Distribution law in Italy

Civil Code, articles 1742 to 1753; Economic Collective Agreements (the so-called AEC) applicable when contracting parties have joined associations subscribing the AEC

Are there any formal requirements upon concluding an Agency Agreement?

No special formalities are required for the validity of the Agency Agreement, but a written contract is required for it to be used as evidence in court.

Are there any specific information obligations on concluding Agency Agreements?

Statutory law does not provide for any specific information obligation regarding Agency Agreements but general principle of good faith when entering into negotiations and concluding the contract applies.

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

If standard terms and conditions are applied, it must be borne in mind that under Italian law they must be known by the other party upon the execution of the contract or at least the opportunity to be aware of their content must be given.

Moreover, certain specific provisions of standard terms and conditions laid down by the statutory law must be expressly accepted in writing by the party to be valid and effective.

Are the parties free to agree on the scope of the Commercial Agency?

By default, the Principal may not have recourse simultaneously to several Commercial Agents for the same territory and the same line of business and the Commercial Agent may not enter into a commitment to promote simultaneously the business of several Principals competing in the same territory and for the same line of business, but such general rule may be derogated by the parties.

However, the parties are free to agree on the scope of the Commercial Agency.

Accordingly, the parties may stipulate that Commercial Agent’s activity is limited to the mere transmission of the orders received by the clients or otherwise that the Commercial Agent is entitled to represent the Principal so that he may conclude directly the contract in the name and on behalf of the Principal.

Parties may decide likewise on instructing the Commercial Agent only for certain territories, for certain specific products and clients of the Principal.

What are the primary obligations of the Commercial Agent and the Principal?

The Commercial Agent has the following primary duties based on statutory law:

• to perform its obligations with due diligence, in good faith and in compliance with the instructions provided for by the Principal;
• to provide the Principal with relevant information regarding the market, as well as any other useful information to evaluate the profitability of the business.

The Principal has the following primary duties based on statutory law:

• to provide the Commercial Agent with the documents related to the concerned goods and services;
• to give the Commercial Agent necessary information for the performance of the Agency Agreement;
• to notify the Commercial Agent within a reasonable notice period when he expects a significant decrease of the volume of transactions;
• to notify the Commercial Agent without delay about the acceptance, the refusal or the non-performance of a transaction that the Commercial Agent has procured to him;
• to provide the Commercial Agent with a (at least) quarterly statement of the due commissions;
• to pay for the accrued commissions in favour of the Commercial Agent (at least) on a quarterly basis.

How is the Commercial Agent paid?

The Commercial Agent is entitled to commission if the business transaction has been concluded:

• as a result of its action;
• by the Principal with clients that were exclusively assigned to the Commercial Agent;
• by the Principal within a territory that was exclusively assigned to the Commercial Agent;
• by the Principal with a subject that the Commercial Agent previously acquired as a client.

After the termination

The Commercial Agent is entitled to commission if:

• the business transaction is mainly attributable to the Commercial Agent's efforts during the contractual term and the transaction was entered into within a reasonable period after he termination of Agency Agreement;
• or the order of the client reached the Principal or the Commercial Agent before the termination or after within a reasonable period.

Unless otherwise agreed upon by the parties, the Commercial Agent is entitled to be paid upon and to the extent that the Principal performed or would have performed its contractual obligation according the contract entered into with the client.

In any case, the commission must be paid to the Commercial Agent at the latest upon the client performed or would have performed its obligation according to the contract entered into with the Principal.

Can a del credere clause be inserted into the agreement?

According to Italian law, a del credere clause (the agreement which charges the Agent, in whole or in part, with the liability for a third party's breach) is null.

Exceptionally, however, parties can from time to time require the Agent to grant a specific guarantee for the executions of customers he has brought on, provided that this is limited to transactions of a special nature and for exceptional amounts. In any case the guarantee of the Agent shall not be higher than the commission that the Agent is entitled to for that transaction. In that case the Agent will also have to be specifically remunerated.

Term of the Agency Agreement

The Parties are free to agree on the duration of the Agency Agreement but according to statutory law if an Agency Agreement of fixed term continues to be performed by the Parties after its expiration it is considered to have been tacitly renewed for an indefinite term.

Termination of the Agency Agreement

If the Agency Agreement has been entered into for a fixed term, as a general rule it may only be terminated for good cause (i.e. serious breach of the contract by other party, impossibility of performing the contract for reasons not attributable to the party).

