Distribution Agreements in Italy

With the title “distribution agreement” we refer to a framework agreement, between a supplier/principal and a reseller/distributor as independent businesses, according to which the distributor buys certain products (or services) from the principal, and resells them to customers. The principal usually grants special conditions to the distributor (territorial exclusivity, favourable price conditions, support in advertising, technical assistance etc.), and the distributor in turn engages in promoting the sales of the principal’s products (minimum purchase quantities, sales objectives, showrooms, stock, after sale services etc.).
A distribution agreement, often known in Italy as a “concession agreement” (contratto di concessione) is not, as such, regulated by Italian law. It is considered an atypical contract subject to the general rules of contract law, rules on similar contracts (vendita, somministrazione, mandato) applied by analogy, some specific legislation, and case law principles. Generally, parties are free to decide the content of the contract, and very few rules are considered mandatory.
Some of the most important general rules to consider before submitting a distribution contract to Italian law are as follows (hereinafter we refer to the Italian civil code as “c.c.”):

• some clauses of general terms and conditions (including forum selection/arbitration clause) that are burdensome for the other party (clausole vessatorie) must be accepted with an additional declaration: this results in the need, peculiar to Italian law, of a double signature of the terms (article 1341 c.c.);
• statutes of limitation (e.g. term to claim warranty, to claim damages etc.) are prescribed by law and cannot be diluted by the parties – for example, the statute of limitation to claim warranty in sales contracts in business relations (B2B) is one year from delivery (article 1495 c.c.);
• clauses limiting liability in cases of fraud, gross negligence, or violation of public policy rules are null and void (article 1229 c.c.); Termination due to the insolvency of one party is subject to mandatory regulation by law (legge fallimentare); and
• non-compete clauses must be stipulated in written form, refer to a certain activity or territory, and cannot exceed five years (article 2596 c.c.).

Other mandatory rules which should be considered are mentioned at paragraph 7. According to the case law, distribution agreements are framework agreements, according to which the parties undertake to stipulate a series of contracts for the supply of goods or services at certain conditions.
Distribution agreements, like all vertical agreements, are subject to antitrust rules. Together with the EU rules, which are directly applicable in all Member States, Italian domestic antitrust rules are contained in the Law n. 287/1990, which applies EU principles on a domestic scale.
As a general rule, Italian courts do not apply commercial agency rules to distribution agreements as they consider that the distributor, unlike an agent, is an independent business that does not qualify for particularly protective rules.

There are no special rules for the conclusion of distribution agreements; it is not mandatory for a distribution agreement to be in written form.

However, a comprehensive written agreement is always advisable, especially in the absence of any standard regulation.

In many cases, a long-term supplier-purchaser relationship over time may evolve into a more complex contractual relationship where, for example, the purchaser is a reseller that is granted special discounts or some form of exclusivity, offers after-sale services, or appears in the website of the supplier. This contractual relation could be considered by the courts as a distribution agreement, with unexpected consequences.

In such cases therefore it is highly advisable to execute a comprehensive distribution agreement, which should include, among others:

• a detailed description of the rights and obligations of the parties, including exclusivity (if any), non-competition, minimum turnover/sales target clauses, stock, advertising, after sale services, etc.;
• if applicable, a licence for the trademarks of the principal, and the conditions to prevent misuse of such trademark;
• regulation of the supply contracts that are concluded during the relationship (delivery, payment, discounts, liability, reservation of title, etc.). This can be done by referencing to the general terms and conditions of the principal, which should be verified according to the law applicable to the contract and to mandatory rules of Italian law;
• the duration of the agreement, the notice, and details of causes for termination;
• the possibility for the supplier to stop deliveries in case of payment delays;
• a detailed description of post-termination obligations (purchase of stock, use of trademarks, settlement of due invoices etc.); and
• for international contracts, a comprehensive choice of law and a choice of court/arbitration clause (including all related obligations between the parties).
  

