HOW TO DISTINGUISH DEFECTS OF THE GOODS OR LACK OF PROMISED QUALITIES FROM THE SALE OF AN ALIUD PRO ALIO.
It is not always easy to distinguish between the sale of a faulty product and the sale of aliud pro alio. Recently the Italian Supreme Court has clarified some aspects of the issue, including the legal actions that shall be taken in one case or another.
As it is known, the provisions concerning defects of the sold product are set by articles from 1490 to 1497 of the Italian Civil Code. Further provisions are contained in the Consumers Code (articles 128 and ff. Consumers Code) yet they are applicable only to consumers contracts.
There are several objections that the buyer might raise against the seller concerning the fitness of the goods purchased.
The first objection: according to article 1490 c.c. the buyer is guaranteed in case of “defects that make the good unfit for its intended use or that lower its value considerably”. The second objection: it is described by article 1497 c.c., it regulates cases of faulty products due to lack of qualities. Such qualities may be those promised by the seller or the qualities which are absolutely necessary for the goods to be suitable for their intended use. Then there is a third objection that can be made when the delivered goods are completely different from what the parties agreed on. Such scenarios constitute the so-called sale of an aliud pro alio.
The Consumers Code unites all the three objections under one single provision (article 129 Consumers Code – Conformity of the delivered goods). Conversely, in B2B sales the aliud pro alio concept has not been codified by the legislator. Therefore, sellers’ liabilities and buyers’ remedies have been set by the courts and by authors. According both to precedents and doctrine, in case of an aliud pro alio sale, the buyer shall resort to the general remedies against breach of contract; which will allow the buyer to escape the strict terms provided by article 1495, paragraphs 1 and 3 c.c. In fact, said provisions respectively provide an 8 days term to denounce the defects (limitation period) and a one year term to bring legal actions (statute of limitation).
In case of an aliud pro alio sale instead, the only applicable term is the ordinary statute of limitations of ten years set forth by article 2946 c.c. and applicable to all cases of termination of the contract for breach of the same (1453 c.c.).
How to distinguish one scenario from the others?
According to the Court of Cassation, the fault described under article 1490 c.c. concerns imperfections and defects related to the manufacturing process, formation, production and storage of the goods. On the other hand, the lack of promised qualities (under article 1497 c.c.) concerns the nature of the delivered goods or in any event all of their essential elements, which determine their belonging to one species or another of the same kind.
The sale of an aliud pro alio may be instead recognized when the delivered goods belong to a completely different kind of item/good, not only a different species. So much so that the differences between the goods purchased and those delivered are so macroscopic that the products are not suitable to fulfil their natural purpose nor the purpose that the parties deemed to be essential (Cass Civ. sez. II, 05.04.2016, no. 6596, Cass. Civ, Sez, I, 05.06.2016, no. 2313; more recently, Cass. Civ. Sez. II, 08.06.2022, no. 18528).
e.storari@macchi-gangemi.com
g.briggi@macchi-gangemi.com
SWAPS WITH LOCAL ENTITIES: THE COURT OF ACCOUNTS DECLARES THE LACK OF JURISDICTION OVER BANKS.
In ruling no. 221 of September 6, 2022, the Court of Accounts declared the lack of jurisdiction over the banks involved in a case of treasury liability exercised by the Regional Public Prosecutor’s Office of the Lombardy Region. The case relates to four derivative contracts (interest rate swap) entered into as part of a debt restructuring by Deutsche Bank and Dexia Crediop with the Province of Brescia between 2006 and 2007, allegedly deemed uneconomic, unprofitable and inefficient since they were not adequate to hedge risks.
According to the prosecution case, based on the scenarios expected at inception, the swap contracts were highly uneconomic and characterized by an initial imbalance that was unfavorable to the Province given the negative initial value (so-called mark to market) that was not rebalanced by the banks’ payment of an upfront sum to the Province. This would have also generated the contracts’ nullity due to a flaw in the contractual cause.
This initial lack of economic convenience and the contractual imbalance allegedly caused an increasing negative exposure of the Province due to the negative payments made by the Province to Deutsche Bank and Dexia, which in the proceedings in question were summoned to repay € 17,939,846.99 and € 17,862,226.68, respectively, corresponding to the negative cash flows paid by the local entity under the derivative contracts. In the alternative, the Prosecutor sought compensation for the implicit costs present at the time the contracts were entered into, respectively, € 1,746,840.06 and € 1,748,831.91.
Moreover, in 2016, the Province of Brescia brought an action for damages against the Banks before the Court of Rome and an action for the annulment of the contracts before the Court of Brescia. However, given the priority of the actions brought by the banks before the High Court of Justice in London to ascertain and declare the validity of the derivatives contracts, and also considering that the jurisdiction of the Italian Courts was challenged by the banks before the Court of Cassation, the dispute moved to the English Courts.
In 2017, after an analysis of British case law on derivatives and in order to contain the significant litigation costs, the Province entered into a settlement agreement with the banks, which involved the dismissal of the pending civil proceedings in Italy and England, waiving further compensatory claims. The Province acknowledged the validity and effectiveness of the derivative contracts and received a payment of a contribution of € 1,050,000 made by Deutsche Bank. Despite the settlement agreement, in its ruling, the Court pointed out that new proceedings are currently pending before Italian and English Courts.
