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**BUSINESS LAW** **PART I -- CONTRACTS** **Chapter I -- Contractual and Non-Contractual Agreements** 1. **Agreement and Contract** The Italian Civil Code provides precise definitions for \"agreement\" and \"contract,\" addressing previous ambiguities and misunderstandings. Historically, these terms were poorly defined and often confused, with overlapping characteristics that covered their distinct roles. An **agreement** is a general category reflecting a shared will between parties to achieve mutual objectives. It may or may not create legal obligations, depending on its legal context and the parties' intentions. By contrast, a **contract** is a specific type of agreement explicitly aimed, as regards the constitution, at establishing, regulating, or extinguishing legal property relationships. Article 1321 of the Civil Code defines contracts as agreements but emphasizes their specific legal binding nature and the coincidence of the two terms, whereby one, the agreement, is used to explain the other, the contract. Everything that **cannot** be attributed to a contract would fall within the scope of the agreement, provided that the agreement is the expression of common will of the parties. To avoid redundancy, the legislator conceptualized agreements as a broader genus, encompassing contracts as a specific species. Article 1325 recognizes the agreement as an essential element for a contract's validity (without which the contract is void/nullo), distinguishing their roles. And also, as one of the components of the contract which has its own specific function and task, and which therefore needs a precise definition with that of a contract. Historically, in Roman law, a contract was tied to obligations (contractus), rather than mutual consent (as for the agreement). Over time, particularly in Justinian law and then consolidated in intermediate law up to the time of codifications, **consent gained prominence** in defining legal agreements. Only to arrive, through an explicit manifestation of consent, at *free-form contracts, atypical contracts, and exchanges without agreement*. The transition from *contractus* to *pactum* or to *nudum* *pactum* introduced a focus on consent to be legally relevant, further legitimizing agreements in commercial practices. The common root for both contracts and agreements lie in the meeting of the parties' wills. Both are based on mutual consent, but their structure and purpose differ significantly. While agreements, as broad legal genus, express **aligned wills** aimed at shared goals (not necessarily create a binding obligations), contracts, as specific type, involve **divergent wills** reconciled through negotiation and mutual compromise to achieve a binding economic transaction. (in contractual agreement). In the contract of exchange, no single party's interests are fully satisfied; rather, their objectives are shaped considering the other\'s expectations, creating a contractual bond. This complexity necessitates a **pre-contractual negotiation phase** in which allows parties to discuss the various aspect of the transaction in progress, and to balance and align their respective rights and obligations before formalizing the contract. Despite their overlap, agreements and contracts maintain distinct characteristics. Specifically, a **gentlemen's agreement** cannot be equated with an agreement of a patrimonial (property-related) nature designed to create a legal relationship. This distinction clarifies that the term \"agreement,\" even if broadly defined, does not fall under the legal definition provided in **Article 1321 of the Italian Civil Code**, which pertains to contracts. According to Pietro Rescigno, the broader concept of \"agreement\" can only exist because of the indispensable patrimonial connotation of the contract. If there is no legal or economic nature to the bond created, or if the agreement merely reflects the parties' intent to achieve a common goal without establishing binding obligations, it falls outside the legal framework of contracts. In cases where relationships are based on custom, courtesy, or social norms there is no legal obligation created. The classification of such relationship as \"agreements\" or \"contracts\" is both unnecessary and misleading because they do not meet the criteria for legal enforceability. 2. **Convention and Pacts** The concepts of \"agreement\" and \"covenant\" are more ambiguous and harder to classify compared to \"agreement\" and \"contract.\" Historically, their meanings have overlapped, with conventions often equated with contracts and considered synonyms. In these cases, the concept of contract was interpreted in its broadest sense, overlapping significantly with the idea of a convention. From this perspective, a convention could not be easily distinguished from the broader concept of an agreement. However, it is evident that conventions and contracts must remain distinct, at least in their substantive nature. Like agreements, contracts are defined by specific content and legal obligations that conventions, by their nature, do not possess. Italian law makes this distinction apparent, as outlined in **Article 1321 of the Italian Civil Code**, which defines contracts in terms of creating legal property relationships. Conventions, on the other hand, do not always share this legal framework. Historical and legislative analysis reveals that expressions of shared intent aimed at achieving a common goal should not automatically be classified as contracts but fall into the category of agreements or conventions. For example, **gentlemen's agreements** represent an intention to collaborate without creating binding legal obligations. In such cases, the term \"agreement" is used precisely in the sense of agreement but not of contract. Referring to a gentlemen's agreement as a \"convention\" does not resolve the issue, as it still does not meet the criteria of a contractual relationship. If the parties' intent is to establish a legal relationship of a pecuniary nature, they likely do not intend to give their agreement a binding legal effect. In contrast, conventions and agreements can serve as frameworks for cooperation or shared intent without establishing a legally enforceable bond. The concept of \"covenant\" adds another layer of complexity. Historically rooted in Roman law, covenants served various purposes depending on the context and time undergoing development through the pre-Classical, Classical, and Post-Classical periods. Initially, covenants were distinct from contracts, as they did not create binding obligations. Instead, their primary function was to **paralyze** through *exceptions*, the **exercise of subjective** **rights** and *actiones,* temporarily or definitively*.* Covenants were relegated to a \"grey area\" because they only provided indirect legal protection. Their role was limited to defenses in court proceedings initiated by the other party, rather than directly conferring legal force. This distinction between covenants and contracts was consistently emphasized in Roman legal sources, where covenants, pacts, and conventions were treated as autonomous categories, each serving distinct purposes. The reason for the demarcation lies in that the covenant's protection was weaker than that of the contracts. Over time, covenants have evolved to take on a **general and adaptable character**, allowing them to be applied in a wide variety of circumstances. As a result, covenants can, on the one hand, be equated with conventions and agreements---while still preserving their distinct features---and, on the other hand, be used as tools to specify or adjust the terms of a contractual agreement. In this context, **agreements** function as a *genus*, legitimized by the principle *pacta sunt servanda* (\"agreements must be kept\"). Over the centuries, this principle has been reinforced through canonical doctrines and the **lex mercatorium**, solidifying the role of covenants as alternatives to contracts. Contracts, in contrast, are considered a *species* within agreements, used to create legally binding obligations. These obligations are enforceable through a range of efficient and effective legal remedies that ensure compliance. From another perspective, agreements and contracts share an emphasis on *consensus* and *conventio* as a mutual will of the parties to create obligations in the legal sphere. As natural law doctrine developed in the 17th century, it became evident that binding obligations could derive not only from contracts but also from agreements. Covenants have become instruments for creating **specific obligations within contracts**. They serve to modify or supplement the terms of existing agreements, such as in **shareholders' agreements**, where covenants clarify or adjust the parties' rights and responsibilities without forming entirely new contracts. The evolution of covenants reflects their unique destiny as legal instruments. Originating in a cultural and economic context where legal forms were used to establish certainty through strict formulas, procedures, and gestures, covenants have undergone a transformation. From their rigid beginnings, they have become a vital part of economic systems---first in mercantile economies and later in capitalist ones---characterized by flexibility and the absence of formalized constraints. Even when covenants lack binding legal force, the need for certainty of relationships and transparency of transactions has led to their incorporation into legislative frameworks, often mediated by case law. For instance, **shareholders\' agreements**, initially informal pacts based on honor, were contractualized by case law, legitimized in company law, and formalized to serve specific functions. Similarly, other types of covenants, such as **voting unions**, **block unions**, **concert unions**, and **consultation pacts**, have been formalized and \"contractualized\" as sophisticated tools that meet the operational needs of market participants. The primary purpose of such covenants is to promote **cooperation** and establish **legal relationships**, even when they do not directly create contractual obligations. Examples include, exclusivity agreements within distribution contracts, clauses like *pactum de non petendo* (limiting the ability to enforce remedies), and agreements designed to take effect upon death or to anticipate succession. While **gentlemen's agreements** can be considered a form of covenant, but they lack the technical binding legal effects that modern covenants typically invoke. While they rely on trust and honor, they do not establish enforceable legal obligations, setting them apart from the broader legal role of covenants. 