Private and Public law
Invalidity and termination rights
1. Invalidity: is an agreement void and null or just
voidable?
2. Termination of agreements
3. Penalties and restoration of damages
Invalidity
Invalidity of agreements
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- VALIDITY: the agreement formally
complies with the general requirements
set out by the law (e.g., real estate
agreement must be incorporated in a
written document; the subject matter
must be lawful)
- ENFORCEABILITY: the agreement is
effective and may be actually enforced
and performed by the parties
Invalidity of agreements
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Invalidity:
- NULLITY: if an agreement is void and
null it may not be enforced. Nullity
arises by operation of law.
- VOIDABILITY: an agreement is voidable,
but is still enforceable as long as none
of the parties requests a Court to have
it voided (declared as null).
Invalidity of agreements
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Nullity
An agreement is null and void if:
- Conflict with mandatory provisions of law
- Breach of fundamental requirements of
agreements in general (e.g., agreement;
object; formal requirements, if any, etc.)
- The agreement was exclusively entered into in
the light of illicit reasons (which are common
to both parties)
- The subject matter of the agreement was not
clearly identified or identifiable
Invalidity of agreements
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A null agreement is not enforceable (so
ineffective). In case of uncertainty, either
party may apply for a declaration of the
Court (there is no statutory period)
Null agreement
Invalid and unenforceable
Invalidity of agreements
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Voidability:
- Either party was not in a position to
enter into the agreement (unable to
acquire rights and obligations)
- The agreement was based on a party’s
mistake, or his/her consent was
obtained through fraud or violence
Invalidity of agreements
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A voidable agreement is enforceable (so
effective), but may be declared void (by
virtue of a declaration of the Court): if so,
it is no longer effective
Voidable agreement
Invalid but enforceable
Invalidity of agreements
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An agreement might be:
- invalid and unenforceable (null
agreements)
- enforceable but invalid (voidable)
- …valid but unenforceable?
Invalidity of agreements
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Nullity:
- of the agreement as a whole
- of specific provisions only : what
happens to the agreement? In such
case: (A) the invalid clauses trigger
nullity of the entire agreement; (B) the
remaining clauses of the agreement
survive
Invalidity of agreements
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More specifically:
Nullity of specific provisions contained in the
agreement (art. 1419 c.c.). In such case :
(A) the invalid clauses trigger invalidity of the entire
agreement: the parties wouldn’t have signed the
agreement without those clauses
(A) the remaining clauses of the agreement survive:
the parties would have signed the agreement
anyway; or the invalid clauses are replaced by
other provisions by operation of law (e.g., 1815 c.c.
on usury)
Invalidity of agreements
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Typical clauses avoiding the whole agreement
from being declared void.
Example (A)
“If, at any time, any provision of this Agreement
is or becomes illegal, invalid or unenforceable in
any respect under any law of any jurisdiction,
neither the legality, validity or enforceability of
the remaining provisions nor the legality, validity
or enforceability of such provision in any other
respect or under the law of any other jurisdiction
will be affected or impaired in any way”.
Invalidity of agreements
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Example (B)
“If any law or regulation or any judgment, order or direction of any court, tribunal or
authority binding upon the Bank in the jurisdiction in which it is formed or has its principal
office or the office identified against its name in X or in which any action is required to be
performed by it for the purposes of this Agreement, in each case which comes into force or
becomes effective after the date of this Agreement, renders it unlawful or contrary to any
regulation for the Bank to contribute to Advances or to maintain or fund the Facilities, the
Bank shall promptly inform the Borrower and if it shall so be unlawful or contrary to any
regulation for the Bank to contribute to the Advances its Commitment shall be reduced to
zero. If it shall so be unlawful or contrary to any regulation for the Bank to maintain or fund
the Facilities the Bank shall give notice to the Borrower requiring the Borrower to prepay
the Total Outstandings on a future specified date not being earlier than the latest date
permitted by such law, regulation, judgment, order or direction and the Borrower shall
prepay the Total Outstandings in accordance with and subject to the terms of such notice
and the provisions of clause X.
Without prejudice to the reduction of the Commitment to zero or the obligation of the
Borrower to make such prepayment, the Borrower and the Bank shall negotiate for a period
not exceeding 30 days with a view to the Bank making available its Commitment and/or
maintaining the Total Outstandings in whole or part in a manner which is not unlawful or
contrary to any regulation”.
Termination rights
Termination rights
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An agreement may be early extinguished in
the following situations:
- Mutual agreement of the parties
- It is no longer possible to perform the
obligations set out in the agreement
- A material unbalance of the parties’ rights
has arisen after execution of the
agreement
- Termination (breach of contract)
Termination rights
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An agreement may be terminated (“risoluzione”):
-
A breach of contract must have taken place
A Court decision is required
The breach must have a substantial impact on the
parties’ rights (“inadempimento di non scarsa
importanza”)
“clausola risolutiva espressa”: termination may happen
even in case that the default has no real impact
Request for termination vs. request for the agreement
to be performed
Performance may be suspended in case the the
counterparty is in default
Termination rights
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Typical termination clause:
“The Parties hereby agree that upon the occurrence of any of the Events of
Default contemplated in Clauses XXX (Non payment and breach of purpose),
XXX (Breach of other obligations) other than the Events of Default
contemplated in Clause XXX, the Lender shall have the right to rescind the
Agreement (“risolvere il contratto”) pursuant to article 1453 of the Civil
Code. If an Event of Default listed in Clause XXX above is outstanding, the
Lender may send a notice to the Borrower indicating that rescission event
has occurred pursuant to article 1453 of the Civil Code and giving a term of
[15 days] for the Borrower to remedy the relevant Event of Default. If the
Borrower fails to remedy the Event of Default mentioned in the notice
contemplated in Clause XXX above after the [15 day] term provided therein
has expired, this Agreement shall automatically terminate with no
retroactive effect on the expiry date of such [15 day] term”.
Termination rights
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“Solve et repete” clause
A party may not refrain from performing his/her
obligations, even in case that the counterparty is
in default. No set-off rights or counterclaims may
be raised to delay performance of the agreement
Example: “Each payment to be made by the
Borrower under the Finance Documents will be
made in full, without any set-off or deduction”.
Termination rights
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“Solve et repete” clause - LIMITATIONS
- such clause may not prevent a party from
claiming nullity or voidability of the agreement;
- the Court may at any time decide to suspend
application of the “solve et repete” clause (e.g.,
in case that the counterclaims raised by the nondefaulting party appear to be well-grounded)
Penalties and restoration of damages
Penalties
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Penalty clause: the agreement sets out
the amount which will be payable by the
defaulting party
the non-defaulting party is not required to
provide evidence that a damage was
created, nor of the damage amount
Penalties
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Penalty clause – breach of contract
- Failure to perform contractual
obligations
- Delay in performing obligations
Penalties
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Penalty clause – limitations/drawbacks
- The non-defaulting party may not obtain
more than the amount specified in the
penalty clause
- The defaulting party may apply to Court,
to obtain a reduction of the penalty
amount, in case that the latter is
considered as ‘unbalanced’ or unfair, or if
the obligations at stake were performed
in part by the defaulting party
Penalties
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The deposit (‘caparra’)
Penalties
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The “deposit” may have several functions
1. to “confirm” either party’s obligations (the other party
would be entitled to retain the deposit amount in case
of default); but, if the defaulting party is the subject
receiving the deposit, he/she must return the double of
the deposited amount. The non-defaulting party may
request restoration of any further damages – “caparra
confirmatoria”
2. to allow either party to unilateraly withdraw from the
agreement (by letting the other party retain the
deposit) – “caparra penitenziale”