Negotiating Corporate and
Commercial Contracts in Europe
A comparative view into typical
Clauses in Corporate and
Commercial contracts in a number
of European Jurisdictions.
Ariel Nachman
(ariel.nachman@simmons-simmons.com)
October 14, 2013
© Simmons & Simmons LLP 2013. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Formation of Contracts.
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Formation of Contracts under Civil Law.
Germany

Freedom of contract (i.e. no numerus clausus of determined contract types).

Requirements for a contract under German law, according to sec. 145 et seq.
German Civil Code (i.e. Bürgerliches Gesetzbuch, as known as BGB):
– (1) One party makes an offer (Angebot); and
– (2) another party accepts this offer (Annahme).

For a contract to be enforceable the parties need to agree on its essential content
(essentialia negotii): (i) parties; (ii) subject; (iii) place of performance; and (iv) any
other rights and obligations.

There is no need for an actual “bargain” (i.e. consideration).

Specific forms are required for certain types of contracts (i.e. notarial form for
donations and real estate contracts). However, the form is not part of the essential
content of a contract. Therefore, upon certain circumstances, if not correct, it can
be cured.
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Formation of Contracts under Civil Law.
Italy
Freedom of contract (i.e. no numerus clausus of determined contract types).
The standard way for entering into a contract is through a contractual offer (made by
one party) and the acceptance of such contractual offer (by the other party) (article 1326
of the Italian Civil Code).
Under Italian law (article 1325 of the Italian Civil Code), a contract to be enforceable
requires: (i) the agreement between the parties; (ii) the so called causa (i.e. the essence
of the contract); (iii) the object; and (iv) to the extent it is requested for specific
contracts, a specific form (i.e. written and/or notarial form – the requirement of the
written form mainly regards contracts related to real estate).
The object of a contract are the obligations thereto. It must be: possible, legal,
determined or determinable (article 1346 of the Italian Civil Code).
The requirement of the causa correspond to the essence of the contract and need to
be legal (i.e. it must not violate mandatory provisions). There is no need for an actual
“bargain” (i.e. consideration).
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Formation of Contracts under Common Law.
England
 Freedom of contract (i.e. no numerus clausus of determined contract types).
Under English law voluntary promises cannot be enforced: for a contract to be entered
into there is always the need for: (i) an offer made by one party and accepted by
another one; (ii) consideration; and (iii) the intent to create a legal relation.
 A contract to be valid need to contain a “bargain”: each party must do something for
the other (i.e. consideration). Court will not assess whether the consideration is fair (i.e.
it can be nominal).
 There is no need for a consideration for something that has been done in the past
(i.e. past consideration) or consideration where one party is already legally obliged to
act (i.e. by statutory law).
 Instead, a promise contained in a deed is enforceable, even without consideration.
However, deeds require special formalities (i.e. written form and witnesses).
 In practice, lack of consideration is rarely an issue.
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Most Common Clauses.
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Most Common Clauses: Conditions precedent.
English Law
German Law
Italian Law
■ Parties can agree on one or
several
condition(s)
precedent for a contract
(there
could
be
also
conditions subsequent).
■ Parties can agree on one
or several condition(s)
precedent for a contract
(there could be also
conditions subsequent).
■ Parties can agree on one or several
condition(s) precedent for a contract
(there could be also conditions
subsequent) (article 1353 of the
Italian Civil Code).
■ In order for such condition(s)
to be valid, said event shall
be future and uncertain.
■ In
order
for
such
condition(s) to be valid,
said event shall be future
and uncertain.
■ In order for such condition(s) to be
valid, said event shall be future and
uncertain and shall be in accordance
with any applicable mandatory
provisions and the public order and
morality principles.
■ It can depend solely on one
party’s
will
(but
such
condition shall be reasonably
interpreted and in practice is
usually avoided).
■ There are no constraints
upon these conditions apart
from that they have to be
sufficiently clear to know
when they have been met.
■ Such event cannot depend
exclusively on one party’s
will
(i.e.
condition(s)
precedent
must
be
objective).
■ Wording of the condition
should be clear – avoid
uncertainty
about
the
occurrence
of
the
condition.
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■ Such
event
cannot
depend
exclusively on one party’s will (i.e.
condition(s) precedent must be
objective) (article 1355 of the Italian
Civil Code).
■ The wording shall be clear in order
to avoid uncertainty.
Most Common Clauses: Representations and Warranties.
English Law
German Law
Italian Law
■ The are no representations
and warranties by default
(only exception: consumer
contracts).
■ By default apply general
representations
and
warranties depending on
the type of contract (i.e.
sale contract: warranty for
clean ownership).
■ By default apply general
representations and warranties
depending on the type of
contract (i.e. sale contract:
warranty for clean ownership).
■ Parties can insert specific
representations
and
warranties, respectively, as
statements of fact that induce
the other party to enter into
the contract or in order to
warrant that a certain fact or
situation is true.
■ Representations
and
warranties are often linked to
indemnities.
■ Parties can agree on
explicit
warranties
(Selbständiges
Garantieversprechen) in
addition or instead of the
warranty regulations set