3. ***De facto* Contractual Relations** By considering the gentlemen's agreement, particular attention should be paid to *de facto* contractual *relations*, a form of exercise of private autonomy where relationships, though resembling the content of a contract, are not based on an explicit manifestation of consent or a formal declaration of will between the parties. Instead, such relationships arise from **conduct** which is of **social importance**, and which, in the view of jurists, can be interpreted as a way of expressing consent of the parties to a contract. Setting aside two specific cases where this phenomenon is evident---namely, the *nullity* of a constitutive contract for a joint stock company and *work performed* under a null employment contract---the primary context in which **de facto contractual conduct** is relevant involves everyday interactions and economic transactions, bringing the legal spheres of individuals into contact. Under the initial framework of a **gentlemen's agreement**, where the parties explicitly exclude any intention to form a legal relationship and instead assess whether to later enter contractual obligations, many figures categorized as \"de facto contractual relations\" in legal doctrine and case law must be excluded. Such examples include mass contracts, courtesy relationships, and contracts formed by implied conduct **(*facta concluden*tia)**. These scenarios have historically been the foundation for this category but continue to create **uncertainty** regarding their legal classification. The formula (Gunter Haup) reflects the ideological climate of its time---an era that emphasized **free law over written law**. This approach allowed for more flexibility in manipulating the existing legal order. It focused on the use of **general principles** instead of strict textual interpretation, and supported the legalization of interests that could serve the convenience of an authoritarian state, such as Nazi Germany. This formula categorized different types of contacts: a. [Relationships established for negotiations], the exchange of courtesies, or the de facto exercise of a right after its term had expired b. [Non-formalized employment relationships] and [null companies] c. [Mass relationships ] d. [Unlawful acts] In the Italian Civil Code of 1942, \"de facto\" contractual relations were not formally recognized, as they were not subject to specific legal rules. Instead, **Article 1173** includes \"any other act or fact" capable of producing obligations that didn\'t fall under contracts or tort. This formula replaced the unstable concepts of \"quasi-contracts\" and \"quasi-delicts,\" serving as a container for all other sources. The phenomenon was studied based on the observation that everyday life generates numerous \"social contacts\" between individuals, which differ from traditional contracts. Unlike contracts, these relationships arise naturally through interaction without explicit or formal expression of intent. This understanding was influenced by the anti-individualist climate of the time. Although the phenomenon was redefined, it still holds significance, as it explains relationships that produce contractual legal effects but do not fit into typical or atypical contracts. However, it retains ambiguity, especially terminologically since it is described as a \"de facto contractual relationship\" despite lacking an actual contract. The key point is the result---the creation of a specific legal relationship. To resolve this ambiguity, the term \"fact\" should be interpreted positively, as the moment of encounter between the parties that gives rise to the obligation. The reference to a contractual relationship then means applying contract rules to regulate the bond formed between the parties. 1. ***De facto* Contractual Relation and Contract. Differences and Similarities** The boundary between the contract and the de facto contractual relation lies in their formation. In contracts, the parties explicitly declare their will, ensuring mutual alignment. In contrast, de facto relations arise from **specific circumstances**, creating obligations without the need for explicit consent or declarations of intent. First, these relationships rely on social contact, when actions generate **mutual reliance** and **cooperation** to achieve shared objectives. For instance, in **healthcare services**, the interaction between a doctor and a patient creates a contractual obligation even without a contract. The mere contact creates two obligations such as: - **Fairness**: to avoids behavior that could harm the legal interests of others - **Cooperation**: both parties must collaborate for the purpose to achieve the transaction desired Secondly, de facto contractual relations often originate from a party's **integration into a community organization,** regardless the validity or existence of the act. In cases like **de facto employment**, where work is performed under a void contract, or **de facto company**, where business is formed through void contract, legal obligations can still arise due to the ongoing conduct of the parties. Finally, another context is **mass-market transactions,** where obligations emerge from implied actions rather than explicit consent. In these situations, consumers accept offers through conduct, such as purchasing goods or using services, without formal agreements being established. This phenomenon, described by Natalino Irti as \"**exchanges without agreement**,\" highlights how sellers' offers and consumers' actions can create mutual obligations without direct negotiations. The key feature of de facto contractual relations is their ability to produce **legal effects from socially significant conduct**, even in the absence of traditional contractual formalities. **Fairness** and **cooperation** are central principles, ensuring that parties act in good faith and work together to achieve their intended outcomes. A **gentlemen's agreement** can be understood as a form of **social contact** that looks to the future and relies on cooperation. However, it cannot be classified as a **de facto contractual relation**. De facto contractual relations arise when one party **relies on the cooperation** of the other to achieve a mutual goal, creating a connection between their legal spheres. Unlike the general duty of **neminem laedere** (to harm no one), these relations impose a **positive obligation** to actively collaborate in fulfilling the other party's legitimate expectations. While cooperation is central to gentlemen's agreements, they lack the binding obligations that define de facto contractual relations. Firstly, the **gentlemen's agreements** are situated in the **pre-contractual stage**, where parties assess whether the conditions for a future business deal can be met. Secondly, these agreements often include an express clause excluding any binding legal effects. Therefore, the legal classification of de facto relations must not assume they derive directly from contracts. Instead, an **inductive method** should be used starting with the factual reality and the parties\' conduct, and then determine if a contractual bond arises. In this way, a **contract becomes the conclusion** of legal reasoning, rather than the starting point. This analysis raises questions about the legal system's structure, requiring a choice between an **open system** (flexible and adaptive to modern needs) and a **closed system** (rigid and formalized). - **Open system**: This approach favors adapting contracts to meet new social and economic needs. It aims for **renewal** and **legal evolution.** - **Closed system:** This option suggests leaving contracts as they are and instead introducing new structures or systems to complement the existing contract framework. Both situations are unsatisfactory because the first approach involves reconsidering the concept of **agreement** and it could challenge existing legal provisions, such as those that nullify contracts without agreement. The second approach could lead to a lack of cohesion, making the legal system more complex and inconsistent. So, **de facto contractual relations** be considered separately from contracts. These relations should be considered based on their **non-contractual nature** and the legal effects they generate. While their outcomes may be similar to contracts, they do not require the same formalities and strict prescriptions that traditional contracts do. 2. **Conclusion** By examining the distinction between **de facto contractual relations** and **gentlemen\'s agreements** we concluded that: a. **De Facto Contractual Relations**: - These are recognized as sources of **legally binding obligations**, either as independent sources or by applying contract rules by analogy. - They illustrate the challenge of distinguishing between **law** and **meta-law**, as this boundary shifts over time, influenced by prevailing ideologies and socio-economic values. b. **Gentlemen\'s Agreements** (meta-law): - These are **explicit agreements**, but they are based on **moral rules**, such as honour, trust, and reputation, rather than the intention to create a legal property relationship. - Their validity depends on **social norms** rather than formal legal codification. - Historically rooted in the **lex mercatoria** and merchant practices, these agreements relied on customs and good faith in an economic system beyond written laws. c. **Key Difference**: - Gentlemen\'s agreements aim to establish **trust-based bonds** without entering the formal legal domain, unlike de facto contractual relations, which create enforceable obligations. d. **Historical and Legal Context**: - Under **common law**, the intention to create a legal relationship is essential for an agreement to be binding, contrasting with systems like the Italian Civil Code (Art. 1372), which equates contracts to \"law.\" - Philosophers like **Adam Smith** justified contractual obligations through principles of **utility**, emphasizing practicality and trust. 4. **The *Ratio* of Gentlemen's Agreement** Before the conclusion of the contract there is the **pre-contractual phase** of economic transactions in which allows the parties to exchange ideas, compare perspectives, and establish preliminary agreements as they work towards their final objective. It is characterized by **flexibility** and **freedom** for the parties to conduct preparatory activities without restrictive legal constraints, also to maintain the momentum needed to promote and realize new economic opportunities. The system should respect the **reserved and careful** approach of the parties to negotiations, providing tools that parties can choose and adapt to their needs. As over-regulation could harm both the **market** and the operators by risking impeding **wealth circulation** and community well-being. Moreover, parties often seek out legal systems that best meets their expectations and best **guarantees** them to minimize risks and maximize their freedom in structuring their activities. This creates a form of **competition among legal systems**, where systems with fewer restrictions are preferred by economic operators. Regulatory anxiety and excessive supervision discourage parties from fully engaging in negotiations, as they fear taking on obligations they are not yet prepared to accept. Often, parties need the negotiation phase to carefully develop their convictions and confidence in the transaction before committing to a binding agreement. For these reasons, the negotiation process relies on **flexible working tools** that allow freedom and adaptability, enabling parties to explore potential terms without legal constraints. At this stage, agreements often operate on a **moral and social level** (\"meta-legal\") rather than within a formal legal framework. As the market records shows the gentlemen's agreements play a vital role as **non-binding instruments**, helping parties outline terms that may later form part of a formal contract. These agreements are intentionally designed to lack legal enforceability, allowing parties to negotiate freely without the risk of judicial intervention or remedies like termination or compensation. Distinguishing a **non-binding agreement**, such as a gentlemen's agreement, from a legally binding contract can be challenging, especially when the agreement contains the **essential elements of a contract** or appears to have a formalized, \"legalized\" nature. The key to this distinction lies in interpreting the **real intention of the parties** and their conduct throughout the agreement\'s lifecycle. The choice of specific clauses, the inclusion of obligations, or the way certain information is communicated can indicate an intent to **avoid legal bindingness**. These agreements often rely on a **meta-legal dimension** (social and moral norms), offering protection against abusive or exploitative behavior. If an agreement outlines the **essential elements of a contract**---such as the subject matter, performance dates, parties' obligations, and price---it may still be classified as a contract even if ancillary terms are postponed for later negotiation. The interpreter is also facilitated by the templates, forms, and examples from practitioners, websites, or teaching materials. Ultimately, the critical factor in determining whether an agreement is binding is the **intention of the parties** to make it so. This intention may be explicitly