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Concession of sale and severance pay. The new legislation in the car industry (and how does it work in Germany?)

The termination indemnity for distributors or sales dealers in Italy has been the subject of recent legislative developments, which have led to significant changes.

The recently introduced law in the motor vehicle distribution sector establishes an 'innovative' right to fair compensation for authorised distributors and a minimum contractual term of five years for fixed-term contracts, as well as twenty-four months' notice for open-ended contracts.

Although the interpretation of the rule and the determination of the amount of the severance payment still present significant complexities, pending further developments in law and jurisprudence, the German model, which has recognised it for years in all business sectors, could provide interesting pointers.

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1. Introduction. Damages and compensation.

Until a few months ago, in the Italian legal landscape, the termination indemnity in sales concession contracts was devoid of any legal regulation and case law remained firm and unanimous in holding that any indemnity should be paid to the concessionaire for the customers contributed by them, thus excluding an analogical application of the agency provisions.

In the Italian legal system, upon termination of the contractual relationship, the interests of the dealer were mainly protected in the context of an assessment of the legitimacy and/or appropriateness of the termination or dissolution of the contract, by means of an estimate of the profits that the dealer could have received if the contract had been fulfilled until its natural expiry. The instrument used is that of damages, calculated in the loss of the expected profit and in the absorption of the costs inherent in the organisation and promotion of sales, as well as the investments undertaken in reliance on the continuation of the contract.[1]

On the other hand, compensation is not intended to reward the dealer for his work in building up a customer base, as is in fact provided for in agency relationships in Article 1751 of the Civil Code.

The termination of the sales and/or distribution dealership contract. Brief analysis.

So that, for the fixed-term contractsunilateral termination of the relationship is excluded (unless expressly agreed by the parties) and termination of the contract may only occur in the event of serious breach.[2]

Otherwise, for the open-ended contractsunilateral termination is permitted, even in the absence of non-performance, provided that adequate notice is given.[3] Where the parties have not agreed on a period of notice, it must be assessed by reference to the interests of the party 'suffering' the termination, the termination party having to grant a period of notice that may enable it to prevent, at least partially, the negative effects resulting from the termination of the relationship;[4] the concessionaire must have the possibility of recovering part of the investments made (e.g. the disposal of inventories), while the grantor must have sufficient time to be able to buy back the goods still in stock from the concessionaire, so that they can be reintroduced into the distribution circuit.[5]

If the parties had contractually agreed and quantified the period of notice, it is debatable whether the judge can assess its adequacy; the majority jurisprudence holds that this period, even if short, must be observed, and that the judge does not have to assess its adequacy.[6]

However, mention must be made of a case in which the Court of Cassation, in a ruling of 18 September 2009 in the automotive sector,[7] dealt with a dispute between an association of former car dealers and Renault; in particular, the manufacturer had terminated the contracts with the dealers, acknowledging the contractual notice period of twelve months. The dealers considered the termination to be abusive, and the court upheld the plaintiffs' claims, ruling that the court can assess whether the right of termination was exercised in good faith or whether it was abused, relying on the criterion of objective good faith, which is considered the fundamental benchmark for the parties' conduct.

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2. The novella on motor vehicle distribution.

In this context, the new regulations introduced for the automotive distribution sector with the Law No. 108 of 5 August 2022later updated by Law No. 6 of 13 January 2023.

In particular, Art. 2 specifically regulates the duration of the contract, providing that:

• if the ratio is at fixed-termthe minimum duration of the agreement is five years, with each party being obliged to give written notice, at least six months before the expiry date, of its intention not to renew the agreement, on pain of ineffectiveness of the notice;
• as regards relations to indefinitethe written notice period between the parties for termination is twenty-four months.

It is then introduced in Article 3 of the Act, an obligation on the manufacturer or importer to provide the dealer withprior to the conclusion of the agreement, as well as in the event of subsequent amendments thereto, all information in its possession, which are necessary to make an informed assessment of the extent of the commitments to be undertaken and the sustainability of the same in economic, financial and asset terms, including an estimate of the marginal revenue expected from the marketing of the vehicles.

Article 4 then introduces a 'revolutionary' (at least for Italian law) obligation on the manufacturer or importer, who terminates the agreement before the contractual deadline, to pay the authorised distributor a fair compensationwhich is to be measured on the basis:

1. of the investments it has made in good faith for the purpose of performing the agreement and which have not been depreciated at the date of termination of the agreement;
2. goodwill for the activities carried out in the performance of the agreements, commensurate with the turnover of the authorised distributor over the last five years of the agreement.

