The termination of the sales and/or distribution dealership contract. Brief analysis.
"The sales concession contract is not governed by Italian law and follows the general rules on contracts, with the application of certain principles regarding mandate and administration. If the contract is concluded for a fixed term, it cannot be terminated in advance unless there is a serious breach; if for an indefinite term, it can be terminated unilaterally with due notice. The notice period, if not agreed, is determined on the basis of the duration of the contract and the investments made; if the parties have agreed and contractually quantified notice period is discussed whether theThe judge can make assessments of its appropriateness.
Since the contract of sale concession is not expressly regulated by our law, the general principles provided for contracts apply to it, paying particular attention to the provisions provided for the contract of supply (1559 et seq. civil code) and mandate (1703 et seq. civil code), types of negotiation very close to the one under consideration.
If the concession contract was concluded at fixed-termit will last until its natural expiry and cannot therefore be unilaterally terminated early by either party, except in the case of (serious) breach.[1]
Conversely, if the sales concession contract is of indefinite duration, it may be terminated unilaterally, without the need to invoke just cause, but subject to the granting of a reasonable notice. Doctrine and jurisprudence reach this conclusion, both by analogical application of the principles dictated on the subject of administration (Art. 1569 of the Civil Code).[2] and mandate (Art. 1725 of the Civil Code),[3] but also relying on the general provisions of the law in the area of unilateral termination and applying the principles of good faith under Article 1375 of the Civil Code.
A major problem opens up concerning theidentification of the duration of the noticein all those cases where the parties have not contractually agreed to do so; this may occur not only where the parties have not thought of regulating this issue when drafting the master agreement, but also in the much more complex situation where the relationship between the parties, which started out as a simple buyer-seller relationship, has in fact over time 'transformed' into a full-fledged distribution contract (on this point, see the article Dealer, distributor or regular customer? Differences, characterising elements and interpretation criteria).
In order to understand what is meant by adequate notice and, therefore, to give a time value to this term, reference must be made to the interests of the person who 'suffers' the withdrawal, since the withdrawing party must grant a term that will allow preventat least partially, the negative effects resulting from the termination of the relationship;[4] Therefore, the concessionaire must be able to recover part of the investments made (e.g. the disposal of inventories), while the grantor must have sufficient time to be able to buy back goods still in stock from the concessionaire, so that they can be reintroduced into the distribution circuit.[5]
To give a more practical slant to this issue, we list below some cases decided by case law where it has been held that[6]
- a deadline of 18 monthswith reference to a contract that lasted about 25 years;[7]
- not congruous a deadline of 6 months (later replaced by one of 12 months), for a contract of 10 years' duration;[8]
- reasonable notice of 3 months in connection with a 26-month contract.[9]
In other situations, case law has applied the period of notice required by agency regulations.[10]
If, on the other hand, the parties had agreed and contractually quantified notice periodThe majority of case law is in agreement that reference must be made to that term in any event, even if it is very short, holding that the judge cannot make any assessment of the appropriateness of the notice period agreed upon by the parties.[11]
With reference to this specific issue, i.e. with regard to the reviewability of the notice period agreed upon by the parties, it is certainly important to bear in mind a relevant ruling of the Court of Cassation of 18 September 2009,[12] which established a number of interesting principles. On the merits, the dispute was brought by an association set up by several former car dealers against the parent company Renault, which had terminated the contractual relationship with those dealers by giving one year's notice, in accordance with the contractual provisions; the dealers sought a declaration that the termination was unlawful because abuse of right. These proceedings were dismissed at first and second instance, but upheld at last instance by the Court, which held that it could not be ruled out whether the right of withdrawal ad nutum has been exercised in good faith, or, on the contrary, an abusive exercise of that right may be conceivable. The Supreme Court came to this conclusion through the use of the criterion of objective good faith, which must be considered as "general canon to which the conduct of the parties should be anchored."[13]
This orientation has been challenged by some doctrine,[14] which he considered should be "considered with the utmost caution". This is confirmed by the very fact that:
"at is to be hoped, that the notion of abuse of rights will continue to be applied only in extreme and justified cases."
In contrast, there is no doubt about the validity of the termination in trunkand thus without the grant of notice, in the event of just cause.[15]
As to the inclusion in the distribution contract of a express termination clausedoctrine and jurisprudence agree that it can be validly included in the agreement (contrary to the guidelines on agency contracts).
If the relationship is terminated without cause, the terminating party is obliged to compensate the damage to the person who suffered such an action. For the purpose of calculating damages, account must be taken of the profits that the dealer would have presumably obtained in the remaining part of the contract (on the basis of the turnover history) or of the expenses incurred by the dealer for the organisation and promotion of sales in anticipation of the longer duration of the relationship.
Instead, case law is unanimous in holding that thetermination indemnity in favour of the concessionaire must be excluded and cannot be applied to this type of contract. agency provisions.[16]
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[1] Cass. Civ. 1968 No. 1541; in doctrine Il contratto di agenzia, Venice - Baldi, 2015, p. 139, CEDAM.
