To infinity and beyond – Perpetual contracts under Québec law

9 August 2017

Kanada

Verträge
Rechtsstreitigkeiten

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
The predictability of it; and
Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

In this clip I briefly introduce the main options to consider when doing business in Iran.

You can read more on this topic in my articles An introduction to Iran Corporations and Obtaining a Foreign Investment License and browse Legalmondo’s blog for some other posts on doing business in the region.

If your business is related to France or you wish to develop your business in this direction, you need to be aware of one very specific provision with regards to the termination of a business relationship.

Article L. 442-6, I, 5° of the French Commercial Code protects a party to a contract who considers that the other party has terminated the existing business relationship in a sudden and abrupt way, thus causing her a damage.

This is a ‘public policy’ provision and therefore any contractual provision to the contrary will be unenforceable.

Initially, the lawmaker aimed to protect any business relationship between suppliers and major large-scale retailers delisting (ie, removing a supplier’s products that were referenced by a distributor) at the moment of contracts renegotiations or renewals.

Eventually, the article has been drafted in order to extend its scope to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.

The party who wishes to terminate the business relationship does not need to provide any justification for her actions but must send a sufficient prior notice to the other party.

The purpose is to allow the parties, and in particular the abandoned party, to anticipate the discharge of the contract, in particular in cases of economic dependency.

It is an accentuated obligation of loyalty.

There are only two cases strictly interpreted by case law in which the partner is exempted from sending a prior notice:

an aggravated breach of a contractual obligation;
a frustration or a force majeure.

There are two main requirements to be fulfilled in order to be able to invoke this provision in front of a judge – an established business relationship and an abrupt termination.

The judge will assess whether the requirements have been fulfilled on a case by case basis.

**What does the term ‘established business relationship’ mean?**

The most important criterion is the duration, whether a written contract exists or not.

A relationship may be considered as long-term whether there is a single contract or a few consecutive contracts.

If there is no contract in place, the judge will take into account the following criteria:

the existence of a long-term established business relationship;
the good faith of the parties;
the frequency of the transactions and the importance and evolving of the turnover;
any agreement on the prices applied and/or the discounts granted to the other party;
any correspondence exchanged between the parties.

**What does the term ‘abrupt termination’ mean?**

The Courts consider the application of Article L442-6-I 5° if the termination is “unforeseeable, sudden and harsh”.

The termination must comply with the following three conditions in order to be considered as abrupt:

with no prior notice or with insufficient prior notice;
sudden;
unpredictable.

To consider whether a prior notice is sufficient, a judge may consider the following criteria:

the investments made by the victim of the termination;
the business involved (eg seasonal fashion collections);
a constant increase in turnover;
the market recognition of the products sold by the victim and the difficulty of finding replacement products;
the existence of a post-contractual non-compete undertaking ;
the existence of exclusivity between the parties;
the time period required for the victim to find other openings or refocus the business activity;
the existence of any economic dependency for the victim.

The courts have decided that a partial termination may also be considered as abrupt in the following cases:

an organisational change in the distribution structure of the supplier;
a substantial decrease in trade flows;
a change in pricing terms or an increase in prices without any prior notice sent by a supplier granting special prices to the buyers, or in general any unilateral and substantial change in the contract terms.

Whatever the justification for the termination, it is necessary to send a registered letter with an acknowledgment of receipt and ensure that the prior notice is sent sufficienlty in advance (some businesses have specific time periods applicable to them by law).

Compensation for a damage

The French Commercial Code provides for the award of damages in order to compensate a party for an abrupt termination of a business relationship.

The damages are calculated by multiplying the notice period which should have been applied by the average profit achieved prior to the termination. Such profit is evaluated based on the pre-tax gross margin that would have been achieved during the required notice period, had sufficient notice been given.

The courts may also award damages for incidental and consequential losses such as redundancy costs, losses of scheduled stocks, operational costs, certain unamortised investments and restructuring costs, indemnities paid to third parties or even image or reputational damage.

