Investors’ (ab)use of the nullity of a contract

It’s time to share my thoughts on recent courts’ decisions on the nullity of master agreements within the context of financial intermediation. This is not a complex topic under a technical point of view, but it is fueling a debate between scholars and courts.

Section 23 of the Italian Consolidated Financial Act (TUF) provides that (i) the master agreement for financial services must be entered into in writing, otherwise the contract is null (ii) the nullity of the master agreement can be disputed by the investors only.

In financial intermediation, the mandatory written form consisting in the parties’ relevant signature, also plays an “informative” role. Within general contexts, written form commonly aims at making the parties’ consent official. Within financial intermediation, in particular, written form has the additional purpose of filling the knowledge gap existing between the investor and the financial intermediary, thus allowing the investor to acquire and dispose of the necessary technical information during the entire contractual relation (indeed, Italian law provides that a copy of the master agreement needs to be delivered to the investor). The informative purpose of section 23 of the TUF therefore answers the following question: why is the written form mandatory?

The prerogative of the claim for nullity granted to the investor reflects the principle of “protection”, as it counterbalances the weaker position of the investor against a stronger position of the financial intermediary. In other words, the legislator intended to extend the protection granted to consumers against professionals also to the financial intermediation context. The purpose of protection granted by section 23 of the TUF therefore answers to the question: who is the protected party?

Over the last years, I believe that these crucial and fundamental rights granted to investors have been misinterpreted and misapplied by Italian courts. In my view, Italian courts have questionably answered to the questions “why” and “who” when applying section 23 of the TUF.

Mandatory written form expresses an “informative purpose”, granting to investors the necessary information to fill the knowledge gap in respect of the financial intermediary’s technical knowledge. As a consequence, the “informative purpose” operates with respect to investors, and not to financial intermediaries.

On the basis of the conclusion set out above, I take the view that the nullity of a master agreement signed by the investor, but lacking of the financial intermediary’s signature, is contradictory with the scope of section 23 of the TUF. Indeed, the nullity of a master agreement duly signed by the investor would twist the scope of section 23 of the TUF as it would no longer protect the interest that the rule intended to defend. If the interest is protected (through the investor’s signature), I consequently believe that the nullity is deprived of the requirements necessary for its application.

In conclusion, in my view recent courts’ precedents that, on the basis of a formal interpretation of section 23 of the TUF, ruled the nullity of a master agreement lacking of the financial intermediary’s signatures (but duly signed by the investor) have wrongly answered to the question: why is the written form mandatory for master agreements?

It is broadly acknowledged that the nullity of the master agreement causes the invalidity of all the investment transactions made under that contract. In this respect, courts’ precedents ruled that the prerogative to claim the nullity granted to the investor operates both with regard to the master agreement and to the specific investment transaction. Consequently, the investor is entitled to decide whether to claim the nullity of the master agreement, and most importantly to cherry-pick the specific transactions he is willing to invalidate, whilst the remaining transactions would remain perfectly valid. Aside from the fact that the persisting validity of transactions effected under a null master agreement is clearly a legal anomaly, I would like to analyze this issue under a different perspective: the abuse of right.

“Cherry-picking” the nullity, which obviously consists in invalidating only harmful investments while saving those that generated a profit, would translate in a transformation of the most severe sanction granted by Italian law into an arbitrary and exploitative remedy which deprives the rule of its main scope of “protection” of the weaker party. “Cherry-picking” nullity does not protect the interest of the weaker party nor it counterbalances its position towards the financial intermediary, but it ends up being an abuse of an (exclusive) right.

An opportunistic use of the nullity remedy is indeed conceptually against the protective principle set forth by the Italian legislator and, therefore, it must be criticized and most of all carefully checked in courts as it seriously affects the principle of good faith in private relations.


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