out by law.
■ Representations
and
warranties
are
often
linked to indemnities.
■ In addition or instead the
general representations and
warranties that apply by default
(as far as they can be
excluded), parties can insert:
specific representations and
warranties, respectively, as
statements of fact that induce
the other party to enter into the
contract or in order to warrant
that a certain fact or situation is
true.
■ Representations and warranties
are often linked to indemnities.
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Most Common Clauses: Indemnity.
English Law
German Law
Italian Law
■ General rule: if one party
violates the contract, it must
indemnify the other party for
any
damages
arising
therefrom (see general breach
of contract provisions).
■ General rule: if one party
violates the contract, it must
indemnify the other party for any
damages arising therefrom (see
general breach of contract
provisions).
■ General rule: if one party
violates the contract, it must
indemnify the other party for
any damages arising therefrom
(see general breach of contract
provisions).
■ Parties can insert clauses that
state a party has to indemnify
the other should some event
occur or some provision
(warranty or representation)
transpire to be untrue.
■ Parties can insert clauses that
state a party has to indemnify
the other should some event
occur
or
some
provision
(warranty or representation)
transpire
to
be
untrue
(flexibility).
■ Parties can insert clauses that
state a party has to indemnify
the other should some event
occur or some provision
(warranty or representation)
transpire
to
be
untrue
(flexibility).
■ Purposes of indemnities are to
derogate from the general time
limitation rules and to limit
indemnifications
to
certain
scenarios and/or up to a certain
maximum amount (see limitation
of liability clause).
■ Purposes of indemnities are to
derogate from the general time
limitation rules and to limit
indemnifications
to
certain
scenarios and/or up to a certain
maximum
amount
(see
limitation of liability clause).
■ Purposes of indemnities are to
derogate from the general
time limitation rules and to
limit
indemnifications
to
certain scenarios and/or up to
a certain maximum amount
(see limitation of liability
clause).
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Most Common Clauses: Limitation of liability.
English Law
German Law
Italian Law
■ Starting point is freedom of
contract.
■ Starting point is freedom of
contract: parties can limit their
liability on a maximum amount of
liability. Can also be applied:
basket
concepts,
floor
and
minimum amounts.
■ Starting point is freedom of
contract: parties can agree on
a maximum amount up to
which they can be held liable.
Can also be applied: basket
concepts, floor and minimum
amounts.
■ Unfair Contract Terms Act
1977 (UCTA).
■ Fraud – liability cannot be
limited or excluded.
■ BUT: Currently possible to
exclude liability for deliberate
breach/wilful
misconduct
AstraZeneca UK Limited v
Albemarle
International
Corporation and Albemarle
Corporation [2011].
■ Not all kind of losses can be
excluded (i.e. personal injury,
death).
■ Limitation period – by default
6 years from accrual of cause
of action (12 years where a
deed is used), but parties can
agree to shorten terms
subject to UCTA.
■ Parties can also limit their liability
by exclusion of certain types of
damages (indirect damages, loss
of profits, etc.). However, it is not
possible to exclude: (i) damages
caused by wilful misconduct (sec.
276 para. 3 German Civil Code);
(ii) liability according to tort law;
and (iii) Product Liability Act and
Liability toward consumers.
■ Limitation period – by default 3
years from accrual of cause of
action. Parties can agree to
shorten terms.
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■ Limitation of liability is not
permitted upon the following:
(i) damages caused by gross
negligence, wilful misconduct
or in connection with public
order provisions (article 1229
of the Italian Civil Code); or (ii)
special case: Consumer Code.
■ Limitation period – by default
10 years from accrual of cause
of action. Parties can agree to
shorten terms.
Most Common Clauses: Penalty.
English Law
German Law
Italian Law
■ Penalties are unenforceable under
English law.
■ Penalties
must
be
explicitly agreed between
the parties.
■ Parties are entitled to insert
penalty clauses in a contract
(article 1382 of the Italian Civil
Code).
■ Instead, liquidated damages are
recoverable if they are a genuine
pre-estimate of an innocent party
in the event of the other party
breaching. They are agreed in the
contract by parties as being
payable
in
specified
circumstances, without needing to
prove actual loss.
■ Often relating to a specific breach
and
usually
they
operates
alongside with the other remedies.
■ Should liquidated damages be
excessively disproportioned they
could be reduced accordingly by
the judge.
■ Parties by drafting a
penalty
clause
in
connection
with
the
breach of a contract can
decide whether it shall
operate as a sole remedy
(i.e. excluding any other
damages).
■ Should a penalty clause
be
excessively
disproportioned
with
respect to the contract it
relates to, it could be
reduced accordingly by
the judge.
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■ Parties by drafting a penalty
clause in connection with the
breach of a contract can decide
whether it shall operate as a
sole remedy (i.e. excluding any
other damages).
■ Should a penalty clause be
excessively
disproportioned
with respect to the contract it
relates to, it could be reduced
accordingly by the judge, in
accordance with article 1384 of
the Italian Civil Code.
Most Common Clauses: Exclusive/Non Exclusive Remedies.
English Law
German Law
Italian Law
■ By default parties are
entitled with the general
breach of contract remedies:
(i)
termination
(specific
performance upon judicial
discretion); and (ii) damage
(see the contractual liability
section).
■ By default parties are entitled with
the general breach of contract
remedies:
(i)
specific
performance (termination only as
an extrema ratio); and (ii)