If the Agency Agreement has been entered into for an indefinite term either party may terminate it but minimum notice periods must be respected depending on the duration of the Agency Agreement in question:

• during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
• during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with;
• during the third, fourth and fifth contractual years, a minimum notice period of three months with effect to the end of the month must be complied with; and
• after the fifth contractual year has expired (i.e. from the sixth contractual year onwards), a minimum notice period of sixth months with effect to the end of the month must be complied with.

The Parties may agree on a longer notice period. Although no formal prescription is provided for termination notice, a written notice is suggested for evidentiary purposes.

The indemnification claim for Agency Agreement's termination

Under the Italian law, the financial consequences of termination are regulated both by the Civil Code and the AEC, but provisions are different.

Under the statutory law, the Commercial Agent is entitled to a financial indemnification capped at the amount of one year’s commission fees calculated on the average of the last five contractual years (or actual term, if shorter) if and to the extent that:

• the Commercial Agent has acquired business with new customers for the Principal or significantly improved the business with the Principal's former clients and the Principal continues to derive a substantial benefit from the business with these clients; and
• the grant of an indemnification claim is equitable with regards to all the circumstances and, in particular, the commission lost by the Commercial Agent on the business transacted with these clients.

Statutory law (article 1751 of Italian Civil Code) does not set out the criteria to calculate the indemnification claim but according to relevant case-law the following must be considered:

• all the commissions paid to the Commercial Agent during the contractual term not only those concerning the orders made by new clients or by the former ones with whom the business has been increased;
• every relevant circumstance, such as the duration of the relationship, the extent of the benefits procured to the Principal, the existence of a non-competing agreement, investments made by the Commercial Agent, etc;

According to the AEC, when applicable, the indemnity consists of three components:

1. the “indemnity for termination” due for the sole reason of the termination of the Agency Agreement;
2. the “supplementary indemnity for clients” due in case of indefinite term Agency Agreements when the termination is attributable to the Principal or to circumstances regarding the Commercial Agent causing him not to keep on working (age, illness, infirmity, death);
3. the “meritocratic indemnity” due under the following circumstances:
   • the indemnity for termination + the supplementary indemnity is lower than the maximum amount of the indemnification according to statutory law (one year’s commissions);
   • the Commercial Agent procured the Principal new business or significantly increased the business with existing clients;
   • the Principal continues to derive substantial benefits from the business with clients (basically equivalent to indemnification set forth by the statutory law).

Relationship between the two provisions is regulated by a Court of Justice decision of 23^rd March 2006 (Case no C – 465/04) ruling that Article 19 of the Directive 86/653/EEC (the “EU Directive”) must be interpreted as meaning that indemnity for termination which results from the application of Article 17 (2) cannot be replaced pursuant to a Collective Agreement (such as the AEC) unless it is established that the application of such an agreement guarantees the Commercial Agent, in every case, an indemnity equal to or greater than that which results from the application of Article 17.

Time limit for claiming the indemnity is one year after the termination of the Agency Agreement.

The indemnification claim is precluded if:

• the Agency Agreement was terminated by the Commercial Agent, unless the termination is due to circumstances attributable to the Principal or the continuation of the Agency is not possible for circumstances regarding the Commercial Agent such as its age, illness, infirmity or death;
• the Agency Agreement was terminated by the Principal due to the non-performance by the Commercial Agent;
• the Commercial Agent assigned rights and duties arising out of the Agency Agreement to a third party upon agreement concluded with the Principal.

Other consequences of the Agency Agreement's termination

According to Italian law, the grant of an indemnification claim for the termination of Agency Agreement shall not prevent the Commercial Agent from seeking damage compensation; however, withdrawal from the Agency Agreement by the Principal does not imply automatically the entitlement to compensation for damages because prove of the alleged damages must be given by the Commercial Agent according to relevant case-law.

A post-contractual non-compete obligation can be agreed upon by the Parties in writing for a maximum period of two years and must be limited to the territory, clients and products within the scope of the pre-existent Agency Agreement. Such an agreement entitles the Commercial Agent to a compensation calculated on the basis of the duration, the nature of the agreement and the other compensations to which the Commercial Agent is already entitled upon termination. In the absence of an agreement between the parties, the compensation shall be determined by the Court on an equitable basis taking into account:

• the average amount of the commission fees paid to the Commercial Agent during the contractual relationship and their influence on the aggregate volume of the business during the same period;
• the reasons for the termination of the Agency Agreement;
• the extension of the territory assigned to the Commercial Agent;
• the existence of an exclusive commitment of the Commercial Agent.

Such a claim is subject to a five-years limitation period starting from the date the claim became effective.

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Distribution Agreements are not regulated by specific statutory provisions thus general rules in matter of contract apply (article 1322 and following of the Italian Civil Code).

Statutory provisions on Agency may be mainly referred to when dealing with Distribution Agreements considered the similarity between them.

Are there any formal requirements on concluding Distribution Agreements?

There are no special formalities to take into account, however, for evidentiary purposes, it is recommended to set out the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

Statutory law does not provide for any specific information obligations regarding Distribution Agreements then general principle of good faith during negotiations and conclusion of the contract applies.

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

If standard terms and conditions are applied, it must be borne in mind that under Italian law they must be known by the other party upon the execution of the contract or at least the opportunity to be aware of their content must be given.

Moreover, certain specific provisions of standard terms and conditions laid down by the statutory law must be expressly accepted in writing by the party to be valid and effective.

Are the parties free to agree on the scope of the Distribution Agreement?

As a general principle, the Parties are free to agree on the scope of the Distribution Agreement, but limitations set out by the statutory law and EU Competition law must be taken into account when drafting the contract.

Non-competition clause is possible but it must:

• be agreed in writing;
• be limited to a specific territory or specific activity;
• not exceed five years.

Exclusivity may also be agreed upon by the Parties verbally or per facta concludentia:

Italian Court decisions have ruled in favour of de-facto exclusivity when: i) no other Distributor was active on the same territory; ii) only the Distributor advertised Principal’s products in Italy; iii) the Principal refused direct sales on the territory.

Distribution Agreements can include Minimum Sales Quotas, provided that the relevant clauses are not unreasonable or unrealistic.

The Principal can only suggest recommended resale prices (not to be disguised fixed price). This point is important in all cases, but above all where the Principal's or Distributor's market share is over 30%.

What are the primary obligations of the Distributor and the Principal?

Statutory law does not provide specific obligations for both the Principal or the Distributor, but they are free (and we advise to) set out their own rules.

According to case law, in addition to general rule of good faith in performing contracts:

• the Distributor has to provide the Principal with relevant information regarding the market, as well as any other useful information to evaluate the profitability of the business;
• the Principal has to provide the Distributor with necessary information for the performance of the contract and to support its activity with respect to the Principal’s business.

How is the Distributor paid?

No fixed remuneration is provided by default for Distributor which purchases Principal’s products and resell them with a mark-up. However, the parties are free to agree upon on special remunerations such as guaranteed minimum or sales awards.

Term of the Distribution Agreement

The parties are free to set out fixed term and indefinite term Distribution Agreements.

Termination of the Distribution Agreement

In case of fixed term agreement, early termination is allowed only if the performance becomes impossible or too onerous due to reasons not attributable to either parties regardless the duration of the notice period which just could impact on the amount of the compensation for damages.

In case of indefinite term agreement, according to applicable general principles, a reasonable notice period for termination should be granted to Distributor taking into account all the circumstances of the specific case, such as the duration of the business relationship and its exclusive nature, the level of the economic dependence of the Distributor towards the Principal and the investments made by the Distributor to run the business should be considered.

In this regard, in order to provide the Distributor with a fair notice period for termination it may be useful to refer to statutory provisions in matter of agency.

Not granting any notice period or granting a too short notice period entitles the Distributor to claim for damages compensation (e.g. under the principle of rupture brutale of the relationship).

The indemnification claim as main consequence of the Distribution Agreement's termination

Statutory law does not provide for indemnification claim for the termination of the Distribution Agreement.

However, according to general rules in matter of contract liability the termination without granting a reasonable notice period may entitle the terminated party to claim for damages, thus in case of judicial dispute the Court could refer to rules provided in matter of agency to quantify compensation for damages due to the Distributor for unlawful termination of the contract (for instance, Court may refer to the net profit the Distributor derives from the resell of Principal’s products on a yearly basis).

Other consequences of the Distribution Agreement's termination

A post-contractual non-compete obligation may be agreed upon by the Parties in writing for a maximum period of five years and must be limited to the territory, clients and products within the scope of the pre-existent agreement.

The Distributor that is bound by a post-contractual non-compete obligation is entitled to a compensation determined based on the duration and the nature of the agreement. In the absence of an agreement between the parties, the compensation shall be determined by the Court on an equitable basis.

All claims arising out of the Distribution Agreements are subject to a ten-years limitation period.

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