stated or inferred from the agreement\'s clauses and the circumstances surrounding its formation. The concept of a **gentlemen's agreement** raises questions about its legal and practical relevance, as it straddles the boundary between binding legal agreements and purely moral acts. Despite this ambiguity, it holds significant importance in negotiating practices. Not all legal scholars agree that parties should have the **freedom to choose** the legal effects of their agreements or to exclude the effects that the law typically attributes to a contract. Allowing this choice emphasizes **private autonomy** over **state-imposed rules**, potentially bypassing the rigid requirements of contract law, such as those outlined in **Art. 1325** of the Italian Civil Code. The Italian system cautiously accepts the agreement that operate outside the law, requiring a **valid justification** for their use. Particularly, they provide greater flexibility for parties to pursue their interests in a way tailored to the specific circumstances. The market benefits from this flexibility, as it facilitates quicker and more practical transactions, enhancing **feasibility** and **success**. However, an agreement that lacks an explicit intention **not to be** legally bound risks being classified as a contract if it possesses the essential elements of a contract. The inclusion of a clause indicating the lack of intent to be legally bound is crucial in distinguishing a non-contractual agreement from a contract. Non-contractual agreements serve as tools for economic operators during negotiations, allowing flexibility and room for growth without premature legal commitments. Common examples include **gentlemen\'s agreements**, **heads of terms**, **letters of understanding**, and **memorandum of understanding**. **NB:** The name of an agreement is marginal in determining its nature or legal qualification. The key to understanding non-binding agreements lies in examining the purpose and content of the clauses, the **intentions** behind the chosen conditions, and the **overall goal** of the agreement. These agreements are primarily moral and social, relying on the reputation and trust of the parties. It is not possible to generalizing the concept of non-binding agreements and of gentlemen\'s agreement, as it varies based on context and the intentions behind it. A typical **gentlemen\'s agreement** includes a **non-binding clause**, signaling that the agreement is not a legal contract. This clause explicitly states that the agreement is **not legally enforceable**, allowing the parties to freely continue negotiations without being bound by the terms. It **excludes liability** for non-performance, damage, or failure to reach a final contract, as it is understood to be a **preliminary step** rather than a concluded agreement. Moreover, these agreements are essentially intended by the parties to record, in a general and non-binding manner, the content of the various stages of the negotiations. The core question is whether interpreters should respect the parties\' intention to avoid legal binding or if the legal system imposes obligations on them based on their actions. When the parties intend to **delay defining a contractual relationship** and are simply working towards a clearer economic transaction, they don't need the immediate intervention of the legal system. At this stage, the agreement should not automatically be subject to legal effects. If the parties decide to conclude a contract, it must follow **contract law rules**, including protecting public interests, ensuring the agreement's legality, and verifying its contents. But if the intention is to bind the parties based on **social and moral principles**, contract law does not need to apply. The parties can include a **non-binding clause** to exclude legal obligations, while keeping certain clauses binding if they wish. The non-binding clause allows them to decide which parts of the agreement are subject to legal effects, based on their moral or social principles. However, parties cannot choose to apply contract law provisions to their non-contractual agreements or gentlemen's agreement. If an agreement is non-binding, the parties cannot choose which parts of **contract law** they want to apply; the legal system only applies its provisions if the agreement is recognized as a contract. They must either fully follow contract law or exclude it entirely. **Chapter II -- Precontractual Information Duties** 1. **Disclosure in Negotiations** The obligation to disclose, imposed by EU and national legislators, aims to **ensure protection** of the weaker party in a contractual relationship. It is important during the negotiation stages and formation of the contract. The purpose is to allow the weaker party to **make an informed decision** about concluding the contract and to ensure the knowledge of relevant and essential information for sharing the risk of error between the contracting parties. It prevents the consumer, or investor **from being forced to suffer** and passively **execute** the contractual will of the counterpart. The contract is a means through which the stronger party intends to carry out the economic transaction and the weaker party is described is in a **position of subordination**, due to lacking information inherent in the economic transaction. The duties to disclose information are mainly contained in EU directives, and then filtered into our legal system. They help to **define the content of the general principle of good faith** prescribed by **art. 1337** of the Italian Civil Code Specifically, regarding the Italian Civil Code: - Art. 1337 contains a **rule of conduct** intended to guarantee the fairness and morality in negotiations. - Art. 1338 prescribes a **rule of validity**, and the information on causes of invalidity and ineffectiveness of the contract. that the party who knows or should know about a cause of invalidity of the contract is obliged to give notice to the other party The strong party is **required to communicate** to the other party the necessary information in detail, as to relieve the weaker party of distinguishing which of the information is relevant to the formation of consent and must be disclosed. For this reason, the EU legislators aimed to implement the **principle of transparency**. This provision of obligations is intended to **inform clients** about the nature and implications of the contract before contractual terms become binding. 2. **Remedies Applied by Case Law** The legislature has not **regulated precisely the nature of liability** and effects on the contract for **breach** of **precontractual information obligations**. Some cases of breach of rules of conduct have been sanctioned with the **remedy of nullity**. - Art. 52, par. 3 of the Italian Consumer Code, in the field of distance contracts in telephone communications, the purpose of the call must be stated at the beginning, under penalty of nullity of the contract. - Art. 67 *septies d*ecies, par. 4 of the ICC, relates to distance contracts for financial services. Sanctions with nullity cases where the supplier: a. Obstructs the exercise of the right of withdrawal by the contractor, b. Does not refund the sums paid by the contractor, and c. Breaches pre-contractual information obligations. - Art. 100 bis, par. 2 of the Italian Testo Unico delle Finanze, if a prospectus has not been published, the purchaser may claim the contract is null and void, and the qualified entities are liable for the damages. - Art.76, par. 3 of the Italian Consumer Code: Guarantees must be explicitly mentioned in contracts. - Art. 21 and 23 of the \"Testo Unico della Finanza\": These articles likely cover mandatory disclosures and legal requirements in financial contracts. Omission of certain rights, such as the right to withdrawal, can render contracts void. - Art. 30, par. 7 of the \"Testo Unico della Finanza\": States that failing to disclose the right of withdrawal results in contract nullity, which can only be invoked by the client. - Art. 122 of Italian TUF - Art. 2, par. 1 of Legislative Decree No. 122: Pertains to contracts for non-immediate ownership transfer. Builders must provide a surety and comply with legal guarantees; otherwise, contracts may be nullified. - Art. 9 of Italian Law No. 192 Sectoral legislation **extends consumer protection**, including the right of withdrawal, administrative fines, and postponement of deadlines to exercise rights. These measures aim to help consumers make informed decisions in contracts, in this case the consumer's right is called *disarmed right*, without the structures and means to be able to realize them. As the nature of liability, interpreters are divided between: - **Precontractual Liability (Article 1337, Italian Civil Code):** This liability arises when the stronger party violates precontractual duties during the negotiation phase. Compensation is limited to **negative interest**, covering costs incurred and lost opportunities for alternative contracts. - **Contractual Liability (Article 1453, Italian Civil Code):** If precontractual obligations are viewed as part of the contract\'s content. It offers a more effective protection including the compensation for harm based on **positive interest**, covering the full benefits the consumer expected from the contract, and the termination of the contract if meets the conditions outlined in **Article 1455**. The breaches on precontractual information obligations can result in significant legal consequences, including **remedies** such as: - **Ineffectiveness of certain clauses:** If a consumer has been misinformed or inadequately informed about specific clauses, these clauses might be deemed ineffective. - **Invalidity of the contract:** it can occur in two forms: - **Annulment (art. 1427):** If misinformation leads to a consumer being misled into signing a contract they otherwise wouldn't have signed or would have signed under different terms, the contract could be annulled. - **Nullity (art. 1418, par. 1):** Nullity is proposed when mandatory precontractual information duties are violated. It is considered **relative nullity**, which is: - Protective, can only be invoked by the consumer. - Virtual, not expressly provided for by a rule of law. Some legal scholars and courts favor nullity as it ensures better protection for the weaker party (e.g., consumers). The logic is that nullity removes contracts that violate mandatory rules from the legal system. These rules are designed to uphold good faith, fairness, and contractual justice in economic transactions. The Italian Supreme Court (SS.UU.) delivered two rulings, **no. 26724 and no. 26725 of 19.12.2007**, to clarify whether a breach of mandatory precontractual information obligations by financial intermediaries renders the contracts null under **art. 1418, par. 1,** of the Italian Civil Code. The question arose from an earlier case where the breach involved **art. 6** of Italian Law no. 1 of 1991, which imposes mandatory principles and rules of conduct on securities companies. However, the court ruled that the mandatory nature of a provision (e.g., Article 6 of Law no. 1 of 1991) is not sufficient to conclude that violating it results in **nullity** of the contract. Nullity must be expressly or impliedly provided for by law. Virtual nullity (an implied nullity not explicitly stated by law) can only apply when the breached rule relates to the intrinsic elements of the contract, such as its structure or content. The breach of conduct rules during negotiations or the formation of a contract does not lead to nullity unless explicitly stated by law. It can only be sanctioned with the remedy of **compensation for damages** and **termination of the contract,** if the breach violates the duty of good faith or specific contractual obligations, the injured party may terminate the contract. The Supreme Court emphasized the distinction between: - **Rules of Conduct:** These govern how parties should act during negotiations or in fulfilling the contract. Violations may result in liability but not