As mentioned in paragraph 1 hereinabove, in Italy the distribution agreement is not regulated by specific rules and, as a consequence, the content of the contractual obligations is determined by the parties.
In principle, the parties are free to determine the content of the exclusivity clauses, and such clauses are effective under the Italian law. The violation of an exclusivity clause may allow the other party to immediately terminate the contract for cause.

Exclusivity granted to distributor. Considering that no rule regulates the grant of exclusivity to the distributor, exclusivity may not be implied in the contract itself and must be agreed by the parties, who are free to stipulate the distributor's exclusive rights as they deem appropriate.
As a consequence, if no clause provides for exclusivity, the distributor cannot claim to be an exclusive distributor. It should be noted, however, that the courts may interpret the fact of exclusivity from the behaviour of the parties, arguing that the parties implicitly agreed de facto on exclusivity.
In principle, when the supplier grants exclusivity to the distributor, the supplier must not sell to customers established in the contractual territory, but he is free to sell to customers outside the territory. Such clauses usually define territory and/or customers included in the exclusivity and, if applicable, the exclusion of certain customers or types of customers from the exclusivity; some clauses allow direct sales by the supplier under certain conditions (i.e. payment of commission), or under certain circumstances. These clauses are valid and effective; the parties should be careful in determining the content of the clause in order to avoid obligations that are too vague (which are null and void).

Exclusivity granted by distributor to supplier. When we deal with exclusivity granted by the distributor to the supplier, it may be defined as an obligation of non-competition for the distributor. This obligation may imply that the distributor is obliged to distribute only the products (or services) of the supplier, or that it may distribute products or services of other producers provided that such products or services are not in competition with the supplier’s products or services. As stated hereinabove, there is no rule governing the grant of exclusivity to the supplier, therefore, the parties may agree to whatever they deem fit for the commercial relationship.
Although the parties are free to determine the content of their obligations, it should be considered that such clauses may be contrary to national (Law 10 October 1990, n. 287) and EU anti-trust rules, when such clauses can affect the trade between member states of the EU (or the domestic trade, whichever the case). For instance, a clause prohibiting an Italian distributor to sell the products outside the Italian territory falls under the prohibition contained in article 101 par. 1 of the EC Treaty on the Functioning of the European Union, and is therefore considered void according to article 101 par. 2.
As a general rule, a supplier may restrict the active sales by a distributor in a territory or to a customer group that has been allocated exclusively to another distributor, or which the supplier has reserved for itself. According to the European Commission: a) “active sales” means actively approaching individual customers by, for instance, direct mail, including the sending of unsolicited e-mails, or visits; or actively approaching a specific customer group or customers in a specific territory through advertisement in media, on the internet, or other promotions specifically targeted at that customer group, or targeted at customers in that territory. Advertisement or promotion that is only attractive for the distributor if it (also) reaches a specific group of customers, or customers in a specific territory, is considered active selling to that customer group or customers in that territory; b) “passive sales” mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers. General advertising or promotion that reaches customers in other distributors' (exclusive) territories or customer groups, but is considered a reasonable way, and intended, to reach customers in one's own territory, is considered passive selling. General advertising or promotion is considered a reasonable way to reach such customers if it would be attractive for the distributor to undertake these investments even if they would not reach customers in other distributors' (exclusive) territories or customer groups.
Furthermore, the supplier cannot prohibit his distributor to promote his products and sell them through Internet, to the extent such promotion and sale is considered as a “passive sale”.
For this specific issue, reference is made to the Guidelines on Vertical Restraints of the European Commission (2010/C 130/01) and Regulation (EU) No 330/2010, the EU’s Block Exemption Regulation (BER), which renders the prohibition under Article 101(1) TFEU inapplicable to vertical agreements meeting certain requirements, and provides such agreements with a ‘safe harbour’.
Hence, special attention should be used when drafting clauses that limit the use of the internet to sell the products. In principle, every distributor must be allowed to use the internet to sell products, as the use of a website to sell products is considered a form of passive selling. The Supplier may impose restrictions prohibiting the use of the internet by the distributor to the extent that promotion on the internet or use of the internet would lead to active selling in other distributors' exclusive territories or customer groups. In general, efforts found to be specifically in a certain territory or for a certain customer group is considered active selling in that territory or to that customer group. For instance, the supplier may prevent the distributor from a) territory-based banners on third party websites, as this would be considered a form of active sales into the territory where these banners are shown; b) paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory is also considered active selling into that territory. Antirust rules are quite complex and must be assessed on a case-to-case basis, therefore we recommend that suppliers and distributors to seek expert advice.

