Negotiating Corporate and Commercial Contracts in Europe

1. Negotiating Corporate andCommercial Contracts in Europe A comparative view into typical Clauses in Corporate and Commercial contracts in a number of European Jurisdictions. Ariel Nachman (ariel.nachman@simmons-simmons.com) October 14, 2013

2. Formation of Contracts.

3. Formation of Contracts under Civil Law. Germany • Freedom of contract (i.e. no numerus clausus of determined contract types). • Requirements for a contract under German law, according to sec. 145 et seq. German Civil Code (i.e. Bürgerliches Gesetzbuch, as known as BGB): • (1) One party makes an offer (Angebot); and • (2) another party accepts this offer (Annahme). • For a contract to be enforceable the parties need to agree on its essential content (essentialia negotii): (i) parties; (ii) subject; (iii) place of performance; and (iv) any other rights and obligations. • There is no need for an actual “bargain” (i.e. consideration). • Specific forms are required for certain types of contracts (i.e. notarial form for donations and real estate contracts). However, the form is not part of the essential content of a contract. Therefore, upon certain circumstances, if not correct, it can be cured.

4. Formation of Contracts under Civil Law. Italy • Freedom of contract (i.e. no numerus clausus of determined contract types). • The standard way for entering into a contract is through a contractual offer (made by one party) and the acceptance of such contractual offer (by the other party) (article 1326 of the Italian Civil Code). • Under Italian law (article 1325 of the Italian Civil Code), a contract to be enforceable requires: (i) the agreement between the parties; (ii) the so called causa (i.e. the essence of the contract); (iii) the object; and (iv) to the extent it is requested for specific contracts, a specific form (i.e. written and/or notarial form – the requirement of the written form mainly regards contracts related to real estate). • The object of a contract are the obligations thereto. It must be: possible, legal, determined or determinable (article 1346 of the Italian Civil Code). • The requirement of the causa correspond to the essence of the contract and need to be legal (i.e. it must not violate mandatory provisions). There is no need for an actual “bargain” (i.e. consideration).

5. Formation of Contracts under Common Law. England • Freedom of contract (i.e. no numerus clausus of determined contract types). • Under English law voluntary promises cannot be enforced: for a contract to be entered into there is always the need for: (i) an offer made by one party and accepted by another one; (ii) consideration; and (iii) the intent to create a legal relation. • A contract to be valid need to contain a “bargain”: each party must do something for the other (i.e. consideration). Court will not assess whether the consideration is fair (i.e. it can be nominal). • There is no need for a consideration for something that has been done in the past (i.e. past consideration) or consideration where one party is already legally obliged to act (i.e. by statutory law). • Instead, a promise contained in a deed is enforceable, even without consideration. However, deeds require special formalities (i.e. written form and witnesses). • In practice, lack of consideration is rarely an issue.

6. Most Common Clauses.

7. Most Common Clauses: Conditions precedent.

8. Most Common Clauses: Representations and Warranties.

9. Most Common Clauses: Indemnity.

10. Most Common Clauses: Limitation of liability.

11. Most Common Clauses: Penalty.

12. Most Common Clauses: Exclusive/Non Exclusive Remedies.

13. Most Common Clauses: Material Adverse Effect/Hardship.

14. Most Common Clauses: Force majeure.

15. Most Common Clauses: Term.

16. Most Common Clauses: Assignment.

17. Most Common Clauses: Third Parties Rights.

18. Most Common Clauses: Set off.

19. Most Common Clauses: Retention right.

20. Most Common Clauses: Early termination/Withdrawal.

21. Most Common Clauses: Confidentiality.

22. Most Common Clauses: Applicable law/Jurisdiction.

23. Most Common Clauses: If & When.

24. Interpretation of Contracts.

25. Interpretation of contracts under Civil Law. Germany • Contracts are interpreted from an objective perspective (objektive Vertragsauslegung) and according to the principle of good faith (Treu und Glauben), according to sec. 157, sec. 242 German Civil Code. • In case an objective interpretation is not consistent with the understanding of both parties, the subjective view of the parties is decisive (falsa demonstratio non nocet) (i.e. subjective interpretation criteria prevail). • The understanding of the parties shall be proved with any kind of evidences (i.e. behavior of the parties, pre-contractual and contractual exchange of e-mails and letters). • In case a contract contains an invalid provision or an unintentional gap, this gap must be filled with a provision that is as closely as possible to what the parties would have agreed, taken into account their economic motivation in the contract. • The invalidity of one (sub-)clause does not harm the rest of the contract (as long as the contract is not considered as Terms & Conditions) (geltungserhaltende Reduktion).

