Italy

Pre contractual negotiations

Is there an implied duty of good faith to continue to negotiate?

Under the law of contracts (1) the parties involved in negotiations are required to act according to the good faith principles. Acting in good faith does not entail a duty to enter into an agreement (as the parties are always free to decide whether or not to conclude a deal) but obligates the parties to act in a clear way, avoiding any unnecessary loss of time or money. Any conduct in breach of such principle, may involve a responsibility for the damages caused to the other party involved in such negotiations.

For example, a conduct will not be in compliance with the good faith principle:

• if, without cause, a party breaks off negotiations that are in such an advanced state that they might give rise to a reasonable expectation by the other party that the deal will be concluded
• if a party during the negotiations fails to disclose the existence of matters which would legally constitute reasons for invalidity of the contract (2) once it is executed, and
• if a party, which intends to break off negotiations, does not communicate immediately such intention to the other party and drags on negotiations while looking for other business opportunities.

What are the consequences of termination of negotiations by one party unilaterally?

In case of termination of negotiations by one party unilaterally and such termination is not reasonably justifiable, the terminating party may be liable to the other party for damages arising from the breach of the good faith duty.

The amount of such damages will be calculated by reference to the interests of the non defaulting party, which has been damaged by entering into negotiations then interrupted without good faith. Such damages may include costs borne during the negotiations, loss of opportunity to negotiate with others and loss of time.

(1) (Art. 1337 Civil Code - 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.)

(2) (Art. 1338 Civil Code - Knowledge of reasons for invalidity - “A party who knows or should know the existence of a reason of invalidity of a contract and does not give notice to the other parties is bound to compensate for damages suffered by the latter in relying, without fault, on the validity of the contract” )

Confidentiality agreements

Are there implied confidentiality obligations?

Italian law does not provide for a general duty of confidentiality. However, it is standard practice in Italy to enter into a confidentiality agreement in order to regulate the relevant issue. Such agreement may have the form of a separate agreement or be included into a wider preliminary agreement.

If no confidentiality agreement has been entered into between the parties (in any form it may be), the undue use or revelation of information acquired during negotiations may be considered as a breach of the general duty of good faith, and consequently treated in terms of responsibility and restoration of damages.

Information will not be considered confidential if it is in the public domain at the date of the disclosure or falls into the public domain after this date.

What are the consequences of breach?

Any confidentiality agreement (or confidentiality clause anywhere included) usually provides for the consequences of the breach of the confidentiality duty, as a non performance of a contractual obligation. This consequences may entail, eg, that the non defaulting party is entitled to break off negotiations and to demand for the payment of a specific penalty. Where no consequences are contractually fixed or the amount of the penalty is not predetermined, Italian courts or an arbitration board (as the case may be) will address the issue.

If no specific confidentiality agreement has been entered into by the parties, any undue release or use of information acquired during negotiations may be considered as a breach of the general good faith principle. In such case, the responsible party may be liable for damages, which may include any costs borne by the non defaulting party, loss of opportunity to negotiate with others and loss of time.

Are specific terms formalities required?

A binding confidentiality agreement is normally made in writing so that the relevant terms are clearly set out and more easily enforceable.

Furthermore, under Italian law, perpetual obligations are not easily enforceable. Any confidentiality agreement should therefore have a reasonable duration (eg one to three years).

Exclusivity arrangements

Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties?

Italian law does not imply exclusivity in negotiations and therefore the parties seeking exclusivity would normally enter into an exclusivity agreement.

Are any specific terms/formalities required to make exclusivity arrangements enforceable?

In order for the exclusivity duty to be in place, the relevant obligations must be set out in express terms. Such kind of arrangement will generally be enforceable when certain requirements are met. For example, it must be: (i) aimed at protecting a reasonable interest, (ii)  of a reasonable duration and (iii) complying with the provisions applicable under the competition law.

A party that breaches an exclusivity agreement is liable to pay damages in accordance with the standard principle applicable to contractual obligations.

Heads of agreement

Are they legally binding?

A letter of intent may be non-binding if this is the intention of the parties or if this letter does not set out precise details of the terms and conditions of the transaction. However it is usually recommended to insert a specific clause& expressly stating that a letter of intent shall not be considered binding, should this be the intention of the parties.

Heads of agreements may be differently detailed and accurate, according to the scope of such documents and the respective interests of the parties. Heads of agreement intended to be legally binding are usually more accurate and comprehensive, and set out in details the agreements already reached between the parties.

If the parties intend to undertake to enter into a final definitive agreement, upon agreed terms and conditions, they may find it appropriate to enter into a “binding preliminary agreement”.

Are any specific terms/formalities required to make them legally binding?

For the sake of clarity and for an easier enforcement before a court, binding heads of agreements should be made in written form, as well as any further amendment to them agreed between the parties.

Under Italian law, in order for a binding preliminary agreement to be valid and enforceable (i) it should be executed in the same form as required for the definitive agreement, and (ii) it should set out all the essential terms of the definitive agreement (1).

When the above requirements in respect of forms and content are met, it constitutes a valid and binding contract by itself.

What are the consequences of breach?

Under Italian law, there is a distinction between the consequences arising from binding or non binding heads of agreements.

The non binding heads of agreements are subject to the same rules applicable to pre contractual negotiations. Therefore, in case of breach of one of the clauses of a non binding heads of agreement, the defaulting party may be liable to pay the damages occurred to the other party as consequence of his acting in breach of the duty of good faith.

Conversely, where the heads of agreement are binding, the defaulting party may be liable to pay damages in accordance with the standard principles applicable to the contractual obligations.

In case of breach of a binding preliminary agreement, the non defaulting party is entitled to:

• terminate the contract (but only where the non-performance by one of the parties has a serious effect on the interest of the other party) and be compensated for any damage suffered as a result of the non-performance of the defaulting party’s obligations,
• and in certain cases expressly provided by the law, obtain an order from the court for the performance of the obligations contemplated in the preliminary agreement.

Can heads of agreement have any tax implications/adverse consequences?

Non binding heads of agreement should not have any tax implications or adverse consequences. In case of binding heads of agreement any assessment regarding tax or adverse consequences would be dependant on the relevant contents.

(1)(Article 1351 of the Civil Code - Preliminary Agreement . “A preliminary agreement is void if it is not made in the form that the law requires for the definitive agreement”.)

Break fees

Are break fees usually payable?

In case of unjustified termination of negotiations, in addition to the damages due for breach of the good faith principle, break fees may also become payable, if so specifically agreed between the parties. The relevant agreement usually sets out both the amount of such fees and the conditions on which they may become payable.

In general, in case of negotiations for the acquisition of a company, break fees arrangement are agreed between the buyer and the seller, without any involvement of the target company.

What are the main legal issues to be considered e.g. enforceability?

Under Italian law, the amount agreed between the parties as break fees should be reasonable also taking into account their respective interests in having the transaction successfully completed.

Break fees of a significantly high amount could be considered as a penalty and as such could be reduced to a fair amount by the judge.

Case law and scholars hold that the ratio of the judicial power to decide such reduction 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.