Compensation under para. 4 is not due in the event of termination for non-performance or when termination is requested by the authorised distributor.

Finally, Article 5-bis of the regulation expressly states that the provisions of paragraphs 1 to 5 are "mandatory".

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3.     Some insights into the new legislation.

To date, there are no case law precedents that allow for an interpretation of the legal provision, which remains very general and difficult to apply in practice.

In anticipation of a jurisprudential development, we briefly raise what are the major criticisms that can be detected even from a simple reading of the text of the law, with particular regard to two aspects, namely:

• the duration of the contract and
• the quantification of fair compensation.

3.1. Duration of the contract and automatic renewal

If the contract has been concluded for a fixed term, it would appear that the contract will be automatically renewed for the same period for which it was concluded if either party fails to terminate it within six months from the closing date.

One can come to this 'hasty' conclusion from a simple reading of the text, which speaks precisely of 'renewal' and not so much of transformation of the contract from a fixed-term to an open-ended term, as is the case, for example, in agency relationships (cf. Article 1750 of the Civil Code.). It is clear that this is a matter of great practical impact, given that the renewal of the contract, if indeed automatic, entails the extension of the relationship for a period of not less than five years, this being the minimum term fixed by the legislation.

This element also has a very important bearing on the possible entitlement of the concessionaire to fair compensation, which, it should be noted, is not only due in the event of the concessionaire's non-performance, i.e. its termination. If, as is more than likely to be expected, the theory of automatic renewal of the agreement passes, the indemnity will be awarded to the dealer even in the event that he declares that he does not wish to renew the agreement before its expiry, since this is not technically a case of actual termination. Similarly, compensation is likely to be due even if the parties agree to terminate the contractual relationship.

Since it is then a mandatory rule that of indemnity, the question arises, as in the case of agency, whether any waiver prior to the termination of the relationship can be considered valid, or whether it is effective only if agreed by the parties once the contract is terminated.

Read also: Which waivers and settlements may be challenged by the commercial agent.

3.2 Fair compensation.

As to the quantification of fair compensation, as we have seen, the rule refers to two very general parameters, namely:

1. the investments made in good faith by the dealer and not amortised at the date of termination of the agreement;
2. l'start-up of commercial activity, commensurate with the turnover developed by the distributor over the last five years of the agreement.

Firstly, it should be noted that it does not appear to be an analogical application of the principles laid down on the subject of agencysince neither requirement makes any reference whatsoever to the clientele brought in by them and the business developed with them, as stipulated by the'Article 1751 of the Civil Code.

Article 4(a) refers precisely to investments made in good faith, completely detached from what was the customer contribution and business development that the dealer managed to develop in the course of the relationship.

The choice made by the legislator seems to want to give more weight to the performance of the relationship according to good faith, which requires, on the one hand, the grantor to act in such a way as to preserve the interests of the concessionaire and thus not to require, or in any case unreasonably induce, the concessionaire to make investments disproportionate to the type and duration of the contract and, on the other hand, the concessionaire to be compensated only for non-depreciated investments made on the basis of a principle of good faith.

With reference, on the other hand, to Article 4(b), the legislature makes a general reference to the goodwill of the concessionaire, without any relevance being given, once again, to the advantages which the concessionaire has brought to the grantor and which the latter enjoys following the termination of the relationship.

Moreover, a general reference is made to the dealer's "turnover" during the last five years of the relationship; it is clear that this is a very general figure, in itself detached from the dealer's own margin or profit, and in itself not necessarily related to the customers procured by the dealer during the term of the contract.

The temporal reference of five years, would seem to recall the period of analysis applied to commercial agents, in Art. 1751 of the Civil Code, with the only (but huge) distinction, that in that case reference is made to the average commission developed by the agent in that interval.

3.3. Mandatory standards and/or standards of necessary application?

As we have seen, Article 5-bis of the new law expressly assigns the new provisions on automotive distribution a mandatory character.

In this context, a relevant question arises concerning the application of the Rome I Regulation (Regulation (EC) No 593/2008) to the new legislation. In particular, the question arises as to whether these provisions can be regarded as 'rules of necessary application' within the meaning of Article 9 of the aforementioned Regulation, also known as 'internationally mandatory' rules.

According to this provision, mandatory rules are legal rules that a country considers crucial to safeguard its public interests, such as its political, social or economic organisation. In certain cases, national legislators may decide to give some of their mandatory rules an even stronger character by providing that they cannot be derogated from even by subjecting the contract to a foreign law. This means that, notwithstanding the contractual choice to apply a different law, a court may be obliged to apply such provisions if it considers them to be of 'necessary application' because they are crucial to safeguarding Italy's public interests.

One must therefore ask oneself (pending an appropriate jurisprudential and legislative development), whether the new provisions on automotive distribution should be considered not only mandatory (under Art. 5-bis) at national level, but also international, under Art. 9 of the Rome I Regulation.

Precisely in the area of sales concessions, an example of a rule of necessary application is the Belgian law of 27 July 1961, Article 4 of which imposes the internationally mandatory application of this rule in the case of disputes concerning the termination of concession contracts performed in Belgium, irrespective of the law contractually chosen by the parties. [7a]

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4. The dealer's indemnity in the German system.

While waiting for a jurisprudential development that refines and directs practitioners to interpret the new legislation, it is interesting to analyse how a system close to ours, which has recognised this allowance for several decades, works; all this without claiming to be German jurists, but with the simple intention of providing the reader with a general overview of this model.

4.1. The prerequisites of the concessionaire's right to indemnity.

In Germany, case law for years apply analogically the principles of agency indemnity, regulated by the § 89b HGB (Handelsgesetzbuch), also to the dealer. The provision in question is the German counterpart of Article 1751 of the Civil Code, both of which were reformed to implement the 1986 European Commercial Agency Directive.[8]

For the allowance to be recognised, German case law requires the following conditions to be met:

1. the contract shall not be terminated by the principal due to serious default by the agent, or by the agent without justified reason, or there has been an assignment of the rights and obligations of the contract to a third party;
2. the concessionaire must be integrated within the distribution network of the grantor;
3. a transfer of the customer list must have taken place.

4.1.1. Dissolution of the relationship.

German case law applies by analogy the principles in agency law, whereby the purpose of the indemnity is to compensate the agent for the benefits that are transferred to the principal following the termination of the contract, since the agent can no longer benefit from the relationships it has established or developed with its customers.

The purpose of the indemnity, therefore, is on the one hand to compensate the agent for the loss of commission suffered by the agent due to the termination of the relationship, and on the other hand to provide the agent with compensation for the benefits derived from the customers acquired and/or developed by the agent. A prerequisite for the claim for indemnity, as set forth in subsection (3) of § 89b HGB, is the fact that the contract has not been terminated by the principal due to the agent's serious breach of contract, by the agent without justified reason, or by the assignment of the rights and obligations of the contract to a third party.

German case law, although the law does not expressly regulate it, has held that the indemnity is due in the event of termination of the relationship due to mutual disagreement, regardless of who first proposed the consensual termination of the relationship.[9]

These criteria are also faithfully applied to dealer contracts, including consensual termination of the relationship.[10] Therefore, even in the event of consensual termination of the contract, the authorised dealer will be entitled to an indemnity, provided that the other requirements, i.e. integration into the manufacturer's distribution network and the obligation to transfer customers, are met.

4.1.2. Integration within the network.

With regard to the requirement of integration within the distribution network, it is important to emphasise that the business relationship is not limited to a simple relationship between a seller and a regular customer, a deeper form of collaboration constituting a true integrated distribution agreement being necessary.

This implies that the authorised dealer is actively involved in the manufacturer's distribution system, so that the claim is intended to compensate the dealer not only for the loss of the benefits of customer relations, but also for the active contribution to the manufacturer's distribution network.

Read also: Dealer, distributor or regular customer?

German jurisprudence[11] over time has developed a number of examples of situations that could lead to, or at least lead to the assumption that there is a real integration in the distribution system of the grantor; here are some of them:

• be recognised as an authorised dealer;
• grant the producer/concessionaire authorisation to enter the business and storage premises at any time;
• be subject to minimum purchase obligations for the contractual products;
• have an obligation to store goods in the warehouse;
• set up and supervise authorised workshops in the contract territory;
• provide customer support and repair services;
• receive training from the producer/concessionaire;
• enhance, preserve and maintain the producer's brand;
• follow the manufacturer's sales guidelines and recommendations;
• have the possibility of selling the producer's products outside the contract territory;
• be assigned to a specific contractual territory, even in the absence of territorial exclusivity.

4.1.3. The transfer of customers.

Another basic requirement for the dealer or reseller to be entitled to severance pay is that there has been a transfer of customer data.

According to German case law,[12] it is not indispensable that the transfer of the customer list be explicitly provided for in the contract, but may arise implicitly as an obligation or be a practice adopted by the parties (e.g. if the dealer sends the names of customers to the manufacturer for warranty management or other after-sales service purposes).

This transfer of the customer list is a crucial element because it allows the manufacturer to maintain and develop the relationship with customers acquired by the dealer even after the relationship with the dealer or reseller has been terminated.

4.2. The calculation of the allowance.

The quantification of the allowance must be carried out considering the following parameters:

1. advantages for the producerIt is necessary to assess whether the dealer has acquired new customers or consolidated existing ones, as required by § 89b HGB (and Art. 1751 of the Civil Code), by means of an analytical prognosis of the benefits derived from the acquired customers. It is up to the dealer to provide proof of developments for each individual customeras the production of a mere list of customers that the dealer has acquired or developed in the course of the relationship is not sufficient.[13] The estimate must then be based on the results of the last five years, in analogous application of § 89b HGB;
2. the quantification of benefits must be done in a "fair" manner, assessing the losses incurred by the dealer as a result of the termination of the relationship. Applying the commercial agency discipline by analogy, the losses to be taken into account must be by commission-based' nature. Although, as is well known, the dealer is not remunerated through commissions, but rather marginalises on the discounts granted to him by the licensor, in order to be able to apply the principles of agency by analogy, it is necessary to calculate what the manufacturer would have paid to a commercial agent on the basis of the sales made by the dealer, if the distribution had taken place through an agency and the sales had been made in this way.

In this context, in order to calculate the allowances and to attempt to "commission" the dealer's revenues, all those remuneration components typical of the dealer and extraneous to the agent must be deducted from the discount. By way of example: expenses for personnel and equipment for the business, advertising, product presentation, assumption of sales, price fluctuation, credit or equivalent value risks, etc.[14]

The limit of the allowance corresponds to the average of the last five years.[15] It is important to emphasise that this is the commission that the dealer would have earned, not the turnover generated by the dealer. This is particularly important as it shifts the focus of analysis away from the dealer's total volume of business, to concentrate instead on actual net revenue.

This approach takes into account the dealer's actual economic benefit, rather than relying on a generic figure that may not accurately reflect the dealer's commercial position. This distinction ensures that the allowance is calculated more accurately and truthfully, reflecting the dealer's actual earnings rather than the total amount of sales realised.

The allowance is then calculated on the basis of these benefits, following an approach similar to that used in the agency.

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[1] On this point, see Venezia, Il contratto di agenzia, 2016, p. 140, Giuffrè.

[2] I contratti di somministrazione di distribuzione, Bocchini and Gambino, 2011, p. 669, UTET.

[3] Concessione di Vendita, Franchising e altri contratti di distribuzione, Vol. II, Bortolotti, 2007, p. 42, CEDAM; In doctrine Il contratto di agenzia, Venezia - Baldi, 2015, p. 140, CEDAM.

[4] In doctrine Il contratto di agenzia, Venice - Baldi, 2015, p. 140, CEDAM; In jurisprudence Court of Appeal Rome, 14 March 2013.

[5] I contratti di somministrazione di distribuzione, Bocchini and Gambino, 2011, p. 669, UTET.

[6] See Trib. of Turin 15.9.1989 (which considered a term of 15 days to be congruous); Trib. of Trento 18.6.2012 (which considered a term of 6 months for a 10-year relationship to be congruous); Distribution contracts, Bortolotti, 2022, p. 659, Wolter Kluwer.

[7] Cass. Civ. 5.3.2009 'On the subject of contracts, the principle of objective good faith, i.e. of mutual loyalty of conduct, must govern the performance of the contract, as well as its formation and interpretation and, ultimately, accompany it at every stage. [...] The obligation of objective good faith or correctness constitutes, in fact, an autonomous legal duty, the expression of a general principle of social solidarity, the constitutionalisation of which is by now unquestionable (see in this sense, among others, Court of Cassation Civ. 2007 no. 3462.)"

[7a] On this point, Bortolotti, Il contratto internazionale, p. 47, 2012, CEDAM.

[8] Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents.

[9] On this point, compare Van Der Moolen, Handbuch des Vertriebsrechts, p. 599, 4th edition, 2016, C.H. Beck.

[10] BGH 23.7.1997 - VII ZR 130/96.

[11] BGH 8.5.2007 - KZR 14/04; BGH 22.10.2003 - VIII ZR 6/03; BGH 12.1.2000 - VII ZR 19/99; on this point see also Van Der Moolen, Handbuch des Vertriebsrechts, p. 600, 4th edition, 2016, C.H. Beck.

[12] BGH 12.1.2000 - VIII ZR 19/99.

[13] BGH 26.2.1997 - VII ZR 272/95.

[14] On this point, compare also Van Der Moolen, Handbuch des Vertriebsrechts, p. 621, 4th edition, 2016, C.H. Beck.

[15] BGH 11.12.1996 - VII ZR 22/96.

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