechtriem (1997), p. 255). The rule on termination for non-performance, a remedy which is granted when the economic goal pursued by the contract is not fulfilled, establishes the legal consequences of termination in general, and is applicable also to the other cases. Termination implies the elimination of the effects of the contract, and consequently it presupposes that it has been validly concluded. This marks a difference between termination and the various forms of invalidity. 2. Action in court required. Termination follows automatically from a specific sets of facts only in three cases (see comment to Art. 9:303 PECL, Antoniolli): when the aggrieved party has given to the other a notice to perform within a specified time and the latter does not perform (Art. 1454 C.C.); when the time of performance is essential for the aggrieved party (Art. 1457 C.C.); when the parties have agreed an express resolutive clause (Art. 1456 C.C.). Yet, the general rule is that in order to terminate a contract, the party must start judicial action and termination derives from the judge’s decision (sentenza costitutiva), i.e. it is not merely declared by it. This choice is rooted historically in Canon law, which established a solution first adopted by the French Code civil and later transplanted in the Italian Codice civile (Sacco (2002), p. 644) as well as in other legal systems influenced by French law, such as the Belgian legal system. The fact that according to the system of the Italian Codice civile termination is primarily based on a judicial action does not mean that in practice automatic termination is rare; on the contrary, a large number of cases are actually concluded by automatic termination. 3. Fundamental non-performance. Termination is a remedy for contracts with respect to which performance and counterperformance are mutually related (contratti sinallagmatici, or a prestazioni corrispettive), where the one party’s non-performance directly affects the performance the other party must render. In fact, termination is not allowed in the case of gratuitous contracts where, in the event of non-performance, the party has only a right to ask for performance. Yet not every non-performance entitles the aggrieved party to request termination of the contract (although every non-performance gives rise to contractual liability and to the right to damages). All legal systems are based on a common requirement that the breach must be sufficiently serious (see Treitel (1988)). In the Italian legal system the kind of nonperformance required is defined negatively in Art. 1455 C.C. which denies termination if the non-performance has ‘‘slight importance with respect to the interest of the other [party]’’. This means that there has to be proportionality between the seriousness of the non-performance and the remedy granted (which eliminates all contractual effects), in 408 – L. ANTONIOLLI

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accordance with the requirements of contractual good faith (see Cass., 20 April 1994, no. 3775, in Corr. giur., 1994, p. 566, note by Carbone; Cass. 13 February 1990, no. 1046, in Rep. Foro it., [1740] no. 374). Deciding whether the non-performance is of slight importance or not requires the evaluation of all circumstances relevant to that particular contract concerning the alteration of the contractual balance, according to objective and subjective criteria (see M.R. Spallarossa, in Alpe-Bessone (1991b), pp. 870–873). The weight and function of the non-performance within the contractual relationship must be considered objectively. The aggrieved’ party’s interest in receiving performance must also be taken into account subjectively, and this can lead to the conclusion that even a slight nonperformance can be considered serious. 4. Action for termination and performance. According to Art. 1453 C.C., the aggrieved party can choose either to ask for performance or for termination of the contract, two remedies aiming at opposite results. The former leads to the performance of the contract, the latter to the elimination of all contractual effects. In order to terminate the contract, however, the non-performance must be serious, a requirement not needed in order to request performance. The plaintiff must prove that there has been non-performance, while the defendant must prove that the non-performance was not fundamental. Art. 1453(2) C.C. establishes some rules concerning the relationship between the two remedies: once the aggrieved party has started an action for termination, he/she cannot later ask for performance (and the other party can no longer perform after the action has been started). On the contrary, if he/she takes action in order to receive performance, he/she can decide later that he/she wants to terminate the contract. 5. Imputability of non-performance. There is some disagreement as to whether termination should be denied when non-performance is not imputable to the party. In the PECL the same rule applies whether non-performance is excused or not, similarly to Art. 79 CISG and Art. 7.3.1 of the Unidroit Principles (see Note 2 to Art. 9:301 PECL and Schlechtriem (1997), p. 258). In Italy, recent case law usually refers to the so-called ‘‘subjective theory’’, according to which excused non-performance gives rise to liability and a right to damages, but not to termination (see Cass., 11 May 1990, no. 4039, Rep. Foro it., 1990, [1740] no. 364; Cass., 17 November 1999, no. 12760, in Rep. Foro it., 2000, [1740] no. 567; Cass., 3 July 2000, no. 8881, Rep. Foro it., 2000, [1740] no. 574). Legal writers, on the other hand, mostly refer to the ‘‘objective theory’’, which considers that every substantial non-performance, evaluated on the basis of the creditor’s interest, empowers him/her to ask for termination of the contract (see e.g. Visintini (1987), p. 393 et seq.; Giorgianni (1970), pp. 886–887). In fact, this problem can be overcome by referring to the rule on supervening impossibility (Art. 1463 C.C.), which provides for termination of contracts where one of the performances has become impossible on account of events beyond the parties’ control. It is usually agreed that impossibility must not be construed in a strict way, and if its scope of application is referred beyond cases of material and absolute impossibility, this rule will cover most cases where non-performance is due to events which are not imputable to the debtor (see Roppo (2001), pp. 960–961). The main L. ANTONIOLLI – 409

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difference between the two hypotheses lies in the fact that if non-performance is not imputable, damages cannot be granted to the creditor. 6. Default. According to Art. 9:301(2), in the case of a non-fundamental delay, the aggrieved party can terminate the contract only by fixing a reasonable additional period of time for performance, and the other party does not perform within this time (see Art. 8:106(3)). Italian law works according to a different mechanism, since the general rule is that a contract must be terminated by taking judicial action. Yet the Codice civile contains a rule which permits to the aggrieved party to terminate the contract automatically after having placed the other party in default: according to Art. 1454 C.C. he/she must send a written notice asking for performance within a certain time (which usually cannot be shorter that fifteen days), stating that if performance is not rendered, the contract will automatically be terminated. The main difference between this rule and Art. 9:301(2) PECL is that it refers to the general requirements for termination and consequently can operate only if non-performance is fundamental, whereas under the PECL termination can be granted even in the case of a non-fundamental delay, after notice of default has been sent (since notice is the general method of terminating a contract and applies in both cases of late performance and wrong performance, if considered fundamental). A notice of default is considered an atto recettizio, meaning that it must reach the other party in order to produce its effects. Written form is strictly required by case law, which considers that a notice in any other form does not amount to a notice of default and consequently is not effective (see e.g. Cass., 22 October 1992, no 11549, in Rep. Foro it., [5110], no. 42).

COMPARISON AND EVALUATION Both the PECL and Italian law recognize a party’s right to terminate a contract in the case of the other party’s non-performance and refer to a rather wide concept of non-performance, comprising both late and defective performance and both excused and non-excused non-performance (with some variance in Italian case law) (Sacco, in this book, pp. 19–20). Moreover, both the PECL and Italian law limit the possibility of terminating the contract only to cases where the breach is fundamental and provide other contractual remedies for cases of non-fundamental non-performance (i.e. action for performance, damages). The evaluation of the seriousness of the breach must be under Italian law on the basis both objective and subjective criteria relating to the notion of contractual good faith and must refer to elements and circumstances close to those foreseen in the PECL. A major difference between the two systems is related to the fact that the standard way of terminating a contract in Italian law is by judicial action, while in the PECL termination is usually by notice. There are some rules in the Italian Codice civile which provide for automatic termination, but in these cases a further element is required in addition to nonperformance (notice of default plus additional period of time, time of performance essential for the contract, express resolutive clause). This explains also the difference between the 410 – L. ANTONIOLLI

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PECL and Italian law with respect to non-fundamental delay: according to the former (Arts 9:301(2) and Art. 8:106(3)) non-fundamental delay can lead to termination after the aggrieved party has fixed an additional period of time, while according to the Codice civile an additional period of time is necessary to terminate a contract on the ground of fundamental delay (contained in a written notice to perform) and non-fundamental delay can lead to the other remedies for non-performance, but not to termination.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:302: Contract to be Performed in Parts If the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental nonperformance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole. 1. General. If a contract is composed of a series of performances by one party that exactly matches an equal series of counter-performances by the other party, it can be considered as being formed by a series of severable units. As a consequence, non-performance of one unit can lead to termination of that part of the contract, but the rest of the contract will remain unaffected, unless the non-performance of that unit is fundamental to the whole contract. The rule is similar to Art. 73 CISG and to Arts 45 and 75 ULIS. 2. Contracts to be performed in parts. The kinds of contracts that can be partially terminated are those which are to be performed in parts, i.e. contracts where one party’s performance is or can be divided into a series of separate performances. Usually counterperformance will be divided in parts as well, but this need not always be the case: for instance, if the counterperformance consists of the payment of a certain amount of money for the whole contract, and the other party is liable only for partial non-performance, if the payment can be easily apportioned, termination will be allowed only for that part of the contract, and consequently the payment will be reduced by the corresponding sum of money (see also Art. 9:306 PECL). 3. Termination of the whole contract. In order to establish whether or not the nonperformance of a unit of the contract is such as to imply a fundamental non-performance of the whole contract it is necessary to consider all relevant circumstances of the case, such as whether or not the non-performance significantly affects the rest of the contract, whether or not the non-performance is likely to be repeated, and so on. For instance, in illustration 2 a cleaning company undertakes to clean an office on a weekly basis but during the first week the work performed is completely inadequate; if it is clear that the poor result is due to the insufficient equipment and manpower of the cleaning company, and this problem cannot be solved quickly, the aggrieved party may terminate the entire contract, not only the part concerning the cleaning in the first week.

ITALIAN LAW Art. 1458 C.C.: Effects of dissolution Dissolution of a contract for non-performance has retroactive effect as between 412 – L. ANTONIOLLI

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the parties, except in the case of contracts for continuous or periodic performance, with respect to which the effect of dissolution does not extend to performance already made. [...] Art. 1464 C.C.: Partial [supervening] impossibility When the performance of one party has become impossible only in part, the other party has a right to a corresponding reduction of the performance due by him, and he can also withdraw from the contract if he lacks an appreciable interest in partial performance. Art. 1258 C.C.: Partial [supervening] impossibility [for cause not imputable to debtor] If the performance has become impossible only in part, the debtor is discharged from the obligation by performing that part which is still possible. Art. 1564 C.C.: Dissolution of [supply] contract In case of non-performance of a single installment by one of the parties, the other can request dissolution of the contract if the default is significant and is such as to reduce the confidence in the punctuality of subsequent performance. 1. General. The general rule in Italian law is that termination has retroactive effects, and therefore all performances which have been rendered by the parties must be returned (and if this is impossible, the equivalent amount of money, according to the rules on unjust enrichment). Yet, Art. 1458 C.C., which regulates the effects of termination, expressly limits the application of the rule in case of contracts for continous or periodic performance (also called contratti di durata, i.e. long-term contracts), a concept which closely resembles that of contracts ‘‘to be performed in separate parts’’ of Art. 9:302 PECL. In this case termination does not affect the performances already made by the parties; this means that it does not have retroactive effects. Although this rule is expressed in terms of exception to the general rule establishing the retroactive effects of termination, its rationale is in line with the whole mechanism of termination: when the contract can be divided into several separate parts, and some of them have been duly performed by both parties, it does not seem reasonable or efficient to undo them because later on there has been non-performance in relation to one or more different parts. 2. Partial and total termination of the contract. There is no equivalent rule to Art. 9:302 PECL in Italian law, because even if non-performance affects only a specific part of the contract, the aggrieved party can decide to terminate the whole contract, as long as non-performance is to be considered fundamental. It is generally considered that even though there is no explicit rule providing for it, the aggrieved party can ask for partial termination in case of partial non-performance, but this is merely an option open to him/her, while under the PECL he/she cannot ask for termination of the whole contract L. ANTONIOLLI – 413

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unless non-performance is fundamental to the contract as a whole (see note to Art. 9:303, Antoniolli). The availability of partial termination is usually inferred from Art. 1464 C.C. on partial supervening impossibility, according to which if due performance has become partially impossible, the aggrieved party can reduce his/her performance proportionally. This is related to Art. 1258 C.C. on obligations, which provides that if performance has become impossible only in part, the debtor is discharged from the obligation by performing that part which it is still possible to perform. Yet, according to this rule the aggrieved party can also decide to terminate the whole contract if he/she lacks an appreciable interest in partial performance. The decision concerning the existence of an appreciable interest on the part of the creditor in partial performance must be taken according to the principle of good faith. This means that it cannot be based merely on subjective factors, but must also refer to an objective criterion (see Roppo (2001), pp. 975–976). As a consequence, total termination may be denied if the aggrieved party has an objective interest in performing the remaining part. Another relevant rule of the Codice civile concerns contracts for the periodical supply of goods (contratti di somministrazione, Art. 1559 C.C.). Non-performance of a single supply entitles the aggrieved party to terminate the whole contract only if such non-performance is fundamental and would impair the party’s trust in the correct performance of the following performances (Art. 1564 C.C.). Again, the combination of two elements (seriousness of the breach and destruction of the mutual trust between the parties) hints at the operation of the principle of good faith, which sets some limits to the discretion of the aggrieved party to ask for total termination. A related rule is envisaged by the Codice civile for the contract of sale in relation to installment sales, where Art. 1525 C.C. provides that the default in the payment of a single installment, if its value is less than 1/8 of the total price, does not entitle the seller to terminate the contract, thereby emphasizing the importance of keeping the contract even in some cases of non-performance (in this case with a view to protect the buyer, considered the weaker party; in fact the rule is mandatory, i.e. it cannot be changed by agreement of the parties).

COMPARISON AND EVALUATION As a general rule, termination in Italian law has retroactive effects. Consequently, all performances must be returned. Yet a significant exception is made with respect to contracts for continuous or periodic performance, for which Art. 1458 C.C. establishes that termination does not extend to performances already made. Therefore, on the issue of retroactive effects of termination Italian law and the PECL reach the same solution, which is in line with the rules of most European legal systems. A partial divergence can be detected on the other hand with respect to the future effects of non-performance of contracts which are apportionable in separate parts: according to Art. 9:302 PECL, in this case the aggrieved party can terminate the whole contact only if the non-performance is fundamental to the contract as a whole, whereas there is no such rule in Italian law. It is generally considered that partial termination is possible, but this is the aggrieved party’s choice, rather than a solution imposed on him/her. 414 – L. ANTONIOLLI

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:303: Notice of Termination (1) A party’s right to terminate the contract is to be exercised by notice to the other party. (2) The aggrieved party loses its right to terminate the contract unless it gives notice within a reasonable time after it has or ought to have become aware of the non-performance. (3) (a) When performance has not been tendered by the time it was due, the aggrieved party need not give notice of termination before a tender has been made. If a tender is later made it loses its right to terminate if it does not give such a notice within a reasonable time after it has or ought to have become aware of the tender. (b) If, however, the aggrieved party knows or has reason to know that the other party still intends to tender within a reasonable time, and the aggrieved party unreasonably fails to notify the other party that it will not accept performance, it loses its right to terminate if the other party in fact tenders within a reasonable time. (4) If a party is excused under Art. 8:108 through an impediment which is total and permanent, the contract is terminated automatically and without notice at the time the impediment arises. 1. General. Under the PECL, in order to exercise his/her right of termination the aggrieved party must necessarily give notice of it to the other party. The rule is similar to arts. 49 and 64 CISG and to art. 7.3.2. of the Unidroit Principles. 2. Requirement of notice. The requirement of notice is amenable to the principle of fair dealing: even if the defaulting party is liable for his/her non-performance, he/she must know whether the other party will subsequently accept or reject performance and make the necessary arrangements. As a consequence, the aggrieved party needs to inform the other party within a reasonable time (to be evaluated according to the circumstances of the case; cf. Art. 1:302 PECL on reasonableness) that he/she wishes to avail himself/herself of the right to terminate the contract. 3. Late or defective tender of performance. If the other party tenders performance, but this is either late or defective, the aggrieved party is given reasonable time to decide whether he/she wants to accept that performance or not, and within that time he/she can notify the other party that he/she intends to terminate the contract. Thereafter, he/she is barred from terminating the contract, and consequently the contract will stand. Again, what is a reasonable time depends on the circumstances of the case. 4. Overdue performance. When performance is due but has not been tendered, the aggrieved party is not compelled to give notice of termination before the tender has been L. ANTONIOLLI – 415

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made, but if the tender is made later he/she cannot terminate the contract unless a notice of termination is given to the other party within a reasonable time. If, on the contrary, he/she wants to receive performance, he/she may seek specific performance. Finally, if the aggrieved party knows that the other party intends to perform within a reasonable time and he/she does not wish to receive performance, he/she must notify the other party that he/she considers the contract terminated. This rule is based on the general duty to act in good faith, because it would be unfair to impose expenses and efforts on the defaulting party, if the aggrieved party already knows that he/she will not accept performance, since he/she has a right to terminate the contract and wants to exercise it. 5. Exceptions to the requirement of notice. The rule requiring notice for termination does not apply in two cases in which termination is automatic, i.e. notice is not required. The first is contained in Art. 9:303(4), regulating the case in which non-performance is excused on account of a total and permanent impediment (if the impediment is merely partial or temporary the defaulting party must tender performance, and this can be rejected by the aggrieved party only by notice). The other is contained in Art. 8:106(3), which provides that in case of a non-fundamental delay in performance the aggrieved party may give a notice fixing an additional period of time (which must be of reasonable length) and providing that the contract will be automatically terminated. if the defaulting party fails to perform within that period.

ITALIAN LAW Art. 1453 C.C.: Dissolution of contract for non-performance In contracts providing for mutual counter-performance, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. [...] Art. 1454 C.C.: Notice to perform The other party can serve a written notice on the defaulting party to perform within an appropriate time, declaring that, unless performance takes place within such time, the contract shall be deemed dissolved. The time can not be less than fifteen days, unless the parties have agreed otherwise or unless a shorter period appears justified by the nature of the contract or by usage. If the time elapses without performance having been made, the contract is dissolved by operation of law. 416 – L. ANTONIOLLI

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Art. 1219 C.C.: Placing in default The debtor is placed in default by means of a notice or request made in writing. [...] Art. 1456 C.C.: Express resolutive clause The contracting parties can expressly agree that the contract will be dissolved if a specified obligation is not performed in the designated manner. Art. 1457 C.C.: Time essential to one party If the time fixed for performance by one of the parties must be considered essential in the interest of the other, the latter, if he intends to demand performance of the obligation notwithstanding the expiration of the time, must so notify the former within three days, unless there is an agreement or usage to the contrary. In the absence of such notice, the contract is deemed dissolved by operation of law, even if dissolution was not expressly agreed upon. Art. 1463 C.C.: Total [supervening] impossibility In contracts providing for mutual counter-performance, the party released for supervening impossibility of the performance due cannot demand performance by the other party, and he is bound to restore that which he has already received, in accordance with the rules concerning restitution of payments not due. Art. 1256 C.C.: Definitive [supervening] impossibility An obligation is extinguished when its performance becomes impossible for a cause not imputable to the debtor. 1. General. While in the PECL the general rule provides that termination is to be exercised by notice, the Italian legal system is based on a general rule of judicial termination, i.e. it is necessary to go to court in order to have a contract terminated (see comments to Art. 9.301, Antoniolli), although provision is made for a number of exceptions, namely in the case of a notice to perform, an express resolutive clause, and when the time of performance is essential for the aggrieved party. This feature of the Italian legal systems is shared by other European countries, such as France, Belgium, Luxembourg and Spain. 2. Termination by notice. Among the rules of the Codice civile that envisage automatic termination of the contract, the first to be compared with Art. 9:303 PECL is Art. 1454 C.C. regulating notice to perform. According to this rule, when there is fundamental nonperformance by one of the parties, the aggrieved party can serve a written notice asking for performance within a certain time, stating that if performance is not rendered the L. ANTONIOLLI – 417

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contract will automatically be terminated. This period of time usually cannot be shorter that fifteen days, unless the parties have agreed otherwise or a shorter period is possible according to the nature of the contract or usages. The main difference is that while according to Art. 9:303 PECL notice of termination does not require any additional period of time for performance, Art. 1454 C.C. permits automatic termination of the contract only after an additional period has been established and performance has not been rendered, and also fixes a minimum time, fifteen days (for a comparative account of the role of the legal rules on Nachfrist as a general or exceptional method for terminating contracts in several legal systems see Schlechtriem (1997), pp. 264–265). If this requirement is not fulfilled, termination cannot operate. This de´lai de grace is envisaged by the PECL only when non-performance is not fundamental, as provided by Art. 8:106 (3) (see also note 3 to Art. 9:301), which according to Italian law will not be considered such as to entitle the aggrieved party to termination. The notice to perform must necessarily be in writing, and case law considers any other form as ineffective (this is provided also by Art. 1219 C.C. referring to obligations in general, according to which the debtor is placed in default by a notice in writing; see e.g. Cass., 22 October 1992, no. 11549, in Rep. Foro it., [5110], no. 42). Moreover, notice must contain two basic elements: the request to perform within a certain period of time and a clear statement that if performance is not rendered within that time, the contract will automatically be terminated. The notice must reach the defaulting party in order to be effective (atto recettizio). 3. Express risolutive clause. The second case in which Italian law admits automatic termination is regulated by Art. 1456 C.C., providing that the parties can agree that the contract will be automatically terminated if one or more specified obligations are not performed. This clause must be specifically expressed, i.e. it cannot be implied from the facts, but its form can be chosen by the parties themselves. The obligation or obligations whose performance leads to termination must be clearly specified, it being insufficient merely to refer generally to all contractual obligations. In contrast to the case of termination by notice, the non-peformance envisaged by an express risolutive clause needs not be fundamental, if the parties so decide, since their evaluation is agreed ex ante. Once nonperformance has happened, the aggrieved party can decide whether he/she will terminate the contract (and in this case he/she must inform the other party that he/she intends to do so, either expressly or by his/her behaviour) or whether he/she still wants to claim performance. Again, this marks a difference from termination by notice, where, once the time has expired, the aggrieved party can no longer opt for performance and the contract is necessarily terminated. 4. Time essential to one party. According to Art. 1457 C.C., if the time for performance of the contract is essential to the creditor, the contract is automatically terminated if performance by the debtor is late, even if this is not explicitly provided for in the contract. The aggrieved party can decide that he/she nevertheless wants to receive performance, but in this case he/she must notify the other party within the very short time of 418 – L. ANTONIOLLI

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three days (unless provided otherwise by the parties or by usages). The essentiality of the term must be evaluated first of all according to an objective standard and it must be determined whether or not late performance would still be useful to the creditor: for instance, if someone hires an orchestra for the day of his/her wedding and the orchestra cannot play because some musicians are ill, it is of no use that they can perform later, since the bride and groom will need an orchestra for their wedding day and no other. Yet, in some cases also a subjective criterion is employed when the parties themselves make it clear that they consider it essential. Case law nevertheless requires that this be explicitly and clearly provided in the contract (see Cass., 18 June 1999, no. 6086, in Vita not., p. 1203, note by Cante, Cass., 18 March 1999, no. 2491, in Rep. Foro it., 1999, [1740] no. 545). In this case the situation is very close to an express risolutive clause. Both objective and subjective standards point to a concept of essentiality that is closely related to the fact of being fundamental, meaning that its importance to the balance of the performances of the contract must be such as to significantly impair it (contra see Sacco (2002), p. 661). 5. Total and permanent impediment. Under Art. 9:303(4) of the PECL, a total and permanent impediment determines the automatic termination of the contract (although non-performance is excusable) from the moment the impediment arises, and consequently no notice thereof is required. Italian law has a rule providing termination for total supervening impossibility of the performance by one of the parties (Art. 1463 C.C.), but there is no specific rule concerning the moment in which termination operates; yet it is generally considered that no judicial action or notice is required (Sacco (2002), p. 672; Roppo (2001), p. 1006; see also Cass. 14 January 1992, no. 360 in Rep. Foro it., 1992 [1740] no. 410, according to which the judicial decision on termination in this case has merely a declaratory nature).

COMPARISON AND EVALUATION The major difference between the PECL and Italian law is that under the PECL a party’s right to terminate the contract is to be exercised by notice to the other party, while according to Italian law the standard way to terminate a contract is by judicial action. Termination by notice is permitted only in a specific instance, provided for by Art. 1454 C.C., where in case of fundamental non-performance by one of the parties, the other can serve him/her a written notice stating that, if performance is not rendered within an additional time, the contract will automatically be terminated. Two other instances of termination without judicial action occur when the parties have inserted an express resolutive clause in the contract (Art. 1456 C.C.) and when time is of the essence to the contract (Art. 1457 C.C.). As for the case of termination by notice, there are further differences: while in Italian law the time limit is strictly defined as to the minimum length, i.e. fifteen days (unless a shorter period can be established on account of the nature of the contract or usages), the PECL refer to a reasonable time, which has to be established according to all relevant circumstances of the case. The flexible rule of the PECL seems to L. ANTONIOLLI – 419

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be preferable to the rigid Italian solution (cf. Hesselink (2001), p. 59), particularly in consideration of the fact that notice is the standard way of terminating a contract, although this necessarily implies some uncertainty for the parties in evaluating in advance what a reasonable time is in their case. Furthermore, according to Italian law a notice to perform must necessarily be in writing (Arts 1219 C.C. and 1454 C.C.) and failure to fulfil this requirement leads to the impossibility of terminating the contract, whereas since the PECL do not provide for any form, also an oral notice is possible (see Art. 1:303 PECL). Both the PECL and Italian law consider a notice to be effective only when it reaches the addressee. The PECL envisage one case in which termination does not require notice: the case of total and permanent impediment, where the contract is terminated automatically when the impediment arises. The corresponding rule of the Italian Codice civile on total supervening impossibility of performance, Art. 1463 C.C., foresees termination as a consequence, but does not specify the moment when termination operates. Yet, legal doctrine considers that no judicial action or notice is required, and as a consequence the law in action seems to be the same under both the PECL and Italian law.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:304: Anticipatory Non-Performance Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it, the other party may terminate the contract. 1. General. According to the PECL, anticipatory non-performance is equated with actual non-performance. This means that an obvious unwillingness or inability to perform, which would amount to fundamental non-performance when performance is due, entitles the aggrieved party to terminate the contract and to all other remedies provided in the case of non-performance. The reason for this choice can be easily understood: once it is clear that the other party will not perform, it is useless and even harmful to wait until non-performance actually occurs. A similar rule on anticipatory non-performance is contained in Art. 7.3.3 Unidroit, Art. 72(1) CISG and Art. 76 ULIS, as well as in several national legal systems (see Schlechtriem (1997), p. 264). 2. Fundamental anticipatory non-performance. In order to entitle the aggrieved party to terminate the contract, the defaulting party’s unwillingness or inability to perform must amount to a non-performance considered fundamental according to Art. 8:103. Moreover, the inability or unwillingness to perform must be manifest, i.e. it must be clear that performance will not be duly rendered. If there is merely a danger that this will happen, the aggrieved party will not be entitled to terminate the contract, but he/she will be entitled to demand an assurance of performance and in the meantime withhold his/her performance, according to Art. 8:105. Only if this assurance is not provided within a reasonable time will he/she be entitled to terminate the contract by giving notice to the other party. The aggrieved party’s belief in the risk of future non-performance must be evaluated according to the standard of reasonableness. 3. Time of termination. Since the right to terminate is related to the other party’s unwillingness or inability to perform, the aggrieved party may exercise it at any time it is clear that there will be a fundamental non-performance, by sending him/her a notice of termination according to the general rules.