International law

The French supreme court competent in civil law (‘Cour de cassation’) considers that in cases where the decision to terminate the business relationship and the resulting damage take place in two different countries, it is a matter of torts and the applicable law will be the one of the country where the triggering event the most closely connected with the tort took place. Therefore the abrupt termination will be subject to French law if the business of the supplier is located in France.

However, the Court of Justice of the European Union (CJEU) has issued a preliminary ruling dated 14 July 2016 answering two questions submitted by the Paris Court of Appeal in a judgment dated 17 April 2015. A French company had been distributing in France the food products of an Italian company for the last 25 years, with no framework agreement or any exclusivity provision in place. The Italian company had terminated the business relationship with no prior notice. The French company issued proceedings against the Italian company in front of the French courts and invoked the abrupt termination of an established business relationship.

The Italian company opposed both the jurisdiction of the French courts and the legal ground for the action arguing that the Italian courts had jurisdiction as the action involved contract law and was therefore subject to the laws of the country where the commodities had been or should have been delivered, in this case Incoterm Ex-works departing from the plant in Italy.

The CJEU has considered that in case of a tacit contractual relationship and pursuant to European law, the liability will be based on contract law (in the same case, pursuant to French law, the liability will be based on torts). As a consequence, Article 5, 3° of the Regulation (EC) 44/2001, also known as Brussels I (which has been replaced by Regulation (EC) 1215/2012, also known as Brussels I bis) will not apply. Therefore, the competent judge will not be the one of the country where the damage occurred but the one of the country where the contractual obligation was being performed.

In addition and answering the second question submitted to it, the CJEU has considered that the contract is:

a contract for the sale of goods if its purpose is the delivery of goods, in which case the competent jurisdiction will be the one of the country where the goods have been or should have been delivered; and
a contract for services if its purpose is the provision of services, in which case the competent jurisdiction will be the one of the country where the services have been or should have been provided.

In this case, the Paris Court of Appeal will have to recharacherise the contractual relationship either as consecutive contracts for the sale of goods and deduct the jurisdiction of the Italian courts, or as a contract for services implying the participation of the distributor in the development and the distribution of the supplier’s goods and business strategy and deduct the jurisdiction of the French courts.

In summary, in case of an intra-Community dispute, the distributor who is the victim of an abrupt termination of an established business relationship cannot issue proceedings based on torts in front of a court in the country where the damage occurred if there is a tacit contractual relationship with the supplier. In order to determine the competent jurisdiction in such case, it is necessary to determine whether such tacit contractual relationship consists of a supply of goods or a provision of services.

The next judgment of the Paris Court of Appeal and those of the Cour de cassation to come need to be followed very closely.

When negotiating contracts, parties typically focus on the key commercial terms of their agreement. The clauses that govern the term of the agreement (i.e., the duration, or how long the contract remains in force), the renewal of the term, and how the agreement can be terminated, however, merit careful consideration.

Under Québec law, contracts typically have terms that are either fixed (e.g., 5 years, 10 years etc.), or are for an indeterminate period of time (i.e., no specific term is provided for). Contracts with fixed terms may also contain automatic renewal clauses. In the case of an indeterminate term contract, a party to the contract can generally, absent specific terms or a notice provision to the contrary in the contract, terminate it, without cause, by providing reasonable notice of termination (what constitutes „reasonable notice“ depends on a number of factors and is decided on the facts of each case). A third category of contracts are contracts with a potentially perpetual term. An example of a potentially perpetual contract is a contract that contains a renewal clause that is entirely under the control of only one of the parties who can, effectively, unilaterally decide whether the contract will go on indefinitely. In such a contract, the other contracting party does not have a right to terminate the contract by providing reasonable notice of termination. The validity of perpetual term contracts was precisely the issue before the Supreme Court of Canada in its July 28, 2017 decision in Uniprix inc. v. Gestion Gosselin et Bérubé inc. https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/16746/index.do („Uniprix„).

