How a Letter of Patronage Works Under Italian Law

A letter of patronage can be considered either as a mere declaration of courtesy to looking at them, on the one hand, as binding guarantees ("fidejussione") or, on the other hand, as an undertaking to fulfil the obligations of a third party.

It would however seem that today there is a general consensus that normally speaking the parties to such letter intend to create a legal relation between them.

While the fideussione is a direct binding guarantee from the guarantor, the letter of patronage can be different case by case and can create a different kind of obligation from the issuing party.    

When reading such a kind of guarantee, you should carefully check what the content of the guarantee is:

1. Information, i.e. if the party issuing the letter informs the beneficiary that it holds a majority in the debtor company, that it approves the obligation (for instance a loan) and that it will communicate variations in its holding. It is generally considered that the failure to conform to the terms of such letter exposes the issuer to the risk of extra contractual liabilities.
2. An undertaking in relation to the obligations of a third party. This applies to those letters of patronage where an undertaking is given to do everything possible to ensure that the subsidiary will fulfill its obligations to the beneficiary (for instance a bank). This has been considered from time to time by the Courts either to be an undertaking by the patronant to fulfil its own obligations (i.e. to use its best efforts to the above purposes and not to reach the result that the subsidiary pay its debt) and to be an undertaking to fulfil the obligations of a third party (i.e. the subsidiary). For this purpose Article 1381 of the Italian Civil Code states:"A person which has warranted the obligations or action of a third party is required to indemnify the other contracting party if the third party refuses to be bound or does nor perform the action." In the event of breach there is an obligation to pay damages.
3. Atypical but fully binding and direct guarantee. This refers to a letter which contains an explicit obligation to provide the means for the subsidiary to satisfy its debts. It is considered that such letter gives rise to a kind of guarantee and, although not a "fidejussione" from the technical point of view, implies an obligation "to perform" rather than "to do something" which is different from actual performance. Thus, in the event of breach by the party guaranteed, the bank has a right to request performance from the guarantor.

The above classification is certainly not definitive and various Court decisions have modified and commented upon the various kind of letter of patronage. Thus, the information obligations have to some extent been given, especially by commentators, more of a contractual nature.

There is, however, a general consensus that, normally speaking, a letter of patronage would not amount to a "fidejussione", the only pure guarantee existing under Italian law. The contract of "fidejussione" is a contract whereby the party giving the "fidejussione" is obligated to perform the obligations guaranteed if the beneficiary does not perform. However, a "fidejussione" must satisfy certain requirements of law which, generally speaking, are excluded in the case of a patronage undertaking. This is because:

"The intention to give a "fidejussione" must be express and, although no particular formulas are required, such intention must show itself in an unequivocal manner, in a way which shows clearly the guarantee agreement."

* This article published by BDA Studio Legale is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.