nullity. - **Rules of Validity:** These govern the essential elements of a contract (e.g., subject matter, purpose). Breaching such rules can render a contract null. Examples from the Italian Civil Code illustrate this distinction: annulment for fraud or violence, rescission for enormous harm, termination for non-performance. These may allow for other remedies but not nullity unless explicitly provided by law. The Supreme Court rejected nullity as a general remedy for breaches of mandatory rules of conduct during negotiations or contract execution. In the absence of legislative provisions specifying nullity, breaches are instead addressed through remedies like damages or contract termination. The duties of good faith and fair dealing are central to contract law but are tied to the specific circumstances of each case. These duties do not affect the **validity of the contract**, as legal certainty requires contract validity to be based on **predetermined rules**, not subjective assessments of conduct. Under **Article 1418 (3)** of the Italian Civil Code, the legislature may explicitly elevate a **prohibition of conduct** to a rule of validity. However, such cases are exceptions and cannot be extended as general principles to other areas of law. Breaches of duties related to **information and proper execution of transactions** give rise to **precontractual liability,** in which it applies to breaches occurring before or during contract formation (e.g., during negotiations). And **contractual liability** which it applies to breaches occurring after the contract is concluded (e.g., during execution). Breaches of rules of conduct (e.g., providing misleading information or failing to execute properly) cannot result in contract nullity, except where explicitly provided by law. These contracts often involve a **framework agreement** followed by subsequent investment or disinvestment transactions. The Supreme Court has clarified that breaches of conduct (e.g., failing to provide accurate information or executing transactions improperly) do not void such contracts unless nullity is explicitly prescribed by law. With regard of precontractual obligations to provide information in financial intermediation contracts, some rulings have found that the hypothetical breach of the rules of the Italian "TUF" cannot lead to the radical nullity of the contract concluded between the intermediary and the investor. Even in this case, these breaches could give rise to precontractual and contractual liability. In no case the breach result in the nullity of the intermediation contract. Article **1418(1)** of the Italian Civil Code limits nullity to cases of non-compliance with rules governing the intrinsic validity of the contract (e.g., content or structure), not rules of conduct like information obligations. Therefore, the breaches of rules of conduct of intermediaries generally do not render contracts or subsequent acts null under Italian law. Instead, these breaches **invoke other civil remedies** (damages, annulment, termination) or **administrative sanctions**, ensuring compliance with the principles of good faith, diligence, and transparency. Nullity is reserved for explicit legislative provisions or violations of rules affecting the contract\'s validity, not its conduct. 3. **The Solution Envisaged by European Private Law** The draft "Principles, Definitions and model Rules of European Private Law. Draft Common Frame of Rederence" (DCFR) deals with precontractual information obligations and provides for the **conduct** to be carried out by the strong contractual party prior to the conclusion of the contract, as well as the **remedies** available to the consumer if information duties are breach. The DCFR outlines specific situations where precontractual information duties are crucial, such as: - **Sale of goods or services to consumers.** - Transactions where consumers are at a significant information disadvantage due to: - **Technical means** used for the contract. - **Physical distance** between the consumer and professional. - The **complex nature** of the transaction. The DCFR provides the following remedies: - **Extended Right of Withdrawal**: For contracts where the consumer is at an information disadvantage, the period for exercising the right of withdrawal is extended up to one year after the contract\'s conclusion. - **Liability for Losses**: A trader who fails to meet information obligations is liable for the consumer\'s losses, whether the contract is concluded or not. - **Binding Performance Obligations**: If the contract is concluded, the trader must perform the contractual obligations that the other party reasonably relied upon, despite the absence or inaccuracy of the information provided. **Consumer**: Any person acting for purposes outside their trade, business, craft, or profession in contracts covered by the Directive. **Trader**: Any natural or legal person, whether privately or publicly owned, acting in the course of their trade, business, craft, or profession, including those acting on behalf of or in the name of the trader. The **Directive on Consumer Rights**, adopted on 25 October 2011, resulted from a review process aimed at simplifying and updating consumer protection rules, by removing legislative gaps. It replaced and amended four key Directives with a unified set of rules under the principle of full harmonization. The *ratio* is to achieve a balance between **consumer protection** and **business competitiveness** within the internal market, and to overcome the inconsistencies between the national legal systems.Indeed, The Directive mandates that Member States **must fully align** their national laws with the rules outlined in the Directive. They **cannot introduce divergent provisions**, whether stricter or not, to maintain uniformity across the EU. Therefore, it creates a well-defined regulatory framework, improving consumer confidence and market efficiency. Prior to the conclusion of a contract, traders must provide clear and detailed information to consumers, regarding the key details about the contract which includes: a. Main characteristics of goods or services b. Identity of the trader, including trading name, geographical address, and telephone number. c. Total price of goods or services, including taxes. If the price is not calculated in advance, explanation of how is calculated, including additional charges (freight or delivery fees). d. Arrangements for payment, delivery, and performance, including complaint handling policies. e. Legal guarantee of conformity for goods and any after-sales services or commercial guarantees. f. Contract duration, the conditions for termination in contracts with indeterminate duration or automatic renewal. g. Functionality of digital content and technical protection measures (if applicable). h. Interoperability of digital content with hardware/software (if applicable). **Additional obligations for distance and off-premises contracts:** a. Full trader contact details, including fax and email (where available). b. If different, the correct address of the place of business c. Costs of distance communication, if higher than basic rates. d. Conditions, time limits, and procedures for exercising withdrawal rights, including a model withdrawal form. e. Costs the consumer must bear for returning goods in case of withdrawal (if applicable). f. Duration of the consumer's obligations g. Conditions of deposits or financial guarantees to be paid required by the trader. h. Access to codes of conduct or redress mechanisms (if applicable). Precontractual information provided by the trader becomes an integral part of the contract and cannot be altered without express agreement by both parties. **Formal Requirements for Information and Payment Acknowledgement for Online Contracts:** - As regard **Off-Premises Contracts:** Information must be provided on paper or another durable medium (if the consumer agrees). The information must be legible, in plain and intelligible language. A copy of the signed contract or confirmation must also be given to the consumer. - As regard **Distance Contracts:** Information must be provided in a manner appropriate to the communication medium and must be accessible and legible if on a durable medium. For electronic contracts, traders must ensure the consumer acknowledges any payment obligation clearly before placing the order. If a distance contract involves payment, the trader must ensure the consumer explicitly acknowledges their obligation to pay before finalizing the order. Buttons or functions initiating the payment must be labelled with clear terms like \"Order with obligation to pay.\" Failure to comply releases the consumer from any binding obligation. **Role of Member States** in Precontractual Obligations 1. **Flexibility** in Precontractual Information Requirements**:** Under **Article 5(4)** of the Directive, Member States may introduce or maintain additional precontractual information requirements beyond those listed, provided they do not contradict the Directive's core principles. 2. **No Additional Formal Requirements:** Member States cannot impose further formal requirements on traders for fulfilling precontractual information obligations. This ensures uniformity across the EU while respecting specific local contexts. The trader **bears** the burden of proving that precontractual information obligations have been fulfilled. Consumer protection for distance and off-premises contracts includes enhanced transparency, right of withdrawal, clarity in digital transactions, and simplified redress mechanisms: **Key Requirements for Distance and Telephone Contracts** Trading websites must clearly display any **delivery restrictions** and **accepted payment methods** at the start of the ordering process. If the contract is concluded using a medium with limited space or time (e.g., SMS or certain mobile apps), the trader must provide at least the information, prior to the contract\'s conclusion, regarding *main characteristics of goods or services, identity of the trader, total price, right of withdrawal, and contract duration and termination conditions* (if applicable). If traders initiating calls to consumers for concluding distance contracts must disclose their *identity and, if applicable, the identity of the person they represent, and the **commercial purpose** of the call at the beginning of the conversation.* For contracts concluded by telephone, Member States may require the trader to **confirm the offer** in writing or through another durable medium. Consumers are bound only after they have provided signed or written consent. Traders must **provide** the consumer with **confirmation** of the concluded contract on a durable medium within a reasonable time (at the latest at delivery or before the service begins). This confirmation must include *all information required under Article 6(1), if not already provided, and confirmation of the consumer's prior express consent and acknowledgment, as required under Article 16.* **Remedies for Non-Compliance with the provision of Precontractual Information** 1. **Extended Withdrawal Periods:** - Under Article 10, if the trader fails to provide information about the right of withdrawal (as required under Article 6(1)) the withdrawal period is extended to **12 months** beyond the initial period. If the required information is provided within this 12-month period, the withdrawal period will expire **14 days** after the information is received. 2. **Exemption from Liability for Diminished Value:** - Under Article 14(2)(4), if the trader fails to inform the consumer about the right of withdrawal, the consumer is: - Exempt from liability for diminished value of returned goods. - Relieved of costs for certain services or utilities (e.g., water, gas, or electricity) in cases where they are not provided in limited quantities. 