Italian Law Quickguides: The Essential Term

Under Italian law of contracts, the essential term (or deadline) determines the termination of the agreement if the obligation is not performed within the set term.

This Quickguide will cover the essential term’s framework as provided for in article 1457 of the Italian Civil Code.

Definition and framework

The essential term is a deadline explicitly set out by the parties, or inferred by the wording used in the contract, within which the obligation must be performed. Non-performance within the set deadline will inevitably determine the termination of the agreement (other rules apply to the Termination of Lease Agreements in Italy). Even though article 1457 of the Italian Civil Code refers only to the deadline within which the obligation must be performed, party autonomy usually distinguishes between an initial and a final essential term. The first type of term refers to the deadline set for the performance to start, whereas the final essential term refers to the deadline within which the obligation must be performed. If the contracting parties do not provide for a deadline, reference should be made to the deadline generally set for that specific type of agreement.

Essential term requirements under Italian law

Parties should clearly state in the agreement that the contract will lose it economic value to the creditor if the obligation is not performed within the established deadline. Designating a deadline within which the obligation should be performed is therefore not considered sufficient for the application of the framework set out in article 1457 of the Italian Civil Code.

Additionally, it is necessary for the defaulting party to be at fault for the termination to occur after the term has expired. Termination will not occur if for example the defaulting party is able to prove that non-performance was due to force majeure.

Moreover, if the creditor’s assistance is required for the performance of the obligation, the expiration of the essential term does not lead to the termination of the agreement if the creditor did not provide the necessary support.

Exercising the termination rights

The essential term operates differently from the formal notice of default and the express termination clause. In the last two instances the termination of the agreement occurs immediately after the breach of contract, whereas with the essential term the termination occurs 3 days after the breach has occurred. The non-defaulting party can therefore accept performance even though the term has expired, albeit the communication must occur within 3 days.

Another difference between the express termination clause and the essential term is that in the first case the non-defaulting party should take action and notifying the debtor of its intention to terminate the agreement. With regard to the essential term on the other hand the non-defaulting party should not take any action for the termination to occur.

The creditor can also waive its right to terminate the contract, but this must be communicated to the debtor within 3 days otherwise the agreement will be considered as terminated. The communication does not need to be in a specific form, although it is advisable for it to be done in writing.