In short. Considering Italian law does not provide for specific rules for distribution agreements, when Italian law is to be applied, we suggest to clearly specify if the exclusivity/non-competition obligations apply and to what extent, bearing in mind that when international transactions are involved, parties should check if their agreement falls within the scope of EU antitrust law.

The "minimum turnover" clause (hereinafter MT clause) is very common in distribution agreements, and is one of the most loved clauses for suppliers, especially when a distributor requests an exclusivity clause, a long-term contract, or a wide territory.
By an MT clause, a distributor undertakes to attain a given minimum turnover during a specific period of time, usually on a yearly basis; in practice we can note that there is an increase of such clauses applying to shorter periods as well (e.g. six months or even three months ).
The MT clause can include either an obligation on the distributor to purchase a minimum amount of product (“purchase obligation”), or an obligation on the distributor to sell a minimum amount of product (“sales obligation”), in the assigned territory.
Furthermore, the obligation of the distributor may concern a minimum turnover (amount of money) or a certain number of products, and the more complex clauses may also include a mix of these obligations.
The MT clause is different from the clause whereby the parties only set sales targets without any actual obligation. But sometimes the difference between the two clauses does not appear so evident at first glance.
Therefore, it is essential to pay close attention when drafting an MT clause in order to avoid ambiguous statements that may jeopardize the rights of the supplier.
All the above-mentioned clauses are valid according to Italian law.
If the MT clause is properly drawn up, in the event of failure to achieve the minimum turnover, the supplier has the right to terminate the contract for breach of contract, according to article 1453 c.c. when the breach of such obligation is material; or, if the parties have foreseen this consequence by a proper express termination clause, invoking the express termination clause, according to article art. 1456 c.c. According to art. 1455 of the civil code, the breach of an obligation is material when it is not of little importance to the party who has an interest in it.
To terminate the contract, the breach (i.e. the non-attainment of the minimum turnover) must be attributable to the distributor’s faulty conduct, and the breach must not be of little importance. Please note that if an express termination clause is agreed, the Italian courts will generally not dispute the importance of the breach if the clause is applied and invoked according the rule of good faith.
The case law on MT clauses for distribution contracts is poor. However, examining the jurisprudence in matter of agency contracts (that, mutatis mutandis, can also be taken as reference for the distribution contracts) the Italian courts have expressed themselves in favour of the validity of these clauses, confirming the termination of the contract due to the fault of the party that had not met the obligation to reach a certain minimum turnover.
In addition, according to Italian law, if the failure to attain the minimum turnover can be attributed to the faulty or wilful misconduct of the distributor, the distributor may be also be liable to pay compensation for damages arising from its breach. Of course, solutions other than termination may also be envisaged by the parties, such as the cancellation of the exclusivity granted to the distributor (if this is the case), or the reduction of the assigned territory.
In some MT clauses, the supplier has the right to unilaterally determine the turnover amount. Such clauses can be considered invalid because they give one party the power to unilaterally modify an essential term of the contract. However, if the clause is applied by the supplier in a reasonable way, and the decision is based on objective criteria, there is a good chance that an Italian court will uphold the validity of the clause.