ITALIAN LAW Art. 1461 C.C.: Change in patrimonial conditions of contracting parties Each party can withhold the performance due by him, if the patrimonial conditions of the other party have become such as obviously to endanger fulfilment of the counter-performance, unless adequate security is given. Art. 1186 C.C.: Loss of benefit of time limit Even if the time limit is established in favor of the debtor, the creditor can L. ANTONIOLLI – 421

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immediately demand performance if the debtor has become insolvent or has, by his own act, reduced the security which he had furnished or has failed to furnish the security which he had promised. Art. 1460 C.C.: Defense based upon non-performance In contracts providing for mutual counterperformance, each party can refuse to perform his obligation if the other party does not perform or does not offer to perform his own at the same time, unless different times for performance have been established by the parties or appear from the nature of the contract. However, performance cannot be rejected if, considering the circumstances, such rejection is contrary to good faith. Art. 1219 C.C.: Placing in default The debtor is placed in default by means of a notice or request made in writing. Placing in default is not necessary: (1) (...); (2) when the debtor has declared in writing that he does not intend to perform the obligation; (3) (...). 1. General. While Art. 9:304 PECL contains a general rule concerning fundamental anticipatory non-performance, which entitles the aggrieved party to terminate the contract in the same way as he/she could in the case of actual non-performance, Italian law does not have such a general rule. Nevertheless, several articles in the Codice civile point in the same direction. 2. Anticipatory breach and withholding of performance. A contract can be terminated for anticipatory breach according to Art. 9:304 PECL only if there is an obvious unwillingness or inability to perform. The Italian Codice civile contains several rules whereby if one of the parties is threatened by a risk that the other party may not perform his/her obligation, he/she can act in order to protect his/her own contractual interests, but not by terminating the contract. The difference in remedy (termination/withholding of performance) is due to the fact that in Art. 9:304 PECL there is reasonable certainty that non-performance will take place, while in the case of the rules of the Italian Codice civile this is merely a danger. In fact, in the case of a situation of risk of future non-performance as envisaged in Art. 1461 C.C. on change in patrimonial conditions, the creditor can withhold performance unless adequate security is given. This corresponds to Art. 8:105 PECL, which in the same way entitles the creditor to withhold performance in case of danger of non-performance by the debtor, and at the same time demand an assurance of performance from the debtor before performing his/her obligations. A similar situation exists in the case of a defence based upon non-performance, regulated by Art. 1460 C.C.: 422 – L. ANTONIOLLI

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a party can refuse to perform if the other does not perform at the same time, unless a different time for performance has been established by the parties or derives from the nature of the contract. In both cases the aim of the remedy is not to terminate the contract, but rather to keep the contractual relationship alive: by entitling the creditor to withhold performance the rules create an incentive for the other party to perform. The difference between the two rules is that the defence of non-performance can only be invoked by the party who must perform after the other, while in the case of change of patrimonial conditions it is the party who must perform first (Sacco (2002), pp. 663–665). The same rationale is to be found in Art. 1186 C.C., concerning obligations in general, which states that the creditor can ask for immediate performance by the debtor if the latter has become insolvent or has reduced a given security or has not given a promised security, even though the contract contains a time limit for performance in favour of the debtor. All these rules can be ascribed to the principle rebus sic stantibus, entitling the party who runs the risk of not receiving the performance as agreed in the contract, to withhold performance rather than to perform and then to have to claim back his/her performance if the other party does not perform. The remedies envisaged are all instances of self-protection (autotutela) by the party threatened with non-performance, in order to provide him/her with quick and simple protection, a simplification which is justified also by the lesser severity of the consequences, which unlike termination aim at maintaining the contractual relationship. The risk must be evaluated according to objective criteria and the general principle of good faith (explicitly invoked in the case of defense based upon nonperformance), and it is generally considered irrelevant whether the situation of risk is imputable or not to the debtor. 3. Termination for anticipatory breach. Although, as we have seen, the Italian Codice civile contains no explicit rule concerning the possibility of terminating the contract for anticipatory breach, related Code provisions and systematic arguments can lead to the inference of the existence of such a rule. Referring to legal obligations in general, Art. 1219 C.C. states that a written notice to the debtor (which is otherwise necessary to place him/her in default) is not needed if he/she has declared in writing that he/she does not intend to perform. As for contracts, both legal writings (Sacco (2002), p. 654) and case law (Cass., 9 January 1997, no. 97, in Danno e resp., 1997, 727 with note by Princigalli; Cass., 16 July 2001, no. 9637, in Rep. Foro it., 2001, [1740] no. 471) agree that the contract can be terminated if the debtor declares that he/she will not perform, or threatens not to perform, before the time when performance is due. The rule is clearly based on the idea that if one of the parties makes it clear that he/she will not duly perform, it is unfair and inefficient to wait until the time for performance has come. Consequently, the aggrieved party is entitled to terminate the contract before actual non-performance. This is exactly the rationale underlying Art. 9:304 PECL on anticipatory breach, although the scope of this rule is wider, since it generally refers to every circumstance in which it is clear that there will be a fundamental non-performance in the future, not merely in case of a declaration by the party that he/she will not perform. L. ANTONIOLLI – 423

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COMPARISON AND EVALUATION Although the Italian system does not have an explicit rule matching Art. 9:304 PECL on anticipatory non-performance, it seems that it can easily adjust to it, since several rules of the Codice civile and case law point in the same direction. Formally the scope of application seems more limited in Italian law, since the Codice civile refers explicitly only to the debtor’s formal declaration that he/she will not perform, while in the PECL any manifest unwillingness or inability to perform which would amount to fundamental non-performance entitles the party to terminate the contract. Yet, the rationale behind the Italian rule can be extended to other cases, while the scope of the PECL rule is limited by two factors, namely that the danger of non-performance must be manifest and the prospective non-performance serious. Remedies provided by the Codice civile for cases where there is merely a danger, but not the certainty, of non-performance are connected to the same need to protect the creditor; but the different factual situation leads to allowing the creditor to withhold performance rather than to terminate the contract.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:305: Effects of Termination in General (1) Termination of the contract releases both parties from their obligation to effect and to receive future performance, but, subject to Arts 9:306 to 9:308, does not affect the rights and liabilities that have accrued up to the time of termination. (2) Termination does not affect any provision of the contract for the settlement of disputes or any other provision which is to operate even after termination. 1. General. Art. 9:305 PECL provides general rules on the nature and effects of termination, whereas Arts 9:306 to 9:309 regulate the effects of termination in specific cases. For other possible effects of termination or for other possible issues in some way connected to termination which are not specifically regulated in this Section of the PECL, other principles and rules may be applied, be they PECL provisions (for example, Art. 9:401 PECL: Right to Reduce Price; Art. 8:102: Cumulation of Remedies; Art. 9:501 PECL: Right to Damages) or principles and provisions outside the scope of the PECL (for example, principles and provisions on unjust enrichment and restitution). 2. Termination does not have retroactive effects. According to the PECL, termination is forward-looking. The rationale of the rule is that it would be very inconvenient to treat as void a contract which has been terminated, in the sense of its never having been made, for several reasons: first, the aggrieved party may be precluded from claiming damages for loss of his/her expectations; secondly, application of dispute settlement clauses or other clauses intended to apply even after termination would be prevented; furthermore, it would be inappropriate to treat a contract which has been terminated as being retrospectively cancelled if that contract was to be performed over a period of time when there can be termination for the future without undoing what has already taken place before termination (see Comment B on Art. 9:305 PECL). Due to its prospective effects, termination releases both parties from their duty to render and to receive performance only for the future (see Comment B on Art. 9:305 PECL) and when performance has been rendered, restitution is not an automatic consequence of termination but may occur only in the cases provided by Art. 9:305 which refers to Arts 9:306 PECL (Property Reduced in Value), 9:307 PECL (Recovery of Money Paid), 9:308 PECL (Recovery of Property) and 9:309 PECL (Recovery for Performance that Cannot be Returned) (even if the latter provision is not mentioned in Art. 9:305 PECL). The PECL approach is different from the CISG approach. The wording of Art. 81, para. 2 CISG, implies the retroactivity of termination (‘‘A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently’’) (see Tallon (1987), p. 604). A.M. MANCALEONI – 425

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Art. 7.3.5 Unidroit Principles, like Art. 9:305, para. 1, first part PECL provides that termination releases parties from the obligation to effect and to receive future performance; however, unlike PECL but similar to CISG, the Unidroit Principles provide for restitution as a general rule ( provided that the claiming party concurrently makes restitution of whatever he/she has received: Art. 7.3.6 Unidroit Principles, para. 1) which makes an exception when performance of the contract has extended over a period of time and is divisible (Art. 7.3.6, para. 2). 3. Provisions operating after termination. Like Art. 81, para. 1, second part CISG and Art. 7.3.5, para. 3 Unidroit Principles, Art. 9:305, para. 2 PECL specifies that termination does not affect any provision in the contract for the settlement of disputes or any other provision which is to operate even after termination. As to provisions for the settlement of disputes (such as arbitration clauses) the rationale of the rule is self-evident, as this type of clause is normally taken into consideration when issues of performance, non-performance and remedies (including termination) arise. Regarding other provisions which are to operate after termination, a clause obliging a party not to divulge confidential information received (see Illustration 1 on Art. 9:305 PECL), penalty or liquidated damages clauses, renegotiation and forum selection clauses, clauses providing any form of security and limiting or excluding liability can be mentioned: these clauses may also involve an issue relating to non-performance causing termination and are clearly intended to operate also after termination

ITALIAN LAW Art. 1453 C.C.: Dissolution of contract for non-performance In contracts providing for mutual counterperformance, when one of the parties fails to perform his obligations, the other party can choose to demand either performance or dissolution of the contract, saving, in any case, compensation for damages. Dissolution can be demanded even when an action has been brought to demand performance; but performance can no longer be demanded after an action for dissolution has been brought. The defaulting party can no longer perform his obligation after the date of the action for dissolution. Art. 1458 C.C.: Effects of dissolution Dissolution of a contract for non-performance has retroactive effect as between the parties, except in the case of contracts for continuous or periodic performance, with respect to which the effect of dissolution does not extend to performance already made. 426 – A.M. MANCALEONI

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Dissolution, even if expressly agreed upon, does not prejudice rights acquired by third persons, except for the effects of transcription of the action of dissolution. 1. General. The effects of termination (risoluzione) for non-performance in general are regulated by Art. 1458 C.C. which provides a general rule (termination has retroactive effect), an exception (termination does not have retroactive effects in the case of contracts involving continuous or periodic performance) as well as a rule on the effects of termination with respect to third parties. Art. 1453 C.C. on termination of contracts for non-performance in general is relevant also to the effects of termination as it provides for the possible cumulation of termination and compensation ( para. 1, last part) (see Comment on Art. 9:301 PECL); it also establishes that the non-performing party can no longer perform after the action for termination has been brought ( para. 3). In cases of multilateral contracts, Art. 1459 C.C. provides that termination for nonperformance by one of the parties does not result in termination of the whole contract unless the non-performance has to be considered essential under the circumstances. 2. Termination has retroactive effects. Unlike the PECL and some European legal systems (see Notes on Arts 9:305–9:309 PECL) but like French law, Italian law provides the general principle according to which termination has retroactive effects. The principle of retroactivity was explicitly included in the Italian Codice civile of 1942 in order to put an end to the disputes that had arisen under the previous Code of 1865 (see Art. 1165 C.C. 1865) which lacked an express provision. It is commonly stated that following termination the contract has to be treated as if it had never come into existence and performances become sine causa (Sacco (1998), p. 59). Consequently, if nothing has been done by either of the parties, they are released from the obligation to perform. The aggrieved party may either refuse to perform his/her own obligation and or to receive future performance from the other party (the so-called effetto liberatorio); the non-performing party on the other hand can no longer perform his/her obligation after an action for termination has been brought (Art. 1453 C.C., para. 3). When performances have already taken place, even if only in part, the parties have to restore the situation to what it was before the contract was stipulated and consequently a party may recover money and/or property (or its value) that has been transferred to the other party or recover the value of a service rendered to the other party before termination (the so-called effetto recuperatorio). Therefore, depending on the circumstances, termination has two effects: it releases parties from future performances (effetto liberatorio) and/or grants a right to restitution with respect to performances already rendered (effetto recuperatorio). Both consequences are explicitly provided with regard to termination due to supervening impossibility (Art. 1463 C.C.) but are implied also in case of termination for non-performance. The latter effect may also be inferred a contrario from Art. 1458 C.C., according to which termination does not affect A.M. MANCALEONI – 427

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performances already rendered when the contract involves a continuous or periodic performance. Termination is effective starting from the non-performance (but on the plaintiff ’s request it may take effect from the date of the judicial claim: Sacco (1998), p. 60). In the cases regulated by Arts 1454, 1456 and 1457 C.C. (extrajudicial termination), termination is effective when all respective requirements are met (see Comment on Art. 9:303 PECL, Italian law). 3. Contracts involving continuous or periodic performance. As mentioned above, Art. 1458 C.C., para. 1, second part provides an exception to the general principle of retroactivity of termination for contracts involving continuous or periodic performance (which are contratti di durata, i.e. long-term contracts). In such cases retroactivity does not affect performances already rendered and parties are released only from future performance. Nevertheless, when only one party has performed, partial restitution occurs with regard to performance(s) already rendered. According to the majority of scholars and case law the notion of contracts involving continuous or periodic performance has to be strictly construed so as to include only those contracts performance of which is continuous or periodic for both parties: only in this case do the prospective effects of termination not alter the contractual balance. Moreover, the only performances not to be returned are those corresponding to the counterperformances already received, while other performances rendered in advance are to be returned because they have become unjustified (sine causa) due to supervening termination (Cass., 6 October 1998, no. 9906, in Studium Juris, 1999, p. 194; Cass., 20 October 1998, no. 10383, in Giust. Civ. Mass., 1998; Cass., 24 June 1995, no. 7169, in Giust. Civ. Mass., 1995). Art. 1458 C.C. can be applied also in cases of contracts providing for a continuous performance in exchange for a periodic performance, such as contracts in the form of a lease (contratti di locazione) (Cass., 2 April 1996, no. 3019, in Giust. Civ. Mass., 1996). According to the Corte di cassazione, in contracts of leasing the effects of termination are regulated on the basis of the distinction made by case law between so-called leasing di godimento and leasing traslativo (see the leading cases: Cass., 13 December 1989, no 5569, 5570, 5571, 5572, 5573, 5574, in Giur.comm., 1990, II, p. 885; Cass., sez.un., 7 January 1993, no. 65, in Foro it., 1994, I, 177). In the case of leasing di godimento the amount of the instalments the lessee has to pay as a counterperformance is determined as corresponding to the enjoyment of the goods: therefore Art. 1458, para. 1, second part is applicable and instalments already paid are not to be returned. In the case of leasing traslativo the contract concerns things (typically immovables) whose residual value at the end of the contract may exceed the option price and the amount of each instalment is determined in order to include a part of the option price ( leasing traslativo): therefore Art. 1526 C.C. on nonperformance in case of retention of title sales is applicable and the lessor has to return to the lessee the instalments already received and has a right to an indemnity for the use of the thing, in addition to possible damages (Cass., 28 November 2003, no. 18229, in Giust. Civ. Mas., 2003; Cass., 1 September 2003, no. 12823, in Giust. Civ. Mass., 2003). 428 – A.M. MANCALEONI

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When the object of the contract is the supply of things or services on a continuous basis (contratto di somministrazione) (see Art. 1559 C.C.), in the case of non-performance of a single obligation the aggrieved party may demand termination if the non-performance is fundamental and compromises his/her confidence in future performances (Art. 1464 C.C.); reduction of price may be claimed as an alternative remedy according to the rules on guarantees in sales contracts, which may come into consideration ex Art. 1570 C.C. (according to which ‘‘to the extent that they are compatible with the provisions of the preceding articles, the provisions governing the type of contract to which the single instalments of performance correspond apply to a supply contract’’. See Cass., 17 March 1998, no. 2842, in Foro it., 1998, I, p. 1851). 3.1. No rules on partial termination. There is no general provision on partial termination. Nevertheless, both doctrine and case law admit partial termination in specific circumstances (contra, as a matter of general principle, see Cass., 16 December 1982, n. 6935, in Giust. Civ., 1983, I, p. 1530). Apart from Art. 1458 C.C., para. 1, second part on termination in the case of contracts involving continuous or periodic performance, a more general rule on partial termination for non-performance may be inferred from Art. 1464 C.C. on partial impossibility, according to which the aggrieved party can claim a reduction of his/her performance (on reduction of price as a general remedy see Comment on Art. 9:401 PECL), in addition to compensation, as an alternative to termination of the whole contract whenever partial performance does not satisfy his/her interest (Bianca (1994), pp. 302–303; Roppo (2001), pp. 975–976). Furthermore, partial termination is admitted when performance is severable in a series of autonomous performances the rendering of which partially satisfies the aggrieved party’s interest (Cass. 15 April 2002, no. 5434, in Giust.Civ., I, p. 2159; Cass., 16 July 1982, no. 4188, in Giust. Civ. Mass., 1982), as in the case of sales contracts to be performed by a series of deliveries (vendita a consegne ripartite): in this case Art. 1458 C.C., para. 1, second part can be properly applied by analogy when partial performance satisfies an appreciable interest on the part of the aggrieved party, on the latter’s demand (Cass., 25 February 1982, no. 1203, in Foro it., 1982, I, p. 1604). See also Comment on Art. 9:302. 4. Nature and function of termination. From a theoretical point of view, depending on the nature and function attributed to termination, different effects should follow. Scholars have been concerned with this issue since the Italian Civil Code of 1865 but have not reached any consolidated, coherent solution. The following two main theories can be compared. (1) The function of termination is to restore the parties’ initial position by considering the contract as never having been made, regardless of the imputability of non-performance to one of the parties. Termination only requires that the aggrieved party’s interest in the other party’s performance no longer exists (see Arts 1455, 1457 C.C.), leaving A.M. MANCALEONI – 429

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aside any fault on the part of the non-performing party (objective theory on termination for non-performance: see Comment on Art. 9:301) (Mosco (1950)). (2) The function of termination is to impose a penalty for the non-excusable nonperformance (subjective theory: see Comment on Art. 9:301). Therefore the consequences stemming from termination may be more serious than those which would derive from non-performance of the contract: following termination the aggrieved party is released from the obligation to perform and may also claim compensation (for the positive interest), whereas when he/she prefers to claim performance and compensation for non-performance, he/she remains obliged to perform (Auletta (1942)). Both theories may provoke objections. The theory which attributes termination the function of restoring the parties’ initial position may contrast with the possibility of recovering damages for positive interest: as a matter of fact, in principle granting compensation for positive interest means that the contract is considered to have been properly performed instead of never having come into existence. On the other hand, considering termination as a penalty for non-performance seems to require that non-performance is imputable to the non-performing party, whereas not all scholars (even if in opposition to established case law) agree that imputability of non-performance to the debtor is a requirement for termination. 4.1. Compensation. As to the role of compensation following termination, scholars have been discussing whether only damages relating to the negative interest, only those relating to the positive interest or those relating to both the negative and the positive interest should be recovered. According to the prevailing legal doctrine and case law, compensation should relate to the positive interest: it should put the claimant in the same situation he/she would have been in if the contract had been properly performed. Yet, from a logical point of view the possibility of claiming compensation for positive interest is not prima facie compatible with the retroactive effects of termination, as explicitly provided by the Codice civile: if the contract never existed, the aggrieved party should be precluded from claiming damages for loss of his/her expectations (and in fact this is one of the reasons why the PECL preferred to adopt the principle of non-retroactivity of termination: see Comment on Art. 9:305 PECL). As to case law, it has not made any significant contribution to the resolution of the still unresolved theoretical problems which have troubled scholars, in particular because it ignores the relation between function and effects of termination (Marella (1985), p. 369 et seq.; according to Luminoso (1990), p. 186, the contradiction may be avoided only by considering restitution and compensation as functionally autonomous). Case law follows some consolidated rules: termination is a remedy available only in case of non-excusable non-performance (unlike the PECL, the Unidroit Principles and CISG: see Comment on Art. 9:301 PECL); compensation may be related to the positive interest and it is therefore equated to compensation for non-performance in general (see Art. 1223 C.C.). In any case, cumulation of restitution and compensation cannot result in unjustified enrichment for the aggrieved party (see Comment on Art. 9:307, Italian law). 430 – A.M. MANCALEONI

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5. Provisions for settlement of disputes or other provisions which are to operate also after termination. In spite of the lack of specific rules corresponding to Art. 9:305, para. 2 PECL, retroactivity of termination does not affect provisions in the contract for the settlement of disputes or any other provision which is to operate even after termination (Roppo (2001), p. 948). As to penalty clauses, in the absence of an express provision in the contract, it is a matter of interpretation whether the parties have stipulated penalty clauses with respect only to the maintenance of the contract or also with regard to termination (Luminoso (1990), p. 348). On penalty clauses see Art. 1382 C.C. and Art. 9:509 PECL. 6. Effects on rights acquired by third persons. As a general principle, the retroactive effects of termination do not affect rights acquired by third persons. According to Art. 1458 C.C., para. 2, termination does not prejudice rights acquired by third parties, except for the effects of transcription of the action of termination. Therefore, in the case of immovables and movables subject to transcription, rules concerning transcription in public registers (trascrizione) come into consideration and termination is effective vis-a`-vis third persons if the claim for termination has been transcribed prior to the transcription of the act by which the third party acquired rights (Art. 2652, C.C., n. 1). When termination has been claimed before the act by which the third person acquired rights was made, the latter may be formally involved in the judgment in order to render the decision effective also in his/her respect (ex Art. 2909 C.C. on res judicata; see also Art. 111 Codice di procedura civile). When termination has automatic effects (Arts 1454, 1456 and 1457 C.C.), the party who wishes to render termination effective vis-a`-vis third parties may ask for a judicial decision declaring termination which can be transcribed. Also the extrajudicial act which causes termination (for example, a formal request for performance) may be transcribed if it is stipulated in the form appropriate for transcription (Dalmartello (1969), pp. 147–148. For the notion of automatic, judicial and extrajudicial termination see Comments on Arts 9:301 and 9:303 PECL, Italian law). According to the same principles on registration, bankruptcy does not affect the rights of the party claiming termination when the claim was registered before the declaration of bankruptcy (Cass., 9 December 1998, no. 12396, in Giust. Civ. Mass., 1998; Cass., 21 February 1994, no. 1648, in Giur.it., 1995, I, 1, p. 196). In the case of the sale of movables, if the contract with the third party was stipulated before termination, the effects of termination between the parties of the contract cannot affect the buyer’s rights. When the contract of sale was stipulated after termination the effects of termination do not affect the buyer’s rights on the condition that he/she acquired possession and was in good faith when the contract was made, as provided by Art. 1153 C.C. (and good faith is presumed ex Art. 1147 C.C.).