3. **Omission of Remedies for Telephonic Non-Compliance:** - The Directive does not maintain the nullity remedy for contracts concluded by telephone when the professional fails to disclose their identity or the commercial purpose of the call. 4. **Penalties for Non-Compliance:** - Article 24 assigns Member States the responsibility of determining penalties for breaches of national rules under the Directive. These penalties must be **effective, proportionate, and dissuasive.** **The Proposal for a Common European Sales Law** On 11 October 2011, the European Commission proposed a Regulation for a **Common European Sales Law** to address differences in national contract laws that hinder cross-border trade. The objective was to **facilitate cross-borde**r trade and purchase for businesses and consumers and introduce a **uniform set** of contract law rules for voluntary adoption. The Common European Sales Law creates a **second contract law regime** that coexists with national laws but is identical across the EU. This regime applies only if both parties explicitly agree to its use. Not a choice of national law but an optional system within the framework of private international law. The law applies to cross-border contracts involving *sale of goods, supply of digital content and related services.* **Precontractual Information Requirements:** Traders must notify consumers of their intention to apply the Common European Sales Law before contract conclusion. This includes providing an **information notice** (as per Annex II of the proposal). If the agreement to use the CESL is concluded by telephone or another method that does not allow the provision of the required information notice, or if the trader fails to provide the notice the consumer is **not bound by the agreement** until they receive confirmation (per Article 8(2)) accompanied by the information notice and explicitly consent to the CESL\'s application. The information notice must include a **hyperlink** (if electronic) or details of a website where the full text of the CESL can be accessed free of charge. Even in this case, Member States determine penalties for breaches, ensuring they are **effective**, **proportionate, and dissuasive**. The rules on precontractual obligations are contained in Chapter 2, Part II of Annex I of the CESL Proposal (Articles 13-29) distinguishing between consumer contracts and contracts between traders. With regards the **information the trader must disclose to the consumer** before concluding a distance or off-premises contract, including: - \(a) Main characteristics of goods, digital content, or related services (appropriate to the medium and type of goods/content). - \(b) Total price and additional charges (as per Article 14). - \(c) Trader's identity and address (as per Article 15). - \(d) Contractual terms (as per Article 16). - \(e) After-sales services, commercial guarantees, and complaint handling (if applicable). - \(f) Availability of alternative dispute resolution mechanisms (if applicable). - \(g) Functionality of digital content and any technical protection measures. - \(h) Interoperability of digital content with hardware and software (if applicable). Two safeguard clauses are provided for in the Proposal: - The regulation prevents traders from avoiding or modifying the application of precontractual information requirements to the consumer's detriment. - Traders cannot derogate from these provisions or alter their effects. With regards the **information in contracts between traders** (Article 23) provides that before concluding a contract for goods, digital content, or related services: - The supplier must disclose all relevant information about the goods or services that they own or reasonably ought to own. - Concealing information contrary to **good faith and fair dealing** is prohibited. - Information must be accurate and not misleading. In terms of **remedies** for breach of precontractual information obligations, the CESL Proposal provides for **compensation for damages**. It does not specify whether liability is contractual or precontractual, leaving this open to interpretation. In cases of missing or incorrect information, the consumer may delay consent to the CESL until proper notice is provided and potentially seek compensation for any harm caused by the breach. **Chapter III -- Penalty Clause** 1. **Structure and Function of the Penalty Clause** This penalty clause has produced extensive debate regarding its **function** and **purpose**. Article 1382 of the Italian Civil Code ambiguously regulates the effects of penalty clauses, stating: *\"A clause by which it is agreed that, in the event of non-performance or delay in performance, one of the contracting parties shall be bound to render a specified performance shall have the effect of limiting the compensation to the performance promised, unless the indemnity for further damage has been agreed upon.\"* This provision has led to diverse interpretations of the **role and objectives** of the penalty clause. Indeed, this institution can be considered as a purely **compensatory instrument**, aimed at pre-determining (lumpifying) damages, recognizing, at most, a function of compulsion to perform (secondary purpose of incentivizing performance). Otherwise, it can be attributed a **punitive-afflictive function**. The "penal" nature may be deduced from a **literal interpretation** of Art. 1382, par. 2, which states that the penalty is due regardless of proof of damage, suggesting a punitive nature. From this point of view, it is possible to distinguish between: - **Pure Penalty Clause**: A clause serving solely as a **sanction** for non-performance or delay, with a punitive function. - **Non-Pure Penalty Clause**: A clause with an **express intention of the parties**, combining punitive and compensatory purposes. It can be said that the penalty clauses serve a **dual function,** both compensatory and punitive: - **Compensatory Function**: Conventional liquidation of damages (ensures predictability for both parties.) - **Punitive Function**: Imposes a penalty for non-performance, irrespective of actual harm suffered. Some courts have **ruled out the possibility** in finding in the penalty clause the character of private penalty. Another school of thought suggests that the penalty clause primarily serves as a **mandatory, pre-determined sanction** for non-performance or delay, independent of compensatory or punitive purposes. Moreover, the law prohibits parties from **adding the penalty to damages**, preventing excessive economic burdens on the non-performing party. This limitation aligns with **Art. 1384** of the Italian Civil Code, which empowers the Court to reduce penalties that are \"manifestly excessive.\" Courts may intervene to ensure that the penalty amount remains proportionate, balancing the interests of both parties. Many scholars regard the penalty clause as the **private penalty par excellence**, emphasizing its role as a contractual mechanism to enforce obligations and pre-determine consequences for breaches. **PART II -- TORTS** **Chapter I -- Credit Rating Agencies** 1. **Introduction** Rating agencies are financial markets operators, functioning as private law companies that provide summary judgments on: - The **creditworthiness** of an issuer (e.g., a company or government). - The **degree of risk** associated with a financial product, rating sovereign debt and securities issued by public or private entities. Two main problems are associated with rating agencies: a. **Conflict of interest:** which can compromise and contaminate the rating process of agencies. b. **Liability for damages:** Rating agencies may cause harm to third parties by issuing erroneous, incomplete, or misleading assessments. Despite multiple legislative interventions and significant judicial rulings aimed at addressing these issues, a **definitive and satisfactory resolution** has yet to be achieved. 2. **Techniques and Methods for Resolving Conflicts of Interest** Credit ratings are critical tools for investors, who rely on them to evaluate the risks and potential returns associated with securities and issuers. These ratings, prepared by experienced analysts, are made available to the public once they are published and disseminated through various media channels. One of the advantages of credit ratings is their accessibility. The public can access these evaluations without paying the agency any fee, as they are typically distributed via ordinary media outlets. This system ensures that essential financial information is widely available, promoting transparency in financial markets. Ratings are assigned either on the **credit rating agency's own initiative** or at the **request of principals**, i.e., entities that have agreed and approved to have their \"creditworthiness\" or the \"creditworthiness\" of the securities they intend to place on the market assessed. Credit ratings can be categorized based on how they are initiated: - **Unsolicited Ratings**: Agencies issue ratings without a direct request from the entity being rated, relying solely on publicly available information. - **Solicited Ratings**: Issuers request and pay for their ratings, granting agencies access to confidential financial data. In the end, both cases require the agencies to **operate** according to the common **criteria of diligence and correctness**, as per art. 1176, par. 2, of the Italian Civil Code, but above all in **pursuit** of the **creditor\'s interest**, according to art. 1174 of the Italian Civil Code. If one agrees that clients are only satisfied when their rating is near the highest value, it becomes clear that the creditworthiness certification system has a serious **conflict of interest**. The conflict lies between providing an objective, truthful evaluation, and the valuer\'s interest in being paid by the issuer. Despite the clause of impartiality of the valuer, it's evident that those being evaluated prefer favorable or at least acceptable ratings. Rating agencies **depend on issuer fees**, which encourages biased ratings and harms credibility. This causes \"**rating shopping**,\" where issuers choose agencies that give higher ratings, misleading investors and destabilizing markets. Misleading ratings distort financial transaction outcomes, affect market stability, and harm investors' assets. Ratings are meant to guide investment decisions, but investors often rely too heavily on them because they trust the agencies\' credibility and independence. **No** solutions are to be found in the case law of the Italian Courts or of the Italian Supreme Court, especially at EU level, about credit rating agencies. The Regulations impose obligations and requirements on agencies to prevent conflicts, but they offer no practical solutions if ratings are still issued under unclear circumstances. Recently, the EU Parliament and Council return to the issued with **Regulation 462/2013**. With this text, the purpose was to distinguish **credit ratings** from mere investment research or advisory opinions, emphasizing their regulatory importance for institutional investors. There were introduced detailed measures to mitigate conflicts of interest, in which: - Agencies must implement policies to ensure independence in ratings, isolating rating activities from sales or marketing functions. - **Standard Operating Procedures (SOPs)**: Required for corporate governance, conflict management, and operational transparency. The EU legislator has set out in detail the cases in which conflicts of interest may arise, introducing a new provision, art. 6 *bis*, par. 1, which seeks to avoid conflicts concerning holders of shareholdings in more than one credit rating agency. - Specific restrictions include: - Holding more than 5% of capital or voting rights in multiple agencies. - Serving on the boards or supervisory bodies of more than one agency. The regulations do not address cases where issuers hold stakes in the agencies that evaluate their creditworthiness, creating a direct conflict of interest. Indeed, despite robust guidelines, enforcement of conflict-of-interest regulations remains inconsistent, with limited remedies for violations. 