The question of a possible breach of competition rules in the ABI's model form of suretyship (fideiussione) emerged in 2005 when, having agreed wording with a number of consumer protection organisations, the ABI submitted the form for approval by the Bank of Italy. The Bank of Italy consulted the Italian Competition Authority1, and concluded that a few of the clauses in the model form were in breach of Italian competition rules against agreements between businesses which prevent, restrict or distort competition in the domestic market2. In particular, the Competition Authority and the Bank of Italy did not approve of the following terms:
- clause 2, imposing on the surety an obligation to repay to the bank any amounts previously paid to it in discharge of the guaranteed debt, where those payments are subsequently clawed-back from the bank or set aside for any reason (eg on the debtor's insolvency) (the “Re-instatement clause”)
- clause 6, affording the lender the benefit of the guarantee until the full discharge of all its claims relating to the primary debtor, beyond the time limits of article 1957 of the Italian civil code (which limits the surety's liability to six months from maturity of the debt guaranteed) (the “Extended-term clause”)
- clause 8, making the surety liable for the guaranteed debt even in the event of the invalidity or unenforceability of the guaranteed obligations (the “Survival clause”).
Whilst all these terms and derogations from the rules of Italian law are permitted and recognised by Italian courts in the ordinary course, the Competition Authority still found anti-competitive behaviour in the pattern of the suretyship, on the basis that the model form adopts for all drafting options the solution which is most biased in favour of the bank creditor. They accordingly concluded that the model form would distort competition by preventing a debtor or surety from choosing a lender based on the contract terms which they offer, and forcing the surety to accept those particularly onerous terms.
As regards the 'Extended term' clause (derogating article 1957 of the civil code), the competition ruling considered that this might work as disincentive to banks from diligently pursuing their claims immediately if payment is not made by the primary debtor when due. From a lender’s point of view, a strict time limitation on a lender to claim payment could lead to unnecessary claims and litigation, and in some cases even hasten a debtor's descent into insolvency. In any event, this issue is averted by the prevailing practice with personal guarantees in Italy because they are generally drafted to remain in place until such time as the debt is discharged, whenever that might be.
The 'Survival clause' also merits reflection when used in connection with a loan transaction. For a guarantor to remain liable even where the principal contract is unenforceable can imply that they are liable to pay even where the principal debtor would not have a payment obligation, which seems unfair. But where a loan has been paid to a borrower, and the credit agreement is later found to be invalid or unenforceable, the borrower is still bound to repay the outstanding loan on a number of legal grounds (including unjust enrichment, or restitution of undue payment). A guarantor's liability should (and usually does) cover this scenario. Whilst the Bank of Italy did address this question, it did not consider the Survival clause to be worthy of protection as it might induce a lender to use a lower degree of diligence and care in the preparation of the terms of the main credit contract.
Competition or legal risk?
The antitrust finding regarding the ABI form of surety is probably no longer accurate given recent huge developments in banking regulation. The Competition Authority noted at the time that it did not consider the Basel II framework in its analysis, and it could not establish the correlation between personal guarantees and the cost of credit. The Bank of Italy did consider Basel II although it did not address the notion that legal risk (as part of residual risk) is of supervisory concern, and which Basel II illustrates citing precisely the example of refusal or delay by a guarantor to pay3.
Since 2005 Basel III has developed the concept of legal risk further. It is now an outright requirement under the EU's Credit Risk Regulation4 for lenders which intend to rely on guarantees to mitigate a borrower's credit risk, not just to provide for irrevocable and unconditional commitments, but also to fulfil any contractual and statutory requirements and to take all steps necessary to ensure the enforceability of those guarantees.
The Bank of Italy's own analysis concedes that standard forms of contract can in fact foster competition, allowing smaller banks to achieve the same degree of contractual protections as lenders with larger budgets for legal assistance. The argument behind the conclusion that some terms are anti-competitive is based on the idea that banks should compete not just on commercial terms or the quality of service, but also on the level of legal risk. This notion seems no longer sustainable in light of the revised framework ensuing from Basel II and Regulation 575 of 2013. Under the revised regulatory framework, banks should pursue the utmost protection and legal enforceability of their rights and credit protection, and use contracts which retain a guarantor's liability for the widest scope and longest term legally permitted. As all banks must seek the maximum available legal protection to comply with their regulatory obligations, a model form of contract setting out just that type of protection should be found to foster, not infringe competition.
There is no question that all provisions in the ABI model form of guarantee (including the Re-instatement, Extended-term and Survival clauses described above) when negotiated at arm's length with customers are permitted and fully enforceable under Italian law. A bank would not even have to show that it has allowed comments and discussions of those terms, as long as the guarantee agreement departs from the model form published by the ABI.
It is also noteworthy that the antitrust discussions did not consider the other primary form of personal guarantee available under Italian law, the independent guarantee contract (contratto autonomo di garanzia). This form is not regulated expressly in the civil code. It has been developed by the Italian courts from the late 1980s5, on the back of similar forms of credit protection available in other European jurisdictions, including Germany and the United Kingdom. Unlike an Italian law suretyship (which is regarded as ancillary to the principal obligation), an independent guarantee is relatively unconnected to the primary debt contract. Over time this type of guarantee has become increasingly used in practice and is now the most common form of personal credit protection given for syndicated loans in Italy. Re-instatement, Extended-term and Survival clauses of the type discussed in the antitrust finding are a natural fit and very common provisions included in an independent guarantee, and it is possible that the analysis would have reached a different outcome if this type of contract had also been considered.
