The sole remedy clause and its compatibility with the Italian law
The main purpose of the "sole remedy clause" in a share purchase agreement is to give certainty and predictability to the risks assumed by the parties by limiting the applicable laws in the event of a breach of contract. With this kind of clause the sole consequence arising from a breach of contract by the seller is the obligation to compensate the buyer, unless there are other remedies provided by law. But how does this clause apply to Italian legal provisions governing the invalidity of an agreement?
The main purpose of the "sole remedy clause" in a share purchase agreement is to give certainty and predictability to the risks assumed by the parties by limiting the applicable laws in the event of a breach of contract.
Indeed, with this kind of clause, the parties agree that the sole consequence arising from a breach of contract by the seller is the obligation of the seller to indemnify the purchaser, unless there are any other remedies provided by law.
Reported below is the standard wording of a sole remedy clause:
|"The rights and remedies provided in this Article [___] of the share purchase agreement shall be exclusive and in lieu of any other right, action, defense, claim or remedy of the Buyer, provided by applicable Law or otherwise, however arising in connection with, or by virtue of, any breach of the representations, warranties, undertakings and covenants of the Seller contained in this Agreement. In particular, but without limitation, the Buyer shall not have any right to terminate, annul or rescind this Agreement or to refuse to effect the Closing or to start the action set forth in the articles 1492, 1494, of the Italian Civil Code".|
The main legal issue arising from using a sole remedy clause is whether the parties are actually able to derogate from the provisions that the parties intend to exclude.
Firstly, it is important to highlight that the sole remedy clause must apply the Italian legal provisions governing the invalidity (the so-called "invalidità") of an agreement.
This is because the provisions regulating the validity of an agreement are set forth in the general interest (i.e. the provisions regulating the nullity) or in the non-disposable interest of one of the parties (as it is for those provisions regulating the void ability ("annullabilità") or rescission ("rescissione") of the agreement as well). The first kind of provisions (i.e. the ones on the nullity) cannot be derogated by definition; the second kind of provisions (i.e. the other ones on the void ability ("annullabilità") or rescission ("rescissione")) gives a protection which cannot be derogated a priori, but only a posteriori, when the protected party becomes aware of the defects affecting the agreement in which such party entered into.
Secondly, sole remedy clause must apply the Italian legal provisions on the agreements entered into as a result of willful misconduct of one of the parties (i.e. Articles 1439 and 1440 of the Italian Civil Code). The problem here is trying to configure a deception ex Articles 1439 and 1440 of the Italian Civil Code, when the representations and warranties given by the seller on the target company are false thus totally excluding the buyer’s interest to purchase a participation in the target's share capital, or to maintain such interest, but upon different conditions. The solution to this problem is very complex and, for sure, can be assessed on a case-by-case basis only; indeed, this will depend on a number of different circumstances, such as, for instance, the knowledge (or know-ability), by the seller, of the falsity of its representations and warranties.
However, as a general comment, we can certainly state that it is the same concept of deception that excludes the possibility to waive the protections offered by the Italian Civil Code: an agreement entered into as a result of artifices or deceptions cannot contain limitations to enforce its effects (on this point, please see the decisions issued by the Court of Milan on May 26 and 27, 2004, in which the court stated that, even if in the presence of a sole remedy clause, the sole fact that the seller had a willful misconduct enables the purchaser to request the remedies provided by Articles 1460 (the "eccezione di inadempimento") and/or by Article 1439 of the Italian Civil Code).
As a result, in the event the seller represents some facts or circumstances on the company's assets which are false, of which the seller aware, but that were not disclosed to the purchaser prior to closing, Article 1440 of the Italian Civil Code shall apply. Therefore, the purchaser will be entitled, on a contractual basis ("a titolo contrattuale"), to be indemnified as per the share purchase agreement and, on a non-contractual basis ("a titolo extracontrattuale"), to request to the seller the payment of compensation for damages for having entered into an agreement upon conditions other than the ones which had effectively negotiated if he would have been aware of the falsity of those representations and warranties.
Moreover, the effectiveness of the sole remedy clause in connection with the Italian legal provisions governing the breach of contract needs to be assessed.
The first legal provision to consider is Article 1229 of the Italian Civil Code, pursuant to which the clauses limiting the liability of the debtor for breach of contract are null in case of willful misconduct or gross negligence.
If we take into account a standard sole remedy clause, one of its main purposes is, indeed, limiting the liability of the seller to the "mere" indemnification of the purchaser, in case of breach of contract. However, it must be noted that, according to the most frequent Italian case law, for sales having as subject a company's participation, the subject of the legal guarantees is represented by the participation per se, and not by the company's assets.
Therefore, any guarantee, which is given by the seller on the company's assets, should be deemed as an additional protection for the purchaser.
In this context, it is clear that, any limit to the obligation to indemnify the purchaser for eventual discrepancies between the effective and the guaranteed situation, do not represent limitations of a liability, but only a criterion adopted by the parties in order to negotiate the obligation of the seller to indemnify the purchaser.
Considering the above, we can conclude that the sole remedy clause is compliant with Article 1229 of the Italian Civil Code, in case the sole remedy clause at issue refers to the breach of representations and warranties giving to the purchaser a contractual protection in addition to, and other than, the remedies provided by law.
Lastly, the sole remedy clause can legitimately exclude the possibility of requesting the termination of the agreement for breach of contract. Indeed, the main purpose of termination of the agreement is to "reset" the transaction, in the sense that, if the termination of the agreement is successfully requested, the effect of this is the elimination of the agreement ex tunc (as if it was never entered into). However, in most cases, the purchaser, in case of losses affecting the consistency of the target company's assets, is interested in obtaining an economic compensation which may offset the decrease in assets, rather than bringing an action which may result in the transaction not carried out.