damage (see the contractual
liability section).
■ By default parties are entitled
with the general breach of
contract remedies: (i) specific
performance or termination; and
(ii) damage (see the contractual
liability section).
■ Parties can add to a
contract:
(i)
specific
representations
and
warranties;
(ii)
specific
indemnities;
and
(iii)
liquidated damages.
■ Even if possible, rarely they
are applied as a sole
remedy (they are interpreted
in accordance with the
reasonability principle).
■ Parties can add to a contract: (i)
specific
representations
and
warranties;
(ii)
specific
indemnities; and (iii) specific
penalties.
■ With respect to the by default
provisions, such remedies can be
either exclusive or non exclusive.
■ Only limitation: wilful misconduct
and gross negligence.
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■ Parties can add to a contract: (i)
specific representations and
warranties;
(ii)
specific
indemnities; and (iii) specific
penalties.
■ With respect to the by default
provisions, such remedies can
be either exclusive or non
exclusive.
■ Only limitation: wilful misconduct
and gross negligence (article
1299 of the Italian Civil Code).
Most Common Clauses: Material Adverse Effect/Hardship.
English Law
German Law
Italian Law
■ By default there is no material
adverse effect/hardship clause.
■ By default in case the
obligations under a contract
become excessively onerous
(Störung
der
Geschäftsgrundlage),
the
parties
may
adjust
of
terminate the agreement
(sec. 313 German Civil
Code).
■ By default one party can
early terminate a contract in
case its obligations become
excessively onerous (article
1467 of the Italian Civil
Code).
■ English law allows for “material
adverse
effect”
clauses
governing
circumstances
under which the contractual
obligations need not to be
complied
with
because
became excessively onerous .
■ The scope of material adverse
effect clause can be as broad
or as narrow as the parties
wish and should be stated in
the contract.
■ Parties could also insert a
proper “hardship” clause.
■ Parties can define material
preconditions
and
consequences, in case they
do
not
happen,
so
broadening or narrowing the
by default provisions.
■ Parties could also insert a
proper “hardship” clause.
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■ Parties are entitled to insert
in a contract a “material
adverse effect” clause, which
allows to determine and
specifically regulates the
events
that
shall
be
interpreted as excessively
onerous.
■ Parties could also insert a
proper “hardship” clause.
Most Common Clauses: Force majeure.
English Law
German Law
Italian Law
■ There are no by default
provisions concerning force
majeure.
■ By default if satisfaction of
a contractual obligation is
impossible, the respective
party is not bound to
comply
(Unmöglichkeit)
(sec. 275 German Civil
Code).
■ By
default,
should
the
performance
of
certain
obligations become impossible,
the obliged party is entitled with
a termination right.
■ Parties to a contract can insert
a “force majeure” clause
allowing for the contract to be
terminated or suspended upon
an event beyond the parties’ ■ Parties can broad or
control.
narrow their scope (but
they cannot exclude them
■ “Force Majeure” is not a
completely).
defined concept in English law
so needs to be defined by the ■ In addition, parties can
contract.
define scenarios which
shall be considered as
“force majeure” and can
agree on consequences for
that (termination right,
etc.).
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■ Parties can broad or narrow their
scope.
■ Parties are entitled to expressly
insert a definition of “Force
Majeure“ in the contract, in order
to better regulate the events
upon which a contract cannot be
performed (i.e. earthquakes,
wars, floods, national strikes
etc.).
Most Common Clauses: Term.
English Law
German Law
Italian Law
■ English law allows for any
term to be given to a
contract.
■ The parties could decide whether
to apply a fixed term or an
unlimited term to a contract. If the
term is not specified, a contract
runs until performance of any
obligations contained thereto is
made (can be unlimited, if ongoing
performance is agreed).
■ The parties could decide
whether to apply a fixed term or
an unlimited term to a contract.
If the term is not specified, a
contract runs until performance
of any obligations contained
thereto is made (can be
unlimited,
if
ongoing
performance is agreed).
■ The term can either be fixed,
given a minimum period and
continue until terminated
thereafter or be unlimited.
■ In any event that a contract
has an unlimited term
(whether
explicitly
or
implicitly) each party shall be
entitled with a right of
withdrawal providing the
other party with a reasonable
prior notice.
■ The
reasonable
notice
depends on the essence of
the contract (i.e. between 3
to 6 months).
■ In case a contract runs without a
fixed
term
(Dauerschuldverhältnis),
each
party has the right to terminate in
order to prevent the parties from
being bound for an unforeseeable
period of time providing the other
party with a reasonable prior
notice.
■ The reasonable notice depends
on the essence of the contract
(i.e. between 3 to 6 months).
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■ In any event that a contract has
an unlimited term (whether
explicitly or implicitly) each
party shall be entitled with a
right of withdrawal providing the
other party with a reasonable
prior notice.
■ The reasonable notice depends
on the essence of the contract
(i.e. between 3 to 6 months).
Most Common Clauses: Assignment.
English Law
German Law
Italian Law
■ The default position is that a
party to a contract can only
assign the benefit of the
contract
and
not
the
obligations
without
the
consent of the continuing
party. Such assignment must
be in writing and notice given
to the other party according to
s.136 LPA 1925 in order to
avoid any confusions of the
continuing party.
■ The default position is that
a party to a contract can
only assign the benefit of
the contract and not the
obligations without the
consent of the continuing
party. In such case the