3. **Rating and Investor Protection: New Liability Profiles** The second major challenge involves determining the **civil liability** of rating agencies for damages suffered by investors who rely on their ratings. This issue is directly linked to: 1. The **critical role** that rating agencies play as gatekeepers in financial markets. 2. The **trust and reputational value** that agencies project, often used to justify their operations despite inherent conflicts of interest. The role of rating agencies as market gatekeepers, derive from the fact that agencies control and certify which entities or securities can access financial markets. Ratings assess an issuer\'s solvency, creditworthiness, and future risk, directly influencing investor decisions. Institutional and collective investor regulations require managers to invest only in securities with certain ratings. Speculative-grade securities are often excluded entirely. Ratings are especially critical for small and medium-sized investors who lack technical expertise to evaluate risks independently. Ratings aim to **overcome the information asymmetry** between issuers and investors, providing crucial data that investors might otherwise not access. They enable comparisons between securities, simplifying decision-making, particularly for complex structured finance products. Given the significant influence of rating agencies, it is important to define a new civil liability framework to contain and repress any unlawful conduct of credit rating agencies. However, there is also a growing necessity for a **harmonized liability system** to regulate their activities and address misconduct. The liability framework for rating agencies must align with those applied to other market operators, such as auditing firms, entities issuing prospectuses, and financial analysts and journalists. A consistent approach ensures balanced liability distribution among all parties contributing to the same harm. Damage in financial markets often results from multiple actors, such as auditors, rating agencies, and financial analysts. Each party should be held accountable based on their **causal contribution** to the damage. Rating agencies carry immense reputational weight, making their assessments pivotal in shaping investor decisions. Investors are often swayed by **simple and accessible language** used in ratings, reinforcing the need for diligent and accurate evaluations. A comparison between the different types of liability reveals the importance that **fault** plays in each of them. Fault in a **subjective sense** refers to the psychological state of the assessors, such as negligence or lack of diligence when disseminating information. Fault in an **objective sense** involves violations of sectors regulations or standards. Current regulations limit the liability of rating agencies to cases of proven fault. Stricter liability models (e.g., presumed fault or business risk) could provide greater protection for investors but would disrupt the balance among financial market participants. In defining the problem of liability of credit rating agencies we find two models classified as: - **The Original Model (US Model)**: Emphasizes the historical approach taken in the United States, which has shaped the foundational understanding of liability for rating agencies. - **The Recent Model (EU Model)**: Reflects the European Union's more recent regulatory framework, designed to address modern challenges in the financial markets. 3. **The US Regulation of Credit Rating Agencies** Regulation of credit rating agencies in the U.S. is a recent development, with major reforms introduced in 2006 and 2010 through the **Credit Rating Agency Reform Act** and the **Dodd-Frank Act**. These laws address various aspects of the rating industry, focusing on the rights and obligations of credit rating agencies, the rating process, ensuring transparency, and investor protection. The **Dodd-Frank Act** includes a specific provision on the civil liability of credit rating agencies, which attempts to address one of the industry\'s critical issues. However, it adopts a framework that offers limited guarantees for investors. Under this model, investors bear a heavy burden of proof, requiring them to demonstrate that the rating agency acted fraudulently or was at fault in preparing and publishing an erroneous assessment. The vague language of the provision leaves courts with the challenging task of defining the scope of liability and balancing the right of credit rating agencies to free expression against investors\' rights to seek compensation for damages caused by reckless, or imprudent conduct by these agencies. 3. **The EU Regulation of Credit Rating Agencies** The EU\'s approach to regulating credit rating agencies offers little reassurance, with future prospects appearing even less promising than current conditions. Efforts to establish a **uniform framework** have influenced agency activities, but significant progress on **civil liability** has been limited. **Regulation No. 1060/2009** left civil liability to individual Member States, creating the **risk of regulatory arbitrage** as agencies gravitate toward jurisdictions with more lenient rules. A notable step came with the **Commission Proposal** amending the 2009 CRA Regulation and introducing **Art. 35 bis**. However, this effort fell short due to the following: - **Too strict liability conditions**: Investors must prove the agency committed an infringement intentionally or with gross negligence. - **Causation requirement**: Investors must show the breach directly impacted the rating and that the rating would have been different otherwise. These burdens **exceed standard legal principles**, where liability usually arises from mere noncompliance with legal obligations, regardless of intent or negligence. **Regulation (EU) No. 462/2013** reinforced these conditions by requiring: - **Proof of reliance**: Investors must demonstrate reasonable reliance on the rating in their investment decisions. - **Liability limitations**: Agencies can preemptively limit their liability, provided the limitations are reasonable, proportionate, and permitted by national law. This framework **heavily favors agencies**, imposing **onerous burdens on investors** and making it difficult for them to protect their rights. 1. **The Fundamental Elements of the Unlawful Acts Committed by Credit Rating Agencies** The legal framework governing credit rating agencies (CRAs) in the US and EU remains **uncertain**, offering limited clarity on future improvements. To address this, doctrine and case law must step in to delineate the balance between **investors' right to compensation** for damages caused by ratings and **CRAs'** **rights to economic freedom** and **freedom of expression**. The relationship between investors and CRAs is **not contractual**, as ratings are public assessments distributed through mass communication channels, such as financial intermediaries. This means liability for damages caused by erroneous or misleading ratings falls under **tort law,** namely an extracontractual nature. Under **Art. 2043 et seq.** of the Italian Civil Code, investors can seek compensation for damages linked to bankruptcy, economic decline of a positively rated entity, or financial losses caused by an erroneous rating, following the rules of civil liability. **Elements of Unlawful Acts** To establish liability, the following elements must be proven: 1. **Guilt or Fraud** - Investors must demonstrate the CRA acted with **intent to mislead** or with **gross negligence**, such as assigning an intentionally false rating. - They must also prove **procedural failures**, such as a lack of prudence, expertise, or diligence in rating activities (e.g., failing to consider all relevant information or disregarding regulatory standards). 2. **Causal Connection** - A causal link must be established between the rating and the investor\'s losses. - This is challenging, as damages may also arise from other factors, such as errors by auditing firms, financial intermediaries, or inaccuracies in prospectuses. - To address this, some suggest using **presumptions**: for example, if an issuer's bankruptcy or a significant change in a security's value occurs after a rating, it's reasonable to assume the rating influenced the investor\'s decisions. 3. **Compensable Damage** - Only **immediate, direct, and unlawful damages** are compensable. These may include: - Loss of invested capital or returns (**consequential damage**). - Missed opportunities for economically advantageous transactions (**loss of profit**). - Violation of the investor's **right to accurate information**, as guaranteed by EU law and the Charter of Fundamental Rights of the EU. Proving these elements is not easy but once proven, however, the burden shifts to the CRA to demonstrate: - It acted diligently and complied with all professional and regulatory obligations. - Misleading ratings resulted from factors outside its control (e.g., false information from issuers or auditors). the most frequent arguments used by CRAs is that ratings are merely **opinions**, not investment advice or guarantees of credit quality. They assert that ratings are subjective and influenced by unpredictable events, thereby distancing themselves from liability. - For **institutional investors**: This defense holds some weight, as these technically skilled individuals are expected to make independent decisions. In such cases, liability may be reduced if the investor's own negligence contributed to the loss (**Article 1227 of the Italian Civil Code**). - For **retail investors**: The argument weakens. Retail investors, lacking expertise, often rely heavily on ratings as definitive guidance. For them, ratings function as de facto **advice** and significantly influence investment decisions. Given the substantial market impact of ratings, it is unreasonable to dismiss their influence on investor behavior. Stronger protections are urgently needed for **weaker parties** in financial markets, such as retail investors. These protections should include remedies not only of a **contractual or administrative nature** but also through **tort-based claims** to address the damages caused by CRAs' conduct. 3. **Case Law of the US Courts** The decision of the US Courts illustrates the **conflict** between **investors\' right to compensation** for rating damages and **credit rating agencies\' (CRAs\') right to free of expression**, protected under the First Amendment of the US Constitution. Historically, US courts have prioritized the protection of CRAs\' free expression, requiring a high threshold of **actual malice** (intentional fraud) to impose liability. This approach creates significant obstacles for investors, who often struggle to prove fraudulent intent at the time of their investment. **Traditional Case Law Approach** US courts have consistently upheld the principle that liability for CRAs is reliant on demonstrating malice or fraudulent intent. Key cases supporting this traditional approach include: 1. [In Re Republic National Life Insurance Company (1975):] The court rejected the investor\'s claim for damages due to **insufficient proo**f of tort. 2. [Mallinckrodt v. Goldman, Sachs (1976) and In Re Towers Financial Corporation (1996):] Both cases ruled that CRAs were **not liable for damages** stemming from information provided by rated entities. Courts held that CRAs had **no obligation to verify the accuracy of information** received from issuers. 3. **Qu**[inn v. McGraw-Hill Companies Inc. (1999):] The court harshly determined that investors' reliance on CRA ratings was **unreasonable**, further limiting CRA liability. **Emerging Trends in Liability** Although traditional case law favored CRAs, there has been a **gradual shift toward recognizing stricter liability standards**, especially following the **Dodd-Frank Act**. These newer decisions reduce the reliance on proving fraudulent intent, easing the evidentiary burden for investors. **Notable Cases Supporting Evolving Standards:** 1. [Mill-Hall Textile Co. v. Dun & Bradstreet (1958):] The CRA was held liable for **libelous defamation** that harmed the issuer\'s economic reputation. This case involved an **unsolicited rating** based on market-gathered information, which was published without a mandate from the issuer. 