In Uniprix, the pharmacy chain entered into an affiliation agreement with various members of a pharmacists‘ group pursuant to which said members operated a pharmacy under the Uniprix banner. The term of the contract was for a fixed term of 5 years and the renewal clause allowed members to provide a notice within a certain period of time, failing which the contract would automatically be renewed for an additional 5 years:

Regardless of any written or verbal provisions to the contrary, this agreement shall commence on the day of its signing and shall remain in effect for a period of sixty (60) months, or for a period equal to the term of the lease for the premises where the pharmacy is located. [The member pharmacist] shall, six (6) months before the expiration of the agreement, notify [Uniprix] of its intention to leave [Uniprix] or to renew the agreement;

Should [the member pharmacist] fail to send the prescribed notice by registered mail, the agreement shall be deemed to have been renewed in accordance with the terms and conditions then in effect, as prescribed by the board of directors, except with regard to the fee.[Translation]

The Uniprix agreement did not provide any say to Uniprix in connection with its renewal and there were no limits on the number of times that the members could renew the agreement. As such, the contract could remain in force perpetually based entirely on the members‘ decision. After the contract had been renewed twice, Uniprix sent the members a notice of non-renewal and purported to terminate the agreement. The members contested Uniprix’s decision based on the fact that under the affiliation agreement, the renewal clause could only be exercised by the members and, unless the members gave notice to the contrary, the contract was automatically renewed. Uniprix argued that the effect of the members‘ position, which would bind the parties in perpetuity, was contrary to public order (i.e., it violated a fundamental societal value) and unlawful and, as such, the term of the agreement should be considered to be for an indeterminate period, which would allow either party to terminate it on reasonable notice.

In a 6-3 decision, the Supreme Court of Canada held (in upholding the decisions of the majority of the Québec Court of Appeal and of the Superior Court of Québec) that there was nothing under Québec law that prohibited a contract of affiliation from having a perpetual term and that this did not, in and of itself and in the context of corporate and commercial agreements, offend any fundamental societal values. The Court’s holding would equally apply to many other types of contracts such as, for example, franchise agreements and licensing agreements. The Court held, accordingly, that the affiliation agreement was not for an indeterminate term and, therefore, could be not be terminated by Uniprix by providing reasonable notice.

With respect to the holding in Uniprix , the following points should be kept in mind:

The Supreme Court of Canada expressly noted that in certain circumstances, such as where an individual’sperson and freedom are affected (e.g., a contract of employment), a perpetual obligation could offend public order.
In certain specific cases set out in the Civil Code of Québec, the legislator has provided maximum terms for certain types of contracts (e.g., a commercial lease cannot exceed 100 years, the duration of payment of an annuity is 100 years).
In the case of a contract of adhesion (which is generally defined as a contract where one of the parties was unable to negotiate its terms), the adhering or vulnerable party can argue that a perpetual term is abusive and, therefore, null.
The Court’s decision in Uniprixapplied to Uniprix’s ability to terminate the contract without cause. A party always retains the right to terminate a contract for cause. What constitutes „cause“ is decided on a case by case basis and may also be governed by the terms of the contract.

When drafting contracts, parties are generally, subject to limitations imposed by the legislator or public order, permitted to structure their relationship as they see fit. Parties should carefully consider whether they truly intend the duration of their agreement to be entirely under the control of one of the parties to the agreement for an indefinite period of time because, as is made clear in Uniprix, perpetual commercial contracts are enforceable under Québec law.

The author of this post is David Stolow.

Exchange controls

The existing Venezuelan foreign currency regulations significantly restrict the ability of private sector companies and individuals to convert the local currency (“Bolivars” or “Bs”) into foreign currency. Because of these restrictions, it is extremely difficult for companies in Venezuela to repatriate profits generated in Bolivars by converting those Bolivars into foreign currency, or otherwise to convert Bolivars into foreign currency to purchase foreign supplies, to pay debt in foreign currency, etc.

The result of these restrictions is the continued generation of trapped cash in Bolivars that cannot be converted into foreign currency. The foreign currency restrictions can also affect the operations of Venezuelan companies if such operations depend on foreign supplies, unless the shareholders or other affiliates of such Venezuelan company are willing to support its operations with foreign currency generated abroad. Also, because of these restrictions Venezuelan companies may not be able to convert Bolivars into foreign currency to pay intercompany debt in foreign currency.