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:306: Property Reduced in Value A party who terminates the contract may reject property previously received from the other party if its value to the first party has been fundamentally reduced as a result of the other party’s non-performance. Art. 9:307: Recovery of Money Paid On termination of the contract a party may recover money paid for a performance which it did not receive or which it properly rejected. Art. 9:308: Recovery of Property On termination of the contract a party which has supplied property which can be returned and for which it has not received payment or other counterperformance may recover the property. Art. 9:309: Recovery for Performance that Cannot be Returned On termination of the contract a party which has rendered a performance which cannot be returned and for which it has not received payment or other counterperformance may recover a reasonable amount for the value of the performance to the other party. 1. General. Arts 9:307 to 9:309 PECL regulate the effects of termination when one of the parties has already performed but has not received counterperformance. They aim at re-establishing the balance between the parties in order to avoid the prospective effects of termination awarding an unjust windfall to the party who has received performance. They do not provide for cases where both parties performed and received performance. In the latter cases partial termination (see Art. 9:302 PECL) or reduction of price (see Art. 9:401 PECL) may take place. The performance to be returned may consist in money (Art. 9:307 PECL), property (Art. 9:308 PECL), services (Art. 9:309 PECL). Art. 9:306 PECL grants the party who terminates the contract the right to reject property previously received when the value of the property received has been fundamentally reduced as a consequence of the other party’s non-performance. 2. Rejection of property. Rejection is an appropriate remedy when one party has received from the other property the value of which has been reduced on account of the other party’s non-performance (see Illustration 1 sub Art. 9:306 PECL: a lessor supplies the hardware, but fails to supply the software; the lessee may reject the hardware) or, in the case of contracts to be performed in instalments, if failure to deliver a later instalment makes the earlier instalments useless (see Illustration 2 sub Art. 9:306 PECL: an essential item of a computer system is not delivered and the buyer terminates the contract; the buyer may reject the components already received). 432 – A.M. MANCALEONI

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Rejection is provided as an alternative to damages (Art. 9:502 PECL) or to a reduction in price (Art. 9:401 PECL). Rejection is preferable when the rejecting party has not yet paid the price, because he/she can thus avoid paying even a reduced price. 3. Recovery of money paid. Art. 9:307 PECL applies when a party has not received performance or has rightfully rejected a performance already paid for. Because of the prospective effects of termination, in cases of contracts to be performed over a period of time or in instalments, performance of which is severable (Art. 9:302 PECL), this rule applies to payments made for performance which has not been rendered or has been rejected (see Comment C on Art. 9:307 PECL). Interest may be claimed according to Art. 9:508 PECL. 4. Recovery of property. Art. 9:308 PECL applies when one party has supplied to the other party property which can be returned and for which he/she has not received counterperformance. If property is not restored, the court may issue an order to restore it or its value (Comment C on Art. 9:309 PECL). The rule is not concerned with third party rights, such as the rights of the buyer’s creditor, of the buyer’s receivers in bankruptcy or of a bona fide purchaser. The relationships between the seller and third parties are regulated by the applicable national law (Comment B on Art. 9:308 PECL). When the contract is to be performed in parts, Art. 9:302 PECL applies (Comment D on Art. 9:308 PECL). In cases of contracts for the sale or assignment of stocks, shares, investment securities, negotiable instruments and debts, which are often performed by delivering a paper certificate or an instrument giving evidence of the right, the seller should be entitled to recover the paper, subject to third party rights (Comment E on Art. 9:308 PECL). In cases of contracts for the assignment of intellectual property rights, restoration of the intangible property may be possible by a formal declaration or by another act of the assignee or, when the intangible property is attached to a thing (for example, sculptures, paintings, works written on paper, see Comment F on Art. 9:308 PECL), by returning also the thing itself. When restoration of property is not possible or is too onerous Art. 9:309 PECL applies. 5. Recovery for performance that cannot be returned. When restitution is not possible Art. 9:309 applies. Impossibility of restitution may occur either because the property which has been transferred has been used up, resold or destroyed or because the result of the performance consisted in work or services which cannot be returned. In both cases the other party may have a claim for the price but subject to the terms of the contract; he/she may have a claim for damages but the party who received the benefit may be the aggrieved party or, though he/she is the one who failed to perform, his/her non-perforA.M. MANCALEONI – 433

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mance is excused under Art. 9:108 PECL. In any case, the party who has received a benefit has to pay for it. When the benefit to the party who received it is less than the cost of performance to the other party, the former has to pay the lesser amount. When the benefit to the recipient is greater than the cost of providing it, the recipient has to pay only a reasonable amount of the contract price (see Comment B on Art. 9:309 PECL). It may be inferred from Art. 9:309 that, according to the PECL, impossibility to return the property is not in principle a bar to termination. Also according to the Unidroit Principles, termination is in principle possible also in the case of impossibility of restitution; moreover when restitution in kind is not possible, restitution should be made in money whenever reasonable (Art. 7.3.6, para. 1. second part; see Schlechtriem (1997), pp. 267–269). European legal systems may have different rules depending on the cause of impossibility and admit termination only when impossibility is not imputable to the party claiming termination (see Notes on Art. 9:305–9:309 PECL). Contrary to the PECL and the Unidroit Principles, CISG provides that termination is not possible when the buyer cannot return the goods received; however impossibility of restitution is defined in a flexible way: goods must be ‘‘substantially’’ in the same condition (which does not mean in the ‘‘identical’’ condition: Art. 82, para. 1; see Tallon (1987), pp. 607–609); in any case there are exceptions to the general rule and termination becomes possible, in particular, when impossibility is not imputable to the buyer (Art. 82, para. 2).

ITALIAN LAW Art. 2033 C.C.: Payment of non-existing debt Whoever has made a payment which was not owing is entitled to the return of what he has paid. He is also entitled to the fruits and interest from the day on which payment was made if the person who received it acted in bad faith, or from the day of demand if the person acted in good faith. Art. 2037 C.C.: Duty to return a specified thing A person who has received a specific thing which was not due him is under an obligation to return it. If the thing is lost, even as a result of a fortuitous event, the person who received it in bad faith shall repay its value, if it has merely deteriorated, the person who gave it can demand its equivalent or its return and a compensation for the diminished value. The person who has received the thing in good faith is not answerable for its loss or deterioration, except to the extent of his enrichment, even if the loss or deterioration was caused by his own act. 434 – A.M. MANCALEONI

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Art. 2038 C.C.: Transfer of thing received when not due A person who has received a thing in good faith and has transferred it before becoming aware of his duty to return it, is under an obligation to return what he has been given in payment for the transfer. If the payment is still owing, the person who gave the thing for payment not due is subrogated to the rights of the person who subsequently transferred it. In the case of gratuitous transfer, the one who acquired the thing is liable, to the extent of his own enrichment, to the person who made the payment not due. A person who has transferred a thing he received in bad faith, or who transferred it after becoming aware of his duty to return it, is under an obligation to return the thing in kind or to pay its corresponding value. However, the one who made the payment not due can demand what has been given as payment for the transfer and can even take direct action to collect the payment. If the transfer was made gratuitously, the person who has acquired the thing is liable, to the extent of his own enrichment, to the person who made payment not due, after the latter has unsuccessfully exhausted all remedies against the one who has transferred the thing. Art. 2040 C.C.: Reimbursement for expenses and improvements The person to whom the thing is returned shall reimburse the former possessor for expenses and improvements, in accordance with Arts 1149, 1150, 1151, and 1152. Art. 2041 C.C.: General cause of action for unjust enrichment A person who has enriched himself without cause at the expense of another shall, to the extent of the enrichment, indemnify the other for his correlative financial loss. If the enrichment consists of a specified thing, the person who received it is bound to return it in kind if it is still in existence at the time of the demand. 1. General. Due to the retroactive effects of termination, following termination the contract has to be treated as never having come into existence (Art. 1458 C.C., para.1). According to established legal doctrine and case law, if one or both of the parties has rendered performance, the rules on payment of non-existing debts and unjustified enrichment are applicable (Arts 2033–2041 C.C.) regardless of the object of performance (things, money, services). Although restitution is a consequence of termination, it does not in practice take place automatically. The judge is not allowed to provide for restitution unless there is a specific request by the interested party (Cass., 14 January 2002, no. 341, in Giust. Civ. Mass., 2002; Cass., 3 April 1999, no. 3287, in Giust. Civ. Mass., 1999); restitution cannot be claimed for the first time either before the Corte di cassazione (Cass., 19 May 2003, no. A.M. MANCALEONI – 435

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7829, in Giust. Civ. Mass., 2003) or the Corte d’appello (Cass., 29 November 1996, no. 10632, in Giust. Civ. Mass., 1996) because it is considered a different, new claim with respect to the claim for termination and cannot therefore, according to civil procedure rules, be raised for the first time on appeal. 2. Rejection of property. The Codice civile does not provide any express rule corresponding to Art. 9:306 PECL. When the value of the thing received by contract is reduced because of the other party’s non-performance, the general rules apply (see Art. 1453 C.C.) and termination of the whole contract, with consequent restitutionary effects, is possible only if the non-performance is not of ‘‘slight importance’’ with respect to the interest of the other party (see Comment on Art. 9:301 PECL). When termination is not possible, the aggrieved party may claim compensation to an amount corresponding to the decrease in value of the thing. Reduction of price is not provided as a general rule: see Art. 9:401 PECL. In non-consumer sales the special rules on guarantees are to be applied: in the case of defects which render the thing unfit for its purpose or diminish its value, the buyer can claim termination (actio redhibitoria) or reduction of price (actio quanti minoris) (Arts 1490 and 1492 C.C.; cf. also Art. 1497 C.C. on lack of quality promised by the seller or essential to the purpose). For consumer sales of movables, Art. 1519 quater C.C. (implementing directive 99/44/EC) provides that in case of non-conformity to the contract the buyer may claim replacement of the goods or to have them repaired and, if impossible, may claim a reduction of price or termination (but the latter only if the defects are serious). See Art. 9:401 PECL. 3. Recovery of money paid. Prevailing case law insists that recovery of a sum of money is a monetary debt (debito di valuta), as opposed to a value debt (debito di valore), both when claimed by the aggrieved party and when claimed by the non-performing party. As a matter of fact, the aim of restitution is to restore the position the parties were in when the contract was concluded, regardless of the imputability of non-performance. In any case the cumulation of the restitutionary monetary debt and damages for non-performance cannot result in an unjustified enrichment for the creditor: see Cass., sez. un., 17 May 1995, no. 5391, in Giust. Civ. Mass., 1995; Cass., 20 August 1999, no. 8793, in Giust. Civ. Mass., 1999; Cass., 20 May 1997, no. 4465, in Giust.Civ. Mass., 1997. On damages in case of monetary obligation see further Art. 1224 C.C. and Comment on Art. 9:508 PECL. 4. Recovery of property. Following termination of contracts for the transfer of property, which are usually consensual contracts (Art. 1376 C.C.), title automatically returns to the transferor (so-called retroattivita` reale). These restitutionary effects are immediately consequential on termination and, due to the retroactivity of termination, not only the property but also the monetary value corresponding to the use and enjoyment of the thing from the date of its delivery to the date of its restitution has to be returned (Cass., 20 May 1997, no. 4465, in Giust. Civ. Mass., 1997; Cass., 15 February 1997, no. 1417, in Giust. Civ. Mass., 1997; Cass., 29 November 1996, no. 10632, in Giust. Civ. Mass., 1996) in 436 – A.M. MANCALEONI

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addition to all the accessories such as fruits or their monetary value. Some confusion and discrepancies may derive from the application of the general rules on restitution to the specific case of termination for non-performance. The general rules on restitution, including the provisions on possession to which Art. 2040 C.C. refers (i.e. Arts 1148–1152 C.C.), make a distinction between good and bad faith behaviour in order to establish the measure of interest and fruits which must be returned with the thing as well as expenses and improvements relating to the thing which will have to be reimbursed to the other party on recovering the property: the party in bad faith receives harsher treatment. In case of termination, the rules referred to must be applied by taking into consideration the function of restitution following termination: therefore considering, as sometimes happens both in case law and in scholarly opinions, the performing party to be in good faith and the non-performing party to be in bad faith should be avoided. As a matter of fact, following termination the contract has to be undone and all its effects have to be considered as never having produced anything for both the parties, regardless of liability for non-performance which is only relevant for the purpose of compensation (Cass., 4 June 2001, no. 7470, in Giust. Civ. Mass., 2001; Cass., 12 March 1997, no. 2209, in Danno e responsabilita`, 1997, p. 795; Cass., 24 February 1995, no. 2135, in Giust. Civ. Mass., 1995). 5. Recovery for performance that cannot be returned. Unlike other legal systems (see Notes on Arts 9:305–9:309 PECL) and similar to the PECL, in Italian law the inability to restore property is not in principle a bar to termination. The obligations of restitution are not mutually dependent and termination is possible even if restitution is not possible because the goods have perished, were transferred to a third party or transformed (see Sacco (1998), p. 59: restitution is not a requirement for but a consequence of termination; Cass., 11 November 1992, no. 12121, in Giust. Civ. Mass., 1992: the obligation to return a performance already received is an application of the principle of unjust enrichment and the inadimplenti non est adimplendum principle is not applicable to the case). Therefore, termination may be demanded also from the party who cannot return the performance received (but on the condition that the impossibility of restitution is not attributable to the party claiming termination: see Cass., 12 February 1983, no. 1254, in Giust. Civ. Mass., 1983). Legal doctrine is not unanimous as to the applicability by analogy of Art. 1492 C.C., para 3 on sales contracts, which bars termination in favour of a reduction of price when the goods delivered have perished on account of force majeure or the buyer’s fault and allows termination only when the loss is due to the defects (compare Bianca (1994), pp. 293–294 and Roppo (2001), pp. 947–948). In any case, when restitution in kind is not possible, the corresponding value is to be returned (pretium succedit in locum rei: Cass., 15 May 1996, no. 4498, in Giust. Civ. Mass., 1996; Cass., 20 October 1997, no. 10256, in Giur.it., 1999, I, 1, p. 249; Cass., 20 March 1989, no. 1391, in Giust. Civ., 1989, I, p. 2436). Performance cannot be returned typically in the case of contracts for services. In this case, in the absence of a general rule corresponding to Art. 9:309 PECL, the right to receive the equivalent value derives form the application of the general principle of unjust enrichment (Roppo (2001), p. 949). A.M. MANCALEONI – 437

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A specific rule is provided in Art. 1672 C.C. with regard to construction contracts: when the contract is terminated because of impossibility due to causes which cannot be imputed to the debtor, the other party has to pay only for work done to the extent that the work is useful to him/her.

COMPARISON AND EVALUATION The PECL and Italian law regulate the effects of termination moving from opposite starting points. According to the PECL termination is prospective; according to Italian law termination is retroactive. The PECL, in principle, seem to be interested in preventing unjust enrichment, whereas Italian law is mainly concerned with restoring the parties’ original position. As a consequence of the retroactive effects of termination, according to Italian law the contract has to be ‘‘undone’’ and – except in the case of contracts involving continuous or periodic performance – restitution can take place also when both parties have performed and received performance, regardless of the object of the contract (things, money, services). Therefore specific rules concerning cases in which the performance rendered must be returned – such as in Arts 9:306 to 9:309 PECL – are not necessary in order to allow restitution. On the other hand the PECL do not provide for cases where both parties have performed and received performance. In these cases partial termination (see Art. 9:302 PECL) or reduction of price (see Art. 9:401 PECL) may take place in addition, if applicable, to compensation. Looking at all the remedies for non-performance available to the parties, the PECL seem on the whole to tend to give preference to the maintenance of the contract, as may be inferred from the rule providing that termination is prospective coupled with the possibility of claiming a reduction of price as an alternative to termination (Art. 9:401), whereas under Italian law termination tends to eliminate all the effects of the contract and there is no general rule providing for a reduction of price (see also Comment on Art. 9:401). Yet, these prima facie differences in the general approach should not be overestimated. The Notes under Arts 9:305 to 9:309 PECL outline that, although some European legal systems (a minority) treat termination as having retroactive effects and others (the majority) as prospective, the differences are more apparent than real and can be appreciated only by taking into consideration the effects of termination in factual situations. In the case of contracts involving continuous or periodic performance, the applicable Italian and PECL rules (Art. 1458 C.C. and Art. 9:302 PECL) lead to the same result: termination is prospective. But as to contracts to be performed in separate parts which do not involve continuous or periodic performance, in Italian law the possibility of partial termination, even if recognised in practice, is not as well defined as it is in the PECL and the practical results may not be the same. See Comment on Art. 9:302 PECL: according 438 – A.M. MANCALEONI

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to the PECL partial termination, when possible, is a solution imposed on the aggrieved party, whereas according to Italian law is a choice open to the aggrieved party. Both the PECL and Italian law allow for the cumulation of remedies, to the extent that they are compatible. In particular, compensation following termination is considered equivalent to compensation for non-performance in general and full damages are recoverable (but the judge cannot award more than the ‘‘re´paration inte´grale’’: see Comment on Art. 8:102 PECL).

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Section 4: Price reduction PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:401: Right to Reduce Price (1) A party which accepts a tender of performance not conforming to the contract may reduce the price. This reduction shall be proportionate to the decrease in the value of the performance at the time this was tendered compared to the value which a conforming tender would have had at that time. (2) A party which is entitled to reduce the price under the preceding paragraph and which has already paid a sum exceeding the reduced price may recover the excess from the other party. (3) A party which reduces the price cannot also recover damages for reduction in the value of the performance but remains entitled to damages for any further loss it has suffered so far as these are recoverable under Section 5 of this Chapter. 1. General. Art. 9:401 PECL allows the party who accepts a non-conforming performance to reduce the price. The rule is a generalisation of the actio quanti minori, traditionally provided in contracts of sale. In case the receiving party does not accept, he/she can claim either restitution of money paid under Art. 9:307 PECL or compensation under Art. 9:501 PECL. Price reduction may be claimed also when non-performance is excused. It is proportional to the reduction in value of the performance. It can be awarded as an alternative to damages for reduction in value; other damages are however still recoverable under Art. 9:502 PECL (see Comment A-D on Art. 9:401 PECL).

ITALIAN LAW Art. 1464 C.C.: Partial impossibility When the performance of one party has become impossible only in part, the other party has a right to a corresponding reduction of the performance due by him, and he can also withdraw form the contract if he lacks an appreciable interest in partial performance. Art. 1492 C.C.: Effects of warranty In the cases indicated in Art. 1490, the buyer can at his choice demand termination of the contract or reduction of the price, unless, for certain defects, usage bars termination. The choice is irrevocable when it is made in a judicial action. 440 – A.M. MANCALEONI

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If the thing delivered is destroyed as a result of the defects, the buyer is entitled to termination of the contract; if instead it is destroyed as the result of a fortuitous event or through the fault of the buyer, or if the buyer has alienated or transformed it, he can only demand a reduction of the price. Art. 1519-quater C.C.: Consumer rights (...) [VII] The consumer may ask, on his choice, appropriate reduction of price or termination in the following situations: (a) repair or replacement are impossible or excessively onerous; (b) the seller did not repair or replace the goods within the reasonable time specified by para. 6; (c) replacement or repair causes significant inconvenience to the consumer. [VIII] In assessing the measure of reduction of price or the sum of money to be returned, the use of the good by the consumer has to be taken into consideration. (...) [X]The consumer cannot ask termination when the defect of conformity for which replacement or repair were impossible or excessively onerous is of slight importance. 1. General. In Italian law there is no general rule providing for a proportional reduction of the price in the case of defective performance corresponding to Art. 9:401 PECL. According to some scholars, in the absence of a general provision, Art. 1464 C.C. on partial impossibility, providing for the reduction of the counter-performance, should be applied as an expression of a general principle applicable in all cases of partial or defective performance: if reduction of price is not admitted in the case of defective performance, the result would be unacceptable because the performing party would enjoy greater protection in the case of force majeure than in the case of negligent non-perfomance (Luminoso (2000), pp. 35–39). 2. Contracts of sale. The right to reduce the price (actio quanti minoris) is provided with specific regard to sales contracts by Art. 1492 C.C. as an alternative to termination (reduction of price is the only remedy given to the buyer when the loss of the thing is due to force majeure or to his/her fault). Consumer sales are subject to a different regulation after the implementation of Directive 99/44/EC on certain aspects of consumer goods and associated guarantees. According to Art. 1519 quater C.C., para. 2, the consumer may claim reduction of price (a) when repair or replacement of the goods is not possible or is excessively onerous; (b) when the seller did not repair or replace them within a reasonable time; (c) when repair or replacement has caused significant inconvenience to the consumer. Reduction of price is an alternative to termination but the latter may be claimed only when the defect of conformity is not of ‘‘slight importance’’ ( para. 10). Also Art. 1668 C.C. on construction contracts provides for a reduction of price as an alternative to the elimination of the defects. A.M. MANCALEONI – 441

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COMPARISON AND EVALUATION Although Italian law lacks a general rule corresponding to Art. 9:401 PECL, reduction of price is provided with respect to consumer and non-consumer sales and to construction contracts. In other cases, in the absence of a general provision, the aggrieved party may reach similar results by requesting compensation corresponding to the decrease in the value of the thing; compensation nevertheless requires that the non-performance be imputable to the non-performing party, whereas according to Art. 9:401 PECL reduction of price may occur even if non-conformity is excused. The application by analogy of Art. 1464 C.C. on partial impossibility, which provides for a proportional reduction of the counterperformance, to all cases of defective performance seems to be a more logical and coherent solution. Following the latter, the Italian rule would correspond to the PECL rule.

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Section 5: Damages and Interest PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:501: Right to Damages (1) The aggrieved party is entitled to damages for loss caused by the other party’s non-performance which is not excused under Art. 8:108. (2) The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur. 1. General. This Art. establishes the principle whereby the party who is aggrieved by the other party’s non-performance is entitled to damages, provided that the non-performance is not due to an impediment covered by Art. 8:108. 2. Requirements. a) Liability for non-performance: Damages may be obtained for nonperformance of any contractual obligation. As Comment B suggests, this Art. presupposes a distinction between obligations to produce a given result and obligations to take reasonable care: fault constitutes a further requirement for liability for damages only when the non-performing party is not bound to produce a given result; otherwise mere failure to produce a given result entitles the aggrieved party to damages. b) Loss: As stated in Comment A, damages may be obtained only to the extent that the aggrieved party has actually suffered a loss; recoverability of so called ‘‘nominal damages’’ is therefore excluded. c) Notice of non-performance: The aggrieved party is not bound to serve any notice to perform before claiming damages for delay in performance (see Comment C). d) Chain of causation: The loss must be caused by the non-performance; as stated in Comment D, liability for damages does not arise when an intervening event would have had an impact on the contract if non-performance had not occurred. 3. Types of loss. a) Non-pecuniary loss: Under Art. 9:501 damages may be obtained for pecuniary as well as non-pecuniary losses, such as loss for pain and suffering, mental distress and inconvenience arising from the non-performance, as opposed to punitive damages, which are not covered by this provision (see Comment E). b) Future loss: Comment F suggests that damages may be obtained also for the future loss the aggrieved party is expected to suffer after the assessment of damages, provided that the future loss is reasonably likely to occur. Future losses may include prospective expenditure which would have been avoided had the breach not occurred, and gains which the aggrieved party could reasonably have been expected to make in case of performance and loss of a chance. 5. UNIDROIT Principles and CISG. Art. 7.4.1 UNIDROIT Principles contains a rule similar to that of Art. 9:501(1). Comment 1 to Art. 7.4.1 confirms that the right to damages arises in the mere event of non-performance, fault not being an additional requirement. Even in the case of the obligation to make best efforts, the test is an objective A. MARI – 443

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one (see Art. 5.4; ICC Award, Geneva, 28 July 2000 no. 9797, www.unilex.info). Art. 7.4.2, in referring to the harm sustained as a result of non-performance, requires a causal link between non-performance and harm. Certainty of harm is required by Art. 7.4.3. Art. 7.4.2(2) provides for compensation for non-pecuniary harm (see also Arbitral Award, Camera Arbitrale Nazionale ed Internazionale, Milano, 1 Dec. 1996 no. A-1795/51, www.unilex.info, excluding compensation for emotional suffering and distress when the aggrieved party is a corporate entity). Compensation for future harm is governed by Art. 7.4.3(1). In CISG the aggrieved party’s right to damages for nonperformance is established in Arts 45 and 61, while damages are governed by Arts 74–77. Art. 74 implies a strict liability not subject to the non-performing party’s fault and presupposes a causal link between breach of contract and damages (see Knapp (1987), p. 538 et seq.). CISG makes no provisions as to the recoverability of non-pecuniary losses.

