In case of breach of contractual obligations, the party in breach is normally required to pay to the other party damages, i.e. an amount of money as compensation for the loss generated by non-performance or delay. Contracts often include liquidated damages clauses, which establish in advance the amount of damages to be paid. However, the effects of such clauses can vary significantly depending on the jurisdiction and it is essential to consider all legal implications when drafting a contract.

Under Italian law contracts can include a liquidated damages clause (in Italian: “clausola penale”), which specifies a predetermined amount to be paid in case of breach or delay. This can either be a lump sum for the case of non performance, or an amount for each period of time (e.g. day or week) of delay.

The party seeking compensation under this clause doesn’t need to prove actual losses, which can be advantageous when damages are difficult to quantify, such as loss of profit or business.

The specified amount in the clause is the maximum recoverable, unless the contract explicitly allows for additional damages (“danno ulteriore”): the party claiming additional damages, however, must prove the entire loss and liquidated damages will remain absorbed.

Simultaneous claims for both liquidated damages and contract performance are not permitted, except in cases of delay.

It is important to know that in Italy courts have the authority to reduce liquidated damages (even ex officio, i.e. without party request) if they are deemed “clearly excessive” in relation to the non-breaching party’s interests.

In addition, extremely low liquidated damages amounts  may be deemed null and void whenever the breaching party has committed fraud or gross negligence, as they can be regarded as a limitation of liability.

It’s important to differentiate between liquidated damages and deposit clauses (“caparra”),  often seen in transactions involving real estate or where a delay in fulfilling obligations is expected.

“Caparra” is a deposit paid by one party to the other upon contract execution, which serves as compensation if one party breaches or unilaterally terminates the contract.

If the party providing the deposit breaches or terminates the contract, the other party retains the deposit. Conversely, if the other party breaches or terminates the contract, they are required to pay double the deposit.  

Upon satisfactory fulfillment of obligations, the deposit is refunded or set off against any remaining payments due.