There are currently three different official exchange rates in Venezuela: (a) the Cencoex rate, fixed by the Venezuelan government from time to time, currently at Bs.6.30 per USD (the “Cencoex Rate”), (b) the Sicad rate, fixed by the Venezuelan government from time to time, currently at Bs.13.5 per USD (the “Sicad Rate”) and (c) the Simadi rate, which is in practice fixed by the Venezuelan government on a daily basis, currently at approximately Bs.200 per USD (the “Simadi Rate”). Given the significant restrictions to convert Bolivars into foreign currency, there also exists a parallel or black market, currently at several times the Simadi rate. The Cencoex Rate (Bs.6.30 per USD) appears as hugely overvalued, if compared to the other official rates (the Sicad Rate or the Simadi Rate) or to the black market rate.

Given the existing Venezuelan exchange controls, many Venezuelan companies have accumulated over the years significant amounts of excess cash in Bolivars that cannot be converted into Dollars.

Foreign Investment Regulations

The only areas currently reserved to companies owned or controlled by Venezuelan investors are open-air television, radio broadcasting, newspapers in Spanish and professional services regulated by law. There are other areas, such as oil, that are reserved to the Venezuelan government in which foreign investors may participate only through minority participations in joint venture companies with the Republic or Venezuelan state-owned companies.

Foreign investors (i.e., foreign companies (head offices), foreign shareholders or foreign partners) must register their direct foreign investments in a Venezuelan company (branch, corporation or partnership) with the Venezuelan foreign investment authority within 60 days following the date on which investment was made (the “foreign investment registration”). The foreign investment registration is one of the documents required to purchase foreign currency through Cadivi to repatriate dividends, branch profits, and proceeds from sales of investment, liquidation of the company or capital reductions.

Several documents must be submitted to the Venezuelan foreign investment authority by the foreign investor to obtain the foreign investment registration, including evidence that the capital of the company was paid with foreign currency or contribution in kind that entered Venezuela. To obtain such evidence, the foreign investor must (a) in case of payment in cash, order a wire transfer to the Venezuelan bank account of the company from an account of the foreign investor located outside Venezuela (as a result of the wire transfer, foreign currency transferred out of the offshore account of the investor will be converted into bolivars at the official exchange rate and deposited in bolivars in the Venezuelan bank account), and (b) in the case of contribution in kind, demonstrate that the asset being contributed to the capital of the company was imported into Venezuela (copies of the import manifest, commercial invoice and other custom documents).

The foreign investment registration must be updated annually by the foreign investor within 120 days of the end of the fiscal year.

Price Controls

The Fair Prices Decree with rank, value, and strength of Organic Law (the “Fair Prices Law”), provides for the possibility of the government to set the prices of any type of good or service sold in Venezuela. The Fair Prices Law creates the Single Registry of People which Develop Economic Activities (RUPDAE) in which all persons and companies that perform commercial activities in Venezuela must be registered. The National Superintendence to Defend Economic Rights (the “Superintendence”), created by this law, has established fixed prices for food, personal hygiene products among other products. Once a list of products is published, their price is frozen until the Superintendence sets the new price (in every level of the commercial chain). In cases in which the Superintendence does not set maximum retail prices, companies should self-regulate their prices, and in no case the maximum profit margin will exceed 30% for manufacturers and 20% for importers. The Superintendence may also establish the obligation to label the maximum selling prices in the body of the product. The Fair Prices Law has also created the following crimes related to commercial activities in Venezuela: (i) sale of expired food or products; (ii) import of unhealthy products; (iii) fraudulent alteration; (iv) hoarding; (v) boycotting; (vi) destabilization of the economy; (vii) resale of products of first necessity; (viii) conditioned sales; (ix) extraction smuggling; (x) usury; (xi) alteration of goods and services; (xii) speculation; (xiii) fraudulent alteration of prices; and (xiv) corruption between private parties. Sanctions are extremely onerous and may include: closure, confiscation of assets, fines and imprisonment.

Filings with the Commercial Registry

All Venezuelan companies must be registered with a Commercial Registry. The Commercial Registry contains copies of the company’s articles of incorporation and by-laws, information on its standing (i.e. annual financial statements, liquidation or bankruptcy proceedings), registered address, directors and officers, the existence of branches, and other information. All information filed with the Commercial Registries is public. Companies must notify the Commercial Registry of changes to their articles of incorporation and by-laws and update other information filed with the registry. Companies must also file annual financial statements and periodically file minutes of shareholders appointing directors and officers.