assignment need to be
notified to the assigned
party.
■ The default position is that a
party to a contract can only
assign the benefit of the contract
and not the obligations without
the consent of the continuing
party. In such case the
assignment need to be notified
to the assigned party.
■ The entire contract can be
assigned with the consent of
the continuing party (it is
called a novation as if a new
contract is formed between
the incoming and continuing
parties).
■ Such notice is only to avoid
any confusions by the
continuing party.
■ Instead, the assignment of
the contract is not possible
without being explicitly
permitted by the other
party. There is no novation
or new contract.
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■ Such notice is only to avoid any
confusions by the continuing
party.
■ Instead, the assignment of the
contract is not possible without
being explicitly permitted by the
other party (article 1406 of the
Italian Civil Code). There is no
novation or new contract.
Most Common Clauses: Third Parties Rights.
English Law
German Law
■ General rule: the contract is
binding between the parties.
Exceptions instigated by
statute, which require some
party or class to be
specifically identified or the
Contracts (Rights of Third
Parties) Act 1999 applies.
■ General rule: the contract
binding between the parties.
■ However, most commercial
contracts specifically exclude
the Contract (Rights of Third
Parties) Act 1999, so third
parties do not usually have
rights.
■ The parties to the contract
can amend or revoke such
third party’s rights any time
providing a simple notice to
such third party.
is
■ Parties may agree on provisions
which are in favour of a third party
(Vertrag zugunsten Dritter, sec.
328 German Civil Code). Parties
may not agree on provisions which
are disadvantageous for a third
party (Vertrag zulasten Dritter).
■ Courts may interpret a contract in
a way that it contains rights for
third parties, even if such are not
explicitly mentioned (Vertrag mit
Schutzwirkung für Dritte).
■ The parties to the contract can
amend or revoke such third party’s
rights any time providing a simple
notice to such third party.
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Italian Law
■ General rule: the contract is
only binding between its parties
(article 1372 of the Italian Civil
Code). No third parties can
claim any rights with respect
thereto.
■ However, in accordance with
article 1411 of the Italian Civil
Code, a contract can be entered
into also in the interest of a third
party.
■ Such contract in favour of a
third party is valid and in full
force
immediately
upon
execution. However, such third
party can either refuse to it or
accept it. As long as it does not
accept it, the parties to the
contract can either amend or
revoke such third party’s rights.
Most Common Clauses: Set off.
English Law
German Law
Italian Law
■ By default if a contract is
silent there is an implied
right of set off between
claims that: (i) regard
money; and (ii) are due.
■ By default each party may set off
(Aufrechnung) two claims against
each other, unless this is
explicitly excluded (sec. 387 et
seq. German Civil Code). Claims
must be (i) of the same nature;
and (ii) due (fällig) in order to be
set off.
■ By default, the set off operates
automatically between claims
that: (i) regard money or
exchangeable goods; (ii) are
liquid (i.e. existing and certain);
and (iii) due (article 1243 of the
Italian Civil Code).
■ The parties are free to
include a set off clause
with regards to future
liabilities between the
parties, derogating one or
more of the by default
requirements (i) or (ii)
above. However, it is
essential the reciprocal
obligations exist.
■ The parties are also
entitled
to
expressly
prohibit any setting off.
■ Parties can insert a set off clause
derogating one or more of the by
default requirements (i) or (ii)
above in relation to certain
reciprocal
future
obligations
thereto. However, it is essential
the reciprocal obligations exist.
■ The parties are also entitled to
expressly prohibit any setting off.
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■ Parties can insert a set off
clause derogating one or more
of the by default requirements
(i), (ii) or (iii) above in relation to
certain
reciprocal
future
obligations thereto (article 1252
of the Italian Civil Code).
However, it is essential the
reciprocal obligations exist.
■ The parties are also entitled to
expressly prohibit any setting
off.
Most Common Clauses: Retention right.
English Law
German Law
Italian Law
■ By default retention right
apply as a guarantee for
the payment of certain
obligation in very specific
and limited cases (i.e.
mechanic over the car that
has just repaired). It
operates as a lien.
■ There is no by default
retention right.
■ By default retention right apply as
a guarantee for the payment of
certain obligations (i.e. article
2756 of the Italian Civil Code for
any repairs carried out over a
movable good). It operates as a
lien.
■ Parties can insert a
specific retention right
broadening or narrowing
the default definition.
■ Parties cannot agree that
the retaining party become
the owner of the retained
good in case its original
owner has not duly fulfilled
its obligation within a
certain period of time
■ Parties can insert a
specific retention right in a
broad or in a narrow way. It
operates as a lien.
■ Parties can agree that the
retaining party become the
owner of the retained good
in case its original owner
has not duly fulfilled its
obligation within a certain
period of time. However, as
a general principle, a
provision of a contract
cannot be excessively
disproportioned
(very
specific cases).
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■ Parties can insert a specific
retention right broadening or
narrowing
the
by
default
definition.
■ Parties cannot agree that the
retaining party become the owner
of the retained good in case its
original owner has not duly
fulfilled its obligation within a
certain period of time (article
1963 of the Italian Civil Code).
Most Common Clauses: Early termination/Withdrawal.