In short. Our practical suggestion to draft an effective minimum turnover clause is- a) to provide an express termination clause in order to smoothly terminate the contract if so desired for the supplier; b) to determine objective criteria to establish the minimum turnover to be achieved, avoiding unilateral determination of the minimum turnover amount by the supplier.

According to the Italian law, the parties may agree to contract for an indefinite term or expiring on a specific date (for a definite term); contracts with automatic renewal are admitted.

Contracts for a definite term may be terminated before the term only if the parties have included such a possibility in the contract. Even in the absence of such right of termination in the contract, either party may early terminate the contract for reasons which do not permit continuing the relationship on a mutual confidence basis and, in particular, in case of a material breach by the other party.

Contracts for an indefinite term may be terminated by either party giving the other party a reasonable termination notice; no reason is required for such termination (so-called termination “ad nutum”). The parties may agree on the notice period in the contract. However, parties should always act in good faith. In a famous Italian case (the Renault case of 18 September 2009, see paragraph 6), the Italian court decided that the termination of the contract was abusive even if it respected the contractual terms agreed by the parties, because the principal had acted in bad faith.

If the contract does not provide for the period of notice, the Court will fix an appropriate period. Unfortunately, there is no clear formula for calculation of the notice period provided by Italian courts, and in the past courts have analogically applied the period of notice of the commercial agents also to distributors. We recommend that parties provide the notice period in the contract, since the Courts usually respect such clauses, even if the period is short.

Additionally, Italian law recognises the right of a party to terminate a contract for an indefinite term without notice (or before its term, if the contract is for a fixed period) in situations that do not permit continuing the relationship on a mutual confidence basis and, in particular, in case of a material breach by the other party.

For example, substantial breaches like repeated and unjustified lack of supply, breach of exclusivity granted, breach of the obligation to pay the goods, distribution of competing products (if there is a non-competition clause), or violation of the other party’s intellectual or industrial property’s right may be considered a material breach. Nevertheless, if no specific clause is agreed by the parties, the courts will decide whether the termination reason is well grounded or not.

In case of unlawful termination, the terminating party may be liable to pay monetary damages to the other party. Such damages are usually calculated taking into account the losses and lost earnings of the innocent party for the notice period in case of a contract for indefinite term, or until the expiry date of the contract in case of contract for a definite term.

In general, there is no requirement of written form for distribution contracts and the same applies to the termination notice; notwithstanding the parties have to pay attention to what the law or contractual clauses provide for. If the contract provides for a specific formality for termination, a termination notice sent without respecting the requested form is ineffective. A written termination notice is requested if a party is willing to send a warning asking for the fulfilment of a certain obligation. The notice specifies that in case of non-fulfilment within the indicated time period, the contract will be terminated (“diffida ad adempiere” according to article 1454 c.c.). The written form of a termination notice is strongly recommended to prove the termination of the contract in accordance with an express termination clause (“clausola risolutiva espressa”). According to article 1456 of the Italian civil code, the contracting parties may expressly agree that the contract is terminated in the event that a specific obligation is not fulfilled according to the established methods; in this case, the termination occurs by law when the interested party declares to the other that it intends to make use of the termination clause.

In all cases, any termination notice is deemed validly given when it reaches the premises of the addressee (article 1335 c.c.).

In short. we recommend: a) to draft specific termination clauses specifying the notice period; b) to include express termination clauses; and c) to use means of communication giving evidence that the notice has been received and when it has been received.

The Italian law does not grant the distributor any right to goodwill indemnity upon termination.

However, as already mentioned in paragraph 5 hereinabove, in case of an unlawful termination, the terminating party may be liable to pay monetary damages to the other party for unlawful termination, in terms of contractual liability. Such amount of money will usually be calculated based on the losses and lost earnings of the innocent party for the notice period in case of a contract for indefinite term, or until the original term of the contract in cases of a contract for a definite term.