The author of this post is Fulvio Italiani

General principles

There are a number of general contracting principles under Venezuelan contract law. These principles are mainly regulated by the Venezuelan Civil Code. General civil law principles like freedom to contract, capacity to contract, and formation are applicable under Venezuelan law. Contracts can be written or oral and, in general, no formal requirement for a contract to be enforceable and valid, the parties should however make sure that the signatories acting on behalf of another person or entity have authority to execute the contract.

Choice of Law and Jurisdiction

In general, the choice of foreign law by the parties as governing law for contracts is binding under Venezuelan law, provided that foreign law does not contrive essential principles of Venezuelan public policy. Collateral granted on assets located in Venezuela and other contracts relating to real estate located in Venezuela are governed by Venezuelan laws.

Choice of foreign jurisdiction is valid under Venezuela law. A foreign judgment rendered by a foreign court is enforceable in Venezuela, subject to obtaining a confirmatory judgment in Venezuela.

Such confirmatory judgment could be obtained from the Supreme Tribunal of Justice of the Republic in accordance with the provisions and conditions of the Venezuelan law on conflicts of laws, without a review of the merits of the foreign judgment, provided that: (a) the foreign judgment concerns matters of private civil or commercial law only; (b) the foreign judgment constitutes res judicata under the laws of the jurisdiction where it was rendered; (c) the foreign judgment does not relate to real property interests over real property located in Venezuela and the exclusive jurisdiction of Venezuelan courts over the matter has not been violated; (d) the foreign courts have jurisdiction over the matter pursuant to the general principles of jurisdiction of the Venezuelan Statute on Conflicts of Law (pursuant to such principles, a foreign court would have jurisdiction over Venezuelan entities if such entities submit to the jurisdiction of such foreign court, provided that the matter submitted to the foreign jurisdiction does not relate to real property located in Venezuela and does not contravene essential principles of Venezuelan public policy); (e) the defendant has been duly served of the proceedings, with sufficient time to appear in the proceedings, and has been generally granted with procedural guarantees that secure a reasonable possibility of defense; (f) the foreign judgment is not incompatible with a prior judgment that constitutes res judicata and no proceeding initiated prior to the rendering of the foreign judgment is pending before Venezuelan courts on the same subject matter among the same parties to litigation; and (g) the foreign judgment does not contravene the essential principles of Venezuelan public policy.

The submission by the parties of an agreement to arbitration in a country outside Venezuela would be binding in Venezuela. Venezuela is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Pursuant to the New York Convention, arbitral awards are enforceable in Venezuela without requiring a confirmatory judgment in Venezuela (exequatur) or a retrial or re-examination of the merits. However, the Venezuelan court in charge of enforcing the award can review the causes of nullity of awards contemplated in the New York Convention.

Enforcement

In practice, enforcement proceedings in Venezuela are generally lengthy, complex and cumbersome, and may be challenged (and therefore delayed) by the affected party on many legal grounds, and may be suspended or delayed. From our experience, an enforcement proceeding may take from several months to a few years, depending on the circumstances and complexity of the case.

In addition, a judgment or award for money issued by a foreign court or arbitration panel would likely be enforced in Venezuela only in bolivars at the then existing Cadivi exchange rate, and then the company receiving the bolivars would have difficulties in converting such bolivars into foreign currency as a result of the existing exchange controls.

In light of the above, counterparties of Venezuelan companies (whether public or private) generally take into account the assets of such companies located outside Venezuela as the real guarantee or support for the contractual obligations of such Venezuelan companies.

Contractual clauses allowing one party to unilaterally terminate a contract without judicial intervention in case of breach of the obligations of the other party may be unenforceable, unless the terminating party is the Venezuelan government or a Venezuelan state-owned company. As a general rule, termination for breach of the other party requires a declaration by the court or the arbitral tribunal (in case the contract contains an arbitration clause).