English Law
German Law
Italian Law
■ Parties are free to insert in a
contract an early termination
clause specifying that upon
the breach of specific
provisions of a contract, it
shall be deemed to be
immediately terminated. The
parties are also free to
determine whether or not
notice is required to be given
to the other party. Parties are
free to insert a cure period.
■ Parties are free to insert
in a contract an early
termination
clause
specifying that upon the
breach
of
specific
provisions of a contract,
it shall be deemed to be
immediately terminated.
Alternatively the parties
can insert a cure period.
■ Parties are free to insert in a contract
an early termination clause specifying
that upon the breach of specific
provisions of a contract, it shall be
deemed to be immediately terminated
(article 1456 of the Italian Civil Code).
Said early termination is effective
upon the relevant notification sent by
the party not in breach to the other
one. Alternatively the parties can
insert a cure period.
■ Parties are free to include in
a contract a clause allowing
for
early
withdrawal.
Normally this will be included
in the clause on term of
contract and include some
notice requirement.
■ Early termination is only
possible if termination
right is explicitly agreed
or if the contract is
concluded
for
an
indefinite period of time
(exception: bankruptcy).
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■ Parties can freely insert a withdrawal
clause in a contract (exception:
bankruptcy). In any event, should the
performance of the obligations of a
contract
already
started,
the
withdrawal shall be effective only for
the obligations not yet performed
(article 1374 of the Italian Civil Code).
Most Common Clauses: Confidentiality.
English Law
German Law
Italian Law
■ Parties are free to insert
confidentiality
clause
according to which the
parties (or one of them) are
obliged not to disclose any
of the provisions of a
contract to third parties.
■ Parties are free to insert
confidentiality
clause
according to which the
parties (or one of them) are
obliged not to disclose any of
the provisions of a contract
to third parties.
■ Parties are free to insert
confidentiality
clause
according to which the parties
(or one of them) are obliged
not to disclose any of the
provisions of a contract to
third parties.
■ Such
clauses
usually
contains few exceptions
(i.e. the possibility to
disclose certain confidential
information
upon
the
issuance of a court order).
■ Such
clauses
usually
contains few exceptions (i.e.
the possibility to disclose
certain
confidential
information
upon
the
issuance of a court order).
■ Such clauses usually contains
few exceptions (i.e. the
possibility to disclose certain
confidential information upon
the issuance of a court order).
■ Such clauses also usually
contains specific penalties
in connection with their
breach: Their breach could
be also a reason for early
termination.
■ Such clauses also usually
contains specific penalties in
connection with their breach:
Their breach could be also a
reason for early termination.
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■ Such clauses also usually
contains specific penalties in
connection with their breach:
Their breach could be also a
reason for early termination.
Most Common Clauses: Applicable law/Jurisdiction.
English Law
■ Regulation
apply.
EU
593/2008
■ Generally the parties to a
contract are free to choose the
relevant law to the contract.
■ Choice of jurisdiction is also
fairly free allowing parties to
negotiate the most favourable
forum for their position. The
choice of jurisdiction can be
either exclusive or nonexclusive (with the latter
allowing “forum shopping” at a
later date).
■ CISG does not apply.
German Law
Italian Law
■ Regulation EU 593/2008 apply.
■ Regulation EU 593/2008 apply.
■ As a principle the parties are
free to choose whatever
applicable law to a contract.
■ As a principle the parties are
free to choose whatever
applicable law to a contract.
■ Some mandatory provisions
cannot be excluded (tort law,
certain
employment
law
regulations etc.).
■ Some mandatory provisions
cannot be excluded (tort law,
certain
employment
law
regulations etc.).
■ The parties are also free to
decide which shall be the
competent
court
(whether
Italian or foreign).
■ The parties are also free to
decide which shall be the
competent court (whether Italian
or foreign).
■ CISG applies to contracts
under German law, if not
explicitly excluded (German law
more buyer friendly than CISG).
■ CISG applies to contracts under
Italian law, if not explicitly
excluded.
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Most Common Clauses: If & When.
English Law
German Law
Italian Law
■ “If and when” clauses
operate as conditions or
time limits for the contract
or for specific provisions
thereof.
■ Parties can agree on
conditions
(Bedingungen) or time
limits (Befristungen) for
the contract or for
specific
provisions
thereof.
■ Under Italian law the parties are
legitimated to insert in a sub-contract
an “if & when” clause: a clause which
sets that the payment in whole or in
part of the consideration thereto by
the sub-contracting party to the subcontractor is conditional upon the
receiving by the sub-contracting party
of the consideration as contractor
under the main contract.
■ There is nothing to prevent
them from operating.
■ The only constraint is that
they must be sufficiently
clear to establish when the
clause has been satisfied.
■ Wording
of
the
conditions/time limits
should be clear – avoid
uncertainty about the
occurrence
of
the
condition/time limit.
■ The applicability and effectiveness of
such clauses depends upon the
reason for which the payment of the
consideration under the main contract
has been not paid or delayed by the
contracting party to the contractor (i.e.
insolvency of the contracting party,
impossibility of the duly fulfilment of a
contract).
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Interpretation of Contracts.
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Interpretation of contracts under Civil Law.
Germany