ITALIAN LAW Art. 1218 C.C.: Liability of debtor The debtor who does not exactly render due performance is liable for damages unless he proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him. Art. 1219 C.C.: Placing in default The debtor is placed in default by means of a notice or request made in writing. Placing in default is not necessary [...] 2. when the debtor has declared in writing that he does not intend to perform the obligation; 3. when the time limit has expired, if the performance must be made at the domicile of the creditor [...]. 1. General. Liability for damages for non-performance of contractual obligations in general is governed by the provisions of Arts 1218–1229 C.C., which apply to damages for tortious liability as well. Other provisions are scattered in some C.C. rules governing single types of contracts. 2. Requirements. a) Non-performance: Liability for damages covers both defective and delayed non-performance (Cass. 31 Mar. 1969 no. 1050, Rep. Gen. Giur. It. 1969). The text of Art. 1218 recalls Art. 1256 C.C. which, in governing the supervening impossibility to perform, states that the obligation is terminated when its performance becomes impossible due to a cause which cannot be imputed to the obligee. So, under Art. 1218, the obligee is liable for damages if he/she does not prove that non-performance is due to an event covered by Art. 1256. b) Fault: Whether fault is a further requirement in order for liability to arise is quite a disputed matter with respect to Italian law, due to difficulties 444 – A. MARI

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which may be encountered when trying to coordinate the provisions of Arts 1218 and 1256 with those of Art. 1176 on diligence in the performance of obligations. Scholars are quite divided on this matter: while some hold that Art. 1218 embodies a strict objective liability so that the non-performing party is liable for damages regardless of any diligence test, the majority, on the contrary, holds that fault does constitute the basis for liability (see: Visintini (1989); Giorgianni (1970), p. 873 et seq.; Santoro (1991), p. 995 et seq.; D’Amico (1995), p. 33 et seq.). Case-law is greatly in favour of the latter theory: liability for nonperformance implies a subjective element consisting of the obligee’s unfair intention not to perform (see ex multis: Cass. 9 July 1984 no. 4020, Giust. Civ. Mass. 1984; Cass. 3 July 1993 no. 7299, Giur.it., 1994, I,1,410). c) Loss: For liability to arise, an actual loss is always necessary, which is often expressed by case-law in terms of its ‘‘certainty’’ and ‘‘potential harmfulness’’ (Cass. 22 June 1978 no. 3078, Foro It., 1979, 1836; Cass. 30 June 1982 no. 3940, Giust. Civ. Mass. 1982). The same is also true in the case of non-performance of pecuniary obligations (see Cass. 4 May 1962 no. 860, Rep. Gen. Giur. It. 1962). Accordingly, nominal or symbolic damages are not allowed. d) Chain of causation: As stated in the last sentence of Art. 1223, recovery is only allowed for the loss caused by nonperformance (see amplius Comment on Art. 9:502, Mari ). e) Burden of proof: Even if the case-law usually requires fault in order for liability to arise, it is often said that fault is to be presumed; thus, the creditor must only give evidence of the failure to perform and of the harm suffered, while in principle it is the obligee who must give full evidence of the absence of any fault on his/her part (Cass. 26 Aug. 2002 no. 12477, Giust. Civ. Mass. 2002). There are two exceptions to this rule: both in the case of negative obligations (obligations to do nothing as opposed to obligations to do or give something) and in the case of obligations to make best efforts (as opposed to obligations to achieve a specific result, see De Lorenzi (1995), p. 397 et seq.), it is up to the creditor to prove fully the nonperforming party’s fault (Cass. 30 Oct. 2001 no. 13533, Giust. Civ., 2002, I, 1934). f ) Notice of non-performance: Under Art. 1219 C.C., liability for damages is usually subject to a prior notice of non-performance by the aggrieved party, except in the cases listed in § 2: when the obligee has already declared in writing that he/she is not willing to perform and, in the case of obligations to be performed at the creditor’s place of business, when the time limit within which to perform has already expired. Some decisions hold that even in the case of obligations to be performed at the debtor’s place of business, no notice is necessary if the parties have agreed on an essential time limit for performance which has expired (see Cass. 19 Jan. 1956 no. 159, Rep. Gen. Giur. It., 1956; Giorgianni (1970), p. 861 et seq.). Art. 1222 states that no notice is necessary in the case of failure to perform negative obligations, where any action in breach of the obligation constitutes a non-performance. Art. 4 of Leg. Decree 9 Oct. 2002 no. 231, which implemented Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions, states that interest for late payment accrues ‘‘automatically’’ in any case (see also Comment on Art. 9:508, Mari ). Another relevant provision in this context is Art. 1495 C.C. on sales-contracts, which requires the buyer to give notice of non-conformity of the goods within 8 days of the discovery of non-conformity and is applicable to claims for damages as well (Cass. 3 Aug. 2001 no. 10728, Giust. Civ. 2002, I,2234). A. MARI – 445

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3. Types of loss. a) Non-pecuniary loss: Apart from the cases involving non-material harm entailing patrimonial losses such as harm to the commercial reputation, recovery of non-pecuniary loss on account of contractual liability is still very difficult to conceive in Italian Law since, under Art. 2059 C.C. – which is in the Part dedicated to tortious liability but is usually considered applicable to contractual liability as well – non-pecuniary losses may be recovered only when expressly provided for by law. This is typically the case of illegal acts amounting to a crime (see Mastropaolo (1988), p. 5 et seq.; Costanza (1987), p. 127 et seq.; Scognamiglio (2002), p. 467 et seq.). While in the field of tortious liability case-law has actually and substantially broadened the scope of recoverable damages by awarding damages which are non-pecuniary in nature in many cases of illegal conduct not amounting to a crime (see, in particular, Cass. 31 May 2003 no. 8828, Foro. It., 2003, I, 2272), this is not yet so with respect to contractual liability. Despite some recent decisions by lower courts definitely and clearly awarding non-patrimonial damages for contractual non-performance (see Trib. Forlı` 14 Mar. 1996, Juris Data; Pretura Salerno 17 Feb. 1997, Giust. Civ. 1998, I, 2037; Giud. Pace Verona, 16 Mar. 2000, Giur.it. 2001, 115; Giud. Pace Milano, 18 Dec. 2000, Giur.it. 2001, 1159; Giud. Pace Venezia-Mestre, 6 May 2002, Juris Data) and despite an ambiguous judgment of the Supreme Court (15 Oct. 1999 no. 11629, Foro It. 2000, I, 1917, setting aside an appeal judgment which had not evaluated damages suffered by the aggrieved party in connection with ‘‘humiliation at being forced to borrow money’’, ‘‘poor living conditions’’ and ‘‘dropping-out of school’’), the recovery of non-pecuniary damages is at the moment actually conceivable in connection only with non-performance of employment contracts (see Cass. 5 Feb. 2000 no. 1307, Giur.it. 2001, 485) or with some provisions of statutory laws implementing European Union laws. This is particularly the case of Leg. Decree 17 March 1995 no. 111, implementing Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours. Here Italian case-law admitted recovery of non-patrimonial damage even before that judgment no. 168 of 12 March 2002 of the Court of Justice of the European Communities confirmed that Art. 5 of the Directive is to be interpreted as conferring, in principle, on consumers a right to compensation for non-material harm resulting from the non-performance or improper performance of the services constituting a package holiday (see Trib. Verbania, 23 Apr. 2002, Giur. Merito 2002, 1193; Trib. Roma, 19 May 2003, D&G Diritto e Giustigia 2003, 30, 55; Cuffaro-Tassoni (2000), p. 761 et seq.; Carrassi (1991), p. 554 et seq.; see also Arts 43–44 Leg. Decree 25 July 1998 no. 286 and Art. 4 Leg. Decree 9 July 2003 no. 215, implementing Council Directive 2000/43/EC of 29 June 2000 concerning the principle of equal treatment between persons irrespective of racial or ethnic origin, and Trib. Milano 30 Mar. 2000, Foro It. 2000, I, 2040). b) Future loss: Case-law regularly admits recovery of so-called future losses, more often in the form of a loss of a chance (see Cass. 23 Nov. 1998 no. 11876, Giust. Civ. Mass. 1998; Cass. 25 Sep. 1998 no. 9598, Giust. Civ. Mass. 1998; Cass. 13 Dec. 2001 no. 15759, Foro It. 2002, 393). Future loss is said to constitute a recoverable loss if the creditor can prove a reasonable possibility of achieving a positive result higher than 50% (see Cass. 19 Dec. 1985 no. 6506, Foro It. 1986, I, 383). As to the actual measure of damages for future losses, it is possible for the courts to allow them on an equitable basis in 446 – A. MARI

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compliance with Art. 1226 C.C. (see Cass. 20 Apr. 1995 no. 4473, Giust. Civ. Mass. 1995). c) Punitive damages: Punitive damages do not exist in the Italian legal system.

COMPARISON AND EVALUATION As to the right to damages for contractual non-performance, Italian law seems to diverge from the PECL, as well as from the UNIDROIT Principles and CISG, in quite important respects. First of all, while liability for damages in the PECL, the UNIDROIT Principles and CISG is an objective one, under Italian law the award of damages always presupposes the non-performing party’s fault. However account is to be taken of the fact that fault is usually presumed. Secondly, unlike the PECL, the UNIDROIT Principles and CISG, Italian law usually requires the aggrieved party to give notice of non-performance before claiming damages. Last, but not least, in Italian law recoverability of non-pecuniary losses due to contractual non-performance has not yet been admitted on a general basis and, notwithstanding some recent judgments which may constitute a development in this direction, is still limited to a few specific cases expressly provided for by statute. There are not many meaningful differences between Italian law and the PECL with regard to certainty of harm, the impossibility to obtain nominal damages, the need for a causal link, and recoverability of future loss.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:502: General Measure of Damages The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived. 1. General. Art. 9:502 establishes the general measure of damages. 2. Nature of the interest protected. This Art. accepts the principle whereby the aggrieved party is entitled to full compensation for the harm suffered on account of nonperformance, so that damages shall reflect the so called expectation interest, aimed at putting the aggrieved party in the very same position he/she would have been had the contract been duly performed. Damages thus shall embrace both expenditure incurred (damnum emergens) and lost profits ( lucrum cessans). 3. Other loss. a) Consequential loss: Comment B makes it clear that recoverable damages may include so called ‘‘consequential damages’’ in so far as the aggrieved party has suffered a loss resulting from his/her particular circumstances. b) Interest: The aggrieved party may also recover interest upon the amount of the loss from the date when the loss was suffered to the date of payment. 4. Compensatio lucri cum damno. Art. 9:502 accepts the principle of compensatio lucri cum damno, whereby loss should be set off against gains and therefore be a net loss; similarly, in computing the lost profits, the cost that would have been incurred shall be deducted. 5. UNIDROIT Principles and CISG. In the UNIDROIT Principles the rule of full compensation is laid down in Art. 7.4.2 (see Arbitral Award, Camera Arbitrale Nazionale ed Internazionale, Milano, 1 Dec. 1996 no A-1795/51; ICC Award, 2001, no. 10422, both in www.unilex.info). The second sentence of § 1, though not referring to the principle of compensatio lucri cum damno, makes it clear that account is to be taken of any gain the aggrieved party has received by avoiding cost or harm. In addition, Art. 7.4.10 provides for interest on damages for non-performance of non-monetary obligations, and the relating Comment stresses the need to avoid double compensation when a currency depreciates in value. In CISG the general measure of damages is set forth in Art. 74, which refers to the loss, including loss of profit, suffered by the aggrieved party (see also U.S. District Court, N.D., N.Y., 9 Sep. 1994 no. 88-CV-1078; U.S. Court of Appeals, 2nd Circ., 6 Dec. 1995, www.unilex.info; Darkey 1995, p. 139 et seq.). There is no express provision in CISG as to either compensatio lucri cum damno or interest on damages.

ITALIAN LAW Art. 1223 C.C.: Measure of damages The measure of damages arising from non-performance or delay shall include 448 – A. MARI

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the loss sustained by the creditor and the lost profits insofar as they are a direct and immediate consequence of the non-performance or delay. 1. General. The general rule on the measure of damages is embodied in Art. 1223 C.C. Other rules may be found in the C.C provisions governing single types of contracts. 2. Nature of the interest protected. Art. 1223 does recognise the principle of full compensation, whereby damages are aimed at the full restitutio in integrum of the aggrieved party’s position, so that the aggrieved party is entitled to recover both damnum emergens and lucrum cessans (see Cass. 16 Dec. 1988 no. 6856, Giust. Civ. Mass. 1988; Cass. 4 Aug. 2000 no. 10263, Giust. Civ. Mass. 2000; Mastropaolo (1988), p. 1 et seq.). The notion of damnum emergens includes the loss sustained by the aggrieved party, while that of lucrum cessans refers to the loss of profit, defined as the net profit the creditor would have made had the contract been duly performed (see Cass. 28 May 1983 no. 3694, Giust. Civ. Mass. 1983). 3. Proof of damage. Case-law holds that the aggrieved party shall give adequate evidence of the existence of the loss of profit according to a strict probability test (see Cass. 3 Sep. 1994 no. 7647, Giust. Civ. Mass. 1994) and of the amount of the loss (see Cass. 3 Apr. 1990 no. 2759, Giust. Civ. Mass. 1990). When the precise amount of damages cannot be exactly proven, it is possible for the courts to assess damages on an equitable basis (see Art. 1226 C.C.). 4. Other loss. a) Consequential loss: There is no specific provision in the C.C. on consequential loss; this matter is usually discussed by case-law and scholars in the framework of the chain of causation requirement. According to the last sentence of Art. 1223, damage is recoverable as far as it is an immediate and direct consequence of the nonperformance. Case-law actually applies a sort of combination of the theory of the condicio sine qua non and the theory of regular and adequate causation, whereby the aggrieved party may recover not only damages which are an immediate and direct consequence of the non-performance but also indirect damage falling within the scope of the regular consequences of non-performance according to a probability and reasonableness test (see Cass. 6 Mar. 1997 no. 2009, Giust. Civ. Mass. 1997; Cass. 9 May 2000 no. 5913, Giust. Civ. Mass. 2000). So, while harm caused by facts extraneous to the obligee’s conduct is not recoverable, a loss deriving from the situation caused on the whole by the non-performance is recoverable when this loss would not have been sustained in the absence of the non-performance, even if the non-performance has not by itself caused the loss (see Cass. 20 May 1986 no. 3353, Giust. Civ. Mass. 1986; Patti (1989), p. 103 et seq.; Santoro (1991), p. 1030 et seq.; Salvi (1989), p. 1088). b) Interest and other additional damages: In Italian law, the rules on the award of interest and other additional damages (such as loss through inflation and devaluation of the currency) on damages awarded for non-performance are strictly connected to the nature of the non-performed primary obligation, namely whether it is a monetary or a non-monetary obligation, the difference being that only the former is subject to the so called face value principle embodied in Art. 1277 C.C., while the latter A. MARI – 449

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turns into a monetary obligation only after the judicial assessment of damages (see Di Majo (1979), p. 233 et seq.). With regard to interest for non-performance of primary monetary obligations, the general rule is contained in Art. 1224(1) C.C., commented sub Art. 9:508, Mari. There is no express provision on additional damages arising from the failure to perform non-pecuniary obligations; case-law is, however, constant in awarding additional damages in the form of interest and loss caused by devaluation of the currency (see, ex multis, Cass. 19 May 1989 no. 2395, Giur.it., 1990, I,1,650; Cass. 1 Jul. 2002 no. 9517, Giust. Civ. Mass. 2002), even if the damage consists in a loss of profit (see Cass. 28 May 1983 no. 3694, Giust. Civ. Mass. 1983): the specific legal basis for doing so is quite unclear but anyhow connected with the principle that damages are aimed at fully restoring the aggrieved party’s loss. As to the consolidation of interest and additional damages connected to inflation, case-law is not constant but the most recent decisions hold in favour of the positive solution on the ground that the two types of damage are aimed at serving different purposes (see Cass. 1 July 2002 no. 9517, Giust. Civ. Mass. 2002). 5. Compensatio lucri cum damno. Case-law and scholars hold that compensatio lucri cum damno is a general principle implied in Arts 1241 and 1243 C.C., which lay down rules on set-off of contractual obligations, and in the general principle that damages awarded must not unduly enrich the aggrieved party (see Cass. 27 July 2001 no. 10291, Giust. Civ. Mass. 2001; Cass. 19 June 1996 no. 5650, Foro.It, 1996, I, 3062; Puleo (1961), p. 29 et seq.). Accordingly, in the assessment of the measure of damages account is to be taken of the beneficial effects of the non-performance (see Cass. 14 June 2001 no. 8062, Giust. Civ., 2001, I, 2955), provided that there is a direct chain of causation between the nonperformance and the benefit (see Cass. 12 May 2003 no. 7269, Giust. Civ. Mass. 2003).

COMPARISON AND EVALUATION Since the principle of full compensation is wholly recognised, Italian law does not seem to differ from either the PECL, the UNIDROIT Principles or CISG very much with regard to the general measure of damages and the principle of compensatio lucri cum damno. On the contrary, Italian law is still not very familiar with a precise notion of consequential damages for contractual liability.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:503: Foreseeability The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent. 1. General. This Art. aims at limiting the scope of the non-performing party’s liability for damages. 2. Foreseeable consequences of failure to perform. Art. 9:503 establishes the widely accepted principle whereby damages should be limited to the loss the non-performing party foresaw or ought to have foreseen at the time of conclusion of the contract as a likely result of its non-performance (see Comment A). 3. Exception in case of intentional breach or gross negligence. The last part of Art. 9:503 states that the non-performing party’s liability for damages is full when failure to perform is intentional or derives from gross negligence, in which case the aggrieved party may recover unforeseeable losses as well. 4. UNIDROIT Principles and CISG. Both Art. 7.4.4 UNIDROIT Principles and the second sentence of Art. 74 CISG limit recovery to the foreseeable loss (on the UNIDROIT Principles see ICC Award, Barranquilla, Dec. 2000 no. 10346; on CISG see Oberlandesgericht Bamberg, 13 Jan. 1999 no. 3U83/98; Arbitral Award, Tribunal of International Commercial Arbitration of the Russian Federation Chamber of Commerce, 24 Jan. 2000; Oberster Gerichtshof, 14 Jan. 2002 no. 7Ob301/01t, all in www.unilex.info). Unlike the PECL, the UNIDROIT Principles and CISG make no provision for compensation for unforeseeable losses in the event of intentional non-performance (see Comment to Art. 7.4.4. and Knapp (1987), p. 543).

ITALIAN LAW Art. 1225 C.C.: Foreseeability of damages If the non-performance or delay is not caused by the fraud of the debtor, compensation is limited to the damages that could have been foreseen at the time the obligation arose. 1. General. Foreseeability of loss is an express requirement in Art. 1225 C.C. for determining the measure of damages for non-performance. The rule is applicable in both cases of defective and delayed performance. A. MARI – 451

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2. Foreseeable consequences of failure to perform. Case-law holds that foreseeability does not constitute a limit to the existence of damages but to their amount (see Cass. 17 Mar. 2000 no. 3102, Foro It., 2001, I, 259). The foreseeability test is an objective one to ascertain whether future damage was likely to occur on the basis of what an average diligent person could reasonably have foreseen in the circumstances of the case (see Cass. 28 May 1983 no. 3694, Giust. Civ. Mass. 1983). Some decisions end up with identifying the foreseeability requirement with that of the chain of causation embodied in Art. 1223 (see Cass. 19 July 1982 no. 4236, Giur.it., 1983, I,1, 1525); others make a clear distinction between the two requirements because, while the existence of the causal link has to be determined at the time when the damage occurs, Art. 1225, on the contrary, expressly refers to the time when the obligation arose (see Cass. 15 Oct. 1999 no. 11629, Foro It., 2000, I, 1917; Santoro (1991), p. 1036 et seq.). The aggrieved party shall give evidence that the obligee knew or could have foreseen all the relevant facts which can normally cause a certain type of loss (see Cass. 26 May 1989 no. 2555, Foro It., 1990, I,1, 1946). 3. Intentional and/or grossly negligent breach. a) Intentional non-performance: Art. 1225 expressly sets out an exception to the above general rule with regard to cases of intentional non-performance. Some courts identify intentional non-performance with bad faith (see Cass. 16 Jan. 1954 no. 85, Foro It. Massimario 1954; Cass. 7 Aug. 1962 no. 2441, Foro It., 1962, I, 1644); others maintain that the requirement is met when the obligee, though aware of the obligation to render a certain performance, intentionally fails to perform, awareness of the damage not being an additional requirement (see Cass. 25 Mar. 1987 no. 2899, Giust. Civ. Mass. 1987). b) Grossly negligent non-performance: gross negligence is not mentioned in Art. 1225 at all. Most case-law holds that, in the framework of Art. 1225, a grossly negligent non-performance cannot be considered equivalent to an intentional non-performance (see Cass. 9 Feb. 1956 no. 399, Rep. Gen. Giur. It., 1956; Cass. 10 Dec. 1956 no. 4398, Rep. Gen. Giur. It., 1956).

COMPARISON AND EVALUATION In both Italian law and the PECL, as well as in the UNIDROIT Principles and CISG, the extent of recoverable losses is limited to those which were foreseeable at the time of the conclusion of the contract. While the UNIDROIT Principles and CISG do not provide for any exception to this rule, both Italian law and the PECL make an express derogation in the event of intentional non-performance. However, in this regard an important difference is that grossly negligent non-performance is not, in Italian law, considered equivalent to intentional non-performance, so that in Italian law there is no compensation for unforeseeable losses caused by a grossly negligent non-performance.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:504: Loss Attributable to Aggrieved Party The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or its effects. 1. General. This Art. deals with loss caused by the aggrieved party’s own conduct. The aggrieved party’s conduct may be relevant because: a) it is a direct partial cause of the nonperformance itself; b) though not having any influence on the non-performance, it has exacerbated the loss-producing effects of the non-performance; c) the aggrieved party could have mitigated the loss but did not. Comment A makes it clear that Art. 9:504 deals only with the first and second situations, while the third is covered by Art. 9:505. The reason for this division rests on the fact that while in most continental European legal systems all three situations are treated in a similar way, English law does distinguish between the concept of contributory negligence, covering the first two situations, and the concept of failure to mitigate, covering the third. 2. Conduct contributing to non-performance. Comment B states that this Art. is an application of the general principle set out in Art. 8:101(3), whereby a party may not resort to any of the remedies set out in Chapter 9 to the extent that his/her conduct caused the other party’s non-performance. Thus, the aggrieved party cannot recover the loss resulting from non-performance to the extent that his/her own act or omission has contributed to causing it. 3. Conduct contributing to the loss-producing effects of non-performance. As stated in Comment C, when the aggrieved party’s conduct, though in no way contributing to the non-performance, exacerbates its adverse effects, additional damages caused by this conduct cannot be recovered. 4. UNIDROIT Principles and CISG. In the UNIDROIT Principles the concept of contributory negligence is embodied in Art. 7.4.7, which is an application of the general rule on interference by the other party set forth in Art. 7.1.2, which, in turn, is very similar to Art. 80 CISG, included in the Section relating to exemptions (on CISG: Oberlandesgericht Mu¨nchen, 8 Feb. 1995 no. 7U1720/94; Oberlandesgericht Koblenz, 31 Jan. 1997 no. 2U31/96; Landgericht Mu¨nchen, 20 Feb. 2002 no. 10O5423/01, all in www. unilex.info; Tallon (1987), p. 596 et seq.). Comment 2 to Art. 7.4.7 UNIDROIT Principles suggests that the relevant act or omission may consist in an external event for which the aggrieved party bears the risk.

ITALIAN LAW Art. 1227 C.C.: Contributory negligence of the creditor If the creditor’s negligence has contributed to cause the damage, the compensation is reduced according to the seriousness of the negligence and the extent of the consequences arising from it. A. MARI – 453

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1. General and ratio. In Italian law all possible consequences of the aggrieved party’s own conduct with respect to the amount of damages to be awarded for non-performance are dealt with in Art. 1227 C.C., which embodies the two concepts of contributory negligence and failure to mitigate loss. However, the difference between the two concepts is very well perceived by the courts, which repeatedly hold that Art. 1227(1) regards the creditor’s contributory negligence in the causation of the non-performance or of the damage, while in the provision of Art. 1227(2) non-performance and consequent loss are wholly imputable to the non-performing party but the harmful consequences of the nonperformance could have been avoided or limited by diligent conduct on the part of the creditor (see Cass. 20 Feb. 1984 no. 1203, Giust. Civ. Mass. 1984; Cass. 10 Dec. 1986 no. 7319, Giust. Civ. Mass. 1986; Cass. 15 Mar. 1989 no. 1306, Foro It., 1989,I,2201; Cass. 16 Nov. 1992 no. 12267, Giust. Civ. Mass. 1992; Cass. 9 Jan. 2001 no. 240, Giur.it., 2001,2289; Santoro (1991), p. 1040 et seq.; Salvi (1989), p. 1088 et seq.). According to the case-law, the provision of Art. 1227(1) finds its ratio in various principles, namely: everyone is responsible for his/her own actions so that any loss caused by the party’s conduct does not amount to a recoverable damage (see Cass. 17 Feb. 1964 no. 351, Foro It., 1964,I,752; Cass. 12 Sep. 1969 no. 3099, Rep. Gen. Giur. It., 1969); the need to avoid unjust enrichment and to proportionate the amount of damages to the real scope of the non-performing party’s fault (see Cass. 28 Mar. 1997 no. 2763, Giust. Civ. Mass. 1997). Other decisions are inclined in referring contributory negligence to the chain of causation requirement (see Cass. 25 Mar. 1961 no. 681, Giust. Civ., 1961, I, 975; Cass. 16 July 1963 no. 658, Rep. Gen. Giur. It., 1963). 2. Conduct contributing to the non-performance or the loss. Since Art. 1227(1) is applicable to tortious liability as well, most of the decisions have so far been rendered in torts cases; yet they have established principles which are undoubtedly applicable to contractual liability as well. Courts are divided as to whether contributory negligence affects the existence or rather the amount of damages; in this regard, it has been said that the non-performing party’s liability shall be wholly excluded only when the aggrieved party’s conduct is the only real cause of the loss (see Cass. 29 Apr. 1964 no. 1039, Giust. Civ., 1964,I,1316; Cass. 27 July 1964 no. 2108, Rep. Gen. Giur. It. 1964); however, the practical result is always that of measuring damages in proportion to the harmful conduct of the non-performing party in compliance with the rules on causation (see Cass. 29 July 1967 no. 2027, Rep. Gen. Giur. It., 1967). The aggrieved party’s conduct, in order to enable the court to exclude or limit the damages, must be negligent or intentional and may consist of either an action or an omission; the conduct may contribute to causing both the non-performance itself or its loss-producing effects (see Cass. 11 July 1966 no. 1839, Rep. Gen. Giur. It., 1966; Cass. 17 Feb. 1968 no. 555, Rep. Gen. Giur. It., 1968; Cass. 21 Mar. 1969 no. 919, Rep. Gen. Giur. It., 1969; Cass. 17 Oct. 1969 no. 3402, Rep. Gen. Giur. It., 1969; Cass. 6 Oct. 1972 no. 2900, Rep. Gen. Giur. It. 1972). Case-law has held that account may be taken not only of conduct occurring at the same time as the nonperformance or subsequently, but also of previous conduct, provided that there is an adequate chain of causation (see Cass. 18 May 1979 no. 2861, Giust. Civ. Mass. 1979). In order for the non-performing party to be able to invoke Art. 1227(1) the creditor must 454 – A. MARI

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have a certain conduct by virtue of statutory law provisions, the contract or the general duty of fair dealing and cooperation (see Cass. 28 May 1977 no. 2194, Giust. Civ. 1977,I,1070; Cass. 17 Jan. 1981 no. 420, Giust. Civ. Mass. 1981). With regard to contractual liability, case-law has not yet elaborated any specific theory as to whether the aggrieved party’s conduct may include external events for which the aggrieved party bears the risk. Courts have nevertheless often pointed out that Art. 1227(1) expressly refers to the aggrieved party’s own conduct only, thereby excluding, in principle, the relevance of the conduct of third parties (see Cass. 5 Oct. 1964 no. 2503, Rep. Gen. Giur. It., 1964); however this rule may allow for an exception with regard to cases concerning the conduct of the aggrieved party’s employees or agents (see Cass. 29 July 1967 no. 2027, Rep. Gen. Giur. It., 1967; Cass. 22 Jan. 1976 no. 185, Rep. Gen. Giur. It. 1976). According to many judgments, the existence of contributory negligence can be raised ex officio by the lower courts (see Cass. 19 Jul. 2002 no. 10580, Giust. Civ. 2003,I,1591). Case-law has also stated that liquidated damages expressly agreed on by the parties in penalty clauses or the like cannot be reduced by virtue of the provision in Art. 1227(1) because the existence of a penalty clause excludes the possibility of proving a higher or lower loss (see Cass. 20 Dec. 1968 no. 4036, Rep. Gen. Giur. It., 1969; Cass. 24 Apr. 1980 no. 2749, Giust. Civ. Mass. 1980).