It should be noted that in a famous court case (“Renault” case of 18 September 2009), the Italian Supreme Court stated a general principle pursuant to which the contractual provision which grants the supplier the right to terminate the distribution contract by notice does not exclude the right of the courts to evaluate if such right has been exercised in accordance with the principle of good faith. This decision seems to recall the principle of abuse of right. In case of abusive termination, the distributors have the right to receive some amount of money (in terms of contractual liability), despite the termination notices having been sent in accordance with the notice period required by the contracts.

In the “Renault” case, the Court of Appeal while deciding the merit of the case ruled by the Supreme Court, has condemned the supplier to pay some amount of money to the distributors.

However, this case law does not involve the recognition of any goodwill compensation, and the amount of damages determined by the court should not be considered goodwill indemnity upon termination.

Economic dependence

The Law 192/1998 regulating sub-supply contracts (subfornitura) contains article 9 that needs to be carefully considered in distribution relationships. This clause contains the prohibition of any “abuse of economic dependence” (abuso di dipendenza economica), and is considered a general rule by the Italian Supreme Court, applicable not only to sub-supply, but to all vertical agreements. According to the rule, if there is economic dependence of one party on the other, the “dominant” party cannot profit from such a situation by refusing to sell or purchase, imposing burdensome conditions, or suddenly terminating the commercial relationship. Such clauses are null and void, and the party which proves to be the victim of abuse can claim a compensation (in terms of contractual liability). Until now, however, there have been very few applications of this principle.

Product liability

Italy has enforced the European rules on product liability into the so called “Consumer Code” (codice del consumo), DL 206/2005, which contains mandatory rules concerning the liability of the manufacturer for defects that cause damage to the user. Product liability is considered non-contractual liability, and may be directly invoked by consumers.

Reservation of title

When drafting the rules concerning sales contracts between supplier and distributor (either in the distribution contracts itself, or in general terms and conditions), parties should consider that reservation of title of movable goods may be difficult to enforce for the following reasons:

• as a general rule, transfer of title is an effect of consent, irrespective of delivery (article 1376 cc); therefore, reservation in order to be effective must be agreed in the sales contracts and not later;
• the transfer of movables in good faith grants the purchaser the full property, even though the seller was not the owner (article 1153 cc);
• reservation of title must be mentioned in the sales invoices (article 11 D.Lgs. 231/2002);
• in order to enforce reservation of title, under certain conditions, the seller must declare the dissolution of the contract and claim the return of the goods (articles 1523-1526 cc); and
• finally, in case of insolvency of the distributor, in order to claim back unpaid goods, the supplier must prove that reservation of title was agreed prior to insolvency. The proof of the date is particularly strict (so called data certa), and may be obtained by registration of the contract or, more easily, applying a digital timestamp or sending the contract via certified email (PEC).

Data protection

In distribution agreements, special attention should be given to the application of the rules on protection of personal data, pursuant to EU Regulation 679/2016 (General Data Protection Regulation – GDPR).

When processing and sharing personal data (in particular, clients’ data), supplier and distributor should carefully consider who is the data controller and the data processor, or if they have to manage a situation in which they are joint controllers, since different rules will apply in each scenario.

In addition, law 196/2003 (so called “Privacy Code”) is still in force in Italy. It states particular rules that also apply when the data concerned is the data of legal persons, in particular, in case of data processing for marketing activities. This matter can be tricky, and we recommend seeking specialized advice on this issue.

The parties to an international distribution agreement may choose the governing law of the agreement and of possible related contracts, such as the contracts for the supply of goods and services.

Choice of law clauses contained in a distribution agreement are valid in Italy according to Regulation (EC) 593/08 of 17 June 2008 on the law applicable to contractual obligations (so-called Regulation Rome I), which is directly effective in all EU Member States, except Denmark.

Therefore, an Italian court will consider the choice of the parties valid if it complies with Regulation Rome I, even though the choice is that of a law of a non-EU country.

The choice of the governing law does not need to be explicit, and may be proved by the terms of the contract or the circumstances of the case. For example, if the contract contains reference to several articles of Italian civil code or other rules of Italian law, this could be considered an implied choice for Italian law governing the entire contract.