On the basis of the principles already stated by the case law that has dealt with similar cases (in particular, the case concerning Morgan Stanley for derivative contracts entered into with the MEF, Cass. SS. UU. no. 2157/2021, and a more recent case concerning derivative contracts entered into by the Basilicata Region, Court of Accounts no. 2/2022), the Court of Accounts concluded that in the case at hand the jurisdiction of the accounting judge is lacking for several reasons.
The Court pointed out that the role of advisor taken on by the banks is private in nature and, by itself, does not prove the establishment of the service relationship which is the necessary prerequisite for the purpose of bringing an action of treasury liability against entities which are not part of the Public Administration.
In this case, the Prosecutor has not provided suitable evidence to show that, in actual terms, the banks would have inserted themselves into the organizational structure of the public entity thereby replacing the Province or, at least, that the banks would have decisively oriented the administrative choices concerning the restructuring and management of debt through the signing of the swap contracts.
Indeed:
– the banks’ proposals for active management of the Province’s debt and the expression of interest in the role of advisor do not constitute evidence of the service relationship, but were contractual offers that the public entity was free to accept or not by fully exercising its discretionary powers;
– even the email correspondence between one of the banks and the competent provincial official, although revealing in the case at hand the participation of such bank in the drafting of the executive resolution and the resolutions of the Province’s Council and Executive Board in relation to the transactions, are considered by the Court to be “texts of technical content, in whose drafting the advisor who will carry out the activity in question generally also participates”, texts that in any case were the result of a confrontation and discussions between public and private parties, and therefore not suitable as evidence of the service relationship between banks and the administration;
– neither does the circumstance that the Province entered into the swaps only after receiving the banks’ proposals demonstrates the insertion of the banks into the Province’s administrative organization since the decision to enter into the derivative contracts is an independent expression of the Province’s will to insure itself against interest rate fluctuations, judging the strategy proposed by the advisors to be effective;
– the presence of the contractual clauses contained in the advisory mandate and the swap contracts in which the Province stated that it made its decisions independently and evaluated at its sole discretion the appropriateness for its own purposes of the contracts, are not merely formal in nature, as the Prosecutor argued. “In fact, the clear wording, their conscious signing and the consideration that their content found subsequent confirmation in the statements made by the Province in the 2017 settlement agreement oust the thesis of being in the presence of mere standard clauses, having instead – in the absence of proof to the contrary – also a substantial value.“;
– the Prosecutor also failed to provide any evidence that the Province lacked competence and expertise in the matter and that the declaration of qualified operator issued by the Province to the banks, pursuant to Article 31 of Consob Regulation No. 11522/1998 in force at the time, was untrue or erroneous. In the case at hand, there was no investigative activity to ascertain that the Province did not have specific skills and experience (for example, the Prosecutor’s Office did not acquire the register of the staff in service, nor did it verify whether, what and how many financial transactions had been carried out by the Province in the past). “Moreover, if it were sufficient to infer the proof of the lack of adequate professionalism in the financial field only from the fact that the Entity turned to advisors, then every time a Public Administration resorts to an advisor it should be assumed that the advisor is automatically inserted in its organization: which, of course, is not true!“.
In the case at hand, therefore, the Court of Accounts ruled out that a service relationship had been established between the Province and the banks, while it should be more correctly configured as a contractual relationship of a private nature, the possible violations of which give rise to forms of civil liability that fall within the competence of civil Courts. Consequently, the Court of Accounts of the Lombardy Region declared that the accounting judge lacked jurisdiction over the banks.
m.divincenzo@macchi-gangemi.com
THE THOUSAND SHADES OF FINANCIAL INTERMEDIATION.
Disputes concerning financial intermediation have reached, despite the level of sophisticated complexity that characterizes them, a well-established position in jurisprudence. Two recent judgements of the Supreme Court suggest dwelling on two central aspects that, as will be seen, still deserve a deeper focus:
1. the first, which has a formal character, consists in the obligation of written form;
2. the second, which is of a substantive nature, consists of information obligations.
1. As is well known, the laws that have succeeded one another from time to time have always provided for the necessity of the written form for the so-called framework contract as well as, upon the occurrence of certain investment risk parameters, for the individual purchase orders.
And in fact, in the case recently decided by the Court of Cassation (29.09.2022 no. 28377), the depositors requested the nullity of the contract (as well as of the subsequent purchase orders) based on the alleged lack of the form in writing. The bank duly produced then in court a hard copy of the framework contract and the Tribunal dismissed the case.
Following the rejection ruling at first instance, however, the depositors objected – for the first time on appeal – the nullity of the contract due to the intermediary bank’s failure to sign it and the Court of Appeal held this objection inadmissible because it was new, pursuant to Art. 345 (1) of the Code of Civil Procedure.
