The liquidated damages clause (in Italian: clausola penale) is often used in Italian law contracts to predetermine the amount payable by the debtor for breach of contract.
This fourth part of the series dedicated on the remedies for breach of contract focuses on the liquidated damages clause under Italian law and will cover:
The objectives of the liquidated damages clause in Italian law
Under Italian law, the key objective of the liquidated damages clause is to strengthen the contractual relationship and to determine in advance the performance the innocent party will receive in the event of breach (Article 1382 (1) of the Italian Civil Code).
It is important to point out that although the Italian Civil Code doesn’t specify the subject of the liquidated damages clause (Article 1382 only refers to the performance), in practice, it usually consists of a sum of money.
The inclusion of a liquidated damages clause in an Italian law contract has two main benefits for the contracting parties as:
it limits the compensation to the agreed amount in case of breach of contract, and
it releases the creditor from proving the existence and amount of the loss suffered.
Even though the proof of the loss is not required, the claimant must still prove that the debtor is in breach of his performance. Indeed, the presence of a liquidated damages clause does not exempt the agreement from the general rules applicable to contractual obligations. For this reason, the defendant will not be held liable if he proves that:
after the contract was formed, performance became impossible for circumstances over which the defendant had no control, or,
non-performance was justified based on the claimant’s breach.
Liquidated damages clause for delay and total breach
The Italian law freedom of contract allows the parties to insert liquidated damages clauses not only in the case of total breach, but also for delay in performing the obligation. Parties are required to specify whether the contractual clause intends to cover the delay or total breach to prevent the clause from being considered null and void.
If the parties have specified the type of clause, the innocent party can claim damages for the delay or total breach even if the debtor was not put on notice. Indeed, liquidated damages are automatically due upon the actual occurrence of such events.
It must also be pointed out that Italian case law allows the simultaneous presence in the same contract of two different clauses, one covering total breach and the other delayed performance.
If the clause covers only the delay, the innocent party will, in addition to the liquidated damages for the delay, also be entitled to claim the loss of the main performance in case of total breach.
The liquidated damages clause is regarded under Italian law as an ancillary obligation with respect to the contract contains it. For this reason, if the debtor is released from performing the main obligation (for example, the creditor’s right to request performance is extinguished due to prescription), creditor will also lose the right to claim the liquidated damages.
Italian law liquidated damages clause and additional damages
The liquidated damages clause allows parties to determine in advance the amount of damages payable to the innocent party. To this regard, if such a clause is inserted in a contract the innocent party will not be able to claim any additional damages.
However, parties are permitted by Italian law to exercise their freedom of contract and provide for the compensation of any additional damages (Article 1382 (2) of the Italian Civil Code). If the contract contains this arrangement, the amount of the liquidated damages clause will be considered as an advance liquidation on the total loss. Though, to recover the additional damages the claimant must be able to prove the loss in its entirety.
Italian courts have also identified cases where additional damages may be recovered by the claimant even in the absence of a provision concerning additional damages. This might occur, for example, when the agreed liquidated damages are set at an amount so low as to result, in practice, in the exclusion of liability.
Moreover, the Italian law liquidated damages clause does not operate in cases where total breach or delay are a consequence of fraudulent behaviour or gross negligence. It follows that the innocent party can claim additional damages regardless of whether this was specified or not.
Excessive liquidated damages clause and reduction
Italian law provides for two cases where a court may reduce the amount of liquidated damages agreed by the parties:
if the main obligation was performed at least in part, or
if the amount indicated in the clause is excessive having regard to the creditor’s interest in the performance (Article 1384 of the Italian Civil Code).
This is considered to be a mandatory provision that prohibits contracting parties from waiving their rights in advance and is applicable to liquidated damages concerning both total breach and delay.
In line with the established case law, a specific request by the claimant is not necessary as the court can reduce liquidated damages of its own motion to balance the interests of both parties.
An example concerning the reduction of the liquidated damages clause is to be found in cases where the creditor claims damages for both delay and total breach. In this instance, the court may reduce the amount of damages to be awarded to the claimant if they are considered disproportionate, having regard to the interest the claimant had in the performance at the time the contract was concluded.
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