As regards cross-default in business transfer agreements, withholding of performance, if legitimate pursuant to Article 1460 of the Italian Civil Code, excludes the counter-party’s possibility to claim judicial termination pursuant to Article 1453 of the Italian Civil Code as well as to resort to the express termination clause (Article 1456 of the Italian Civil Code), whose effectiveness, regardless of the seriousness of the default pursuant to Article 1455 of the Italian Civil Code, implies anyway that the same be imputable.

Court of Turin, First Division, no. 1228 of 6 March 2017

The case at issue

The ruling under examination refers to a case – originating from a dispute based on a business transfer agreement – that faces the issue of cross or bilateral default with particular reference to the necessary balance between the default importance and the impact of single performances on the contractual obligations.

In particular, the claimant (seller) sued the purchaser asking first and foremost to establish the termination of the business transfer agreement pursuant to Article 1456 of the Italian Civil Code due to the purchaser’s failure to pay five monthly instalments (breach considered as reason for termination pursuant to the express termination clause contained in said agreement) and, as a consequence, to order the purchaser to return the business as well as to compensate further damages pursuant to Article 1218 of the Italian Civil Code. As an alternative, the seller asked to establish the contractual breach and, therefore, that the agreement be terminated pursuant to Article 1453 of the Italian Civil Code.

The defendant filed an appearance to challenge the claimant’s claim raising an objection regarding the opposing party’s breach, pursuant to Article 1460 for the Italian Civil Code, connected to the breach of the warranty of compliance with building code standards of the healthcare structures that made up the business.

With the ruling at issue, the Court of Turin, having established the existence of cross default, made a comparative assessment of said default on the basis of the chronological, etiological and proportionality criteria, indicated by constant case law, in order to establish whether the claimant’s default was such as to justify the defendant company’s failure to pay the residual price instalments.

In light of the foregoing, the trial court, deeming lawful the objection raised by the defendant regarding breach, dismissed the claimant’s main claim, since the conditions were not met to issue a declaratory judgement of termination by law under the express termination clause, but it accepted the claimant’s alternative claim deeming that the conditions under Articles 1453 and 1455 of the Italian Civil Code were met and, as a consequence, it declared the business transfer agreement terminated and ordered the defendant to return said business to the seller.

Balance of contractual breaches. The assessment criteria adopted by the Court.

The Court, in order to determine which of the parties was in culpable default, which justified the other party’s default, made a single and comparative assessment of the respective behaviours that, besides the necessary reference to their chronological element, was based also on the dependence relationship between the parties and on the concept of proportionality, taking as well into account the socio-economic function of the agreement.

The withholding of performance cannot be considered as justified pursuant to Article 1460 of the Italian Civil Code if it is not proportionate to the counterparty’s default. Hence, the Court of Turin, with a view to balancing the mutual default of the parties, has carried out an assessment in terms of seriousness and relevance.

So, in order to decide the dispute the Court has made a dual assessment.

In the first place, with reference to the main claim of the seller, the Court has pointed out that the claimant resorted to the express termination clause only after the defendant had raised the objection regarding breach and that, when the latter enforced its default against the seller’s default, the debt owed by the seller to the purchaser was equal to Euro 200,000 against outstanding price instalments equal to Euro 80,000. The Court of Turin has therefore duly pointed out that at the time the claimant declared to resort to the express resolution clause, the defendant’s default was proportionally justified compared to the claimant’s default. As a consequence, the Trial Court dismissed the main claim of the claimant, since the conditions were not met to issue a declaratory judgement of termination by law pursuant to the application of the mentioned express termination clause. The objection regarding breach raised pursuant to Article 1460 of the Italian Civil Code by the defendant has, therefore, paralysed – per se – the effectiveness of the express resolution clause to which the claimant subsequently resorted.

Hence, the other party’s default is not sufficient to justify withholding of performance, indeed withholding must be in good faith. In other words, a minor default of the other party cannot be taken as an excuse to justify one’s own default. Therefore, for the purposes of applicability of Article 1460 of the Italian Civil Code, it is necessary to comply with the principle set out in Article 1375 of the Italian Civil Code, that is good faith in the performance of contracts.

In the second place, the merits Court has examined the claimant’s alternative claim taking into account the prolonged default of the defendant, which, despite the maintained building irregularities, has continued to use the business. Indeed, at the time of the judgement, the defendant’s default amounted to Euro 400,000, an amount definitely higher and, hence, disproportionate to the claimant’s default. Therefore, in relation to the seller’s alternative claim, the defendant’s withholding of performance could no longer be considered as justified pursuant to Article 1460 of the Italian Civil Code for not being, at that time, proportionate to the claimant’s default, given that the expense necessary to remedy the building non-conformity was by far lower than the sum that the defendant refused to pay.

So, the Court of Turin, acknowledging the existence of the conditions under Articles 1453 and 1455 of the Italian Civil Code accepted the claimant’s alternative claim and declared the business transfer agreement terminated, ordering the defendant to return the business to the seller.

In conclusion, it should be pointed out that the comparison of the opposed defaults was carried out by the merits Court with regard to the economic-social function of the agreement, therefore in this context importance was given not only to the main obligations attributed in the contract but also to secondary obligations having a substantial importance from a synallagmatic point of view, such as those relating to collaboration, information and protection. If the default of the party against which the objection is raised is not seriously affecting the interest of the other party, the latters’ withholding of performance cannot be justified pursuant to Article 1460 of the Italian Civil Code.