2. [La Salle National Bank v. Duff & Phelps (1996):] The court reaffirmed the principle of protecting **investor confidence** in CRA ratings, recognizing their influence on investment decisions. Fraudulent conduct by the CRA aimed at misleading investors was central to the ruling, but the case also highlighted the **reputational value** of CRA assessments. 3. [Commercial Financial Services v. Arthur Andersen (2004):] This landmark decision established that First Amendment protections do not shield CRAs in cases where they are **contractually obligated** to issue ratings for payment. CRAs were found liable for failing to fulfill their professional obligations, with the court emphasizing their responsibility to perform services accurately and diligently. US case law on CRA liability reflects a complex interplay between free speech and investor protection. While early cases imposed near-unbeatable barriers to investor claims by requiring proof of malice, more recent decisions signal a shift toward holding CRAs accountable for negligent or fraudulent conduct. This emerging trend offers **some relief to investors**, particularly where CRAs fail to meet professional standards or contractual obligations. Nonetheless, the burden of proof remains challenging, especially in balancing the influence of ratings with CRAs\' rights to free expression. 3. **Case Law of the Italian Courts** Italian case law on credit rating agencies (CRAs) remains limited and largely reflects the challenges investors face in attributing damages from ratings to the conduct of CRAs. Two significant judgments---one by the **Court of Rome** and another by the **Court of Catanzaro**---illustrate key difficulties in establishing CRA liability. Both courts emphasized challenges such as: 1. **Nature of CRA Ratings**: Whether ratings should be classified as objective recommendations or subjective opinions that cannot directly influence investment choices. 2. **Causal Link**: The difficulty in attributing damages to CRAs\' conduct as opposed to the actions of other market operators, unforeseeable circumstances, or the investor's own decisions. **Court of Rome (7 January 2012)** In this case, an investor sought damages from *Moody\'s Italia S.r.l., Standard & Poor\'s, Banca Monte dei Paschi di Siena S.p.a., and Consorzio Patti Chiari* after incurring losses on Lehman Brothers securities. These securities had been positively rated until shortly before the issuer's bankruptcy. The court classified CRAs\' ratings as **subjective opinions** rather than binding recommendations and dismissed the claim against the CRAs. The court determined that ratings, by their nature, do not directly influence investors\' decisions and cannot be considered the sole factor in financial losses. **Court of Catanzaro** This case was brought by investors who claimed damages caused by a CRA's favorable rating of Lehman Brothers securities, which remained rated "A+" until shortly before the company filed for bankruptcy. The plaintiffs assumed a **conflict of interest** between the credit rating agency and issuer (Lehman Brothers), claiming the CRA knowingly avoided a downgrade despite the issuer\'s disastrous financial situation to avoid worsening its collapse. They argued this violated Italian TUF, Civil Code, and Directive 2003/6/EC for disseminating false and misleading information. However, the court held the **financial** **intermediary liable** for breaching its statutory duty to inform clients but **excluded the CRA\'s** liability. **Key Points from the Judgment:** The court characterized CRA ratings as **indispensable parameters** influencing investors\' decisions. Ratings were seen as **autonomous and independent assessments** that foster reasonable investor confidence. However, the court ultimately rejected the claims against the CRA for two main reasons: 3. The investors could **not prove** their accusation that the CRA had deliberately avoided downgrading Lehman Brothers to prevent worsening its financial collapse. 4. Investors were **unable to demonstrate** the existence of the constitutive elements of the unlawful act. That are, the **lack of diligence**, or failure of the CRAs to follow industry standards during the rating process. And to prove the **causal link** that they would not have purchased the securities or would have sold them if the CRA had provided accurate ratings. The court recognized that investors are obligated to exercise ordinary diligence in monitoring ratings and market conditions. However, they are not required to undertake extraordinary efforts to mitigate potential damages. Investors were required to show that the CRA's erroneous rating: - Violated their **contractual freedom** by inducing them to buy securities they otherwise would not have purchased or under different conditions. - Undermined their trust in the **reputational value of the CRA**, whose professional role carries an inherent obligation to provide accurate information. **Court of Rome (7 February 2014)** Recently, the Court returned to the issues related to jurisdiction over CRAs\' liability. The plaintiffs sued *Standard & Poor\'s, Moody\'s*, and *Fitch Ratings* for damages resulting from their purchase of Lehman Brothers bonds. The plaintiffs argued that the CRAs had **misled the market** by continuing to assign positive ratings to Lehman Brothers, despite its deteriorating financial position that ended with the financial collapse in 2008 and disseminating **false information** about the safety of their bonds, betraying investors' trust in the issuer's reliability. The CRAs, in their defense, raised a preliminary objection of lack of jurisdiction. The Court of First Instance reviewed this objection in relation to the plaintiffs\' two claims: **contractual** **liability** and **tort liability,** reaching different conclusion: 1. **Contractual Liability (Social Contact)**: The Court found the objection **well-founded**, relying on **art. 5(1)(a)** of Regulation no. 44/2001, which requires a direct obligation between parties. Since CRAs operate in a \"non-relation\" context, they do not establish a direct relationship with investors and do not undertake specific obligations toward them. Thus, contractual liability for \"social contact\" fell outside the scope of this regulation, and the Italian Court lacked jurisdiction on this claim. 2. **Tort Liability (Non-Contractual)**: The Court reached the opposite conclusion ruling the objection **unfounded**, under **art. 5(3)** of Regulation no. 44/2001, which allows tort claims to be brought in the jurisdiction where the harmful event occurred. The court defined the **harmful event** as the impairment of the investor's contractual freedom caused by erroneous ratings, which occurred at the location where the securities were purchased (*initial damage*). The court distinguished between **consequential damage**, losses resulting from a reduction in the victim's assets, and **initial damage**, the impairment of the investor's decision-making process due to the CRA's dissemination of inaccurate ratings. The court concluded that jurisdiction is based on the **initial damage** (place of contract conclusion), not the location of consequential damage (investor's domicile). Applying this reasoning, the Court **affirmed Italian jurisdiction**. The plaintiffs demonstrated that they had purchased Lehman Brothers securities in Italy, establishing the country as the location of the harmful event. The Court further noted that this framework also applies in cases where misleading ratings discourage the sale of securities, resulting in a loss of opportunity. In such situations, investors may seek protection in the Courts of the State where the securities were originally traded. 5. **Conclusions** Attributing civil liability to credit rating agencies (CRAs) for investor losses is complex, largely due to their reliance on information provided by other market actors. While issuers, auditors, and financial intermediaries control the primary flow of information, CRAs sit at the apex of the information hierarchy, tasked with evaluating this data using professional diligence. Despite their reliance on third-party information, CRAs cannot evade liability entirely. They may be held proportionally responsible under the principle of contributory negligence or even solely liable if investor losses are causally linked to their actions, such as misusing accurate data or deliberately issuing misleading ratings (**Article 1176, paragraph 2 of the Italian Civil Code**). The economic crisis exposed the significant role of CRAs in influencing investor decisions, revealing systemic errors that contributed to widespread financial losses. Recent case law underscores the growing recognition of CRA accountability and suggests an increase in future litigation, emphasizing the need for greater diligence and responsibility in their operations. **Chapter II -- Cyber Law** **1. A General Overview** The information age and the rise of **Techfin** and **Fintech** models have transformed the global economy, reshaping markets and their underlying structures. Innovations in **digitization**, **automation**, and **artificial intelligence**, coupled with the internet\'s rapid expansion, have influenced economic policy, company strategies, market competition, and consumer behavior. These changes have facilitated the global flow of capital, expanded investment opportunities, and introduced new players, such as intermediaries, digital markets, consumer retailers and enhanced regulatory authorities at national, European, and international levels. Key advancements include **electronic payments**, **digital contracts** (e.g., smart contracts), **blockchains**, and **cryptocurrencies**. These innovations have revolutionized consumer and investor interactions. The late Stefano Rodotà even proposed for amending Article 21 of the Italian Constitution to include internet access as a fundamental right, recognizing it as a key medium for knowledge dissemination and personal development. Computer revolution marked the shift from traditional, localized economic relationships to **virtual interactions**, where exchanges are standardized and take place in virtual spaces. This transition, as foreseen by Giorgio Oppo, marks the decline of community-driven contracts in favor of anonymous mass transactions. **Legal Challenges and Regulatory Gaps** The rapid technological revolution has outpaced traditional legal frameworks, making it difficult to adapt existing regulations or create new ones. The emergence of **Cyberlaw**, with a focus on flexible, soft law rules, is necessary to address challenges posed by Fintech. These rules could provide cross-border applicability and better regulatory flexibility. The **European Union** (EU) has taken significant steps to address these challenges. Its legislative and regulatory bodies, including *Consob* and the *Bank of Italy*, have worked on **creating a balance** between innovation and protection. The European Parliament\'s Resolution of 2017 called for a comprehensive **FinTech Action Plan**, emphasizing the need for a stable, competitive, and consumer-focused financial system. The **2018 FinTech Action Plan** identified FinTech as the intersection of financial services and the Digital Single Market, highlighting its importance in driving economic and social transformation. **Cryptocurrencies and Privacy Concerns** The rise of cryptocurrencies has raised questions about their legal nature. While they hold market value and can be traded, cryptocurrencies do not qualify as traditional currency since they are not issued or regulated by central banks or state authorities. Additionally, the **protection of privacy and digital identity** has become central to modern legislation. Rights such as consent to data processing, control over its use, and protection of digital identity have gained prominence. The **proposed reform of the e-Privacy framework**, complementary to the **GDPR**, aims to enhance privacy protection in electronic communications and ensure legal certainty. This reform is essential for preserving freedoms such as thought, expression, and personal data protection in the digital age. The **Consumer Financial Services Action Plan (2017)** addresses transparency in cross-border financial transactions, cost disclosures, and enhanced consumer protection. Similarly, the **European Parliament\'s Resolution** on **Civil Law Rules** on **Robotics (2017)** advocates for common definitions of robotics and AI systems, focusing on human oversight, ethical standards, and the prevention of harm, especially for vulnerable groups such as children and the elderly. These measures reflect a broader European approach, combining market discipline with the protection of fundamental rights. Unlike past authoritative regulation, the EU now focuses on fostering collaboration between independent agencies, market participants, and stakeholders to create a balanced, liberal framework for the future. **Artificial intelligence (AI)**, though difficult to define, refers broadly to systems capable of performing tasks requiring human intelligence. These systems process data, learn from their environment, and make decisions autonomously. Applications of AI span industries, particularly in **banking**, **insurance**, and **e-commerce**, where algorithms predict customer behavior, personalize services, and improve efficiency. The widespread adoption of AI raises legal questions about responsibility, accountability, and ethics. Despite its transformative potential, it underscores the need for **updated legal frameworks** to address its implications on privacy, consumer protection, and market regulation. 