Country Economic Snapshot
With strong integration in the EU value chain, Italy is the 2nd largest manufacturing economy in Europe, the 5th largest globally, and the 8th largest exporter in the world.
The key sectors of the Italian economy include machinery and robotics, engineering, design, automotive parts, chemicals, pharmaceuticals, fashion, textiles, and food.
Foreign companies can find extensive networks of SMEs and manufacturing clusters in Italy, able to supply high-quality intermediate products specifically tailored to meet customers’ needs in a wide range of sectors, including industrial machinery, metals, chemicals, plastics, paper, ceramics, textiles, and marine industries.
However, foreign enterprises should be savvy in mitigating possible legal risks while doing business with an Italian company, particularly regarding contract risks, since even minor mistakes can result in lengthy and costly disputes.
Five mistakes to avoid while negotiating commercial contracts with an Italian company
Negotiating a business contract with an Italian company can be a challenging experience. Italian culture and traditions can greatly influence business negotiations, and the Italian legal system is not famous for being business-friendly.
Here are five common mistakes that should be avoided when negotiating a business contract with an Italian company.
#1: Failing to understand Italian business culture
A large number of Italian enterprises are family-owned SMEs. Italians place a high value on personal relationships and trust. Negotiations may require sufficient time and a cooperative approach, with a focus on building a relationship and finding a mutually beneficial solution.
In addition, Italians tend to be indirect in their communication style, and understanding non-verbal signs and body language may be useful to conduct a successful negotiation.
#2: Failing to consider the legal and regulatory environment
A wide range of legal and regulatory requirements must be considered when drafting an agreement that is relevant to the Italian jurisdiction. Failure to consider these requirements can result in a contract that is unenforceable or exposes one or both parties to legal liability. For example, commercial contracts may be subject to laws and regulations governing consumer protection (or other “weak” parties, including commercial agents and subcontractors), product liability, intellectual property, antitrust, and formal requirements of the contract itself.
It is important to ensure that the contract complies with all applicable laws and regulations and that the language used in the contract is consistent with legal standards.
#3: Failing to address possible exceptional events
In spite of the Covid-19 outbreak, the war in Ukraine, and skyrocketing energy costs, it is not yet uncommon to see commercial contracts failing to address, in a proper way, the occurrence of exceptional events that may affect the fulfilment of the obligations envisaged by the contract. More specifically, force majeure clauses should be included in the contract to govern cases where performance has become (temporarily) impossible due to an event beyond one party’s control, and hardship clauses regarding cases where, due to an event beyond one party’s control, performance is still possible but much more burdensome.
The United Nations Convention on Contracts for the International Sale of Goods (CISG – Vienna Convention of 1980) governs force majeure when it is not addressed in the contract. However, the CISG is not always applicable. When it is, the solution envisaged by it is not necessarily suitable for the specific case.
Additionally, the CISG does not provide any remedy with respect to possible cases of hardship. In this respect, the Italian civil code provides that the party affected by an extraordinary and unforeseeable event, in which performance has become excessively onerous, can judicially demand the termination of the contractual relationship. The party against whom termination is demanded, if it has an interest in maintaining the contractual relationship, may offer to modify the conditions of the contract equitably. Therefore, based on the Italian civil code, the party affected by the extraordinary event may not request and/or obtain a modification of the contractual conditions but only withdraw from the performance of the contract, invoking its termination before the court of competent jurisdiction.
“Culture and traditions can greatly influence business negotiations, and the Italian legal system is not famous for being business-friendly.”
#4 Failing to include a unilateral termination clause
The parties to a long-term commercial contract sometimes find themselves “trapped” in the relationship for lack of a provision entitling either party to unilaterally terminate the relation, at will or upon the occurrence of a contractual breach.
Regarding this last point, it is worth noting that, to be effective under Italian law, the early clause must precisely and clearly indicate what are the contractual obligations whose non-performance results in the termination of the contract. Therefore, a clause containing a generic reference to the non-performance of all contractual obligations will not entitle termination, should any generically and comprehensively considered breaches occur.
#5 Failing to include a suitable and effective dispute resolution mechanism
One of the biggest mistakes that can be made is failing to include a properly drafted dispute resolution clause. Litigation in Italy is often considered extremely challenging, if not a nightmare. There is still limited use of alternative dispute resolution methods, such as mediation or arbitration. The state judicial system is widely known for its slowness, as court proceedings often take years to resolve. This is due to the Italian court system being overburdened with cases and to the overly complicated legal procedures and rules laid down by the legislator.
In the framework of the Next Generation EU (NGEU) program, Italy has adopted its National Recovery and Resilience Plan (NRRP), a large-scale plan of action (worth around €235 billion up to 2026) aimed at modernising the country in different sectors, including the judicial system. The implementation of the NRRP is underway, and some reforms in the civil judicial system came into effect at the beginning of 2023. It is not yet possible to predict whether such reforms will solve the longstanding problems of the justice system. However, a cautious approach is imperative, and it is absolutely recommended to take any measures to properly handle possible disputes arising from the contract.