It is important to consider that according to Regulation Rome I, overriding mandatory provisions of the State where the court sits may prevail over the law chosen by the parties. Therefore, it is possible that an Italian judge may be of the opinion that the rules of the Italian legal system that are absolutely mandatory, and should apply irrespective of the contract, and irrespective of the foreign law which governs the contract. This may, for example, refer to tax rules, banking and financial regulations, rules on product liability, or antitrust rules.

If the parties have not chosen an applicable law, or there is no written contract, the governing law will be identified according to Article 4, 1 letter f) of Regulation Rome I, which contains a specific rule for distribution contracts – lacking a choice of the parties, distribution agreements are regulated by the law of the country where the distributor has its habitual residence, or its main place of business.

This rule should be carefully considered by principals dealing with resellers in other countries. In some cases, commercial relationships develop over the years on the basis of very limited contractual rules, and it is also possible that a supplier-purchaser relationship evolves into a distribution agreement without proper regulation. In such cases, in case of a litigation, the law of the country where the distributor has its seat will apply!

The parties may agree to submit an international distribution agreement to the courts of a certain State.

If the choice refers to the courts of an EU Member State, any Italian court will consider such a clause valid, provided it complies with Regulation (EU) 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (so-called Regulation Brussels I recast), which is directly applicable in all EU Member States (except Denmark, which has implemented it in national law). Regulations Brussels I recast applies to legal proceedings instituted on or after 10 January 2015. It does not apply to arbitration.

In order to be valid, the forum selection clause shall be (a) in writing or evidenced in writing; (b) in a form established between the parties; or (c) in a form consistent with the usage that is widely known in the particular trade or commerce concerned. Any communication by electronic means that provides a durable record of the agreement shall be equivalent to “writing”.

If the clause is valid, the chosen jurisdiction shall be exclusive unless the parties have agreed otherwise.

Besides, a party which is summoned before the courts of a Member State - except in some limited cases - may decide to appear without contesting jurisdiction.

If the choice of the parties refers to the courts of a State which is not part of the EU, Italian judges would verify such clause according to applicable international treaties, or ultimately according to the rules of the Brussels Convention of 1968, due to a reference contained in Law 218/1995.

As far as arbitration is concerned, Italy – like many other countries – is party to the New York Convention of 10 June 1958 on the recognition and enforcement of foreign arbitral awards. Therefore, if the parties have agreed in writing to submit the contract to arbitration in a country which is a part of the New York Convention, Italian courts will respect such a choice, unless they find that the agreement is null and void.

If the parties have not agreed on the jurisdiction, or there is no written agreement, Regulation Brussels I recast will apply whenever the defendants have their domicile in an EU Member State.

As a general rule, a party which is domiciled in a Member State shall be sued in that Member State, irrespective of their nationality (Article 4 Reg. Brussels I recast). Therefore, Italian courts have jurisdiction whenever the defendant is domiciled in Italy or has a representative in Italy.

In addition, according to Article 7, a party domiciled in a Member State may be sued in the place of performance of the obligation that forms the subject of the claim. The Regulation further specifies that in the case of sale of goods, the place of performance is the place where, under the contract, the goods were delivered; and, in the case of provision of services, the place of performance is the place where, under the contract, the services were provided.

There is no special mention of distribution contracts. Therefore, the question arises- if the claim concerns a distribution agreement, what is considered the place of performance of the obligation? Are distribution agreements sale or service contracts?

The question was submitted to the European Court of Justice, which stated in several cases (Corman Collins, C-9/12; Granarolo, C-196/15; Saey Home, C-64/17) that a distribution agreement may be considered a contract for the provision of services in cases where the distributor supplies services like promotion of the sale of goods, after-sale services, etc..

According to the case law of the ECJ, therefore, a party to a distribution agreement may be sued in the country where the distributor provides the services, i.e. where the distributor carries out its activity.