Fair Dealing

The damages payable by a party who, in breach of the duty to act in good faith breaks off contractual negotiations, may now also include damages in respect of "lost opportunity" (i.e. lost as a consequence of the fruitless negotiations) where the potential contract lost is of a different type to and/or less advantageous than the contract which was the object of the negotiations in question.A decision of the Italian Court of Cassation of 1993 has, in fact, finally removed a limitation which had been imposed by case law requiring that the "lost opportunity" had to be in respect of a contract which was at least as advantageous as the one subject to negotiation and had to be of the same or a similar type.The above distinction, made in previous case law, had been criticised by commentators for some time as being artificial and outdated. The question is without doubt of general interest in relation to the conduct of negotiations and business in general and therefore is worth examining in the context of a general look at the Italian law of pre-contractual liability.Although there are few provisions of law which refer specifically to the question, the following principles should be noted: (i) in the course of negotiations which are intended to lead to the conclusion of a contract, the parties are under an obligation to act in good faith (article 1337 of the civil code). Conduct in breach of this duty will result in pre- contractual liability (which is a type of liability in tort). Such conduct will include the situation where a party breaks off the negotiations without justification and in circumstances where the other party was legitimately entitled to assume that the contract would be entered into. This was the situation in the case considered by the Court of Cassation;(ii) where a contract has actually been entered into by the parties but one party has deceived the other with the consequence that the contract has been entered into on different terms than would otherwise have been the case (but the deception is not such as would have affected the actual consent to the conclusion of the contract), then, although the contract will still be valid, the contracting party who acted in bad faith will be liable to pay damages to the other (article 1440);(iii) a party who knows or who should have known of the existence of a reason for the invalidity of a contract and does not give notice of this fact to the other party is bound to pay compensation for the damages suffered by the other who relied (without being at fault) on the validity of the contract (article 1338);The generally accepted view is that any of the above illegitimate acts will give rise to compensation for injury to the so-called "negative interest" of the party in question, i.e. the interest it has in not commencing negotiations which result in wasted time and costs being incurred or loss suffered. This is in contrast to cases of breach of contract where compensation is awarded for injury to the "positive interest" of the party in question, i.e. the interest the party has in achieving the positive results which would otherwise have been derived from the execution of the contract.Case law has determined that the measure of damages in relation to injury to "negative interest" is such as would put the injured party in the same position as if it had not entered into futile negotiations. This includes, inter alia, loss suffered by failure to take advantage of other contractual opportunities the party would otherwise have had and which is a direct and immediate consequence of the conduct of the other party.The case considered by the Court of Cassation concerned a motor- tanker owned by company "A" and which company "B" wished to charter. Company "C" then entered into negotiations with "A" for the purchase of the ship and subsequently withdrew from those negotiations at a point when company A was legitimately entitled to believe that the contract would be concluded. The opportunity of chartering the ship to "B" had by now been lost and the ship eventually had to be scrapped. The Court of Cassation abandoned the former restrictions which would have prevented "A" from recovering damages from "C" for the lost opportunity to enter into a hire contract with "B" on the grounds that it was a contract of a different type to the sale contract with "C", and was also less advantageous.Some commentators have queried whether this less restrictive view means there could be scope for the development of a concept similar to the "tort of interference with contract/ business relations" developed in common law jurisdictions. Such a principle would in theory have entitled company "B" to bring an action for recovery of loss against company "C" for having persuaded the owner of the ship not to enter into a contract for the charter of the ship.Practical PointerCare should be taken in carrying out business negotiations to comply with the duty to act in good faith as conduct in breach may result in damages being payable to the other party for loss suffered.