3. **The New Contract** The evolution of contract law in the age of artificial intelligence and automation necessitates a reexamination of the **synallagma** (the reciprocal obligations in contracts), particularly within the context of \"automation contracts.\" This category includes **telematic contracts** (contracts concluded in electronic form) and **computerized contracts**, where the contract is concluded with a digital signature. The evolution in technology and the rise of cyber law has made possible the evolution to **smart contracts**, a radical development in contractual transactions. [ ***What are Smart Contracts?***] Smart contracts are computer programs that facilitate, execute, and enforce contractual agreements. These contracts are distinguished by their reliance on **distributed ledger technology (DLT)**, such as blockchains, and their programmable execution, defined through alphanumeric code. Their defining features include: 1. **Self-execution**: Smart contracts autonomously apply the agreed terms, requiring minimal external intervention. 2. **Self-enforcement**: Contractual clauses are directly programmed into the code, ensuring compliance and automating remedies. 3. **Contingency Management**: Smart contracts can adapt to unforeseen circumstances, providing real-time adjustments to balance obligations and risks. **Applications and Advantages** Smart contracts introduce a degree of flexibility and precision previously unreachable in traditional contracts. They allow for the digitalization of contractual autonomy, where agreements are embedded in code and executed automatically. These contracts are particularly advantageous for handling: - **Contingencies**: By linking specific triggers (events) to predefined outcomes, smart contracts *modernize the resolution of unexpected developments, especially in long-term agreements*. - **Risk Allocation**: In contracts with overdue or ongoing performance, smart contracts enable parties to *mitigate risks associated with unforeseen changes in circumstances*. - **Commercial Transactions**: Commonly used for consumer goods purchases, ticketing systems, and e-commerce, smart contracts *simplify transactions and enhance efficiency*. For example, e-commerce platforms utilize algorithms and smart contracts to predict customer preferences and suggest personalized products. The potential extends further into industries such as real estate, insurance, and finance, where automated systems can manage the execution of complex, multi-party agreements. **A Shift in Legal Remedies** Traditional contract law offers remedies that are typically **ablative**---removing or dissolving the agreement in response to changed circumstances. This approach reflects the assumption that, once a contract becomes impractical, the parties should be free to negotiate new terms. In contrast, **maintenance remedies** aim to preserve the contract, adapting its terms to new realities. Smart contracts inherently align with this perspective, as they: - Automatically adjust obligations based on evolving conditions. - Enable pre-programmed responses to contingencies, preserving the contract\'s viability. By embedding these adaptive measures into the code, smart contracts reduce the need for external dispute resolution and ensure continuity in contractual relationships. **Technological and Legal Foundations** In 2019, Italy introduces legal definitions of **Distributed Ledger Technology (DLT)** and **smart contracts** through the \"Decreto Semplificazioni.\" This regulatory framework, combined with provisions from the EU\'s Fifth Anti-Money Laundering Directive (Directive 2018/843), represents an early effort to integrate blockchain-based systems into the legal landscape. The legislative initiative underscores the potential of blockchain technology to revolutionize contractual relationships. However, this framework remains in its infancy and requires further development to address practical and ethical concerns comprehensively. 3. **Robot Law** The judiciary is not immune to the transformative potential of technology, and discussions surrounding its application to judicial systems are already well underway in some countries. While Italy has only recently engaged with this debate, the concept of **predictive justice**---using algorithms to assist or even partially automate judicial decision-making---has gained traction globally. **The Role of Algorithms in Judicial Decision-Making** Proponents of algorithmic judicial systems argue that technology can help rationalize the decision-making process, improving consistency, transparency, and efficiency. The foundation of this approach is the idea that algorithms can serve as **tools for law enforcement**, operating within the boundaries of established legal frameworks. For instance: - **Article 12 of the Preliminary Provisions (Preleggi) of the Italian Civil Code** prohibits arbitrary interpretation of laws, reinforcing the principle that judges must adhere to the clear wording of statutes. - **Article 101 of the Italian Constitution** stipulates that judges are subject only to the law, underscoring the impersonal and objective nature of legal application. Given these principles, it follows that a well-designed algorithm could support judicial decision-making by ensuring uniformity in the application of laws. For this to be feasible, however, legal texts must be clearly and unambiguously formulated---an essential prerequisite for achieving **legal certainty**. **The Promise and Limitations of Predictive Justice** The implementation of algorithms in the judiciary need not be feared if their purpose is confined to **supporting human judges** rather than replacing them. When properly used, artificial intelligence could provide several benefits: 1. **Enhanced Interpretation:** Algorithms can analyze judicial precedents and identify patterns in decisions, offering interpreters predictions of likely outcomes based on historical data. 2. **Simplified Research:** By sifting through vast legislative frameworks, algorithms could identify relevant legal provisions or suggest potential solutions to specific cases. 3. **Improved Efficiency:** Automated tools can assist in managing the vast number of legal provisions currently in force in Italy, reducing the burden on judges and legal practitioners. For example, judicial decisions often follow rigid syntactic and logical structures. Algorithms capable of analyzing this structured corpus of rulings could predict outcomes, thereby aiding lawyers, litigants, and judges in navigating complex legal landscapes. However, caution must be exercised to avoid over-reliance on these systems. Ethical considerations, such as transparency, accountability, and the potential for biases encoded into algorithms, must remain central to any technological integration into the judiciary. 3. **Conclusions** In its **Resolution of 16 February 2017** titled *\"Civil Law Rules on Robotics,\"* the **European Parliament** acknowledges the imminent arrival of a **new industrial revolution** driven by robotics and artificial intelligence. However, it emphasizes that this transformation must be guided by **fundamental ethical principles** to ensure responsible technological development, including: - **Safety and health** of individuals - **Freedom and privacy** protection - **Integrity and dignity** - **Self-determination**, **Non-discrimination and personal data protection** These ethical considerations serve as both the **objectives and boundaries** for technological advancement, ensuring that innovation remains aligned with societal values and fundamental rights. **Chapter III -- Private Penalties** 1. **Nature and Function of the Sanctions in Civil Law System** The concept of \"sanctions\" in civil law raises a fundamental question: Can **private penalties** be considered a legitimate institution within the legal system? This inquiry is crucial in determining whether private individuals can wield punitive power. **Do Private Penalties Exist in the Italian Legal System?** One of the main difficulties in studying this subject is the **lack of a uniform legal definition** of private punishment. **Historically**, the notion of private punishment adopted in Roman law was associated with **monetary compensation** paid by the offender to the offended, making the offender poorer while enriching the injured party. However, this definition is **outdated** and too narrow for modern legal frameworks. Private penalties can be defined in two distinct ways, depending on the scope of the term: 1. **Broad Definition:** Private penalties are considered as a *genus,* encompassing all **civil penalties**, including any punitive measure that deprives an individual of a right or creates an obligation to punish the offender of a specific rule. 2. **Narrow Definition:** This perspective restricts private penalties to those sanctions that are **private in source or application**, meaning they are either imposed by a private individual on another or imposed by a court upon the initiative and in favor of a private individual. The term \"private penalty\" itself appears contradictory, as penalties are traditionally seen as a function of public authority, raising questions about the legitimacy of private individuals wielding punitive power. According to Enrico Moscati, a private penalty is an **afflictive or punitive measure** arising from a negotiated act, applied in a private matter, and potentially imposed by judicial authority at the request of a private individual. Private penalties serve both **punitive functions** aligning with the broader category of civil sanctions, with the aim of addressing the harm caused to the injured party, and **deterrent functions**, with the aim to prevent the repetition of the behavior that is subject of the sanctions. **Challenges and Controversies in the Italian Legal System** The legitimacy of private punishment in Italy remains debatable, as punitive measures are typically reserved for public authorities. The ambiguity in definition has led some scholars to avoid the term \"private punishment\" altogether, instead referring to the **punitive power of private individuals**. 2. **The functions of Tort Liability** The debate over the functions of tort liability, particularly whethe

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