The precise nature of the letter of patronage has been the object of much debate in Italian legal writing. The debate has ranged from considering letters of patronage mere declarations of courtesy to looking at them, on the one hand, as binding guarantees ("fidejussioni") or, on the other hand, as an undertaking to fulfil the obligations of a third party. It would, however, seem that to-day there is a general consensus that, normally speaking, the parties to such a letter intend to create legal relations between them.

In addition to the "fidejussione" the kind of legal relations which can be created by means of a letter of patronage can be summarized as follows:

(i) Information, i.e. where the party issuing the letter informs the bank that it holds a majority in the lender company, that it approves the loan and that it will communicate variations in its holding. It is generally considered that the failure to conform at the terms of such letter exposes the issuer to the risk of extra contractual liabilities.

(ii) An undertaking in relation to the obligations of a third party. This is taken to apply 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 bank concerned. 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.

(iii) Atypical 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 give performance" 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 defini¬tive 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 view 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 give performance of 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 letter of patronage. 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 unequivocable manner, in a way which shows clearly the guarantee agreement."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.