Breach of Contract and Compensatory Damages Under Italian Law

A breach of contract can have a negative impact on the creditor that sometimes goes beyond not receiving what he/she is entitled to under the terms of the agreement. Therefore, bringing an action for damages may be necessary to restore the position the claimant would have been in if the contractual obligation was performed as intended.

This part two of the series dedicated on the remedies for breach of contract will focus on the compensatory damages under Italian law and will cover:

Contract damages under Italian law

According to the Italian Civil Code, damages for breach of contract should include both the actual loss the claimant has suffered and the loss of profit in so far as they are the immediate and direct consequence of the breach of contract (Article 1223 of the Italian Civil Code).

Regarding the actual loss for breach of contract, under Italian law the compensatory damages may refer to, for example:

the economic value of the obligation that was not performed by the debtor

if the article lacks the promised quality, the so called “cost of cure”

if the asset is temporary not usable, the costs generally payable in the open market to use that specific asset

for late payment of money, the interests paid to third parties (e.g., a bank) to make up for the late payment.

Concerning the loss of profit for breach of contract, Italian courts rigorously assess (on a balance of probabilities) whether the claimant would have received of any pecuniary benefits from the performance of the obligation. The compensatory damages for loss of profit may refer to, for example:

in case of late performance, not being able to use the asset (e.g., if the tenant does not leave the premises on time after the lease has been terminated, the landlord can request damages for not having been able to rent out the property)

loss of earnings the claimant would have made from the contract being performed as agreed

the damages to the claimant’s reputation.

It must be pointed out that if the breach of contract is due to late performance of the contractual obligation, the compensatory damages will be added to the main obligation. Conversely, if non-performance is total and definitive, the compensation is going to substitute the main obligation.

Damages for breach of payment obligations: claims in debt

In cases where the main contractual obligation consists in the payment of a sum of money, if the debt is paid late due to the debtor’s fault, the creditor can claim interests at the legal rate (in Italian: interessi moratori) on the amount due (Article 1224 (1) of the Italian Civil Code).

Interest starts to accrue from the day the debtor is put on notice, but there are some exceptions where interest starts to accrue automatically (e.g., the debtor declares in writing he/she is unwilling to perform the obligation).

These types of interests are due even if the creditor has not suffered any damages from the delay. Since no proof of loss is required, they are regarded as a form of compensation for the delay.

If the creditor proves to have suffered a loss that exceeds the interests at the legal rate, he/she will be entitled to the additional compensation (Article 1224 (2) of the Italian Civil Code).

Currency depreciation is a typical damage occurring to claims in debt. However, these damages are not automatically awarded by the judge, but they must be specifically claimed and proved by the creditor. Failure to prove the loss will determine the dismissal of the creditor’s claim.

Causation between loss and breach of contract

As a general rule, under Italian law if the party that wants to bring a claim to court bears the burden of proving the facts upon which the claim is based (Article 2697 (1) of the Italian Civil Code). Additionally, as mentioned above, to receive compensation for any suffered damage, both the actual loss and the loss of profit must be an immediate and direct consequence of the breach of contract.

This means that the claimant must provide proof not only of the loss, but also of the connection between the breach of contract by the defendant and the occurred losses. To this regard, Italian courts have stated that compensation will occur to the extent that the occurred damages are regarded as a normal, and therefore typical, effect of the defendant’s breach of contract.

When awarding the damages, the judge performs an evaluation formulated in hypothetical terms and based on the probable occurrence of the damages in relation to the assessment of a person of ordinary diligence.

The conduct of the claimant and duty to mitigate the damages under Italian law

Pursuant to Article 1227 (1) of the Italian Civil Code, if the suffered loss is partly due to the claimant’s contributory fault the compensation is reduced having regard to the claimant’s share in the responsibility for the damage. This limits the amount that will be awarded to the claimant and conversely the amount due by the defendant who will be exempted from bearing the loss not attributable to his or her conduct.

If it is not possible to determine the amount of contributory fault attributable to the claimant, this will be assumed as being divided in equal shares between claimant and defendant.

Moreover, the law specifies that there will be no compensation for those losses that the claimant could have prevented from being suffered by exercising reasonable care (Article 1227 (2) of the Italian Civil Code). The provision requires an active behaviour from the claimant who must limit or minimise the negative effects of the counterparty’s harmful conduct.

In accordance with the Italian case-law, the reasonable care the claimant is required to exercise to prevent further losses does not include those activities which are burdensome, exceptional or which involve considerable risks or major sacrifices. Put it another way, the claimant is not required to act differently from how a reasonable and prudent man would.