COMPARISON AND EVALUATION Italian law, like the PECL, the UNIDROIT Principles and CISG, does recognise the principle whereby contributory negligence by the aggrieved party may affect the amount of recoverable damages for contractual non-performance. While under Arts 7.4.7 UNIDROIT Principles, 9:504 PECL and 1227(1) Italian C.C., the contributory negligence seems to refer to the amount of damages rather than to the liability of the nonperforming party, Art. 80 CISG, on the contrary, seems to exclude liability for nonperformance rather than limit the amount of recoverable damages. In Italian case-law the concept is not very well elaborated because most judgments so far rendered concern tortious liability, to which the same rule is applicable. Even if Art. 1227(1) C.C. expressly refers to the aggrieved party’s contribution to causing the damage only, case-law has made it clear that it also applies when the conduct contributes to causing the non-performance. While Art. 7.4.7 UNIDROIT Principles expressly takes the events for which the aggrieved party bears the risk into account, both the Italian C.C. and the PECL are silent in this regard. Italian case-law has however made it clear that the conduct of the aggrieved party’s employees or agents may well be relevant, a situation which seems to reflect those mentioned in Comment 2 to Art. 7.4.7. UNIDROIT Principles.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:505: Reduction of Loss (1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party could have reduced the loss by taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the loss. 1. General. The provisions of Art. 9:505 deal with situations in which the aggrieved party, though not having contributed to the non-performance or its loss-producing effects, fails to mitigate the loss. 2. Failure to mitigate. As to the scope of the aggrieved party’s duty to mitigate, Comment A states that the aggrieved party is only required to take reasonable measures which can result in a reduction of the loss or to refrain from unreasonable action, such as unreasonable expenditure. When the duty arises depends on the circumstances of each case. 3. Expenses incurred in mitigating loss. The aggrieved party may recover any reasonable further expenditure he/she had to incur in order to mitigate the loss (see Comment C). 4. Reasonable attempts to mitigate which increase the loss. According to Comment D, the aggrieved party may recover the full loss when, in trying to mitigate it, he/she takes a reasonable measure which in fact increases it. 5. UNIDROIT Principles and CISG. Also under Art. 7.4.8 UNIDROIT Principles the non-performing party is not liable for not having mitigated damages and the aggrieved party, when actually mitigating, is entitled to recover any expenses incurred. Comment 1 suggests that the mitigating steps may often consist in a replacement transaction (see Arbitral Award, United Nations Compensation Commission, Panel F1, 23 Sep. 1997, Rec. S/AC.26; ICC Award, Mar. 1999 no. 9594, both in www.unilex.info). In CISG the matter is covered by Art. 77, which expressly imposes on the party aggrieved by the other party’s breach of contract, the duty to take reasonable measures to mitigate the loss (see, ex multis, Arbitral Award, Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft, Wien, 15 June 1994 no. SCH-4366; Oberlandesgericht Mu¨nchen, 8 Feb. 1995 no. 7U1720/94; Oberlandesgericht Hamburg, 28 Feb. 1997 no. 1U167/95; Bundesgerichtshof, 25 June 1997 no. VIIIZR300/96; ICC Award, Paris, Dec. 1997, 8817; Oberlandesgericht Celle, 2 Sep. 1998 no. 3U246/97; Bundesgerichtshof, 24 Mar. 1999 no. VIIIZR121/98, stating that the matter may be raised ex officio; Oberlandesgericht Braunschweig, 28 Oct. 1999 no. 2U27/1999, stating that Art. 77 does not oblige the seller to make a cover sale; Tribunal Supremo (Spain), 28 Jan. 2000; Landgericht Darmstadt, 9 May 2000 no. 10O72/00, all in www.unilex.info). 456 – A. MARI

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ITALIAN LAW Art. 1227 C.C.: Contributory negligence of the creditor (...) (2)Compensation is not due for damages that the creditor could have avoided by using ordinary diligence. 1. General and ratio. In Italian law a concept very similar to the concept of the duty to mitigate is dealt with in § 2 of the very same Art. of the C.C. dealing with contributory negligence: case-law has pointed out that while contributory negligence affects the nonperformance or its effects, violation of the duty to mitigate affects only the amount of damages caused by a failure to perform wholly imputable to the non-performing party (see Cass. 9 Jan. 2001 no. 240, Giur.it., 2001, 2289). Moreover, case-law has pointed out that the creditor’s failure to mitigate loss cannot be raised ex officio because it amounts to a violation of an autonomous legal duty (see Cass. 26 Feb. 1999 no. 1684, Giust. Civ. Mass. 1999; Cass. 28 Apr. 1988 no. 3209, Archivio Civile, 1988, 1054). There are various theories on the ratio of Art. 1227(2): some decisions hold that the duty is connected with the requirement of causal link embodied in Art. 1223 C.C. (see Cass. 20 Feb. 1984 no. 1203, Giust. Civ. Mass. 1984); others maintain that the duty finds its basis in the general duties of fair dealing, good faith and cooperation (Cass. 20 Nov. 1991 no. 12439, Foro It., 1993, I, 1223). 2. Scope of the duty to mitigate. With regard to both contractual and tortious liability (to which Art. 1227(2) is also applicable), Italian courts have confined the scope of the creditor’s duty to mitigate within quite narrow limits so that it more or less coincides with the duty of ordinary diligence (see Santoro (1991), p. 1040 et seq.; Salvi (1989), p. 1088 et seq.). Thus the creditor is not in principle bound either to take any unreasonably burdensome, expensive or risky step (see Cass. 14 Jan. 1992 no. 320, Giur.It., 1993, I,1,156; Cass. 29 Sep. 1999 no. 10763, Giust. Civ. Mass. 1999; Cass. 6 Jul 2002 no. 9850, Giust. Civ. Mass. 2002) or: to perform in the obligee’s place (see Cass. 5 Dec. 1997 no. 12347, Giust. Civ. Mass. 1997); to give up the performance he/she is entitled to (see Cass. 6 Apr. 1971 no. 1008, Rep. Gen. Giur. It. 1971); to have the goods repaired by a third party (Cass. 18 Sep. 1980 no. 5303, Giust. Civ. Mass. 1980); to start a judicial action (see Cass. 31 Jul. 2002 no. 11364, Giust. Civ. Mass. 2002). Courts are instead quite divided as to whether the duty to mitigate implies the duty to make a substitute transaction. While some decisions hold that the aggrieved party is not bound to get elsewhere the goods or services in respect of which performance has been defective, or to sell to someone else the goods or services contracted for (see Cass. 15 Feb. 1983 no. 1165, Giust. Civ. Mass. 1983; Cass. 6 Aug. 1983 no. 5274, Foro It., 1984, I, 2819; Cass. 15 Jul. 1982 no. 4174, Giust. Civ. Mass. 1982), other courts have stated that in cases where ordinary diligence would require the creditor to get the goods or services elsewhere, failure to do so implies a proportional reduction of damages under Art. 1227(2) (see Cass. 13 Oct. 1997 no. 9939, Giur.it., 1998, 2274; Cass. 12 Oct. 1967 no. 2437, Rep. Gen. Giur. It., 1967). Courts have also pointed A. MARI – 457

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out that Art. 1227(2) shall be coordinated with Art. 1460 C.C. which, with regard to contracts implying mutual obligations of the parties, entitles the creditor to withhold performance in compliance with the general principle inadimplenti non est adimplendum; since the exercise of this right by the creditor may aggravate the loss, the possible conflict between the two provisions shall be solved in favour of Art. 1460, provided that withholding of performance is not contrary to good faith (see Cass. 1 Mar. 1976, no. 672, Rep. Gen. Giur. It. 1976). 3. Expenses incurred in mitigating loss. Case-law has made it clear that the expenses incurred by the creditor in trying to mitigate the loss are recoverable as damages and that their amount is subject to both interest and additional damages on account of devaluation of currency (see Cass. 9 Jan. 1978 no. 57, Foro Amm., 1979, 880; Cass. 19 Apr. 1980 no. 2331, Giust. Civ., 1980, I, 2226; Tribunale Padova, 1 June 1976, Giur.it., 1977, I, 2, 766). 4. Penalty clauses. Art. 1227(2) is not applicable when the parties have mutually agreed in advance on the amount of damages to be paid in case of defective or delayed nonperformance (see Cass. 21 Dec. 1995 no. 13023, Giust. Civ. Mass. 1995) (see also Comment on Art. 9:509, Mari ).

COMPARISON AND EVALUATION Only Art. 77 CISG is expressly worded in terms of a duty to mitigate, while the wording of Arts 7.4.8 UNIDROIT Principles, 9:505 PECL and 1227(2) Italian Codice Civile is somehow different. In any case, even though the wording of Art. 1227(2) Italian C.C. is not the same as that of Art. 9:505 PECL and Art. 7.4.8 UNIDROIT Principles, the three rules do not differ that much after all, also because the concept of diligence embodied in Art. 1227 is more or less equivalent to that of reasonableness underlying the other rules. However, under each of the instruments mentioned, the practical result of a failure to mitigate is always the reduction of the amount of recoverable damages. Italian law seems to diverge from the PECL, as well as from CISG and the UNIDROIT Principles, in that the scope of the duty to mitigate loss appears narrower, with particular regard to the aggrieved party’s duty to enter into a substitute transaction which, according to some decisions, is not necessarily implied in the duty to mitigate. Even if Art. 1227(2) is silent on the matter, Italian case-law has admitted the recoverability of expenses incurred by the aggrieved party in trying to mitigate the loss.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:506: Substitute Transaction Where the aggrieved party has terminated the contract and has made a substitute transaction within a reasonable time and in a reasonable manner, it may recover the difference between the contract price and the price of the substitute transaction as well as damages for any further loss so far as these are recoverable under this Section. 1. General. This Art. states that when the aggrieved party has actually made a cover transaction, the most appropriate measure of damages is the difference between the contract price and the price of the substitute transaction, plus any further reasonable loss recoverable under the same Section. 2. Reasonable alternative transaction. Comment B makes it clear that the cover transaction shall be reasonable, so that the aggrieved party cannot recover the difference between the contract price and the price of a cover transaction which is so different, either in value or in kind, from the original contract as not to amount to a reasonable substitute. 3. UNIDROIT Principles and CISG. Arts 7.4.5 UNIDROIT Principles and 75 CISG contain rules very similar to that of Art. 9:506 PECL: they emphasize the reasonable character of the substitute transaction and establish a minimum right of recovery (on UNIDROIT Principles see: Arbitral Award, International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, 20 Jan. 1997 no. 116, www.unilex.info; on CISG see: ICC Award, Basel, 1995 no. 8128; Corte Appello Milano, 11 Dec. 1998; Oberster Gerichtshof, 28 Apr. 2000 no. 1Ob292/99v; Landgericht Braunschweig, 30 July 2001 no. 21O703/01, all in www.unilex.info).

ITALIAN LAW Art. 1515 C.C.: Forced sale for non-performance of buyer If the buyer does not fulfil his obligation to pay the price, the seller can have the thing sold without delay for the account and at the expense of the buyer. The sale shall be made at auction by a person authorized to make such sales, or, in the absence of such person in the place where the sale is to be made, by a process server. The seller shall give timely notice to the buyer of the day, place, and hour in which the sale will be made. If the thing has a current price, established by an act of the public authority or shown in stock-exchange lists or market reports, the sale can be made without auction at the current price by the persons indicated in the preceding paragraph, A. MARI – 459

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or by a commissioner appointed by the tribunal. In such a case, the seller shall give the buyer prompt notice of the sale. The seller is entitled to the difference between the price agreed upon and the net proceeds of the sale, in addition to compensation for any greater damages. Art. 1516 C.C.: Forced sale for non-performance of seller If the sale concerns fungible things having a current price according to the provisions of the third paragraph of the preceding Article, and the seller fails to fulfil his obligation, the buyer can without delay have the things acquired at the expense of the seller, by one of the persons indicated in the second and third paragraphs of the preceding Article. The buyer shall give the seller prompt notice of such purchase. The buyer is entitled to the difference between the expenses of such acquisition and the price agreed upon, in addition to compensation for any greater damages. 1. General. There is no general provision in the C.C. on substitute transactions but only some provisions applicable to single types of contracts, the most relevant of which are Arts 1515 and 1516 on sales-contracts. Other relevant provisions may be found in Arts 1551 and 1690 as well as in Arts 2344 and 2466 as amended by Leg. Decree no. 6/2003: failure by a company’s shareholder to pay his/her shares, failure by a limited liability company’s partner to pay his/her share). 2. Ratio and content of the provisions. a) Ratio: Case-law has identified the ratio of the provisions on substitute transactions in sales-contracts as a form of private self-protection by the aggrieved party (see Cass. 11 July 1968 no. 2444, Rep. Gen. Giur. It., 1968; Luminoso (1999), p. 650 et seq.). The majority of the courts holds that the substitute transaction does not constitute a duty of the aggrieved party, so that when this does not happen the aggrieved party is still entitled to claim termination of the contract as well as damages according to the general rules, without damages being subject to reduction on account of the failure to mitigate them (see Cass. 23 May 1985 no. 3109, Giust. Civ. Mass. 1985; Cass. 26 Mar. 1986 no. 2140, Giust. Civ., 1987,I,176; Cass. 11 Mar. 1997 no. 2171, Giust. Civ. Mass. 1997; but see contra: Cass. 13 Oct. 1997 no. 9939, Giur.it., 1998,2274; Cass. 12 Oct. 1967 no. 2437, Rep. Gen. Giur. It. 1967). Under both provisions the aggrieved party must have recourse to the substitute transaction with no delay. Some courts have held that this rule does not necessarily mean that the aggrieved party must act immediately after the non-performance (see Cass. 25 Nov. 1985 no. 5856, Giust. Civ. Mass. 1985); others have stated that the creditor shall act as soon as the non-performance comes into existence in all its elements, so that a delay implies a waiver; however, even if a delayed substitute transaction is not effective as such, this does not deprive the aggrieved party of the right to claim termination of the contract and damages (see Cass. 26 Feb. 1965 no. 319, Giur.it., 1965, I,1,1550). b) Non-performance by the buyer: Art. 1515(1) states that the seller may have the goods sold on behalf of and in the name of the buyer; this 460 – A. MARI

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means that the application of the rule presupposes that the buyer has already become the owner of the goods (see Cass. 5 July 1968 no. 2283, Rep. Gen. Giur. It. 1968). In order for the resale to produce the effects provided for by Art. 1515(4), it must be made by the persons specifically identified in § 2. The seller must give prompt notice to the buyer of the time when the resale is to be made; failure to do so entitles the buyer to claim damages but the resale remains effective (see Cass. 19 Aug. 1950 no. 2487, Foro It. Massimario 1950). As long as the buyer is not the owner of the goods, the seller is entitled to resell them by freely entering into a new sales-contract with a third party, without the formalities provided for in Art. 1515 (see Cass. no. 2283/1965 cit.; Cass. 22 May 1986 no. 3405, Foro Padano 1987, I, 450). c) Non-performance by the seller: While the resale provided for in Art. 1515 can be made with regard to any goods, in the case of non-performance by the seller, on the contrary, the buyer can have the goods purchased in compliance with Art. 1516 only if the goods contracted for are fungible and have a current price. The purchase can be made only by the same persons specifically identified in Art. 1515(3). 3. Measure of damages. The aggrieved party is entitled to damages amounting to the difference between the contract price and the price of the substitute transaction, plus any additional damages.

COMPARISON AND EVALUATION As to substitute transactions, Italian law differs from the PECL, as well as from the UNIDROIT Principles and CISG, in many respects. In Italian law there is no general provision on substitute transactions, but only some provisions applicable to single types of contracts. Even if this difference could be minimized by the fact that the case-law has held that Arts 1515, 1516, 2334 and 2466 C.C. express the principle that substitute transaction is a general remedy for non-performance of contractual obligations (see Cass. 21 Mar. 1964 no.650, Rep. Gen. Giur. It., 1964), the fact remains that the two most important rules on sales-contracts differ, as to both wording and substance, not only from Arts 9:506 PECL and 7.4.5 UNIDROIT Principles, but also from Art. 75 CISG. While Art. 9:509 PECL as well as Arts 7.4.5 UNIDROIT Principles and 75 CISG seem to imply prior termination of the contract by the aggrieved party, under Italian law a substitute transaction does not seem to constitute a duty and does not presuppose termination of the contract. Moreover, Arts 1515 and 1516 C.C. can apply only with reference to the types of goods mentioned therein. Finally, under these rules substitute transactions are subject to so many specific procedural requirements (not mentioned in either Art. 9:506 PECL or Arts 7.4.5 UNIDROIT Principles and 75 CISG at all) that the rules have in fact very seldom been applied. On the contrary, there are no meaningful differences with regard to the amount of damages, including additional damages.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:507: Current Price Where the aggrieved party has terminated the contract and has not made a substitute transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further loss so far as these are recoverable under this Section. 1. General. Art. 9:507 establishes the measure of damages in cases where the contract is terminated because of the non-performance and the aggrieved party has not actually made a cover transaction as provided for in Art. 9:506. 2. Damages measured by current price. Art. 9:507 measures damages as if the aggrieved part had made a cover transaction, by substituting the price of the substitute transaction referred to in Art. 9:506 with the current price of the performance contracted for. The aggrieved party is thus entitled to recover the difference between the contract price and the current price, plus any other loss recoverable under the same Section. 3. UNIDROIT Principles and CISG. Art. 7.4.6 UNIDROIT Principles and Art. 76 CISG contain provisions very similar to that of Art. 9:507 PECL. Unlike the PECL, both the UNIDROIT Principles and CISG give an express definition of the relevant current price (on the UNIDROIT Principles see ICC Award, Paris, Nov. 1996 no. 8502, www.unilex.info; on CISG see: Oberlandesgericht Hamburg, 4 July 1997 no. 1U143/95 and 410O21/95; Oberlandesgericht Celle, 2 Sep. 1998 no. 3U246/97; Kantonsgericht des Kantons Zug, 21 Oct. 1999 no. A31997–61; Oberster Gerichtshof, 28 Apr. 2000 no. 1Ob292/99v; Landgericht Mu¨nchen, 20 Feb. 2002 no. 10O5423/01 all in www.unilex.info).

ITALIAN LAW Art. 1518 C.C.: Standards for determining compensation If the sale concerns a thing having a current price according to the provisions of the third paragraph of Art. 1515, and the contract is resolved due to non-performance by one of the parties, the compensation shall be determined by the difference between the price agreed upon and the current price in the place where and on the day when delivery should have been made, subject to the proof of greater damage. In a sale providing for periodic performance, compensation for damages is determined on the basis of current prices in the place and on the day set for each delivery. 462 – A. MARI

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1. General. There is no general provision in the Italian C.C. with regard to the measure of damages when there is a current price for the performance contracted for. The most relevant rule is contained in Art. 1518 on sales-contracts. Case-law has constantly held that Art. 1518 calls for a very strict interpretation because it derogates from the ordinary and general rules on damages (Cass. 16 Apr. 1994 no. 3614, Giust. Civ. Mass. 1994; Cass. 4 Mar. 1998 no. 2386, Giust. Civ. Mass. 1998). 2. Damages measured by current price. Art. 1518 is applicable only in the case of contracts for the sale of the goods identified in Art. 1515(3) (goods having a current price fixed by an act of a Public Authority, or shown in stock-exchange lists or market reports; see Cass. 29 July 1983 no. 5222, Giust. Civ. Mass. 1983; Cass. 16 Apr. 1994 no. 3614, Giust. Civ. Mass. 1994). The provision derogates from the ordinary criteria for determining damages (see Comments sub Art. 9:501 and 9:502, Mari ) in that it establishes a sort of presumption of both the existence and the amount of the minimum loss recoverable (difference between the contract price and the current price at the time of delivery); caselaw is divided as to whether the non-performing party is entitled to overcome this presumption by giving evidence of a lower loss (for the positive answer see Cass. 24 Apr. 1956 no. 1253, Giust. Civ., 1956, I, 1917 and Cass. 5 Aug. 1964 no. 2230, Rep Gen. Giur. It., 1964; contra see Cass. 16 Nov. 1960 no. 3071, Rep. Gen. Giur. It., 1960 and Cass. 20 Oct. 1962 no. 3060, Rep. Gen. Giur. It., 1962). Another deviation from the general rules is that under Art. 1518 the loss shall be evaluated at the time of delivery rather than at the time of termination of the contract. The obligation to pay damages measured in compliance with Art. 1518 is considered a primary monetary obligation (see Comments on Arts 9:502 and 9:508, Mari ), so that only interest is in principle due, while additional damage caused by devaluation of currency must be proven by the creditor in compliance with Art. 1224(2) C.C. (see Cass. 4 July 1956 no. 2432, Giust. Civ., 1956, I, 1494). 3. Additional damages. Art. 1518 expressly entitles the aggrieved party to recover additional damages he/she may have suffered, provided that there is adequate evidence in compliance with the general rules on damages. Examples of additional damages include expenditure incurred by the aggrieved party and the higher subjective value that the contracted performance would have had (see Cass. 18 May 1981 no. 3280, Giust. Civ. Mass. 1981). 4. Instalment contracts. With reference to contracts for the delivery of goods in instalments, Art. 1518(2) provides that damages shall be measured on the basis of the current prices in the place and on the day fixed for each single instalment, except when the creditor claims delivery in one instalment, in which case § 1 is applicable (see Cass. 22 Feb. 1980 no. 1281, Giust. Civ. Mass. 1980).

COMPARISON AND EVALUATION With regard to current price, Italian law differs from the PECL, as well as from the UNIDROIT Principles and CISG, in several respects. First of all, in Italian law there is no A. MARI – 463

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general provision governing the measure of damages when there is a current price for the performance contracted for, but only one provision which applies to sales-contracts only, just as Art. 76 CISG does: thus, while Arts 9:506 PECL and 7.4.6 UNIDROIT Principles are, at least in principle, applicable to any contract, Italian case-law, on the contrary, has made it clear that Art. 1518 C.C. is applicable to sales-contracts only. Another major difference is that under Art. 1518 C.C. the damages shall be determined by the difference between the price agreed upon and the current price at the time of delivery, while under Arts 9:506 PECL, 7.4.6 UNIDROIT Principles and 76 CISG regard is to be had to the current price at the time of termination of the contract. There is no difference as to the recoverability of additional damages.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:508: Delay in Payment of Money (1) If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due. (2) The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section. 1. General. Art. 9:508 deals with interest owed for non-payment or delay in payment of primary monetary contractual obligations, while it does not cover damages for, or interest on, secondary monetary obligations. 2. Interest. a) Difference from ordinary damages: According to Comment B, interest, not being a species of ordinary damages, is not subject to the same rules, particularly with regard to those on excuse for non-performance and the duty to mitigate the loss, so that interest is due even if the delay in payment is excused or the aggrieved party has not taken any measure to mitigate. b) Rate of interest: Interest shall be measured according to the average commercial bank short-term lending rate to prime borrowers; the rate to apply is the one prevailing for the contractual currency of payment (as defined in Art. 7:108) at the place where payment is due (as defined in Art. 7:101) and interest is to be paid in the same currency as that of the principal sum, as underlined in Comment D to Art. 9:510 as well. Comment B states that the general rule on the rate of interest is subject to the autonomy of the parties who may fix a different rate of interest and/or its currency. 3. Additional damages. Remedies for non-payment or delay in payment of monetary obligations include, besides interest, any further additional loss recoverable in compliance with the general rules on damages. Comment C provides the following examples: loss of profit on a transaction which the aggrieved party would have concluded with a third party had the money been paid in due time; a fall in the internal value of the money through inflation; loss on exchange. 4. UNIDROIT Principles and CISG. Art. 7.4.9 UNIDROIT Principles contains rules quite similar to those of Art. 9:508. The main difference is that the black letter rule of Art. 7.4.9. UNIDROIT Principles on the one hand expressly states that interest is due whether or not the failure to pay is excused, and, on the other hand, makes additional provisions applicable in the absence of the main interest rate. Comment 1 to Art. 7.4.9 suggests that no notice of default is necessary for interest to accrue and explains that if the delay is the consequence of force majeure, interest is still due not as damages but as compensation (see Arbitral Award, United Nations Compensation Commission, Panel F1, 23 Sep. 1997 Rec. S/AC.26, stating that force majeure does not affect monetary obligations; A. MARI – 465

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ICC Award, Milan, Sep. 1998 no. 8908; Arbitral Award, International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, 5 Nov. 2002 no. 11/2002, all in www.unilex.info). On the contrary, Art. 78 CISG, while definitely entitling the aggrieved party to interest, does not fix the applicable interest rate at all. Courts have so far been more inclined to refer to the domestic law applicable in the absence of CISG or the law of the creditor/debtor’s country or the law of the place of payment (see: U.S. District Court, N.D., N.Y., 9 Sep. 1994 no. 88-CV-1078; Handelsgericht Zu¨rich, 5 Feb. 1997 no. HG950347; Corte Appello Milano, 11 Dec. 1998; Oberlandesgericht Koblenz, 18 Nov. 1999 no. 2U1556/98; Trib. Pavia, 29 Dec. 1999 no. 468; Landgericht Darmstadt, 9 May 2000 no. 10O72/00; Rechtbank van Koophandel, Veurne, 25 Apr. 2001; Landgericht Berlin, 21 Mar. 2003 no. 103O213/02 all in www.unilex.info), but there are many decisions which, in paying more attention to the international character of the contract, clearly show the tendency to apply rules similar to those of Art. 7.4.9 UNIDROIT Principles (see ICC Award, Paris, 1992 no. 7197/1992; ICC Award, Paris, 1994 no. 7531/1994; Arbitral Award, Internationales Schiedsgericht der Bundeskammer der gewerblichen, Wien, 15 June 1994 no. SCH-4366; Juzgado Nacional de Primera Instancia en lo Comercial (Argentina), 6 Oct. 1994 no. 56.179; ICC Award, Basel, 1995 no. 8128; ICC Award, Zurich, 1996 no. 8769; ICC Award, Milan, Dec. 1998 no. 8908 all in www.unilex.info; Ferrari (1999), p. 86 et seq.; Veneziano (1995), p. 547 et seq.).

