Учебный год 22-23 / Alpa_Italian_Private_Law_University_of_Texas

222 Transactions and Contracts

be deposited in the borrower’s current account. For practical reasons, case law adopts the latter view.

In commercial and banking practice, there are contracts that closely resemble loans, but cannot be so described, for the important reason that if the delivery is not actual the contract is not concluded. This gives rise to uncertainty and many contractual disputes in the courts.

If one party undertakes to provide capital repeatedly, for example, to finance the construction of buildings or installations, and the other party undertakes to pay interest, and possibly divide the profits, this is not a loan, but a finance contract.

The purpose loan is quite widely used. It is a kind of financing that banks extend to businesses in economic difficulties, or in the process of modernisation, or just starting up.

7.18.4. Preliminary contract

A preliminary contract is one in which the parties undertake to conclude a future contract. It is called ‘preliminary’ because it leads to a ‘definitive’ contract. It should not be misconstrued from this as only ‘half a contract’ akin to negotiations, or as one in which only certain points are agreed, leaving the rest to be determined in the definitive contract – it is different from the memorandum described above. It is a fully fledged contract; only obligations arise from it. The duty undertaken by the parties is that of concluding another contract with the same subject matter. The code is concerned with the preliminary contract only to the extent of providing that it must be concluded in the same form as the definitive contract (Art 1351 civil code).

In practice the preliminary contract is in wide currency. It is used when one party does not have immediate access to the funds necessary to conclude the definitive contract, but does not want to ‘let the deal slip’, or when he wants to make checks that will take time to carry out.

The preliminary contract can also be unilateral, that is, imposing obligations on only one party. This is to be distinguished, however, from an option contract (Art 1331 civil code), because the latter operates automatically whereas a preliminary contract requires a new manifestation of will (namely, the definitive contract).

If one of the parties does not in fact intend to conclude the definitive contract, the aggrieved party can seek enforcement of the duty to conclude one (Art 2932 civil code). The court will be asked to make an order of specific performance which produces the same effects as the missing contract. For example, if A is under a duty arising from the preliminary contract to sell his house to B but has since changed his mind and refused to conclude a definitive contract, B can seek specific performance to obtain transfer of the house. It is for this reason that

the preliminary contract must be in the same form as the definitive contract; otherwise the effect of transfer cannot be produced by the court order. It must also contain all the essential elements of the definitive contract, as the judge cannot use his discretion to resolve aspects of the subject matter that have not been resolved by the parties.

The right of action is dependent on the claimant having himself offered to conclude the contract he seeks to impose on the other party. Such offer can consist of a simple letter in which the offeror invites the offeree to present himself before a notary to conclude the definitive contract. No precautionary notice of delay is required and the offer can be made in court itself. Specific performance cannot be obtained against the public administration, because an ordinary judge cannot force the public administration to suffer the effects of a contract that it, in the exercise of its discretionary powers, did not wish to conclude.

7.19. Effectiveness of the contract

7.19.1. Effects of the contract

A contract has the force of law between the parties. This means that once the contract has been concluded the parties have imposed rules on themselves that must be respected (Art 1372(1) civil code).

The contract produces effects only as between the parties, a rule that tends to be expressed in the form of a principle, the principle of privity of contract. The exact meaning of this principle must, however, be understood: the law does not mean that strangers to the contract cannot in any way be interested parties in the activities arising from a contract.

For example, if A and B conclude a cartel agreement, it will suit them because they will be able to sell their products at the same prices in different territories. It will not, however, benefit their competitor, C who will be hampered in competing with them and so suffer a reduction in demand for his products.

Thus the agreement between A and B is valid only as between them, but it has an effect also on C’s profits.

So the rule means that third parties cannot be bound by an agreement concluded between two other parties. Nor can they dispose of property or legal relations belonging to third parties. The rule allows the contract to produce effects on others (legal effects, that is, and not purely economic effects as in the example) only when the law so provides (Art 1372(2) civil code).

The law allows the parties to extend the remit of the contract to third parties in certain situations.

Among the most significant exceptions are the contract in favour of third parties, the promise of a third person’s act, and prohibition of sale.

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7.19.2. Repudiation

The parties are usually free to establish which of them may, and in which ways, repudiate, or ‘withdraw’ from the contract, thus no longer being bound in any way. This is known as unilateral repudiation (Art 1373 civil code).

The right to repudiate effectively creates a power for the benefit of the repudiator. He has repudiated of his own free will and the other party must cede to his will. The power to repudiate can be exercised until the moment that the execution of the contract begins (Art 1373(2) civil code). Sometimes the parties might agree that one of them may repudiate in return for a payment made to the other (a repudiation penalty) or a promise of payment (a repudiation fine). In such cases the penalty is agreed by the parties as a ‘payment for withdrawal’; the repudiator forfeits the sum or has to refund double what he has received (Art 1386 civil code).

