Because of the way this matter was referred to the Italian Supreme Court, the special composition of the Court making this judgment, and recent legislation, this decision is bound to become an almost binding precedent, in Italy.

Under the Italian Civil Code, when a property deal goes wrong in Italy, the aggrieved party has two different ways of protecting their interests.

- Action on the legal deposit - Normally an Italian Preliminary Contract (“Compromesso”) provides that the buyer shall pay to the vendor a deposit on exchange of contracts. Where such deposit is defined as a “Caparra Confirmatoria”, in case of breach of contract, if the defaulting party is the buyer, then the vendor is entitled to both terminate the contract and to retain the deposit as liquidated damages.

Where the defaulting party is the vendor, then the innocent buyer will be entitled to terminate the contract, and demand that the vendor pays him a sum equivalent to twice the deposit paid, as liquidated damages.

Clearly tricky legal questions are bound to arise where both parties accuse each other of breach of contract.

- Action for damages to be assessed - Alternatively, where either party to the Compromesso is in breach, the other (innocent) party may apply to the Courts to compulsorily enforce the contract or, rescind (terminate) the contract and claim damages.

Clearly where the innocent party is the buyer and the vendor is in breach, the buyer is also entitled to claim his deposit back, in addition to the damages. If the buyer is in breach he is entitled to claim credit for the deposit already paid to the vendor, to be set off against any damages actually awarded to the vendor.

The judgment in question was issued by the Italian Supreme Court on the 14th January 2009 and includes a valuable, detailed legal analysis of the relevant legal provisions quoted above, and how they operate in practice.

In this case, a couple (A and B) sold a property to buyers C and D. A deposit was first paid, and then C and D tendered a further amount in promissory notes (rather than special cheque as originally stipulated), as a further deposit under the terms of the contract. The vendors (A and B) refused the promissory notes, as they were entitled to be paid with a special, guaranteed cheque.

The buyers C and D, alleging that the vendors were in breach of contract, then applied to the Courts for the contract to be discharged, for damages to be paid and for the deposit actually paid to be returned. The vendors (A and B) counterclaimed in damages to be assessed, seeking at the same time to be entitled to retain the deposit received.

In first instance the Court discharged the contract between the parties and then found for the vendors (A and B) and rejected the buyers`claim. However, because the vendors could not prove any actual damages, the Court ordered the vendors to return the deposit to the buyers (C and D).

The point to be noted here is that the vendors in their counterclaim had elected for an action in damages to be assessed. They had not elected for an action on the legal deposit to be retained as liquidated damages, and given that they could not prove any actual damages suffered, none could be assessed. The Court had to order the deposit to be returned to the defaulting buyers.

The vendor then appealed to the local Court of Appeal, seeking to change their position. Rather than claiming for damages to be assessed (which they could not prove / had not materialized / could not be assessed) they applied to retain the deposit paid by the defaulting buyers, as liquidated damages (action on the deposit). This action does not require actual damages to be assessed.

The local Court of Appeal rejected this application. It was by now too late for the vendors to change their position in the legal proceedings. Because the vendors had originally elected to claim actual damages to be assessed, they could not be allowed now to change their claim on appeal. The first instance judgment was accordingly confirmed and the vendors were ordered again to return the deposit to the defaulting buyers with interests.

The innocent vendors, clearly aggrieved by this decision, took the matter to the Supreme Court which however rejected their appeal and confirmed the decision of the Court of Appeal, providing very helpful and detailed analysis of the legal provisions involved.

This judgment is a powerful reminder of some very basic points any foreign buyer should consider where an Italian property deal threatens to go wrong. Retaining a specialized lawyer and having a professionally drafted "Compromesso" are certainly an advantage.

Initially attempts should always be made to dissuade the defaulting party from its conduct, and legal proceedings should always be considered as the last possible option. Legal proceeding can take very long time to come to a final decision in Italy, they may also prove expensive for the foreign buyer. In addition it is never possible to predict the Court`s decision with absolute certainty. There is always a very wide margin of risk, until the actual final judgment has been issued.

If however proceedings for breach of contract are seriously contemplated, it is important to analyse the position very carefully.

Once a decision on the possible legal alternatives has been taken, it is important to be consistent throughout, to the very end of the proceedings.

As this judgment shows, attempting to change horses in midstream can have disastrous consequences.