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09 06 2017 Distribution agreement in Italy – New guidelines of the Italian Court of Cassation.

The second division of the Italian Court of Cassation recently issued a verdict readdressing the matter of Distribution agreement, also known in Italy as “Contratto di Concessione di Vendita”. A short explanation will be proposed hereinafter, given the frequent use of this contract with foreign operators.

The verdict (Supreme Court, second division, February 27th 2017, No. 4948, full text in Italian) provides new interpretation that might interest both legal experts as well as Italian and Chinese contractors. In fact, the judgment deals not only with the nature of the contract but also specifies the limits of the obligations on the contract’s parties. The following interpretations are fully applicable where the law of the contract is the Italian law and the rights, e.g. related to the enforcement or termination of contract, are brought in front of domestic tribunal.

1. Premises

In Italy, the Distribution agreement is considered as a non-standard contract (or, a contract not specifically defined by the national civil law) used in the business practice, often between Italian and foreign parties as well. In the present case, the contracting parties affected by the Court verdict are an Italian and an Austrian company.

The Italian company (or “grantor”) summoned to Court the Austrian company (or “distributor”), requesting the termination of the distribution agreement due to the non-fulfillment of the Austrian company, requesting it to be condemned to the damage compensation as well.

As inferred by the Italian company, the distribution agreement obliged the distributor to carry on the promotion and sale activity of the products purchased from the grantor with the obligation to reach a minimum sale amount; furthermore, the grantor objected that the Austrian company unilaterally interrupted the business relationship, discontinuing the purchase and sale of the products.

The Austrian company, admitting the interruption of the distribution agreement implementation, raised objections on the grantor’s non-fulfillment for the violation of the provisions contained in the exclusivity clause, granting the related rights for the Austrian area. Therefore, the defendant specified that it terminated the contract on its own initiative and for this reason it requested the Court as counterclaim to verify the termination of the business relationship due to the non-fulfillment of the Italian company, condemning the latter to the damage compensation. The verdict of first instance was pronounced in favor of the Italian grantor.

Therefore, the Austrian company filed an appeal against this unfavorable verdict. The Court of Appeal, partially reforming the first instance verdict, rejected the request of the Italian company, considering that it was based on the exception of the distributor’s non-fulfillment for its failure of achieving the minimum sale goals.

Nevertheless, the Court of Appeal observed that the contract did not provide any damage compensation to the grantor in case of failure to achieve the minimum sale goals. As a matter of fact, the contractual provision taken into consideration only granted the Italian company the right to terminate the business relationship. The termination request proposed by the Austrian company for the violation of the exclusivity agreement has been rejected by the Judge as well.

 

Therefore, the Italian company filed an appeal at the Italian Supreme Court, complaining that the application for the contract resolution should have been considered as based on the non-fulfillment coming from the termination performed by the Austrian company, which, in fact, interrupted the goods purchase, and not on the failure to achieve the minimum sale goals, as observed by the judges of  the Court of Appeal.

 

We would like to remind to foreign readers that the verdicts of the Italian Supreme Court are binding for the trial to which they refer, serving also as guideline for the future verdicts of Italian judges, although it shall not be interpreted that their content shall always and in any case be applied by lower courts.

 

2. Decision of the Supreme Court of Cassation

Firstly, the Supreme Court confirmed that the Distribution agreement is a non-standard exchange contract (e.g., a contract between Party A and Party B, where B afterward will promote the sale to other subjects, for example in a specific territory) which shall be distinguished from the Agency contract, as another contract often used between Italian and foreign parties, where the “cooperation” between Party A and Party B is the main characteristic.

Furthermore, the Court specified that the contract has the nature of a “regulatory contract” from which specific obligations arise for the party to whom the assets are transferred at first. This party shall keep into consideration the conditions defined in the Distribution agreement when entering into further agreements or promoting related sales.

Therefore, according to the Court, the Distribution agreement is a “framework agreement” which sets out a set of rules for the parties to follow when entering into further and related agreements with other parties.

Furthermore, the distributor, “Party B” of our example, has the obligation to increase the products’ sale according to the instructions given by the producer – Party A, always taking into consideration the agreement. The proper implementation of the said obligations defines the proper fulfillment of the contract; otherwise, it could lead to the termination due to non-fulfillment, with the possibility to claim the damage compensation.

In the present case a “minimum sale amount” was provided (most common are biannual, annual, or per annual increments).

On the above matter the Court specified that, to obtain compensation the failure to achieve these minimum sales amount shall have been considered by the parties as serious as to determine the contract termination, and such a determination shall be made examining both parties provisions and their actual behavior.

Analyzed the contract, the Supreme Court thus highlighted that the failure to achieve the minimum sale amount had not been evaluated by the parties as an event so important as to lead to the contract termination, and that this case – due to the parties’ will – would have given the grantor only the right to terminate the business.

However, the Court, recalled article 1455 of the Italian Civil Code according to which “In view of the proposal of non-fulfillment termination based on the occurrence of specific circumstances detrimental to the creditor, the judge shall take into consideration the behavior of the debtor and its capacity to favor the consumption of these consequences in order to evaluate the importance of the non-fulfillment”. Recalling the aforementioned article, the Court stated that the Austrian distributor had to be considered anyway as unfulfilling for the obligation of promotion and sale of the goods purchased from the Italian company.

 

Considering the above, we would like to emphasize once more the importance of a proper and detailed draft phase of these contracts.

 

Reminding the purely informative purpose of this Newsletter service, which do not replace the consultancy and experience of our staff, Picozzi & Morigi Law Firm reaffirms its complete availability to provide full assistance on related matters, and reply to further questions and explanations on the subject.

 

Picozzi Morigi Law Firm