Contracts are interpreted from an objective perspective (objektive
Vertragsauslegung) and according to the principle of good faith (Treu und Glauben),
according to sec. 157, sec. 242 German Civil Code.

In case an objective interpretation is not consistent with the understanding of both
parties, the subjective view of the parties is decisive (falsa demonstratio non nocet)
(i.e. subjective interpretation criteria prevail).

The understanding of the parties shall be proved with any kind of evidences (i.e.
behavior of the parties, pre-contractual and contractual exchange of e-mails and
letters).

In case a contract contains an invalid provision or an unintentional gap, this gap
must be filled with a provision that is as closely as possible to what the parties
would have agreed, taken into account their economic motivation in the contract.

The invalidity of one (sub-)clause does not harm the rest of the contract (as long as
the contract is not considered as Terms & Conditions) (geltungserhaltende
Reduktion).
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Interpretation of contracts under Civil Law.
Italy
In Italy the interpreter is guided in the interpretation of contracts by a series of articles
of the Italian Civil Code, particularly 1362 to 1371 stating subjective and objective
interpretation criteria: subjective interpretation criteria prevail.
Subjective interpretation criteria: the interpreter is expected to establish the intention
of the parties first of all on the basis of literal meaning of the contract. Should the literal
meaning be clear, the interpreter should verify its consistence with the intention of the
parties with any other external elements of the contract (i.e. parties’ behavior, precontractual and contractual exchange of e-mails and letters).
Objective interpretation criteria: such criteria should be applied only when the literal
meaning of the contract it is not clear and it is not possible to reconstruct the intention of
the parties by elements outside the contract. Therefore, the contract shall be interpreted
in accordance with the good faith principle.
If the language of the contract is clear enough, the interpreter cannot apply any other
interpretation criteria contained in the interpretation rules of the Italian Civil Code (i.e.
the purpose of the contract).
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Interpretation of contracts under Common Law.
England
In England the interpreter of a contract is expected to establish the mutual intention of
the parties on the basis of the document itself (i.e. objective interpretation criteria
prevail).
The wording of the provisions has to be understood according to its plain and literal
meaning; even if the interpreter will attempt to read the provisions in a manner that does
not lead to absurdity or inconsistency with the remaining provisions, it will not be
possible to construe the contract in a manner that runs against the language.
The importance of the literal interpretation is strengthened also by the interpretation
rule according to which reference in the contract to a certain case will exclude that the
contract applies to other corresponding cases that have not been expressly mentioned:
expressio unius est exclusio alterius.
The literal meaning prevail as far as meets the intention of the parties.
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Good Faith.
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Good faith under Civil Law.
Germany

The general principle of good faith (Treu und Glauben) applies to pre-contractual
scenarios and to contracts (sec. 242 German Civil Code).