ITALIAN LAW Art. 1224 C.C.: Damages in pecuniary obligations In obligations having as their object a sum of money, legal interest is due from the day of the default even if it was not due previously and even if the creditor does not prove that he has suffered any damage. If interest was due at higher than the legal rate before the default, interest after default shall be due at the same rate. The creditor who proves to have suffered greater damages is entitled to additional compensation. This is not due if the rate of interest to be paid after default was agreed. Art. 1282 C.C.: Interest on pecuniary obligations Liquidated and exigible claims of sums of money bear interest by operation of law, unless the law or the instrument or transaction provides otherwise. [...] Art. 1284 C.C.: Rate of interest The legal rate of interest is 2.5 per cent per annum. The Treasury Minister by decree published in the Official Gazette of the Republic of Italy within December 15 of the preceding year may change the rate of interest on an annual basis with reference to the average gross yield of 466 – A. MARI

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Government bonds having a maturity of not more than twelve months and keeping into account the inflation rate registered in the year. If no rate has been determined within December 15 the interest rate remains unchanged for the coming year. Interest derived from agreements is computed at the same rate, unless a different rate was fixed by the parties. Interest above the legal rate must be specified in writing; otherwise it is due at the legal rate. 1. General. Italian C.C. envisages three different types of interest on pecuniary obligations governed by different rules (see Inzitari (1993b), p. 567 et seq.; Libertini (1972), p. 95 et seq.): interest for use of money, in other words, interest to be considered as remuneration for the use of someone else’s money (Art. 1282); default interest, damages which compensate the loss for non-payment or delay in payment of pecuniary obligations (Art. 1224), and compensatory interest, a category which includes some cases expressly provided for by the Code, where interest is intended to compensate the creditor for the lost enjoyment of a good which produces fruits or other income (see Arts 1499, 1815 and 1825). Case-law tends to define as compensatory interest also the interest due on sums paid as the pecuniary equivalent of the loss caused by the non-performance of non-pecuniary obligations. The two categories of interest, the one for the use of money and the default interest, cannot be cumulatively applied: it is possible to infer from Art. 1224 that interest for use of money turns into default interest as soon as the necessary requirements are met. Case-law has pointed out that the parties can validly agree on the consolidation of interest for use of money and default interest (see Cass. 5 June 1987 no. 4920, Foro It., 1988, I, 2352). 2. Interest for use of money. Under Art. 1282(1) the creditor of a sum of money is always entitled to interest, provided that the credit is liquidated and exigible, unless the laws or the contract provide otherwise. According to the case-law, interest for the use of a sum of money is the subject-matter of an obligation which is ancillary to the primary obligation of payment; it accrues as soon as the credit becomes liquidated and exigible and is due whether or not non-payment is imputable to the obligee’s fault; its accrual is not subject to any prior notice of non-performance (see Cass. 18 July 2002 no. 10428, Giust. Civ. Mass. 2002). 3. Default interest. Under Art. 1224(1), in case of non-performance or delayed performance of monetary obligations, the aggrieved party is entitled to damages in the form of default interest at the statutory rate from the date of the notice of non-performance or, when no notice is required (see Comment on Art. 9:501, Mari ), from the date payment was due. The provision states that default interest is due even if it was not due before the notice of non-performance or before the expiration of the payment term or the creditor does not prove that he/she has suffered a loss. Moreover, if the parties, before the default, had expressly agreed on interest at a higher rate than the statutory rate, default interest shall be measured at the same rate. Default interest is a damage in any respect; it differs from ordinary damages only because it is due automatically regardless of any proof as to its A. MARI – 467

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existence and consists of a lump sum. Apart from this, its award is subject to the same rules applicable to ordinary damages; in particular default interest presupposes a delay imputable to the obligee’s fault and cannot be awarded if the delay is excused or in case of nonpayment due to withholding of performance (Cass. 5 Apr. 1990 no. 2803, Giust. Civ. Mass. 1990; Cass. 26 Sep. 1996 no. 8567, Giust. Civ. Mass. 1996; Inzitari (1995), p. 469 et seq.; di Majo (1979b), p. 222 et seq.). 4. Applicable interest rates. a) Statutory rate: The provision governing the statutory rate is Art. 1284 C.C., as amended by Art. 2(185) Law 7 Mar. 1996 no. 662, in force since 1 Jan. 1997, which now gives the Ministry of the Treasury (at present the Ministry of Economics and Finance) the power to change the interest rate on an annual basis with reference to the average gross yield of Government bonds having a maturity of not more than twelve months and taking into account the inflation rate registered in the year. The statutory rate has been fixed at 2.5% as of 1 Jan. 2004 (see Min. Decree 1 Dec. 2003; Capolino (2000), p. 518 et seq.). b) Leg. Decree no. 231/2002: In this context due regard is to be had also to Leg. Decree 9 Oct. 2002 no. 231, which implemented Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions, which is applicable to all payments made as remuneration for commercial transactions between undertakings or between undertakings and Public Authorities which lead to the delivery of goods or the provision of services for remuneration, concluded after 8 August 2002. Under Art. 3 the creditor is entitled to interest for late payment unless the debtor shows that the delay in payment has been caused by impossibility not imputable to him/her. Art. 4 lays down the rules on the accrual of interest and in particular states that interest accrues automatically. Art. 5 is dedicated to the interest rate and states that unless otherwise specified in the contract, the applicable rate is the rate the European Central Bank applied in the most recent main refinancing operation it carried out before the first calendar day of the half-year in question plus seven percentage points. b) Higher or lower contractual rate: The provisions of Art. 1284 (2) and (3) confirm that under Italian law the parties may well derogate from the statutory rate by fixing a specific contractual rate (Capolino (2000), p. 524 et seq.; Libertini (1972), p. 124 et seq.). The case-law usually admits that the parties may fix a contractual rate lower than the statutory rate (see Cass. 17 Mar. 1994 no. 2538, Giust. Civ. Mass. 1994); on the contrary, the parties’ autonomy in fixing higher rates is subject to specific limits with regard to the form of the stipulation and the impossibility to fix a rate which is usurious. As to the form, Art. 1284(3) requires that the stipulation of a higher rate be in writing; otherwise interest is due at the statutory rate. The measure of the contractual interest rate is now governed by Law 7 Mar. 1996 no. 108, Provisions as to usury. 5. Additional damages. The matter is governed by Art. 1224(2) C.C., whereby the aggrieved party may, in addition to default interest, recover additional damages for any further loss caused by non-performance of the pecuniary obligation (see in general: Mazzarese (1994), p. 452 et seq.; di Majo (1979b), p. 286 et seq.); this rule applies to any loss and is not limited to loss due to inflation and devaluation of currency alone. The last sentence of Art. 1224(2) excludes the possibility of recovering additional damages when 468 – A. MARI

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the parties have expressly agreed on the amount of default interest. The ratio of the latter rule often found by the courts is that an express stipulation as to the measure of default interest amounts to a liquidated damages clause which has the effect of determining in advance, and thus limiting, the measure of damages (see Cass. no. 2538/1994 cit.). Caselaw, however, has pointed out that the parties may expressly derogate from Art. 1224(2) by stipulating that the creditor, besides the default interest agreed upon, may well recover possible additional damages (see Cass. 7 Apr. 1992 no. 4251, Giust. Civ. Mass. 1992). With regard to the burden of proof, the aggrieved party must as a rule give full evidence of the additional damage suffered, that is of a specific fact which, as a result of nonperformance, caused a higher loss than interest at the statutory rate; this burden is however minimized by the possibility of assessing damages on an equitable basis in compliance with Art. 1226 C.C. (see Cass. 25 Feb. 2000 no. 2139, Giust. Civ. Mass. 2000). The matter of the burden of proof of additional damage caused by inflation and devaluation of currency is quite different. In the past the majority of courts, in consideration of the very strong inflation then existing, used to maintain that inflation did constitute a widely known fact and that the existence of additional loss on account of inflation and the actual measure of the additional loss could be presumed (see Cass. 4 July 1979 no. 3776, Giust. Civ., 1979, I, 1546). More recently the courts, in consideration of the great reduction of inflation, have narrowed the possibility of recourse to presumptions at least with regard to the measure of additional damage, which has to be fully proved (see Cass. 16 May 2000 no. 6327, Giust. Civ. Mass. 2000; Cass. 1 Apr. 2003 no. 4919, D&G Diritto e Giustigia, 2003, 17, 94). The matter of consolidation of default interest and additional damage caused by devaluation of currency is quite problematic: in the past the courts generally admitted consolidation (see Cass. 13 Feb. 1987 no. 1607, Giust. Civ. Mass. 1987); on the contrary, the majority of the most recent decisions tends to exclude consolidation on the ground that additional damages for devaluation, in expressing the real whole loss suffered by the aggrieved party, totally replace the usually lower default interest (see Cass. 28 Mar. 1997 no. 2780, Giust. Civ. Mass. 1997; Cass. 10 May 2000 no. 5988, Foro It., 2001, I, 575; see also Inzitari (1993b), p. 602 et seq.; Capolino (2000), p. 519 et seq.; Uccella (1998), p. 79 et seq.; Libertini (1972), p. 116 et seq.).

COMPARISON AND EVALUATION There appear to be quite important differences between Italian law and the PECL with regard to interest for delay in payment of money. First of all the PECL, as well as the UNIDROIT Principles and CISG, seem to adopt a unified approach applicable in any case of non-payment of money, so that default interest is not subject to the same rules as ordinary damages. On the contrary, Italian law treats default interest for non-performance of monetary obligations as damages subject to a special evidence regime: this means that default interest is awarded only if the delay is imputable to the obligee’s fault and as from the date of default by notice of non-performance in writing when necessary, two requirements which are not contained in either the PECL, the UNIDROIT Principles or CISG. However the above differences should now be minimized by the implementation of A. MARI – 469

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Directive 2000/35/EC on combating late payment, which contains some rules more similar to the PECL’s approach. Italian law diverges from the PECL also with regard to the interest rate, which is now fixed and amended annually by the Government; the rate is different also with regard to contracts covered by Directive 2000/35/EC. There appear to be some differences also in connection with the parties’ power to stipulate higher rates than the statutory rate: under Italian law this power is limited by the provisions concerning usury; moreover, when parties do fix a contractual rate, this usually prevents them from claiming additional damages. As in the PECL, also in Italian law additional damages other than damage caused by inflation are recoverable. In Italian law additional damages for devaluation of currency are usually allowed besides default interest, but the most recent trend is that additional damages replace default interest.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:509: Agreed Payment for Non-Performance (1) Where the contract provides that a party which fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party shall be awarded that sum irrespective of its actual loss. (2) However, despite any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances. 1. General. Art. 9:509 is concerned with parties’ agreements in the form of penalty or liquidated damages clauses upon damages to be paid in case of non-performance. 2. Stipulation as to agreed payment binding. a) Enforceability: Comment A recalls that penalty clauses can have two purposes: they are intended to make the quantification of damages easier by assessing the amount in advance and to induce the debtor to perform voluntarily. While the validity of the penalty clause is to be established under the rules of Chapter 4 as for any other contractual clause, Art. 9:509 is concerned with its enforcement, making it clear that, contrary to what happens in some legal systems such as the common law systems, penalty clauses serving both the above purposes are enforceable, subject only to the judicial power of reduction. b) Burden of proof: In any case the effect of penalty clauses is to relieve the aggrieved party of the burden of proving the loss actually suffered: he/she can be awarded the agreed sum of money irrespective of the actual loss, even if the actual loss is lower or higher. c) Minimum sum payable: When the contract merely specifies the minimum sum payable by the non-performing party, the aggrieved party may recover a higher amount if he/she can prove a higher loss (Comment A). 3. Court’s power to reduce grossly excessive stipulations. The reason for the provision of § 2 is to be found in the need to avoid abuse of the parties’ autonomy by allowing courts the power to reduce penalties which are excessive and unreasonable. The black letter rule imposes on the courts the duty to ascertain whether the agreed sum is excessive in the light of the actual loss resulting from the non-performance and ‘‘other circumstances’’, not better specified. Comment C, in turn, refers only to the failure by the aggrieved party to mitigate the loss. 4. UNIDROIT Principles and CISG. Art. 7.4.13 UNIDROIT Principles contains more or less the very same rule as Art. 9:509 (on reduction of penalty see: Bonell (1994), p. 99 et seq.; Arbitral Award, International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, 5 June 1997 no. 229/1996; Arbitral Award, Ad hoc Arbitration, Helsinki, 28 Jan. 1998, both in www.unilex.info). On the contrary, CISG has no provisions as to penalty or liquidated damages clauses. Courts have so far enforced penalty clauses but have pointed out that the matter of their validity is excluded from the scope of CISG (see Arbitral Award, International Arbitration Court of the Chamber of Commerce A. MARI – 471

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and Industry of the Russian Federation, 23 Nov. 1994 no. 251/93; Rechtbank van Koophandel, Hasselt, 21 Jan. 1997 no. AR1972/96, all in www.unilex.info) and that no provision in CISG provides a basis for reducing a contractual penalty, so that the matter is to be solved in compliance with the domestic law otherwise applicable to the contract (see Gerechtshof ’s Arnhem, 22 Aug. 1995 no. 94/305 and ICC Award, Paris, 1992 no. 7192/1992, all in www.unilex.info).

ITALIAN LAW Art. 1382 C.C.: Effects of penal clause A clause by which it is agreed that in case of non-performance or delay of performance one of the contracting parties is liable for a specified penalty, has the effect of limiting the compensation to the promised penalty, unless compensation was agreed on for additional damages. The penalty is due regardless of proof of damage. Art. 1383 C.C.: Prohibition against cumulation The creditor cannot demand both the principal performance and the penalty, unless the penalty was stipulated for mere delay. Art. 1384 C.C.: Reduction of penalty The penalty can be equitably reduced by the court, if the principal obligation has been partly performed or if the penalty is manifestly excessive, always taking into account the interest which the creditor had in the performance. 1. General. In Italian law, penalty and liquidated damages clauses for non-performance are governed by the provisions of Arts 1382–1384 C.C. 2. Validity and purposes of a stipulation as to agreed payment. Art. 1382 makes it clear that under Italian law a stipulation as to an agreed payment for non-performance of a contractual obligation is valid and enforceable. Case-law and scholars have pointed out that the penalty clause may be aimed at both coercing non-performance and assessing damages for non-performance in advance (see Cass. 6 Nov. 1998 no. 11204, Giust. Civ. Mass. 1998; see also Marini (1988), p. 1 et seq.). 3. Requirements. a) Non-performance: Penalty clauses may be stipulated for both nonperformance and delay in performance; if the penalty clause is stipulated with reference to delay in performance only and the contract is not performed, the penalty clause is not enforceable with regard to non-performance (see Cass. 16 Nov. 1984 no. 5828, Giust. Civ. Mass. 1984); parties may well in their autonomy stipulate an agreed payment for both delay in performance and non-performance (see Cass. 30 May 2003 no. 8813, Giust. Civ. 472 – A. MARI

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Mass. 2003). Courts cannot give relevance to the fundamental character of the nonperformance or delay in performance because the mere existence of the non-performance or delay is enough for the creditor to claim enforcement of the penalty clause (see Cass. 20 July 2000 no. 9532, Contratti, I,2001,335). b) Fault: Consistent with the predominant theory on requirements for liability in damages for non-performance (see Comment on Art. 9:501, Mari ), Italian case-law maintains that penalty clauses are always related to a non-performance which is imputable to the obligee’s fault, so that the aggrieved party is not entitled to claim the agreed payment when the non-performance is not imputable to the obligee because the obligee is excused on account of force majeure or is justified in withholding performance; the parties may, in their autonomy, stipulate an agreed payment for non-performance which is not imputable to the obligee’s fault, but such a clause is atypical and cannot fall in the legal scheme of a penalty clause (Cass. 2 Aug. 1984 no. 4603, Giust. Civ. Mass. 1984; but see, contra, Art. 4 of Resolution (78)3 of 20 Jan. 1978 on Penal Clauses in Civil Law adopted by the Committee of Ministers of the Council of Europe which excludes that the penalty may be due in case of non-performance which is not imputable to the obligee). c) Notice of non-performance: The majority of case-law holds that no notice of non-performance is necessary in order to enforce a penalty clause (Cass. 24 Sep. 1999 no. 10511, Giur.it. 2000,1154; contra Cass. 17 Dec. 1976 no. 4664, Rep. Gen. Giur. It. 1976). d) Amount: Parties are not allowed, by means of a penalty clause, to limit damages to a sum which is so low as to amount to a violation of the prohibition, set forth in Art. 1229 C.C., of exemption clauses excluding liability for intentional or grossly negligent non-performance or for violation of mandatory rules of law (Cass. 28 July 1997 no. 7061, Giust. Civ. Mass. 1997; De Nova (1988), p. 378). 4. Stipulated payment replaces damages. a) Effects as to burden of proof: As expressly stated in Art. 1382(2), the stipulation as to an agreed payment for non-performance exempts the aggrieved party from having to prove the actual existence and amount of the damage suffered. b) Interest and additional damages connected to inflation: Courts maintain that the payment of the agreed sum for non-performance is an autonomous primary monetary obligation (see Comments on Arts 9:502 and 9:508, Mari ) so that while the creditor is entitled to interest under Art. 1224(1) C.C. on the amount of the penalty clause, possible devaluation of the currency is irrelevant unless the creditor is able to prove that he/she has suffered additional damages under Art. 1224(2) (see Cass. 8 Apr. 1998 no. 3641, Giust. Civ. Mass. 1998). c) Other additional damages: Under Art. 1382, the penalty clause has the effect of limiting the recovery of damages to the amount agreed in advance by the parties, unless the parties have expressly agreed that the aggrieved party can recover additional damages. The parties’ autonomy to agree on additional damages appears to be subject to some limits because the general principle of unjust enrichment prevents the parties from agreeing that the non-performing party will be obliged to pay both the amount agreed in the penalty clause and full damages, so that contractual provisions entitling the aggrieved party to recover additional damages shall be construed as referring to damages which are not covered by the agreed penalty (see Pretura, Milano, 13 July 1976, Foro It., 1977, I, 534, and Arts 5 and 6 of Resolution (78)3). d) Form: Case-law is uniform in holding that penalty clauses do not constitute unfair terms subject to approval A. MARI – 473

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in writing under Art. 1341 C.C., but this solution is no longer maintainable with regard to consumer contracts because the new text of Art. 1469-bis C.C., implementing Council Directive 93/13/EEC of 5 Apr. 1993 on unfair terms in consumer contracts, does include penalty clauses among unfair terms (see Cass. 17 June 2002 no. 8697, Diritto e Giustizia, 2002, 29, 80). 5. Prohibition of consolidation of remedies. Under Art. 1383 the creditor cannot simultaneously claim performance and enforcement of the penalty clause unless the agreed payment has been stipulated for delay in performance only. If the penalty clause refers to delay in performance only, the creditor may well claim performance and, when the delay turns into non-performance, additional damages not covered by the agreed payment for the delay (see Cass. 22 Aug. 2002 no. 12349, Giust. Civ. Mass. 2002). Accordingly, the non-performing party may well be ordered to perform and cannot escape liability by offering to pay the agreed sum (see Cass. 31 July 1962 no. 2018, Rep. Gen. Giur. It. 1962). Penalty clauses, moreover, do not prevent the aggrieved party from claiming termination of the contract (see Cass. 28 Oct. 1975 no. 3606, Rep. Gen. Giur. It. 1975). These solutions are in line with Arts 2 and 3 of Resolution (78)3). 6. Court’s power to reduce stipulations. a) Mandatory character of the rule: Art. 1384 expressly gives the courts the power to reduce the amount of the agreed payment for nonperformance when the primary obligation has been partly performed or when the amount of the penalty is grossly excessive. Case-law and scholars hold that the ratio of the judicial power to reduce the amount agreed in penalty clauses is to be found in the general interest to confine the parties’ autonomy within certain limits, so that the exercise of this autonomy may not turn into an abuse of the principle of freedom and equality of the parties; accordingly, even if the black letter rule states nothing as to the parties’ faculty to exclude contractually judicial reduction of the amount agreed in the penalty clause, case-law has made it clear that the parties cannot waive in advance the right to claim the reduction, which is a power the laws confer only on the courts (see Cass. 4 Feb. 1960 no. 163, Rep. Gen. Giur. It. 1960); this position is in line with Art. 7 of Resolution (78)3). Case-law is divided as to whether the judicial power of reduction may be exercised in connection with penalty clauses contained in government contracts and stipulated in the interest of the Public Authority concerned: the most recent decisions show a trend in favour of a positive answer based on the assumption that in contractual matters the Public Authorities and private parties act on an equal footing (see Cass. 7 Aug. 1992 no. 9366, Giust. Civ. Mass. 1992). b) Requirements for the reduction: Art. 1384 does not confer on the non-performing party any right to the reduction, because the reduction is a matter of a discretionary power of the court which may (not shall) reduce the agreed amount (see Cass. 7 July 1981 no. 4425, Giur.it., 1982, I,1,669) at the recurrence of either of the two legal requirements of partial performance and grossly excessive amount, and always with due regard to the creditor’s interest in performance (see Cass. 21 Apr. 1965 no. 699, Giust. Civ., 1965, I, 1339). With particular regard to partial performance, courts have constantly held that regard must be had to the importance and relevance of partial performance and to the patrimonial interest the aggrieved party had in full and exact performance, so that the 474 – A. MARI

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agreed payment may indeed be reduced but cannot be wholly excluded (see Cass. 5 Aug. 1989 no. 3600, Giust. Civ. Mass. 1989). Case-law is not constant with regard to the other circumstances to be taken into account and to the relevant time for evaluating the creditor’s interest in performance of the contract. Some courts have definitely held that regard is to be exclusively had to the time when the contract was concluded, so that the reduction may be not be based on a comparison between the amount of the agreed payment and the actual loss suffered by the aggrieved party (see Cass. 5 Aug. 2002 no. 11710, Contratti, I, 2003, 336). Other decisions, instead, tend to state that the courts shall ascertain the actual relevance and incidence of the non-performance on the whole contract and its repercussions on the balance of the parties’ obligations; reference to the actual loss suffered by the party invoking the penalty clause is thus permitted, but cannot constitute the decisive and exclusive element of the evaluation (see Cass. 24 Apr. 1980 no. 2749, Giust. Civ. Mass. 1980; Cass. 9 June 1990 no. 5625, Giust. Civ. Mass. 1990; Cass. 23 May 2002 no. 7528, Nuova Giur. Comm., 203, I, 407). Case-law has also made it clear that the agreed payment cannot be reduced by invoking the application of the statutory provisions on contributory negligence and duty to mitigate damages (see Comments sub Arts 9:504 and 9:505, Mari ) or supervening excessive onerousness of contracts with obligations for one party only (see Art. 1468 C.C.), because the existence of a penalty clause limiting damages in advance prevents both parties from proving a higher or lower loss (see Cass. no. 2749/1980 cit.; Cass 16 June 1983 no. 4141, Giust. Civ. Mass. 1983; Cass. 23 May 1985 no. 3120, Giust. Civ. Mass. 1985). c) Party’s request: case-law appears divided as to whether the power of reduction may be exercised ex officio by the courts; while in the past the strong majority of decisions used to hold that the exercise of the power presupposes an express request by the non-performing party (see Cass. 23 Nov. 1990 no. 11282, Giust. Civ. Mass. 1990; Magazzu` (1960), p. 195), some recent decisions have cast some doubt as to this consolidated trend, holding that the power may be exercised ex officio but the interested party shall give evidence of the disproportion between the value of the contract and the amount of the penalty (see Cass. 23 May 2003 no. 8188, Giust. Civ. Mass. 2003).