The repudiation penalty must be distinguished from an earnest and from a penalty clause.

The effects produced by the contract between the parties are not only those intended. There are also effects resulting from interpretation, from supplementation, from substitution and from partial nullity of the contract.

The parties may suspend the effects of the contract using a condition precedent, or may cancel them altogether with a condition subsequent. Sometimes effects are suspended by operation of law, such as in future sales, where the property can only be transferred once the subject matter has come into existence (Art 1472 civil code).

7.19.3. Prohibition on alienation

Covenants by which the parties limit their right to alienate a thing are quite common in commercial practice, where ‘exclusive zones’ are often created. Business A sells ice creams of type X. It makes an agreement with its retailers that they will, in return for payment, sell exclusively this brand of ice cream and not any produced by enterprise B. Or business A might require distributor B to sell only through retailers, and not direct to the public.

Covenants prohibiting alienation were once very common among noble families, and other social strata in which a need to maintain the family heritage intact led the father to ban the sale of certain property. In this way the prohibition of alienation came close to resulting in a family trust.

There are cases in which prohibiting alienation does not arise from agreement but by operation of law. For example, assignees of rent-controlled dwellings cannot resell them until a specified time has elapsed.

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for sale at a very affordable price, so he buys it, reserving the right later (when he has found a client) to name the person who will be the effective purchaser. This is not a simple ‘reservation’, but a genuine purchase made for the person to be named. This avoids a double transfer from the vendor to A and then from A to the client.

The purchase cannot remain uncertain, however. Within three days (or such other period as the parties agree) the person who is to become the purchaser must be named. The declaration is ineffective if not accompanied by the acceptance of the named person, or if a proxy has not been effected prior to the contract (Art 1402 civil code). When the naming declaration is validly made, the named person assumes the rights and obligations arising from the contract, with effect from the moment it was agreed (Art 1404 civil code).

If the naming declaration is not validly made within the time laid down by law or agreed by the parties, the contract is effective as between the original contracting parties (Art 1405 civil code). In the example, if the client refuses the flat, it will remain the property of A.

Contracts for persons to be named are usually categorised in indirect agency (purchase for the account of another).

7.19.6. Contract for the account of whom it may concern

Sometimes the person who is a party to the contract is not named, or remains unknown, because he or she will be determined subsequently. Over time, however, the prestation may become impossible; the promisor is then authorised to perform it for third parties for the account of the effective beneficiary or person entitled. For example, if A entrusts a consignment of bananas to B, and B is not able to identify the consignee C (because he has changed address, for example), he may sell the goods to the highest bidder for the account of C, transferring the selling price when C has finally been identified. Such contracts are for the account of whom it may concern.

7.19.7.Assignment of contract. Sub-contracting. Succession and contract

It may happen that one of the parties who have concluded a contract wishes to transfer the dealing to another. In this case, rather than repudiating the contract (supposing this can be done) and suggesting to the other party that he concludes an entirely new contract with the third party, he may himself substitute the third party. There is then a trilateral agreement, which gives rise to an assignment. The participants in the agreement are the assignor, the other party to the original contract and the third party, the assignee.

Assignment of a contract differs from assignment of a debt in two important respects. It involves the acquisition of rights and obligations, because the assignee takes the place of the assignor completely, whereas in assignment of a debt he takes over only a credit relation. Moreover, a third party participates in the agreement and his willingness is a sine qua non of the assignment of the contract, while in assignment of a debt the original debtor expresses no wish and has no say in the agreement.

Assignment is not always possible. The contract must be for reciprocal obligations which have not yet been carried out (Art 1406 civil code). A sale contract, for example, cannot be assigned by the purchaser if he has not yet paid the purchase price while the vendor has already delivered the goods. Obviously, gratuitous contracts, not containing reciprocal obligations, cannot be assigned.

Assignment of contract is by its nature releasing. Once the agreement is concluded, the assignor owes nothing more to the original counterparty, unless the latter declares that he does not release the assignor. In that case an action lies against the assignor for the assignee’s breach (Art 1408 civil code).

Assignment of contract is distinct from sub-contracting, by which one of the contracting parties agrees a separate contract with a third party, transferring all or part of the prestations contained in the original contract. Subletting is fairly common; the lessee lets out to other parties rooms that he has himself rented. A sub-contract depends on the original contract: termination, nullity or avoidance of the principal contract act on the sub-contract and deprive it of its effects.

Succession operates on a contract when one of the parties dies. The effects of the contract pass on to the heirs, the successors of the deceased. The civil code contains no general rules on the effects of succession on a contract, because a contract, as a relation creating rights and obligations between the parties, becomes another part of the assets and liabilities of the estate, like any of the deceased’s other sources of earnings, property and liabilities.