The author of this post is Fulvio Italiani

The Italian Court of Cassation, United Sections (judgement no. 24244 of 27 November 2015), recently issued a judgement on the applicability of article 5 no. 1 of the Brussels I Regulation on the jurisdiction, recognition and enforcement of judgements in civil and commercial matters, now corresponding to article 7 no. 1 of the Regulation 1215/2012 (Brussels I bis).

The above-referenced provision sets a special forum in matters relating to a contract, providing for the competence of the courts located in the place of performance of the obligation in question. According to letter b) of this provision, in case of the sale of goods, the place of performance of the obligation in question shall be the place in a Member State where, under the contract, the goods were delivered or should have been delivered.

In the case brought before the Court of Cassation, an Italian company – while objecting the claim of a French company regarding the conclusion of some sale agreements that the latter stated to have entered into with the first one – asked for a declaratory judgement stating the inexistence of any contractual obligation between the parties, and, alternatively, for a declaration that the alleged agreements were null and void.

First of all, the Court of Cassation asserted the applicability of article 5, letter b) of the Brussels I Regulation to the case de quo.

Albeit recognizing that the abovementioned provision seems to refer only to actions addressed to the performance of a contract and not to actions regarding the dissolution of a contractual obligation, the Italian Supreme Court has considered that also claims aiming at ascertaining the inexistence, invalidity or ineffectiveness of an agreement concern matters relating to a contract. More precisely, the Supreme Court has held that such claims involve an initial, actual or alleged, voluntary assumption of an obligation, of which they tend, in several ways, to default. In the light of this assumption and considering that the delivery of the goods was supposed to take place in France (according to the contractual documents evidenced during the proceedings), the Court of Cassation has found that Italian Courts were lacking jurisdiction over the case, thus confirming the judgement previously issued by the Court of Appeal.

The judgement of the Italian United Sections is important because it has definitively confirmed, consistently with the European uniform trend, that the place of delivery is the only autonomous linking factor to be applied to all claims grounded on contracts for the sale of goods and not only to claims based on the non-performance of the delivery obligation itself.

The author of this article is Silvia Petruzzino.

A crucial clause in international contracts is the one which deals with litigation.

My advice, since we have seen that negotiation can be pretty long, complicated, and, exhausting, is that such clauses should not be the last to be dealt with, often times late at night when parties are exhausted, but the among the first.

Generally parties argue at length on such clauses, because neither party is willing to give up on its national jurisdiction for different reasons, foremost of all the fear that foreign judges would not be impartial and treat with favor the local part.

This deadlock often leads to bad compromises, like choosing the judge of a third state or combining the jurisdiction of one state with the application of the law of the other, which is definitely not recommended.

There is no one-fits-all solution to offer here: the advice is that such clauses should be tailor made on a case by case basis, and that the choice of a state court or arbitration should be expressed taking into account where the final decision shall be enforced.

If we foresee that our client may seek payment of a price or claim damages for breach of contract, ‘where is the money’ or ‘where are the assets’ should be the driving factor, and the choice of jurisdiction should be made accordingly.

If there is no such concern, and litigation may be foreseen only or mostly in a defensive scenario, then the proximity to the money or assets is no more a priority, and other options can be evaluated: in that case, the choice of a Judge in a far away country can be the best option, as it is a strong deterrent for litigation.

When battling for a clause with domestic jurisdiction, however, one should keep in mind that the process of recognition of a foreign decision is generally a rather complicated and lengthy process, even if (as is the case of Italy and China), there is a bilateral treaty for mutual recognition of judicial decisions (but very few cases have been recognized and enforced in China thereafter); it should also be kept in mind that all documents filed with the application for recognition of the foreign decision need to be translated into mandarin, notarized and legalized, which in complex litigations can represent an unforeseen additional high cost.

In other cases, like in the USA, where there is no bilateral treaty in this field, to litigate abroad often means that the foreign decision will be almost useless, with the necessity to sue again in China to seek enforcement of the decision.

Arbitration can be a valid alternative, as China is a member of the New York Convention of 1958 and enforcement of an arbitral award is in most cases easier and faster than the process of recognition of a foreign court decision.

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