Francesco Paolo Patti

Price Adjustment Mechanisms and Penalty Rule in Sale and Purchase Agreements

  • Abstract

Informations and abstract

Keywords: Sale and Purchase Agreements; Representations and Warranties; Price Adjustment Clauses; Contractual Penalties.

The contribution tackles the problem of the application of rules on contractual penalties to indemnity and price adjustment clauses. It starts with a survey on the main features of sale and purchase agreements and then focuses on the juridical nature of 'representation and warranties' made by the seller. These provisions trigger the mechanisms of the indemnity and price adjustment clauses and are essential in order to assess whether the regime of contractual penalties applies. The UK Supreme Court decision on "Cavendish Square Holding BV v. Talal Makdessi" analyzed the nature of price adjustment clauses and the possible application of the penalty rule. Seen from an Italian perspective, the judgment makes clear that the qualification of the price adjustment clause as a penalty depends on distinct elements, as, among others, the existence of a breach of contract and of a disproportion between the price adjustment and the legitimate interest of the non-breaching party. In conclusion, the contribution argues that, according to Italian law, the rules on contractual penalties may apply to price adjustment clauses through the rules on construction or by an analogical application of Art. 1384 of the Italian Civil Code which provides the judicial power to reduce the amount of a penalty. Mandatory rules have to be applied in cases in which the juridical and economical effects of the price adjustment clause do not differ from those of a penalty clause.

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