COMPARISON AND EVALUATION As in the PECL and the UNIDROIT Principles, in Italian law both penalty and liquidated damages clauses are enforceable; in both the PECL and Italian law higher damages can be awarded only subject to an express agreement by the parties, while this does not seem possible under the UNIDROIT Principles. In the PECL it is not clear whether penalty clauses are enforceable also in cases of non-performance for which the non-performing party is not liable, as seems to be the case under UNIDROIT Principles (see Comment 2 to Art. 7.4.13). In Italian law the non-performance must always be imputable to the nonperforming party: moreover, stipulations of an agreed payment for non-performance which is not imputable to the non-performing party, while in principle valid, appear now in contrast with Art. 4 of Resolution (78)3 of 20 Jan. 1978 on Penal Clauses in Civil Law adopted by the Committee of Ministers of the Council of Europe. It seems that in both the PECL and Italian Law, as well as in the UNIDROIT Principles, the parties may not A. MARI – 475

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stipulate an agreed payment lower than the loss, but the legal basis for this is to be found in the rules on exclusion clauses rather than in those on penalty clauses. As to the judicial reduction of grossly excessive penalty clauses, in Italian law, even if the relevant C.C. provisions do not expressly exclude agreements by the parties to the contrary, the mandatory character of the rule has been recognised by case-law and is in line with Art. 7 of Resolution (78)3 above. In this context, the most striking differences regard the circumstances which the courts may take into account. As a matter of fact, while under both the PECL and the UNIDROIT Principles, courts may reduce the amount by specifically evaluating the actual loss resulting from the non-performance, in Italian law, on the contrary, reference to the actual loss can never constitute the decisive and exclusive element of the evaluation because regard is mainly to be had to the interest that the aggrieved party had in performance at the time when the contract was concluded. This approach ends up in not allowing courts to take into account the aggrieved party’s contributory negligence or breach of the duty to mitigate damages, if any. Finally, while in both the PECL and Italian law it is not clear whether the courts may exercise the power of reduction ex officio, this seems to be the solution adopted by the UNIDROIT Principles.

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PRINCIPLES OF EUROPEAN CONTRACT LAW Article 9:510: Currency by Which Damages to be Measured Damages are to be measured by the currency which most appropriately reflects the aggrieved party’s loss. 1. General. The ratio of this Art. rests with the need to avoid possible over or undercompensations related to the fluctuations to which exchange rates among individual currencies are subject. According to the Comment, a distinction must be drawn between Art. 9:510, which fixes the currency for damages and/or interest for non-performance, and Art. 7:108, which instead governs the currency of payment in general, so that if damages have arisen in a currency other than the local currency of the place of payment, any conversion into the latter is to be made in accordance with Art. 7:108. 2. Purpose and meaning of ‘‘appropriate’’. Art. 9:510 is a specific application of the general rule of full compensation set forth in Art. 9:502. Thus damages must be expressed in the currency which is the most appropriate for granting the aggrieved party full compensation. This provision, therefore, excludes that damages may be automatically measured in the local currency of the court, so that if damages have actually arisen in a currency other than the local currency of the court, even though judgments in foreign currency are not allowed, the court should measure the damages by the correct currency and convert them into the local currency at the current exchange rates. Comment C makes it clear that the determination of the most appropriate currency depends on the circumstances of each case, even if in most cases this will be the contractual currency of account. 3. Derived claims. Comment D suggests that interest as well as liquidated damages are usually measured, respectively, in the same currency as that of the principal sum or in the same currency as that of the contract price. 4. Autonomy of the parties. According to Comment E, the parties are free to fix the currency in which damages or interest should be measured. 5. UNIDROIT Principles and CISG. In the UNIDROIT Principles this matter is governed by Art. 7.4.12, which refers to the currency in which the monetary obligation was expressed or to the currency in which the harm was suffered, whichever is more appropriate. On the contrary, CISG does not contain any specific provision in this regard, but courts have taken the matter into account (see Handelsgericht Zu¨rich, 5 Feb. 1997 no. HG 95 0347; Supreme Court of Queensland (Australia), 17 Nov. 2000 no. 10680/1996; Arbitral Award, Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft, Wien, 15 June 1994 no. SCH-4366, all in www.unilex.info).

ITALIAN LAW 1. Damages in foreign currency. There is no provision in the Codice Civile specifically addressing the matter of the currency in which damages are be measured. The matter has A. MARI – 477

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however been dealt with by case-law, which, in the absence of a statutory provision, seems to address it by jointly applying the general principles governing damages for non-performance set forth in Arts 1223–1224 C.C. (see Comments on Arts 9:502 and 9:508, Mari ) and some of the principles implied in Art. 1278, which states that if the sum due is expressed in a currency which is not legal tender in the State, the debtor has the power to pay in legal money at the rate of exchange of the day when the sum is due and at the place agreed for payment (see Cass. 6 Nov. 1991 no. 11834, Giust. Civ. Mass. 1991, which stated that Art. 1278 is a general provision applying to any obligation). Some decisions are quite specific, others are less specific but clearly reflect the purpose to fully compensate the aggrieved party. Courts have stated the principle whereby the parties may well agree upon payments to be made in a foreign currency, so that the non-performing party may well be ordered to pay the due sum in the foreign currency (see Cass. 21 Aug. 1962 no. 2607, Rep. Gen. Giur. It., 1962). It has also been held that in assessing the damage suffered by the aggrieved party in terms of both damnum emergens and lucrum cessans, the courts may well refer to a foreign currency when the aggrieved party has actually incurred expenditure or would have made gains in this currency (see Cass. 6 June 1981 no. 3656, Giust. Civ. Mass. 1981). Some courts have pointed out that the damage suffered by a foreign person consisting in expenditure and impossibility to use the damaged goods, shall be measured by converting the amount in foreign currency into the domestic currency at the official exchange rate of the day of the payment (see Tribunale Udine, 24 Dec. 1987, Foro It., 1989, I, 1618 and Pretura Portogruaro, 21 July 1981, Rivista Giuridica Circolazione e Trasporti, 1983, 544, regarding tortious liability). With regard to sales-contracts, it has been held that if the contract price is expressed in a currency other than the currency of the current price referred to in Art. 1518 C.C. on the normal measure of damages in salescontract (see Comment on Art. 9:507, Mari ), the courts shall compare the two prices and apply the exchange rate of the day and place agreed for the delivery of the goods; since the obligation to pay damages is related to the primary obligation to perform the contract, the comparison shall be made with regard to the currency of the aggrieved party, which is entitled to be paid damages in the same currency as that of the contract price (see Cass. Cass. 24 Apr. 1956 no. 1253, Giust. Civ., 1956,I,1917). With particular reference to fluctuations of the exchange rates among individual currencies, and even when damages have finally been assessed in the domestic currency, courts have made it clear that since the pecuniary equivalent of the loss is a mere figure which is not subject to changes linked to possible fluctuations of the exchange rates, if the loss is suffered in a foreign currency, the amount of damages in the domestic currency shall be necessarily assessed with reference to the exchange rate of the time when the harmful event occurred; however, since damages must be aimed at fully compensating the aggrieved party, he/she is entitled to recover additional damages caused by the devaluation of the domestic currency in the time between the occurrence of the harmful event and the judicial decision (see Cass. 9 Oct. 1997 no. 9810, Giur.it., 1998, 1096; Tribunale Firenze, 13 May 1996, Responsabilita` Civile e Precidenza 1996, 1241; Cass. 12 July 1993 no. 7679, Giur.it., 1994, I, 1, 410; Cass. 16 Mar. 1987 no. 2691, Foro It., 189, I, 1209; Cass. 24 June 1980 no. 3971, Foro It., 1981, I, 1369; Cass. 22 Dec. 1977 no. 5694 Giur.it., 1979, I, 1, 515; Tribunale Varese, 478 – A. MARI

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6 Mar. 1989, Giur.it., 1989, I, 2, 436). Similarly, courts have stated that the non-performing party of a pecuniary obligation expressed in a foreign currency shall pay the difference between the exchange rate at the time of expiration of the contractual term for payment and the exchange rate at the time of payment, otherwise the non-performing party, in paying in the domestic currency at the exchange rate in force at the time of expiration of the contractual term, would make an unjust gain and take advantage of the non-performance (see Cass. 17 July 2003 no. 11200, Giust.Civ.Mass. 2003).

COMPARISON AND EVALUATION Unlike the PECL and the UNIDROIT Principles, Italian law does not contain any general provision on the currency in which damages are to be measured. Such a general provision would be most welcome in consideration of the fact that Italian case-law has not yet stated clear principles in this regard. However Italian courts have somehow recognised both the possibility of assessing damages in a foreign currency and the need to proceed on the basis of the full compensation principle.

A. MARI – 479

LIST OF AUTHORS Luisa Antoniolli Professor of Comparative Private Law, Faculty of Law, University of Trento Correspondence address: Faculty of Law, University of Trento, Via Verdi 53, 38100 Trento, Italy M. Joachim Bonell Professor of Comparative Law, Faculty of Law, University of Rome I – La Sapienza; Consultant, UNIDROIT; Chairman of the UNIDROIT Working Group for the Preparation of the Principles of International Commercial Contracts; member of the Commission on European Contract Law Correspondence address: UNIDROIT, Via Panisperna 28, 00184 Rome, Italy Alessandra Bonito Oliva PhD candidate, Faculty of Economics, University of Napoli (Federico II) Correspondence address: Faculty of Economics, University of Napoli (Federico II), Via Cinthia 26, 80126 Napoli, Italy Valentina M. Donini Research Fellow, University of Rome I, La Sapienza, Department of Legal Sciences, Comparative Private Law Correspondence address: UNIDROIT, Via Panisperna 28, 00184 Rome, Italy Silvia Ferreri Professor of Comparative Private Law, Faculty of Law, University of Turin Correspondence address: Faculty of Law, University of Turin, Via Sant’ Ottavio 20, 10124 Torino, Italy Antonio Fici Researcher of Private Law, Faculty of Law, University of Rome II (Tor Vergata) Correspondence address: Faculty of Law, University of Rome II (Tor Vergata), Via B. Alimena 5, 00173 Rome, Italy Bianca Gardella Tedeschi Researcher of Private Law, Faculty of Law, University of Eastern Piedmont (Piemonte Orientale), Alessandria Correspondence address: Faculty of Law, University of Eastern Piedmont (Piemonte Orientale),Via Cavour 84, 15100 Alessandria, Italy 481

LIST OF AUTHORS

Michele Graziadei Professor of Comparative Private Law, Faculty of Law, University of Eastern Piedmont (Piemonte Orientale), Alessandria Correspondence address: Faculty of Law, University of Eastern Piedmont (Piemonte Orientale),Via Cavour 84, 15100 Alessandria, Italy Paola Iamiceli Researcher of Private Law, Faculty of Economics, University of Trento Correspondence address: Faculty of Economics, University of Trento, Via Inama 5, 38100 Trento, Italy Elena Ioriatti Researcher of Comparative Private Law, Faculty of Law, University of Trento Correspondence address: Faculty of Law, University of Trento, Via Verdi 53, 38100 Trento, Italy Francesco Macario Professor of Private Law, Faculty of Law, University of Foggia Correspondence address: Faculty of Law, University of Foggia, Via IV Novembre 1, 71100 Foggia, Italy Anna Maria Mancaleoni Professor of Comparative Private Law, Faculty of Law, University of Cagliari Correspondence address: Faculty of Law, University of Cagliari, Viale S. Ignazio 17, 09123 Cagliari, Italy Alessandra Mari Attorney at Law, Rome Correspondence address: Studio Legale Paoletti, V. Barnaba Tortolini 34, 00197 Rome, Italy Alberto Monti Professor of Comparative Private Law, University Bocconi, Milan, and Attorney at Law, Milan Correspondence address: University Bocconi, Via Roberto Sarfatti 25, 20136 Milano, Italy Alberto M. Musy Professor of Comparative Private Law, Faculty of Economics, University of Eastern Piedmont (Piemonte Orientale), Novara, and Attorney at Law, Turin Correspondence address: Faculty of Economics, University of Eastern Piedmont (Piemonte Orientale), Via E. Perrone 18, 28100 Novara, Italy 482

LIST OF AUTHORS

Roberta Peleggi Research Fellow, University of Rome I, La Sapienza, Department of Legal Sciences, Comparative Private Law Correspondence address: UNIDROIT, Via Panisperna 28, 00184 Rome, Italy Arianna Pretto-Sakmann Fellow and Tutor in Law, Brasenose College, University of Oxford Correspondence address: Brasenose College, Oxford, OX1 4AJ, United Kingdom Rodolfo Sacco Emeritus Professor of Comparative Private Law, Faculty of Law, University of Turin Correspondence address: Faculty of Law, University of Turin, Via Sant’ Ottavio 20, 10124 Torino, Italy Filippo Sartori Researcher of Private Law, Faculty of Law, University of Trento Correspondence address: Faculty of Law, University of Trento, Via Verdi 53, 38100 Trento, Italy Alessandro Somma Professor of Comparative Private Law, Faculty of Law, University of Ferrara Correspondence address: Faculty of Law, University of Ferrara, Corso Ercole I d’Este 37, 44100 Ferrara, Italy Anna Veneziano Professor of Comparative Private Law, Faculty of Law, University of Teramo Correspondence address: Faculty of Law, University of Teramo, Coste S. Agostino, 64100 Teramo, Italy

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504

INDEX A Abuse of economic dependence 14, 216, 218 Abuse of right 55, 350 Acceptance 11–14, 25, 47, 64, 67, 72–75, 87, 88, 98, 106–142, 160–162, 223, 243, 296, 306, 308, 309, 323, 324, 334, 336, 338, 341, 345, 362 by act of performance 131 by conduct 12, 87, 93, 96, 105, 114, 120, 121, 123, 124, 126, 131, 132 by statement 120, 123, 132 concludes the contract 87, 110, 112–114, 123, 124, 128 conditional 130, 336 fixed time for acceptance 114, 115 late acceptance 127–129, 135 by delay in transmission 128, 129 treated as timely 128 mode of 120, 121 modified acceptance 98, 130, 131 of an offer 87, 110, 112–114, 123, 124, 128 reasonable time for 126, 127, 130 relevance of silence or inactivity 120, 121, 122 time-limit for 114, 116, 117, 126, 127 without notice 123 Act legal 73, 147 meaning of the term 62, 65, 66 Actio quanti minoris 436, 441 Actio redhibitoria 436 Adaptation of contract in case of mistake 199–202 Additional terms 257 see: Modified acceptance of an offer Advertisement 110, 113, 276 Agency 82, 140, 147–156, 179, 228, 302, 303, 306, 368, 399 and external relationship 148 and internal relationship 147, 149, 184 in contracts 147 Agent 48, 82, 147–180, 184, 228, 333 acting in exercise of its authority 153 acting without authority or outside of its authority 163 in conflict of interest 166–168

liability 163, 164, 165, 175 see also: Authority of an agent Agreed payment for nonperformance 471–476 court’s power to reduce 474 prohibition of consolidation of remedies 474 reduction if grossly excessive 471, 474, 476 valid 472, 475 see also: Penalty clause Agreement as condition for conclusion of contract 87–94 sufficient 87, 88, 96, 97, 120, 197, 287, 290 to terms not individually negotiated 98–101 Alternative performance 328–331 Analogy in Italian law 47–48 in the application of the PECL 48 Anticipatory non-performance 404, 421–422 Annulment 188, 192–202, 207, 208, 211, 212, 227–235, 244, 275, 277 Application of the PECL as general rules of contract law in the European Communities 62 by arbitrators 21–25, 36 by way of analogy 47 to fill in gaps 43 to questions of consent 37 when agreed by the parties as part of lex mercatoria 27–29 as contractual content 27–29 as law governing the contract 27–29 without the parties’ choice 27 Appropriation of performance 335, 343–346 Arbitration 24, 36, 65–66 arbitration clause 64, 99–100, 135, 222, 426 Assurance of performance 373, 374, 421, 422 Authorisation independent nature of 152, 156 made public 157 Authority of an agent 147–185 acting in exercise of 153

INDEX 505

INDEX

Authority of an agent (continued) acting without or outside of 163 apparent 148, 152–153, 156–159, 158–164 conflict of interest 166–168 death of agent 174, 176 duration 174 express 152, 153, 156, 158 implied 152, 153, 156, 158, 169 insolvency of agent 174, 176 insolvency of principal 174, 176, 177 ratification by principal 161–164, 171–173 subagent 169 third party asking for ratification by principal 171 Auxiliaries 83, 85, 380, 388 Average quality of performance 298–300 Avoidance 13, 18, 23, 166, 168, 192, 195, 197, 198, 224, 226, 227, 232–249, 351, 368 effects of 236 notice of 199, 202, 214, 230, 231 partial 240–241 see also: Invalidity Avoidability 221 B Bad faith 52, 82–84, 127, 142, 146, 154, 155, 189, 204, 218, 237–239, 294, 366, 434–437, 452 Bankruptcy 346, 375, 431, 433 Battle of the forms 133–136, 266 Bill of exchange, transfer of 74, 336, 338, 392 Boni mores 31, 218 Breach of confidentiality after contractual negotiations 145–146 Breach of contract 210, 213, 313, 319, 348, 444, 456 see also: Non-performance, Remedies C Capacity 66, 110, 111, 113, 137, 148, 154, 155, 158, 160, 162, 166, 174, 206, 237, 257 lack of 158, 187, 188, 237 not covered by PECL 187 Caso fortuito (force majeure) 330 Categories of representation 150

506 INDEX

Causa 16, 89, 91–93, 108, 187, 188, 218, 398 see also: Consideration Chain of causation 443, 445, 449, 450, 452, 454 Change of circumstances 20, 51, 54, 114, 153, 310, 312, 408 adaptation of contract 311 court’s powers 310–315 duty to renegotiate 311 ending of contract 310 Change of remedy 363 Cheque as payment 60 Circumstances relevant 55, 56, 116, 127, 206, 221, 252, 257, 270, 302, 374, 375, 412, 419 relevant for interpretation, see: Interpretation Clauses excluding or restricting remedies 247 see also: Exclusion or exemption clause Commercial Register 157, 158 Common intention of the parties governs interpretation of contracts 94, 197, 251, 254, 279, 281 Common mistake 192, 194, 195, 200–202 Common terminology 62 Communication 47, 62, 72–77, 126, 137, 143, 173, 244 inaccuracy in 197, 198 mistake in 16 of the identity of the principal to the third party 181 of the identity of the third party to the principal 180 Compensatio lucri cum damno 448, 450 Compensation 64–66, 70, 145, 175, 216, 221, 237, 261, 312, 319, 330, 358, 359, 362, 363, 371, 392, 397, 401, 407, 416, 426, 434, 436, 437–440, 442, 444, 446, 448–453, 456, 457, 460, 462, 465, 466, 472, 477, 479 Computation of time 77, 78, 80 Conclusion of contract 18, 23, 40, 67, 74, 94, 98, 103, 117, 120, 123–125, 128, 132, 137–139, 141, 144, 151, 161, 192, 195–198, 204, 208, 210, 213, 214, 217, 227, 232, 243, 251, 254, 257, 275, 276, 288–290, 310, 311, 313, 315, 317–320, 366, 373, 374, 381, 451, 452 by act of performance 125

INDEX

by commencing performance 125 conditions for 87 not through offer and acceptance 120–125, 140, 141 professional’s written confirmation 137–139 time of 123, 125, 217, 276, 289, 310, 317, 366, 451 see also: Formation of contract Conduct 12, 17, 23, 37, 47, 48, 50, 64, 70, 84, 87, 88, 93, 94–96, 102–107, 114, 120–126, 130–132, 142, 143, 147, 152–157, 166, 169, 171, 176, 177, 197, 204, 206, 207, 217, 218, 222, 223, 230, 233, 234, 235, 243, 252, 257, 280, 369, 373, 403, 406, 446, 449, 453–455 contributing to non-performance 453 contributing to the loss-producing effects of non-performance 453 Confidentiality breach of 145, 146 duty of 145, 146 Confirmation 234 of agent’s authority 171 professional’s written confirmation 67, 137 Conflict of interest 166–168 Conflict of laws, see: Private international law Conflicting general conditions 133 see also: General conditions, Battle of the forms Consent application of PECL to questions of 37 by the principal 168 defects in a contracting party’s 14, 15, 18, 66, 83, 84, 154, 187, 188, 190, 192, 204, 209, 211, 214, 215, 226–249 Consideration 14, 305, 393, 394, 399, 400 see also: Causa Construction contract 60, 288, 295, 313, 438, 441, 442 Consumer contracts 34, 35, 56, 100, 207, 220, 222–225, 241, 250, 260, 274, 276, 277, 371, 389, 473, 474 consumer protection 13, 14, 241, 388 Contents and effects 273–316 Contra proferentem rule 260–261 see: Interpretation

Contract (s) aleatory 312, 313 application of PECL to, see: Application of the PECL binding on the offeror only 141 conferring excessive benefit or unfair advantage 214, 226, 242, 243, 247 consumer 34, 35, 56, 100, 207, 220, 222–225, 241, 250, 260, 274, 276, 277, 371, 389, 474 content and effects 273–316 for an indefinite period 301–304 in favour of a third party 75, 228, 305, 309 invalidity of 52, 54, 66, 142, 143, 155, 187, 189, 201, 235, 244, 250, 283, 408 integration of 281, 282 not concluded through offer and acceptance 140 of adhesion 220 to be performed in parts 412, 433 unfair contract terms not individually negotiated 23, 99, 220, 247 see also: Acceptance, Formation of contract, Ineffectiveness, Invalidity and Avoidance, Non-performance, Offer, Remedies, Termination Contractual gaps 280, 282, 296, 297 Contributory negligence 361, 453–455, 457, 475, 476 Cooperate, duty to 53, 58–60, 63, 71, 350 see also: Good faith and fair dealing Court, meaning of the term 62, 65 Creditor (s) behaviour of 50, 58, 63, 69, 360 default of 348–351, 359, 393 effect of simulation on 287 of the mandatory 182 Cumulation of remedies 250, 362–364, 425, 439, 472 see: Remedies Cure by non-performing party 365, 370–372 Currency agreed currency of payment 339 by which damages are measured 477–479 devaluation 449, 450, 458, 463, 468, 469, 473, 478 of account 339, 477 of payment 328, 339, 340, 341, 391, 465 of place of payment 339, 341, 477

INDEX 507

INDEX

Currency (continued) rate of exchange 337, 339–341, 478 right of conversion 339, 342 Custom, see: Usages and practices D Damages additional 388, 449, 450, 453, 458, 461, 463, 464, 465, 468, 469, 470, 472, 473, 474, 478 agent’s liability in damages when acting without authority 163, 175 aggrieved party’s failure to mitigate loss 454, 457 and avoidance for invalidity 166 and interest 443 cumulation with other remedies for nonperformance 250, 362–364, 425, 427, 430, 436, 439 currency by which damages are measured 477–479 expectation interest 16, 163, 212, 236, 448 foreseeability of 451, 452 future losses 443, 446, 447 liability for 359, 443–447, 451 limitation of liability clauses 387–389 liquidated damages, see: Agreed payment for non-performance, Liquidated damages and penalty clause(s) measure of 164, 190, 203, 205, 242, 244, 246, 362, 388, 446–451, 459–464, 469, 471 measured by current price 462, 463 measured by substitute transaction 459–461 nominal damages not awarded 443, 447 non-pecuniary losses 443, 444, 446, 447 not precluded 401 ordinary 465–469 penalties, see: Agreed payment for nonperformance, Penalty clause reliance interests 165, 207, 229, 234, 235 right to 357, 359, 362, 364, 370, 371, 408, 409, 443, 444, 447 Damnum emergens 448, 449, 478 Death of agent 174, 176 Debt (s) future 53 release of the 341, 345, 350, 351, 355

508 INDEX

Debtor (s) assent of 332 discharge of 332 expenses of payment 355 fair behaviour 50, 58, 63, 69, 370 liability of 64, 66, 358, 383, 401, 444 partial (supervening) impossibility for cause not imputable to 413 performance of 65 right to release 355 Declaration by any means 73 of will 47 Default interest 467–470 of creditor, see: Mora creditoris 334, 393 Defective performance 62, 332, 334, 357, 359, 360, 395, 410, 441, 442 right to have it cured 361 Defence (s) based upon non-performance 51, 56, 57 limitations to power to raise 99, 100, 135 of intermediary 181, 182 of principal 182 of third person 180, 181, 182 self-defence of the creditor 374 Delayed performance see: Performance, Nonperformance, Interest Deposit 88, 92, 141, 302, 349, 350, 352, 354, 355, 388, 392, 394 Diffida ad adempiere (Additional term fixed for performance) 20, 67, 74, 75, 378 Diligence 69, 71, 99, 100, 135, 193, 194, 222, 300, 352, 366, 385, 388, 445, 457, 458 Direct representation 148, 150, 152, 154, 156, 158, 160, 162, 163, 229 Directive see: EC Directive Discharge of the debtor 332 of the party left in possession 348 Dispatch principle 72, 74–76 see also: Notice Dissolution of contract 64, 67, 311–315, 358, 359, 362, 363, 378, 379, 392, 396, 397, 401, 407, 412, 413, 416, 417, 426, 427 Dolus bonus 208, 275 Duration of agent’s authority 148, 174 see also: Authority of an agent

INDEX

Duress 66, 70, 211, 212, 227, 231, 235, 244, 245 Duty of care 100, 300 of disclosure 245 to cooperate 58–60, 63, 71, 350, 358, 371, 393, 394 to inform the other party 98, 133, 144, 190, 194, 203–208, 244, 249, 250, 358 to mitigate 456–458, 465, 475 –476 to negotiate 311 to renegotiate 311, 316 E Early performance 323, 324 see also: Performance Eccessiva onerosita` sopravvenuta (change of circumstances) 20, 271, 312 Ending of contract due to changed circumstances, see: Change of circumstances 310 of contract for an indefinite period 304 Equita` 17, 55 Equity 28, 35, 39, 50, 51, 53, 55, 57, 59, 70, 71, 97, 253, 271, 280, 282, 288, 297, 316 Error 191, 192, 269 EC Directive 84/450/EEC 14, 275 90/314/EEC 276, 446 1993/13/EC 100, 101 1999/44/EC 276, 365, 367 2000/35/EC 445, 468, 470 2000/43/EC 446 European Union 13, 18, 21, 25–27, 32, 446 Evidence, see: Proof, burden of Exceptio non adimpleti contractus 325, 327, 403 Excessive benefit or unfair advantage 214, 215, 226–230, 232, 235, 242, 243, 247 Exclusion or exemption clause 23, 387, 388, 473, 475 Exclusion or restriction of remedies 247, 248, 387–389 Excuse due to an impediment 114, 357, 381, 408, 415, 416, 443 see also: Excused non-performance Excused non-performance 357, 360, 406, 409, 410, 434 Expectation interests 16, 163, 212, 236, 448

see also: Damages Express authority of an agent 152, 153, 156 see also: Authority of an agent Extrajudicial act 431 termination 428, 431 F Failure to cooperate 58, 60, 62, 63 Failure to mitigate damages 453–460, 471 Family law 32 Fair dealing, see: Good faith and fair dealing Fault 52, 66, 73, 74, 84, 90, 93, 103, 111, 124, 143, 163, 176, 208, 209, 244, 326, 330, 363, 430, 437, 441, 443–447, 454, 467–469, 473 Favor debitoris 261, 270, 324 Force majeure 358, 381, 382, 386, 408, 437, 441, 465, 473 Foreseeability 203, 205, 243, 245, 246, 366, 382, 451, 452 Forfeiture of right 399, 400 Form meaning of term "written statement" 62, 63, 65, 67, 68 no form required 88 of payment 336, 338, 391 see also: Contract, Writing Formation of contract agreement required 87, 88, 89, 90, 91, 96, 97 causa required 89, 91, 93 form required 89, 90 formal requirements 90–94 general conditions, see also: Standard terms 98, 100, 130–134 intention to be bound required 87, 110, 113, 120, 121, 283, 287 models for conclusion other than offer and acceptance 140, 141 object required 89, 91, 92, 97, 189, 289, 292 oggetto required 97 offer and acceptance 110–113 time of formation 99, 135, 222 see also: Acceptance, Agent, Authority of agent, Form, Offer

INDEX 509

INDEX

Fraud 206–209, 227, 235 in a contracting party’s consent 14, 15, 24, 55, 66, 229, 233, 242, 243, 247, 271, 274, 275, 277 fraudulent non-disclosure 206 fraudulent representation 206 incidental 204–209, 229, 275 see also: Invalidity and Avoidance Freedom of contract 30–33, 102, 142, 143, 161, 210, 215, 296 Fundamental non-performance 63, 67, 68, 365–370, 373, 381, 404, 406, 408, 412, 419, 421, 424 of intermediary to principal 179, 180 of intermediary to third party 181 see also: Non-performance G Gap-filling 278–282, 301, 303 General conditions of contract common in substance 133, 134 conflicting 134, see also: Battle of the forms in the formation of the contract 98, 100, 130–134 see also: Standard terms General principles of law 27 Generic goods 300 Good faith and fair dealing 22, 23, 25, 30, 31, 32, 42, 43, 50–60, 70, 71, 82, 142–145, 158, 162, 164, 173, 175, 191–195, 204, 206, 209, 214, 215, 218–223, 242–248, 257, 278, 279, 281, 310, 311, 325, 341, 350–352, 387, 396, 403 see also: Duty to co-operate, Excessive benefit and unfair advantage, Reasonableness, Revocation of an offer Gratuitous promise 88, 92–94 H Harm 241, 245, 388, 444–449, 477 I Illegality 17, 32, 187, 188, 218, 395, 398 Imbalance 214–225, 313 significant 220, 221 Immorality 187, 188 Impediment

510 INDEX

as excuse for non-performance 18, 114, 332, 357, 358, 380–386, 408, 415, 416–420, 443 in transmission 128 temporary 382 total and permanent 415, 416, 419, 420 Implied authority of an agent 152, 153, 156, 169 terms 17, 51, 257, 278–282, 325, 360 Import-export licences 34 Impossibility absolute 398, 400, 409 initial 189, 190, 290 of performance 18, 59, 64, 66, 189, 348, 351, 358–360, 383–385, 401, 420, 444 of restitution 433, 434, 437 relative 398, 400 Imputability 18, 409, 429, 430, 436 Imputation of intention, negligence and bad faith 84, 85 of knowledge and foresight 84, 85, 380 of non-monetary obligations 344 of payment 344, 345 Imputed knowledge and intention 82 Inaccuracy in communication 73, 197, 198 Incapacity 16, 18 legal 231 of agent 174, 176 of parties 187, 188 of the offeror 115, 116 of the principal 174, 176, 177 temporary 271 Incompatible remedies 249, 362, 364 Inconsistent behaviour 50 Incorrect information 23, 194, 203–205, 226–229, 242, 247, 248, 274, 275 Indirect representation 148–151, 163, 178–180, 183–185 Individually negotiated contract terms 263 Ineffectiveness 222, 224, 240, 241, 247 Information given by a professional supplier 273–276 Insolvency of agent 174, 176 of co-debtor 75 of debtor 374, 375 of intermediary 179–181 of principal 174, 176, 177

INDEX

Insurance 96, 261, 308, 309 companies 261, 306 contracts 91, 92, 151, 306, 314, 388 life insurance 75, 308 policy 263, 399 Intellectual property 433 Intention common intention of parties 17, 48, 94, 197, 198, 251, 254, 279, 281, 282 intention to deceive 206 of the parties 11, 12, 14, 16, 313 to be legally bound as condition for conclusion of contract 87, 110, 113, 120, 121, 282, 287 Intentional act 62, 66, 68 breach or gross negligence 451 Interest (s) and other additional damages 449, 450, 458, 465, 468, 469, 473 default interest 467, 468, 470 for late payment 445, 465 for use of money 467 on pecuniary obligations 466, 467 rate of 466, 467, 468 see also: Damages Intermediary 147, 148–151, 179, 182–185, 198 insolvency or fundamental non performance to principal 179, 180 insolvency or fundamental non performance to third party 181 not acting in the name of a principal 179 see also: Agent Interpretation according to good faith 51, 53, 54, 59, 70, 258, 270, 270, 271, 316 against the author of provision 99, 261 common intention prevails 17, 94, 197, 251, 254, 279–282 contra proferentem rule 222, 260 general rules of 251 inaccuracy and interpretation 197, 198 integrative interpretation 281 judicial interpretation 305 linguistic discrepancies 268 nature and purpose of contract relevant for 257, 269, 270

of the PECL 42–44 preference for interpretation making the contract lawful and effective 266 preference for negotiated terms 263 priority of intention over literal expressions 251 reference to contract as a whole 265 relevant circumstances 257 scholarly interpretation 305 systematic 368 terms to be given effect 266 uniformity of 42, 43 Invalidity 17, 18, 50, 52, 54, 66, 201, 235, 250, 282, 296, 408 due to illegality, immorality or lack of capacity 187, 188 knowledge of reasons for 142, 143, 244 Investment securities 433 Invitation to make offers 110–113 to withdraw the deposited things 352 Irrevocability 13, 75, 175, 177, 309, 329 Iustum pretium 214, 221 K Knock-out rule 133, 134, 136, 266 see also: Battle of the forms Knowledge and foresight 82, 84 L Lack of capacity 158, 187, 188, 237 Laesio aenormis 214 Last shot rule 134, 135 see also: Battle of the forms Late acceptance of an offer, see: Acceptance Late performance, see: Delayed performance Letters of intent 32 Lex mercatoria 24–29 Liability contractual 248 exoneration of liability clauses 387–389, 426 extra-contractual (or Aquilian) liability, relation to 145, 204, 248, 307 fault liability 84 for acts of auxiliaries 83, 380 for damages 359, 443–447, 451, 473

INDEX 511

INDEX

Liability (continued) for late, partial or incorrect performance 360 for negotiations 142 for non-performance 185, 189, 401, 408, 409, 443, 445, 454, 455, 473 in case of avoided contract 244 in case of unavoided contracts 244 in tort 244, 245, 444, 446,454, 457, 478 limitations on liability 99, 100, 135, 222, 247 of agent 163, 164, 165, 175 of debtor 64, 66, 358–361, 383, 384, 401, 444 pre-contractual 50, 52, 64, 70, 142, 143, 190, 204, 205, 222, 229, 243–250, 275 Liquidated damages 382, 387, 388, 426, 455, 469, 471, 472, 475, 477 see also: Agreed payment for nonperformance, Damages, Penalty clause Loss (es) attributable to aggrieved party 205, 243, 245, 246, 453 compensation of the 145, 362, 451, 452 consequential 448, 449, 454 foreseeable / unforeseeable 451, 452 future 443, 446, 447 non-pecuniary 443–447 of benefit of time limit 80, 323, 374, 421 of profits 351, 448, 449, 450, 465 reduction of 243, 245, 246, 456 sustained 115, 449 type of 443, 446, 452 Lucrum cessans 448, 449, 478 M Mandate 84, 149, 151, 156, 173, 177, 178, 182, 183, 184, 288, 302 contract of 156, 169, 172, 176, 355 Mandatory rules in the PECL 30, 31, 49 of law 18, 29, 33, 35, 36, 89, 91, 97, 136, 187, 189, 280, 281, 304, 316 of national law 33, 34 violation of 235, 398, 473 Material alteration 130, 131, 137 matter 62, 63

512 INDEX

meaning of the term 63, 165 subjective conditions 83, 154, 155 validity 37 Meaning of terms 62 Merger clause 23, 102–104, 255, 273 Mistake adaptation of contract, in case of 199 as defect in consent 14, 15, 24, 47, 52, 55, 66, 190, 229–235, 242, 243, 245, 271, 275 as to facts or law 191 avoidance, due to 192, 197, 249 common 192, 194, 195, 200–202 damages 242 essential 193, 195, 198, 228, 268 fundamental 189, 190, 191, 199, 203 in declaration or transmission 197, 198 incorrect information 23, 191, 192, 194, 203–205, 227, 247, 248 inexcusable 189–193 recognizable 192, 193, 195, 198, 228 remedies 23, 247 Modification of terms only when written, see: Written modification only Modified acceptance of an offer 98, 130, 131 Monetary obligations. see: Obligation Money delay in payment of 465, 469 depositing money not accepted by creditor 354 not accepted 354 obligation to pay 317 place of performance of monetary obligations 317, 318, 336 recovery of money paid 425, 432, 433, 436 right to performance of monetary obligations 391 see also: Payment, Price, Right to reduce price Mora creditoris 59, 60, 65, 351, 353, 354, 358, 360, 393, 394 N Naming declaration 160–162 Nature and purpose of contract relevant for interpretation 257, 269, 270 see also: Interpretation Negative interest (s) 164, 190, 242–246, 430

INDEX

Negligence 62, 66, 68, 82, 84, 164, 165, 248, 361, 384, 387–389, 451–457, 475, 476 Negotiated terms preferred to nonnegotiated 17, 98, 263 see also: Interpretation Negotiations break off of 52, 142 contrary to good faith 142, 310, 311, 315 freedom to negotiate 142 pre-contractual liability 50, 64, 70, 142, 204, 222, 243 No oral modification clauses, see: Written modification only Nominal principle 341, 342 Non-performance and remedies in general 357–389 anticipatory 404, 421–424 covers any failure to perform for which the debtor carries the risk 62, 63, 66, 357, 360 cure by non-performing party 370 excused 357, 360, 409 fundamental 63, 67, 68, 179–181, 365, 366, 368, 370, 373, 381, 404, 406, 408, 412, 419, 421, 423, 424 future 366, 405, 421, 422 meaning of the term 63, 66 unitary concept of non-performance 358 see also: Damages, Defective performance, Delayed performance, Mora creditoris, Excused non-performance, Remedies, Right to performance, Price reduction, Termination, Withholding of performance Not individually negotiated unfair contract terms 220, 224, 247 see also: Terms not individually negotiated Notice dispatch principle 72, 74–76 fixing additional period for performance 376 impediment, in case of 381 insolvency or non-performance by intermediary, in case of 180–182 of avoidance 199, 202, 214, 230, 231 of default 67, 68, 75, 76, 410, 411, 465 of non-performance 443, 445, 447, 467, 469, 473

of termination 415 of withdrawal 75 receipt of 67, 181, 381 to perform 20, 64, 74, 377, 378, 407, 408, 411, 416–420, 443 see also: Notification Notification 175, 185 Nullity 17, 89–93, 136, 187–190, 198, 232, 240, 241 O Obligation de moyens 280, 300 de re´sultat 280 monetary 316, 323, 339, 343, 375, 391, 392, 436, 450, 463, 465, 467, 469, 473, 477 non-monetary 344, 395, 396, 448, 449 pecuniary 318, 319, 338–343, 347, 445, 450, 466–468, 479 to perform 300, 427, 430, 478 to renegotiate 315 Offer and acceptance 12, 13, 67, 73, 75, 110, 112, 113, 115, 133, 136, 140, 141 irrevocable 114–118, 140 proposal 110–113, 116, 117 rejection 107, 108, 118, 119, 121, 130, 132, 141, 308 revocation 13, 73–75, 111, 114–117, 124 to the public 75, 111–117 written 126 see also: Acceptance, Formation of contract Object 89, 91, 92, 97, 187, 188, 189, 191, 193, 195, 282, 288, 289, 292, 293, 296, 385, 398, 429, 438 Onerousness excessive 20, 54, 55, 311, 313, 314, 408, 475 of the performance 311 supervening 311–313 Option 115, 140 Order of performance 325–327, 403 to pay as form of payment 336 Ownership transfer of 182, 386, 397

INDEX 513

INDEX

P Partial avoidance 240, 241 Particular remedies for nonperformance 391–479 Payment currency of 328, 339, 340, 342, 465, 477 delay in 465–469 form of 336, 338, 391 of interest 217 of a non-existing debt 236, 434, 435 partial 344 place of 319, 339, 341, 466, 477 time of 319, 337, 340–346, 465, 479 see also: Agreed payment for nonperformance, Appropriation of performance, Currency, Price PECL – Principles of European Contract Law and mandatory rules of law 30, 31 and private international law 33, 42 see also: Application of PECL Penalties 296, 382, 387, 471 see also: Agreed payment for non performance, Damages, Penalty clause Penalty clause 388, 431, 455, 458, 471–476 cumulation with other remedies 472 power to reduce 219, 471, 474 Performance alternative 328, 330, 331 appropriation of 335, 343 assurance of 365, 373 by third person 333 continuous 428 costs of 19, 310, 355, 434 defective 62, 332, 334, 357–361, 395, 410, 441, 442 delayed 62, 320, 365, 379, 385, 410, 419, 451, 467 demand for 324, 364 early 320, 323, 324 entrusted to another 380 impossibility of 18, 59, 64, 66, 189, 348, 351, 358–360, 383–385, 401, 420, 444 in separate parts 412–414, 438 not accepted onerousness 311 overdue 415 order of 325–327, 403 place of 78–80, 132, 270, 317–320, 336

514 INDEX

quality of 298–300 right to refuse 327, 405 withhold 58, 238, 373, 375, 378, 379, 403 time of 38, 79, 80, 131, 298, 299, 320–322, 346, 408, 411, 417 see also: Non-performance, Remedies, Right to performance, Withholding of performance Period of grace 407 Positive interests 245, 430 Power of attorney 155, 156, 160–162 modification and termination of 175 revocation of 75 Power to reduce penalty clauses, see: Penalty clause Practices established between the parties 38–41, 96, 325 see also: Usages and practices Pre-contractual liability 50, 52, 64, 70, 142, 143, 190, 204, 222, 229, 244–249, 275 Preliminary negotiations, relevant for interpretation 257 see also: Interpretation Prescription (time limitation) 78, 231 Price current 167, 459–464, 478 damages measured by current 462–464 determination by a third person 290, 291, 292, 293, 295 determination of 287–289 lack of express determination of 288 reduction of 71, 357–264, 367, 385, 387, 425, 429, 432, 436–442 reference to a non-existent factor 290, 293, 296 right to reduce price 440, 441 stated price 110, 111, 113 unilateral determination by a party 290, 291, 294, 295, 296 Principal 83–85, 147–185, 227, 228 not nominated 151 unidentified 160, 161 see also: Authority of an agent Private international law 28, 33, 42 Privity of contract 305, 307 Professional

INDEX

professional supplier 23, 110–113, 273–276 professional’s written confirmation 67, 138–140 Promise binding without acceptance 47 gratuitous 88, 92–94 revocation of 112 to pay 108, 336 to the public 48, 74, 113 Proof, burden of 39, 43, 48, 49, 67, 68, 74, 87, 90, 92, 93, 103–108, 124, 128, 158, 159, 164, 167, 171, 173, 207, 241, 245, 252–257, 286, 295, 346, 351, 374, 388, 399, 401, 433, 445, 449, 452, 462, 463, 467, 469, 471–473, 475 Property immovable 74, 92, 182 movable 13, 182 not accepted 347, 352 real 15, 55, 398 recovery of 425, 432, 433, 436 transfer 15, 74, 436 Proportionality 56, 326, 327, 404, 405, 408 Proposal 67, 110–113, 116, 117, 139, 217, 296 Public order 31, 248 policy 17, 34, 89, 91, 97, 188, 215, 218, 248, 388 Publicity principle 153, 155 Purposes of the PECL 42 Q Quality of performance, see: Performance R Rate of exchange 337–341, 478 Ratification 161–164, 190 of agent’s acts by principal 171–173 Reasonable alternative 210, 212, 213, 459 foreseeability 366, 381, 382 length 301, 302, 304, 328, 376, 406, 416 period 310, 311, 315, 376, 396, 410 person 62, 70, 71, 94, 130, 211, 212, 251, 253, 275 price 287, 288, 290, 291 reliance 52, 53, 54, 95, 364

term 347, 348, 396 time 70, 71, 77, 80, 121, 126, 127, 130, 142, 160, 164, 166, 168, 174, 231, 301, 302, 320, 328, 343, 344, 362, 373, 377, 379, 383, 395, 396, 415, 416, 419, 420, 421, 441, 459 Reasonableness, standard of 38, 69–71, 403 see also: Good faith and fair dealing, Standard of reasonableness Receipt principle 72, 74, 76, 81, 230 Recovery for performance that cannot be returned 425, 432, 433, 437 of damages 446, 451, 473 of money paid 425, 432, 433, 436 of property 425, 432, 433, 436 right of 459 Reference to a non-existent factor 290, 293, 296 Rejection 56, 107, 108, 308, 323, 324, 432, 433, 436 contrary to good faith 51, 56, 323, 325, 378, 404, 422 of an offer, see: Offer Release 248, 335, 341, 349, 352, 384, 397 cost of 355, 356 right of the debtor to 355 with imputation 345, 346 Reliance interests 165, 207, 229, 234, 235 Remedies availability of remedies 249, 357, 366 clause excluding or limiting remedies 248, 387, 389 cumulation of 250, 362, 363, 425, 439 exclusion or restriction of 247 excused non-performance and remedies 358, 360, 410 for breach of duty of confidentiality 145 for fundamental non-performance 249, 250, 365–368 for non-payment or delay in payment of money 465 for non-performance 249, 250, 273, 337, 360, 361, 387, 391–479 not incompatible remedies 249, 362, 364 Renunciation (waiver) 47, 176 Representation categories of 150

INDEX 515

INDEX

Representation (continued) direct 148–163, 190, 228, 229 indirect 148–151, 163, 177–185 mandate with / without power of representation 84, 151, 182, 183 Rescission 55, 215–217, 231, 232, 235, 313 Res judicata 431 Restitution impossibility of 433, 434, 437 in kind 236, 238, 239, 434, 437 right to 427 see also: Recovery Retroactive effect 161, 162, 171, 172, 236, 412–41, 425–427, 431, 435, 438 Retrospective effect 162 Revocation of an offer 13, 73–75, 111, 114–117, 124 of power of attorney 75 Right to performance 305, 309, 357, 375, 391, 401 see also: Performance to reduce price 425, 440 to withhold performance 58, 238, 373, 375, 378, 379, 403 Risk contractual 311, 312, 314, 399 of extraordinary, unforeseeable events 313 of fundamental non performance of the contract 181, 317, 375, 381, 421–432 of impossibility of performance 16, 67, 189, 190, 360 of loss 72, 75 of the change of circumstances 310, 315 of the mistake 75, 191, 192 of uncertainty 146, 192 transfer of 351

Silence 12, 138, 162, 172, 201, 207, 228 not constituting acceptance 120–123 of the principal 171, 173 professional’s written confirmation, in receiving 138, 140 Simulation 283–286 Simultaneous withdrawal 73, 75 Solidarity 71, 75 duty of 60, 218 principle of 32, 55 Specific performance 18, 19, 66, 175, 189, 357, 359, 362, 363, 376, 382, 393–402, 416 Standard of reasonableness 69–71, 421 see also: Reasonableness, Good faith and fair dealing Standard terms 40, 98–101, 133, 137, 138, 220, 388 see also: General conditions Starting time 77, 79 Statements giving rise to contractual obligations 273 Stipulation 102–106, 254, 468 as to agreed payment binding 471–475 in favour of a third party 305–309 Strict compliance of the essence of the contract 19, 365, 406 Subagency 169, 170 see also: Agency, Authority of an agent Subagent 169, 170 see also: Agent, Authority of an agent Substitute transaction 243, 391, 396, 457–462 Substitution 169, 294, 297, 337, 368 Sufficient agreement, see: Agreement Supplementation of the PECL 42–45 Suspension of payment 373

S Scope of application of the PECL 43, 330, 424, 425 Security 323, 343–345, 374, 375, 404, 405, 421–423, 426 Set-off (compensation) 180, 182, 359, 450 see also: Currency, Notice Significant imbalance required for setting aside unfair contract terms 220, 221

T Terminating events 174–178 Termination after having served a notice fixing additional period for performance 377 after no adequate assurance of performance 373, 375 action in court not required 406, 407 action in court required 408 by notice 410, 415–419

516 INDEX

INDEX

by judicial action 410, 419 effects of 425 extrajudicial 428, 431 for anticipatory breach 423 for excessive onerousness 55 for non-performance 368, 379, 408, 427, 429, 437 for total supervening impossibility of the performance 409, 419 of the contract 19, 24, 54, 56, 176, 325, 327, 347, 357, 358, 367, 369, 371, 372, 377, 378, 406, 408, 409, 413, 417–419, 425, 432, 440, 441, 460, 461, 463, 464, 474 partial 413, 414, 429, 432, 438, 439 retroactive effect 413, 414, 425, 427, 430, 431, 435, 438 recovery for money paid 425, 432, 433, 436 recovery for performance that cannot be returned 425, 432, 433, 437 recovery of property 425, 432, 433, 436 property reduced in value 425, 432 right to terminate the contract 368, 373, 406, 410, 415, 416, 419 time of 421, 425, 463, 464 Terms of the contract 34, 97, 103, 112, 134, 136, 137, 139, 205, 220, 266, 433 determined by reference to a non-existent factor 290, 293, 296 implied 17, 51, 257, 278–282, 325, 360 not individually negotiated 23, 98, 99, 260 to be determined by a party 290 to be determined by a third person 290–297 to be determined by interpretation 265, 266, 269, 270 unfair not individually negotiated 99, 222, 226, 249 Third party contract with 153, 160, 165, 167, 431 stipulation in favour of 305, 309 Third person (s) defences 100, 135, 180, 182 determination of term by 269–297 fundamental non-performance to 181, 185

performance by 332–335 Threats 14, 15, 210–213, 226–229, 242–244, 247 see also: Consent, Invalidity and Avoidance Time computation of 77, 78, 80 limits and prescription 78, 231 for acceptance of an offer 114, 116, 117, 126, 127 for notice of avoidance 231 for ratification by the principal 172 of naming declaration 160, 161 see also: Notice, Silence of conclusion of the contract 123, 125, 217, 276, 289, 310, 317, 366, 451 of performance 38, 79, 80, 131, 298, 299, 320–322, 346, 408, 411, 417 Time limitation, see: Prescription, Time Tort(s) 52, 55, 65, 70, 84, 143, 204, 210, 212, 213, 228, 244–248, 319, 444, 446, 454, 455, 457, 478 see also: Liability Transfer of ownership 11, 89, 182, 384–386, 397 of property 15, 74, 436 of right(s) 89, 236, 384, 397 of risk 351 of thing received when performance not due 237, 435 U Undisclosed contracting party 151 Undue influence 51, 211 Unfair advantages 14, 214, 215, 217, 226–229, 232, 235, 242, 243, 247 see also: Avoidance, Excessive benefit and unfair advantage, Invalidity contractual terms 100, 101, 160, 220, 223, 263 see also: Avoidance, Invalidity terms not individually negotiated 23, 99, 220, 224, 247 Uniformity of application 42, 43 Unilateral determination of a term by a party 290–297 juridical act 75, 152

INDEX 517

INDEX

Unjust enrichment 145, 237, 239, 319, 413, 425, 431, 434–438, 454, 473 Unjustified enrichment 145, 239, 430, 435, 436, 437 Unlawful acts 63, 65, 145, 277 Unreasonable 17, 19, 23, 37–39, 69, 240, 241, 290–293, 318, 348, 370, 391, 395, 396, 456, 466 see also: Reasonable Usages and practices 38, 69, 71, 96, 137, 236, 279, 288 contractual 282 normative 281, 282, 318 V Validity of contracts 32, 37, 52, 105, 106, 143, 159, 163, 187–250 matters not covered 187 see also: Avoidance, Invalidity Venire contra factum proprium 53, 104

518 INDEX

W Warranty (ies) 196, 250, 340, 367–371 against defects in thing sold 358, 364 effects of 359, 360, 363, 440 Withdrawal 13, 14, 71–75, 114, 118, 144, 204, 303, 304 Withholding of performance 357, 359, 362, 365, 374, 378, 403, 422, 458, 468 anticipatory 403 anticipatory breach and 422 Writing merger clauses 102–104 not required for conclusion of contract 87 professional’s written confirmation 67, 137–139 written modification only 105, 106 Written modification only 105 Written statement 62–68