26. Interpretation of contracts under Civil Law. Italy • In Italy the interpreter is guided in the interpretation of contracts by a series of articles of the Italian Civil Code, particularly 1362 to 1371 stating subjective and objective interpretation criteria: subjective interpretation criteria prevail. • Subjective interpretation criteria: the interpreter is expected to establish the intention of the parties first of all on the basis of literal meaning of the contract. Should the literal meaning be clear, the interpreter should verify its consistence with the intention of the parties with any other external elements of the contract (i.e. parties’ behavior, pre-contractual and contractual exchange of e-mails and letters). • Objective interpretation criteria: such criteria should be applied only when the literal meaning of the contract it is not clear and it is not possible to reconstruct the intention of the parties by elements outside the contract. Therefore, the contract shall be interpreted in accordance with the good faith principle. • If the language of the contract is clear enough, the interpreter cannot apply any other interpretation criteria contained in the interpretation rules of the Italian Civil Code (i.e. the purpose of the contract).

27. Interpretation of contracts under Common Law. England • In England the interpreter of a contract is expected to establish the mutual intention of the parties on the basis of the document itself (i.e. objective interpretation criteria prevail). • The wording of the provisions has to be understood according to its plain and literal meaning; even if the interpreter will attempt to read the provisions in a manner that does not lead to absurdityor inconsistency with the remaining provisions,it will not be possible to construe the contract in a manner that runs against the language. • The importance of the literal interpretation is strengthened also by the interpretation rule according to which reference in the contract to a certain case will exclude that the contract applies to other corresponding cases that have not been expressly mentioned: expressio unius est exclusio alterius. • The literal meaning prevail as far as meets the intention of the parties.

28. Good Faith.

29. Good faith under Civil Law. Germany • The general principle of good faith (Treu und Glauben) applies to pre-contractual scenarios and to contracts (sec. 242 German Civil Code). • There are several specific obligations that arise out of the general concept of good faith under German law, prior to and during the lifetime of a contract, sec. 242 German Civil Code: • Obligation not to act in contradiction to previous behaviour and not to make contradicting statements (venire contra factum proprium) (both pre-contractual and contractual). • Obligation to respect the contract (pacta sunt servanda) (contractual). • General obligation to respect other party’s interest and to mitigate damages (the scope of this obligation is uncertain) (contractual).

30. Good faith under Civil Law. Italy • Italian law contains a general clause on good faith under article 1175 of the Italian Civil Code. • Specific clauses on good faith in the phase of negotiations are set out under article 1337 of the Italian Civil Code, which states that the parties shall behave in good faith in the phase of the negotiations and the formation of the contract. • Article 1375 of the Italian Civil Code states that the parties shall perform in good faith the obligations set out under a contract. • This results, among others, in duties of: (i) disclosure; (ii) cooperation; and (iii) protection of the other party’s rights and goods.

31. Good faith under Common Law. England • By default there is no good faith principle (neither pre-contractual nor contractual). However, a general principle of reasonableness apply. • There are some exceptions to these rules for certain types of contracts, such as implied terms as set forth in specific statutory law (mainly for the protection of the consumer) or such as insurance contracts, where the insured party is supposed to disclose information to the insurance company. • Definition of duty of good faith in, or in relation to the negotiation of, B2B contracts, as: “playing fair, coming clean or putting one’s cards face upwards on the table.” (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433). However, “good faith” has never be deemed applicable. • Very recent developments: Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB). According to such case a duty to act in good faith can be implied into a contract in the same way as any other term. As a consequence: obligations not to undercut and knowingly provide false information implied into contract. • However, such principles have not yet been dealt in other judgments.