There are several specific obligations that arise out of the general concept of good
faith under German law, prior to and during the lifetime of a contract, sec. 242
German Civil Code:
 Obligation not to act in contradiction to previous behaviour and not to make
contradicting statements (venire contra factum proprium) (both pre-contractual
and contractual).
 Obligation to respect the contract (pacta sunt servanda) (contractual).
 General obligation to respect other party’s interest and to mitigate damages (the
scope of this obligation is uncertain) (contractual).
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Good faith under Civil Law.
Italy
Italian law contains a general clause on good faith under article 1175 of the Italian
Civil Code.
Specific clauses on good faith in the phase of negotiations are set out under article
1337 of the Italian Civil Code, which states that the parties shall behave in good faith in
the phase of the negotiations and the formation of the contract.
 Article 1375 of the Italian Civil Code states that the parties shall perform in good faith
the obligations set out under a contract.
This results, among others, in duties of: (i) disclosure; (ii) cooperation; and (iii)
protection of the other party’s rights and goods.
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Good faith under Common Law.
England
By default there is no good faith principle (neither pre-contractual nor contractual).
However, a general principle of reasonableness apply.
There are some exceptions to these rules for certain types of contracts, such as
implied terms as set forth in specific statutory law (mainly for the protection of the
consumer) or such as insurance contracts, where the insured party is supposed to
disclose information to the insurance company.
 Definition of duty of good faith in, or in relation to the negotiation of, B2B contracts,
as: “playing fair, coming clean or putting one’s cards face upwards on the table.”
(Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433).
However, “good faith” has never be deemed applicable.
 Very recent developments: Yam Seng PTE Ltd v International Trade Corporation Ltd
[2013] EWHC 111 (QB). According to such case a duty to act in good faith can be
implied into a contract in the same way as any other term. As a consequence:
obligations not to undercut and knowingly provide false information implied into contract.
 However, such principles have not yet been dealt in other judgments.
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Pre-contractual liability.
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Pre-contractual obligations under Civil Law.
Germany

During contract negotiations prior to signing, the parties have only secondary
contractual obligations arising in connection with good faith principle.

Obligation to sign the contract?
 No, never. However, if negotiations are very close to signing already and
one party walks away without any reason, then there can be an obligation
to compensate the other party for damages incurred (very limited
definition of damages: only expenses occurred in connection with
negotiations. No loss of opportunity).
 Non-Binding LoI/MoU may include break-up fees.
 Written pre-contract (Vorvertrag) may require signing of the contract.

As previously seen, a contract can be considered formed and enforceable when
an offer (containing all the essentialia negotii) is made by one party and is
accepted by another one. The actual formation of a contract shall be determined
on a case by case basis.
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Pre-contractual obligations under Civil Law.
Italy

Parties shall carry out the negotiations for the entering into an agreement in good
faith (article 1337 of the Italian Civil Code).

The interruption of the negotiations might entail a pre-contractual liability only upon
the occurrence of the following two conditions:

In the meanwhile the counterpart has matured a reasonable expectation of
the entering into the contract.

The interruption of the negotiations is completely unjustified.

Under pre-contractual liability, the damages that can be compensated only cover
cost and expenses arising in connection with the negotiations and any loss of
opportunity.

As previously seen, a contract can be considered formed and enforceable when
an offer (containing all the essential content under article 1325 of the Italian Civil
Code) is made by one party and is accepted by another one. The actual formation
of a contract shall be determined on a case by case basis.
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Pre-contractual obligations under Common Law.
England

Pre-contractual liability mainly falls under tortious liability (i.e. only reliance losses)
and statutory liability (where applicable): mainly obligations aimed to avoid a
contract from entering into existence inadvertently (i.e. oral contracts) or
misrepresentations.

The approach of English law is primarily based on the assumption that each party
is to take care of its own interests, to acquire the information that it deems
necessary, and to provide for a contractual regulation that is adequate for the
purpose that that party has.

In case of unjustified breach of negotiations, by default no rights to compensation.
In fact, any costs and expenses arisen to that point can be compensate only if
specifically agreed in advance between the parties.

As previously seen, a contract can be considered formed and enforceable when an
offer (containing a specific consideration; and made with the intent to create a legal
relation) is made by one party and is accepted by another one. The actual
formation of a contract shall be determined on a case by case basis.
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Contractual liability.
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Remedies for breach of contract under Civil Law.
Germany

By
default
breach
of
primary
contractual
obligations
(vertragliche
Hauptleistungspflichten), (i.e. the material obligations of a contract, such as
performance of insufficient/wrong service or product, delay or non-delivery) (sec.
241 para. 1 German Civil Code):
 Specific performance: delivery of missing services or non-defective product OR
Replacement: new delivery of agreed service or product.
 Termination: only if repair and replacement are both impossible or unacceptable
(only under very rare circumstances) (i.e. right to termination is an extrema
ratio).
 In any case: compensation of damages (sec. 280 para. 1 German Civil Code).

Breach of secondary contractual obligations (vertragliche Nebenpflichten) (sec. 241
para. 2 German Civil Code), (i.e. not material obligations, such as information,
disclosure of relevant facts, etc.): only “Repair” of breach: Comply with obligations in
the future compensation of damages (sec. 280 para. 1 German Civil Code). In such
case there is no termination right.
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Remedies for breach of contract under Civil Law.
Italy

By default (article 1453 of the Italian Civil Code) in case of a breach of contract by
one party, the other party may decide either for:
 Specific performance (non need for the breach to be material): delivery of
missing services or non-defective product or replacement (new delivery of
agreed service or product).
 Termination of the contract (only if the breach is material with respect to the
global obligations of the contract and is not justified).