The Supreme Court, on the other hand, stated that the appeal judges should not only have held the objection as admissible pursuant to Art. 345 (2) of the Code of Civil Procedure – since the objection of nullity, even for so-called “protective” nullities, can also be raised ex officio – but should also have invited the parties to discuss this point pursuant to Article 101 (2) of the Code of Civil Procedure (a provision which, as is well known, regulates precisely the case in which the judge considers to base his decision on an objection raised ex officio). And the Supreme Court set aside the judgment referring it to another chamber of the same Court of Appeal.
The decision, although correct from a procedural law point of view, is however puzzling: constant case law now holds that the bank’s lack of signature does not trigger the nullity of the contract (so-called ‘mono-signature contracts’, see Cass. S.U. 16.01.2018 no. 898 and Cass. 2.04.2021 no. 9196); now this principle will have to be assessed by the Court of Appeal on remand, after about six years in the Court of Cassation (of which almost two years between the date of the council chamber and the date of publication of the judgment).
2. With reference to the disclosure obligations, instead, Cass. 11.10.2022 no. 29616 stands out for a rigorous approach while, at the same time being attentive to the substance and effectiveness of the protection of the depositors, where it states that “the plurality of obligations (of diligence, fairness and transparency, of information, of highlighting the characteristics of the transaction to be performed) provided for by the Legislative Decree No. 58 of 1998, art. 21, paragraph 1, lett. a) and b), art. 28, paragraph 2 and art. 29 of CONSOB Reg. no. 11522 of 1998 (applicable ‘ratione temporis’) and pertaining to persons authorised to carry out financial transactions, converge towards a unitary end, consisting in indicating to the depositor, in relation to his ascertained propensity to risk, the unsuitability of the investment transactions he is about to undertake“: this is the so-called “suitability rule“, which is linked to the further obligations laid down by the so-called “know you customer rule” and “know your product rule“.
It is up to the financial intermediary, in the event of objections raised by the depositor, to prove that it has fulfilled its information obligations (the fact that the depositor has given his purchase order in writing only gives rise to the presumption that he has been informed but does not exempt the intermediary from the burden proof). In this respect, the judgment at stake gives weight not only to the written documentation delivered by the bank, but also to the information provided verbally by the bank officer.
The Supreme Court’s conclusions of this second decision appear to be supportable. On the one hand, it delineates a complete and effective framework for the protection of the depositor, in which the intermediary must not only inform, but also be informed and arrive at an assessment of adequacy. On the other hand, precisely with a view to effectiveness, it stresses not only the formal element – of written documentation – but also the substantial one: the oral and, it may be said, personal element of information that, through the bank officer, should be the central focus of the relationship between depositor and intermediary.
VAT-EXEMPTION FOR THE SUPPLY OF GOODS AND SERVICES TO EMPLOYEES OF INTERNATIONAL BODIES AND ORGANIZATIONS.
By Ruling no. 495 of October 5th, 2022, the Italian Revenue Agency accepted a request for VAT refund submitted by an employee (official) of an international body not established in Italy concerning the purchases of goods for personal use effected in Italy. The official answer was grounded on the exemption regime set forth, under conditions of reciprocity, by Article 151 of Directive 2006/112/EC (the so-called “VAT Directive”) for the supply of such goods.
The applicant’s request was supported by the filing of the appropriate certificate, issued by the competent authorities of the EU Member State hosting the international body, attesting the requirements for the VAT exemption.
Under Article 151, paragraph 1, letter b) of the VAT Directive, the following are indeed exempt: “the supply of goods or services to international bodies (…) of the host Member States, and to members of such bodies, within the limits and under the conditions laid down set by the international conventions establishing the bodies or by headquarters agreements“.
The domestic Italian VAT legislation provides for the same exemption under Article 72, paragraph 1, letter f) of Presidential Decree No. 633/1972.
The regulatory framework is completed by Article 51 of the implementing Regulation (EU) no. 282/2011, according to which the exemption regime is subject to the issuance of a special certificate by the competent authorities of the EU Member State in which the applicant is established (so-called “VAT exemption certificate”).
In other words, the competent authorities of the EU Member State hosting the international body shall have to assess the entitlement of the VAT exemptions and, where appropriate, issue the exemption certificate, or grant the exemption in accordance with the aforementioned Regulation No. 282/2011.
In the case at hand, on the basis of the above, once the Revenue Agency had ascertained that the exemption certificate produced by the applicant was in compliance with the provisions of the Regulation No. 282/2011, deemed the purchases of goods for personal use made in Italy to be eligible for the VAT benefit and, therefore, accepted the refund request submitted by the applicant.
This answer integrates the previous official clarifications provided by Ruling no. 45/2021, in which the Revenue Agency had already commented on the VAT regime applicable to supplies of goods and services effected by international bodies and organizations.
a.salvatore@macchi-gangemi.com
f.dicesare@macchi-gangemi.com
DISCLAIMER: This newsletter merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi. The newsletter does not replace individual legal consultation. Macchi di Cellere Gangemi assumes no liability whatsoever for the content and correctness of the newsletter.
TO READ OUR PREVIOUS NEWSLETTER OF 30 SEPTEMBER 2022: