Letter of interest and contractual liability

The Court of Appeals of Milan with decision No. 2138 of June 17, 2022, regarding damages resulting from loss of chance in the context of a negotiation for the sale and purchase of quotas of two limited liability companies (società a responsabilità limitata), ruled that agreements signed by and between potential sellers can be binding not only against the buyer, but also by and between the potential sellers themselves, implying contractual liability in case of failure to perform the obligation.

The case

Two quotaholders ("Quotaholder A" and "Quotaholder B"), owners of two limited liability companies, as potential sellers, executed a letter of interest with a fund, as potential buyer, for the transfer of 100% of the corporate capital of both companies. In addition, the letter of interest included an exclusivity obligation between the parties until December 31, 2014.

In execution of the letter of interest, each quotaholder signed a preliminary sale and purchase agreement with the fund for the sale and purchase of the equity of the companies, subject to conditions precedent, containing the provision that the final agreement would be signed by March 31, 2015.

Moreover, each preliminary sale and purchase agreement contained a clause that allowed the potential buyer not to enter into the final deed of purchase of the equity of one company if the final deed of purchase of the other wasn’t executed. 

The fund notified the fulfilment of the conditions according to preliminary sale and purchase agreements, inviting Quotaholder A to enter into the final deed of purchase. The Quotaholder A, however, had proceeded to sell part of his quotas in one of the two companies, to a third party, thus jeopardizing the success of the overall transaction and Quotaholder B's interest in it.

The Court of Milan ordered Quotaholder A to pay damages in favor of Quotaholder B.

The defeated Quotaholder A appealed the decision of the Court before the Milan Court of Appeals, claiming that Quotaholder B, by entering into the preliminary sale and purchase agreement, had not acquired a stable right to the sale, having subordinated the future execution of the final deed of purchase to conditions precedent set in the exclusive interest of the fund.

The decision

The Court of Appeals of Milan confirmed the decision of the Court of Milan, which condemned Quotaholder A to pay damages in favor of Quotaholder B as contractual liability. 

The Court pointed out, in fact, that a contractual obligation could be found between Quotaholder A and Quotaholder B since they had assumed a unified position toward the fund by entering together into the letter of interest.

Moreover, the two preliminary sale and purchase agreements involving the sale of the companies' were linked. As a result of this, the transaction acquired a unitary nature, from which inevitably followed the commitment, even between Quotaholder A and Quotaholder B, not to sell the quotas to parties other than the fund. The Quotaholder A's conduct, therefore, was found to be peacefully in breach of the obligations deriving from the letter of interest and in violation of the rule of objective good faith under Articles 1175 and 1375 of the Italian Civil Code.