In any case: compensation of damages.

Once termination is demanded, the specific performance cannot be demanded any
more. However, once specific performance is demanded, termination can still be
demanded at a later stage.
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Remedies for breach of contract under Common Law.
England
By default, principal remedies for breach in the absence of further remedies expressly
agreed are:

Damages.

Termination, where:
 Repudiatory breach (breaching party treats contract as discharged).
 Fundamental breach (breach deprives the non-breaching party of substantially
all of the benefit that it would derive from the contract, if properly performed).

Specific performance (equitable remedy, not available “as of right” or where
damages alone are a sufficient remedy).
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Damages.
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Damages under Civil Law.
Germany (I)

By default, if the breach of a contract causes a damage, the breaching party must
compensate this damage (sec. 249, 251 German Civil Code).

The obligation to compensate the damage occurs irrespective of the legal type of
fault (sec. 276 para. 1 German Civil Code): (i) simple negligence (leichte
Fahrlässigkeit); (ii) gross negligence (grobe Fahrlässigkeit); and (iii) wilful
misconduct (Vorsatz).

The minimum conditions for demanding a compensation of damages are the
following: (i) breach of contract; (ii) causation: adequate link between breach and
damage necessary: the damage must occur as a logical consequence of the
breach (if the damage is caused by several different reasons, the liability will be
allocated pro rata between all responsible persons); and (iii) damage.

Burden of proof: (i) claimant must provide evidence of the damage and the breach,
but not of the link in-between; (ii) legal assumption that the damage was caused by
the breach (sec. 280 para. 1 sent. 2 German Civil Code); and (iii) the breaching
party must give evidence that the damage was not caused by the breach.
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Damages under Civil law.
Germany (II)


What needs to be compensated (i.e. categories developed by practice)?

Direct damages (direkte Schäden): costs for repair/replacement of the damaged
good/insufficient service itself; reduction of the market value of the damaged
good (merkantiler Minderwert) (including the hypothetical profits lost due to the
damages are one of the most important types of indirect damages).

Indirect damages (indirekte Schäden): all damages caused as a consequence of
the breach of the contract (Mangelfolgeschäden).

Immaterial damages (immaterielle Schäden): compensation for injuries of body,
health and freedom (Schmerzensgeld).

Wasted expenditures (frustrierte Aufwendungen): reasonable expenditures that
were made in expectation of the performance of the contract (compensation
according to sec. 284 German Civil Code). They shall be claimed separately from
damages.
Duty of mitigation: claimant cannot recover for losses he could have avoided by taking
reasonable steps.
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Damages under Civil law.
Italy

The minimum conditions for demanding a compensation of damages are the following:
(i) breach of contract; (ii) causation; and (iii) damage.

Burden of proof: (i) claimant must provide evidence of the damage and the breach,
but not of the link in-between; (ii) legal assumption that the damage was caused by
the breach; and (iii) the breaching party must give evidence that the damage was not
caused by the breach.

In particular the contractual damages are the following:
 Consequential damage (danno emergente): damages suffered as a direct effect of
the breach of contract by the other party.
 Loss of profit (lucro cessante): loss of profit in connection with the breach of
contract by the other party.

Duty of mitigation: claimant cannot recover for losses he could have avoided by taking
reasonable steps.
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Damages under Common Law.
England (I)

General purpose of damages for breach is to put non-breaching party in the position
it would have been in had the contract been properly performed – generally in the
form of gain (whether financial or the benefit of the performance of the
obligations/profit and/or anticipated saving) (expectation loss). In some
circumstances, possible to claim damages to put non-breaching party in position it
would have been in had there never been a contract (reliance loss/wasted
expenditure).

In particular the type of contractual damages are the following:
 Reliance losses: see Anglia Television v Reed [1971] 3 All ER 690 – actor
breach of contract led to a claim for reliance loss, rather than expectation loss.
 Expectation losses: see Bridge UK Com Ltd v Abbey Pynford plc [2007] EWHC
728 (TCC) – negligent installation of a printing press - both expectation and
reliance loss claimed.

Generally parties have to elect which of expectation or reliance loss they wish to
recover, to avoid double recovery of same loss. Reliance loss generally used where
it is difficult to quantify loss on an expectation basis but cannot be used to escape a
bad bargain.
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Damages under Common Law.
England (II)

Burden of proof: the non-breaching party must prove duty (contractual obligation),
breach and loss.

Concept of remoteness (see Hadley v Baxendale [1854]): can only be compensated
damages which are arising naturally according to the usual course of things (direct
loss) and (ii) special losses which may reasonably be supposed to have been in the
contemplation of both parties at the time they made the contract, as the probable
result of breach having knowledge of special circumstances (indirect or
consequential loss).

Losses falling outside of the above definition are too remote to be recoverable in
damages.

Duty of mitigation: claimant cannot recover for losses he could have avoided by
taking reasonable steps.

Reasonable expense incurred in taking reasonable steps can be recovered.
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Any questions?
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