32. Pre-contractual liability.

33. Pre-contractual obligations under Civil Law. Germany • During contract negotiations prior to signing, the parties have only secondary contractual obligations arising in connection with good faith principle. • Obligation to sign the contract? • No, never. However, if negotiations are very close to signing already and one party walks away without any reason, then there can be an obligation to compensate the other party for damages incurred (very limited definition of damages: only expenses occurred in connection with negotiations. No loss of opportunity). • Non-Binding LoI/MoU may include break-up fees. • Written pre-contract (Vorvertrag) may require signing of the contract. • As previously seen, a contract can be considered formed and enforceable when an offer (containing all the essentialia negotii) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case by case basis.

34. Pre-contractual obligations under Civil Law. Italy • Parties shall carry out the negotiations for the entering into an agreement in good faith (article 1337 of the Italian Civil Code). • The interruption of the negotiations might entail a pre-contractual liability only upon the occurrence of the following two conditions: • In the meanwhile the counterpart has matured a reasonable expectation of the entering into the contract. • The interruption of the negotiations is completely unjustified. • Under pre-contractual liability, the damages that can be compensated only cover cost and expenses arising in connection with the negotiations and any loss of opportunity. • As previously seen, a contract can be considered formed and enforceable when an offer (containing all the essential content under article 1325 of the Italian Civil Code) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case by case basis.

35. England Pre-contractual obligations under Common Law. • Pre-contractual liability mainly falls under tortious liability (i.e. only reliance losses) and statutory liability (where applicable): mainly obligations aimed to avoid a contract from entering into existence inadvertently (i.e. oral contracts) or misrepresentations. • The approach of English law is primarily based on the assumption that each party is to take care of its own interests, to acquire the information that it deems necessary, and to provide for a contractual regulation that is adequate for the purpose that that party has. • In case of unjustified breach of negotiations, by default no rights to compensation. In fact, any costs and expenses arisen to that point can be compensate only if specifically agreed in advance between the parties. • As previously seen, a contract can be considered formed and enforceable when an offer (containing a specific consideration; and made with the intent to create a legal relation) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case by case basis.

36. Contractual liability.

37. Remedies for breach of contract under Civil Law. Germany • By default breach of primary contractual obligations (vertraglicheHauptleistungspflichten), (i.e. the material obligations of a contract, such as performance of insufficient/wrong service or product, delay or non-delivery) (sec. 241 para. 1 German Civil Code): • Specific performance: delivery of missing services or non-defective product OR Replacement: new delivery of agreed service or product. • Termination: only if repair and replacement are both impossible or unacceptable (only under very rare circumstances) (i.e. right to termination is an extrema ratio). • In any case: compensation of damages (sec. 280 para. 1 German Civil Code). • Breach of secondary contractual obligations (vertragliche Nebenpflichten) (sec. 241 para. 2 German Civil Code), (i.e. not material obligations, such as information, disclosure of relevant facts, etc.): only “Repair” of breach: Comply with obligations in the future compensation of damages (sec. 280 para. 1 German Civil Code). In such case there is no termination right.

38. Remedies for breach of contract under Civil Law. Italy • By default (article 1453 of the Italian Civil Code) in case of a breach of contract by one party, the other party may decide either for: • Specific performance (non need for the breach to be material): delivery of missing services or non-defective product or replacement (new delivery of agreed service or product). • Termination of the contract (only if the breach is material with respect to the global obligations of the contract and is not justified). • In any case: compensation of damages. • Once termination is demanded, the specific performance cannot be demanded any more. However, once specific performance is demanded, termination can still be demanded at a later stage.

39. Remedies for breach of contract under Common Law. England • By default, principal remedies for breach in the absence of further remedies expressly agreed are: • Damages. • Termination, where: • Repudiatory breach (breaching party treats contract as discharged). • Fundamental breach (breach deprives the non-breaching party of substantially all of the benefit that it would derive from the contract, if properly performed). • Specific performance (equitable remedy, not available “as of right” or where damages alone are a sufficient remedy).