Guidance by the Supreme Court
The United Sections (Sezioni Unite, SS.UU.) are the most authoritative body of the Supreme Court of Cassation, and they can be engaged when there are conflicting decisions on a given legal question from the individual Sections of the Court of Cassation, or to address matters of special importance or when a question is submitted to the Court of Cassation for the first time. The antitrust finding of 2005 had led to conflicting rulings from the judiciary and caused uncertainty as to the lawfulness of signed customer guarantees documented on the ABI model form in light of the special nature of the protection afforded by antitrust legislation.
The Supreme Court's initial view6 was that customers should be prevented altogether from challenging the validity of those guarantees. This was followed soon after by another Supreme Court decision7 affirming the validity of such customer guarantees, but allowing customers to bring action for the reimbursement of damages incurred by them as a result of the banks’ anti-competitive behaviour in adopting the offensive provisions in the ABI model form.
The question was submitted for a prior review by the United Sections of the Supreme Court8, which recognised that anti-competitive arrangements reverberate on consumers by infringing their right to an effective choice between competing products, and bank customers should have access to the same remedies available to businesses which did not participate in the anti-competitive behaviour. On this basis, consumers executing a contract implementing anti-competitive arrangements could take action in court to have it declared null and void. Other decisions9 affirmed that the same analysis applies to guarantees issued before the Competition Authority’s finding of a breach of Italian competition rules, as long as they were issued in the form published by ABI.
Later the Supreme Court recognised10 that the effect of the illegal anti-competitive arrangements in affected guarantees does not necessarily mean that the whole guarantee is null and void, but only the particular anti-competitive terms. However, other recent cases11 continued to express the conflicting view that consumer contracts implementing illegal arrangements should be struck out entirely. The ensuing uncertainty prompted the submission to the United Sections of the Supreme Court leading to the ABI Forms Case12.
In this decision, the Supreme Court affirmed the view that end-customers should be permitted to challenge the validity and enforceability of guarantees they have given to creditors and not be limited to just claiming the reimbursement of damages. However, the Supreme Court considered article 1419 of the Italian civil code13 to conclude that Italian law aims to conserve the terms of private contracts where possible, and that the nullity of a particular clause should only lead to the unenforceability of the whole contract in exceptional cases. To this end, the party challenging a contract must show an inextricable connection between the wrongful provisions and the remaining terms of that contract. In other words, end-customers must show that they would not have entered into that contract at all had those wrongful clauses not been included.
In the case of a guarantee based on the ABI’s model form, the Supreme Court found that, being creditor-friendly terms, a surety would have no reason to rely on the existence of any of the Re-instatement, Extended-term or Survival clauses being included in the contract. The lender, on the other hand, would of course choose to retain the benefit of that guarantee even without those terms as opposed to forfeiting it altogether. Against this background, the court ruled that guarantees reflecting those wrongful terms are not invalid as a whole, but instead survive but with those terms excluded.
In light of this judgment, banks which still rely on personal guarantees based on the model forms published by the ABI need not fear that their credit protection is altogether unenforceable. They will not be able to rely on any of the Re-instatement, Extended-term or Survival clauses, but this has been public knowledge since 2005 and in most cases those banks will have arranged for supplemental or alternative remedies by now anyway.
Of course the state of competition in the European loan markets should not raise significant concerns in light of the European Commission’s final report. Please see our article for more details on this report.
The ABI Forms Case is no longer significant for live transactions because the forms of guarantee addressed in the dispute have been out of use for a few years and we would expect that there are probably few assets which still benefit from this type of guarantee.
The Supreme Court's judgment does, however, provide valuable general guidance on the possible impact on contracts which contain anti-competitive provisions. This should foster legal certainty in an area where Italian courts have in the recent past taken inconsistent positions.
1 Autorita Garante della Concorrenza del Mercato, Provision No. 14251 of 20 April 2005
2 Bank of Italy, Provision No. 55 of 2 May 2005
3 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards – June 2004, Part 3, III B.3, para. 767
4 Article 213.3 of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013, on prudential requirements for credit institutions and investment firms.
5 Among others in Cass. Civ. Sez. I, No. 4006 of 6 October 1989; Cass. Civ. Sez. III, No. 1420 of 11 February 1998; Cass. Civ. Sez. III, No. 27333 of 12 December 2005.
6 Cass. Civ. Sez. I, No. 17475 of 9 December 2002
7 Cass. Civ. Sez. III, No. 9384 of 11 June 2003
8 Cass. SS.UU., No. 2207 of 4 February 2005
9 Cass. Civ. Sez. I, Ord. No. 29810 of 12 December 2017
10 Cass. Civ. Sez. I, No. 24044 of 26 September 2019; Cass. Civ. Sez. III, Ord. No. 3556 of 13 February 2020
11 Cass. Civ. Sez. VI, Ord. No. 6523 of 10 March 2021
12 Cass. SS.UU., No. 41884/21 of 30 December 2021
13 1419. Partial nullity – 1. The partial nullity of a contract or the nullity of single clauses causes a nullity of the contract as a whole, if it is established that the parties would not have entered into that contract, in the absence of the part of its contents which is affected by nullity. 2. The nullity of single clauses does not lead to nullity of the contract [as a whole], where the clauses affected by nullity are replaced with mandatory provisions (norme imperative) as a matter of law.
Authored by Carlo Massini, Susan Whitehead and Giulia Geraci.