There are, however, special rules governing succession in particular kinds of contract, and regulating particular types of relation. For example, personal contracts, made intuitu personae, are not transferred by succession and do not therefore affect the successors, as they are based on certain personal qualities which might well not apply to any successor. An example is mandate (Art 1722 civil code). Proxy is not transferable either; it terminates on the death of either principal or agent. Offer and acceptance are ineffective if either of the parties dies before a contract has been concluded.

There are cases where succession is provided by law to facilitate the carrying on of business activities. A mandate having as its subject matter action concerning the exercise of a business is not extinguished if that

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business continues to operate, though the parties or the heirs may repudiate (Art 1722(4) civil code). The same applies to offer and acceptance on the part of the entrepreneur (Art 1330 civil code).

7.19.8. Added covenants

The regime governing contract, as well as that of other sectors such as succession, business contracts and relations between enterprises, provides various rules covering covenants made by the parties. It is not these rules, however, that usually regulate such covenants expressly, but rather custom and usage within commercial practice. When the law intervenes it does so to limit freedom of contract. A covenant, or added clause, is any agreement that the parties add to the contract or to any specific aspect of it, even after the contract has been concluded.

There are many types of covenant. The most common concern the content of the contract, but they may also relate to evidence or effects of the contract, etc. The code specifically covers covenants that are unlawful because they give an excessive advantage to one of the parties, or because they infringe a legal principle.

These are types of unlawful covenant.

(a)A covenant of forfeiture (Art 2744 civil code) which has been inserted into pledge and mortgage contracts, but is also unlawful if found in an antichresis contract (Art 1963 civil code), ‘a contract by which a debtor or third party undertakes to deliver immoveable property to the creditor to guarantee the debt, so that the creditor may take the income therefrom and apply it to the reduction of any interest due and then to the principal’. To sterilise the prohibition a clause is inserted by which the transfer of property attached in a creditor’s favour is effected by a cause other than failure to pay on the due date, such as occurs when the transfer arises from a freely concluded contract between the attachment creditor and debtor for a price determined upon the considered assessment of a third-party. The third-party assessment precludes any arbitrariness on the creditor’s part and does not prejudice other creditors.

(b)An agreement of inheritance is prohibited because it limits the freedom of the testator (Art 458 civil code: ‘any agreement to dispose of one’s succession is void; any act by which a person purports to dispose of or renounce rights which he may expect to acquire by a future succession is also void’).

(c)An exclusion agreement violates the principle of protection of members, partners and shareholders (Art 2265 civil code: ‘any agreement whereby one or more members, partners or shareholders is excluded from participating in profits or losses is void’).

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provide a form of legal pre-emption, designed to promote agricultural development and protect the party who actually cultivates the land, so helping to make farming land affordable (Art 47(2) Constitution).

The kind of pre-emption that concerns us here, however, comes about through agreement, freely arrived at by the parties. By a pre-emption agreement one party promises to give first refusal to the other when he decides to sell the property. The preference implies equal terms. If A makes a pre-emption agreement with B and later decides to sell his property he must give preference to B – on equal terms – over other prospective purchasers. The agreement gives rise to obligations only as between the parties: if A sells to C in breach of the agreement, he is liable to pay damages to B for non-performance, but C’s purchase remains valid and B cannot have the sale revoked. There is a duty to inform owed by A to B regarding his intention to sell.

Exoneration clauses are very frequent. They can be incorporated into individually negotiated contracts or in standard terms imposed by an enterprise. In the latter case, clauses which exonerate or limit liability or guarantee are considered oppressive (Art 1341(2) civil code) and are ineffective unless countersigned by the other party (in B2B von). Agreements which exonerate or limit liability are different from those limiting or restricting risk. The latter do not impinge on liability, but allocate risk in advance among the parties.

Except in consumer contracts, clauses which exonerate or limit liability are admissible without limit, except when they purport to nullify the legal process. The debtor cannot exempt himself from liability for fraud or gross negligence; if he could, he would be in a position of being able to act entirely according to will, amounting to ‘I’ll pay if I feel like it’. Any agreement with such an outcome is void. By the same token, exoneration clauses are void if they are contrary to public order.

Specific rules apply to the guarantee of proper functioning (Art 1512 civil code) which is widely used in practice, especially in sales of moveable goods, such as white goods, vehicles, etc. According to common opinion, guarantees of proper functioning are much more effective than the law recognises.

The guarantee of proper functioning is distinguished from ordinary guarantees by the more supple and clearly expressed way it works. The purchaser is not required to identify the defects in the goods; he merely needs to show that they do not work. The amount of time the purchaser has to report these defects is longer than with an ordinary guarantee, while the prescription period is shorter, as befits the nature of the guarantee, designed as it is to remedy a situation in which the goods are unusable. This guarantee does not operate only in cases of serious non-performance: a minor defect, so long as it impedes the use of the goods, is sufficient to invoke the vendor’s responsibility, but only to the