40. Damages.

41. Damages under Civil Law. Germany (I) • By default, if the breach of a contract causes a damage, the breaching party must compensate this damage (sec. 249, 251 German Civil Code). • The obligation to compensate the damage occurs irrespective of the legal type of fault (sec. 276 para. 1 German Civil Code): (i) simple negligence (leichte Fahrlässigkeit); (ii) gross negligence (grobe Fahrlässigkeit); and (iii) wilful misconduct (Vorsatz). • The minimum conditions for demanding a compensation of damages are the following: (i) breach of contract; (ii)causation: adequate link between breach and damage necessary: the damage must occur as a logical consequence of the breach (if the damage is caused by several different reasons, the liability will be allocated pro rata between all responsible persons); and (iii) damage. • Burden of proof: (i) claimant must provide evidence of the damage and the breach, but not of the link in-between; (ii) legal assumption that the damage was caused by the breach (sec. 280 para. 1 sent. 2 German Civil Code); and (iii) the breaching party must give evidence that the damage was not caused by the breach.

42. Damages under Civil law. Germany (II) • What needs to be compensated (i.e. categories developed by practice)? • Direct damages (direkte Schäden): costs for repair/replacement of the damaged good/insufficient service itself; reduction of the market value of the damaged good (merkantiler Minderwert) (including the hypothetical profits lost due to the damages are one of the most important types of indirect damages). • Indirect damages (indirekte Schäden): all damages caused as a consequence of the breach of the contract (Mangelfolgeschäden). • Immaterial damages (immaterielle Schäden): compensation for injuries of body, health and freedom (Schmerzensgeld). • Wasted expenditures (frustrierte Aufwendungen): reasonable expenditures that were made in expectation of the performance of the contract (compensation according to sec. 284 German Civil Code). They shall be claimed separately from damages. • Duty of mitigation: claimant cannot recover for losses he could have avoided by taking reasonable steps.

43. Damages under Civil law. Italy • The minimum conditions for demanding a compensation of damages are the following: (i) breach of contract; (ii)causation; and (iii) damage. • Burden of proof: (i) claimant must provide evidence of the damage and the breach, but not of the link in-between; (ii) legal assumption that the damage was caused by the breach; and (iii) the breaching party must give evidence that the damage was not caused by the breach. • In particular the contractual damages are the following: • Consequential damage (danno emergente): damages suffered as a direct effect of the breach of contract by the other party. • Loss of profit (lucro cessante): loss of profit in connection with the breach of contract by the other party. • Duty of mitigation: claimant cannot recover for losses he could have avoided by taking reasonable steps.

44. England (I) Damages under Common Law. • General purpose of damages for breach is to put non-breaching party in the position it would have been in had the contract been properly performed – generally in the form of gain (whether financial or the benefit of the performance of the obligations/profit and/or anticipated saving) (expectation loss). In some circumstances, possible to claim damages to put non-breaching party in position it would have been in had there never been a contract (reliance loss/wasted expenditure). • In particular the type of contractual damages are the following: • Reliance losses: see Anglia Television v Reed [1971] 3 All ER 690 – actor breach of contract led to a claim for reliance loss, rather than expectation loss. • Expectation losses: see Bridge UK Com Ltd v Abbey Pynford plc [2007] EWHC 728 (TCC) – negligent installation of a printing press - both expectation and reliance loss claimed. • Generally parties have to elect which of expectation or reliance loss they wish to recover, to avoid double recovery of same loss. Reliance loss generally used where it is difficult to quantify loss on an expectation basis but cannot be used to escape a bad bargain.

45. Damages under Common Law. England (II) • Burden of proof: the non-breaching party must prove duty (contractual obligation), breach and loss. • Concept of remoteness (see Hadley v Baxendale [1854]): can only be compensated damages which are arising naturally according to the usual course of things (direct loss) and (ii) special losses which may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of breach having knowledge of special circumstances (indirect or consequential loss). • Losses falling outside of the above definition are too remote to be recoverable in damages. • Duty of mitigation: claimant cannot recover for losses he could have avoided by taking reasonable steps. • Reasonable expense incurred in taking reasonable steps can be recovered.

46. Any questions?

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