[2] It is the unanimous conviction in doctrine that Article 1569 of the Civil Code, relating precisely to the contract of supply, according to which either party may withdraw from the contract without the need to invoke a just cause, may be applied analogically to this case (see on this point I contratti di somministrazione di distribuzione, Bocchini and Gambino, 2011, p. 669, UTET)
[3] Concession of Sale, Franchising and Other Distribution Contracts, Vol. II, Bortolotti, 2007, p. 42, 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] Distribution Contracts, Bortolotti, 2016, p. 564, Wolters Kluver.
[7] Trib. Treviso 20 November 2015 in Laws of Italy.
[8] Trib. Napoli 14 September 2009 in Laws of Italy.
[9] Trib. Bologna 21 September 2011 in Laws of Italy.
[10] Trib. Bergamo 5 August 2008 in Agents and Sales Representatives 2010, No. 1, 34.
[11] See Trib. Torino 15.9.1989 (which considered a term of 15 days to be congruous); Trib. di Trento 18.6.2012 (which considered a term of 6 months for a 10-year relationship to be congruous).
[12] Cass. Civ. 2009, no. 20106.
[13] Cass. Civ. 18.9.2009 "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.)"
[14] Distribution Contracts, Bortolotti, 2016, p. 565, Wolters Kluver
[15] Court of Appeal Rome, 14 March 2013
[16] Trib. Trento 18.6.2012; Cass. Civ. 1974 no. 1888; Contratti di distribuzione, Bortolotti, 2016, p. 567, Wolters Kluver; Il contratto di agenzia, Venezia - Baldi, 2015, p. 153, CEDAM
Early termination of an agency contract. How is the indemnity for lack of notice calculated?
The termination of an agency contract is expressly regulated in Art. 1750(2) of the Civil Code. This article grants both parties the right to freely withdraw from the contract for an indefinite period of time, without justification, by giving notice to the other within a specified time limit.
Article 1750(3) of the Civil Code further provides that the "agency contract of indefinite duration may only be terminated by the parties if notice is given, which may not be less than":
- 1 month for the 1st year
- 2 months for the 2nd year
- 3 months for the 3rd year
- 4 months for the 4th year
- 5 months for the 5th year
- 6 months for the 6th and subsequent years.
It is important to remember that the parties may provide for a notice period that is longer, but never shorter, than that dictated by the codified rules.
One wonders, outside the cases where early termination is permissible, what happens when a party terminates the agency agreement without observing notice. In this situation, two types of problems usually arise:
- understand whether the contractual relationship continues or is interrupted;
- understand whether and to what extent the other party will be entitled to the damages.
With regard to the first point, a distinction must be made between fixed-term and open-ended contracts.
With reference to the contract to fixed-termit is common ground that the contract continues to be effective until its expiry. In such a case, an unlawful termination will in no way terminate the contract, which will therefore continue even after the unjustified termination until its normal expiry (cf. Cass. Civ. 1990 no. 1614).
"con an agency contract where the principal unlawfully terminates the relationship and consequently fails to provide the agent with the cooperation indispensable for the performance of its activities, this does not result in the termination of the contract, which is to be regarded as still being in force until the scheduled expiry datebut rather the liability of the principal itself, who is obliged - even in the absence of a default notice - to compensate the agent for the damage."
In such a case, although the contract continues to be effective even after the unjustified termination, it must also be borne in mind that, in principle, it will be almost impossible for the non-terminating party to actually continue the relationship. Precisely on this point, the Supreme Court in the above-mentioned judgment stated that:
"è practically impossible for an agent to continue promoting business where the principal has given notice of termination, albeit unlawful, and has consequently behaved in a manner consistent with that termination by ceasing to provide the agent with the cooperation necessary for the performance of the relationship."
It follows, therefore, that the continuation of the contractual relationship until its natural expiry will in fact entitle the agent to claim damages, to be quantified in the loss of earnings for the remaining duration of the relationship.
With reference to the open-ended contractThe question was posed in different terms before the reform of Art. 1750 of the Civil Code, which was so replaced by Art. 3 of Legislative Decree 10 Sept. 1991, No. 3030, implementing Directive 86/653/EC. With the reform, in fact, the reference in Article 1750 of the Civil Code, which granted the parties the option of replacing notice with the payment of an indemnity, was eliminatedwhich was (and still is) determined by collective economic agreements (see also (cf. calculation of former AEC 2014 allowances, calculation of former AEC 2009 allowances, calculation of ex ANA allowances 2003).
Following this legislative intervention, the majority orientation of the case law and part of the doctrine (Bortolotti), considers that the abrogation of the possibility of the parties to replace the notice with an indemnity, has in fact attributed a 'real effectiveness' to the notice with the consequence of recognising, at least from a theoretical point of view, the right of the non-terminating party to continue the relationship until the expiry of the notice.
The Court of Cassation, on this point, recently reiterated in judgment no. 8295 of 25 May 2012the principle, of the real effectiveness of the notice or of ultrateractivity of the contractual relationship.
"In accordance with the principle of continuation of the relationship during the notice period, the open-ended agency contract does not terminate when one of the parties terminates the contract, but only when the notice period expiresin the interest and for the protection of the non-terminating party."
According to the above case law, giving "real" effect to the notice confers on the non-terminating party the right to continue the relationship until its natural expiry. Although, as noted above, in practice it is difficult to continue a relationship that has been de facto terminated by one of the parties, the parties' right to the continuation of the relationship until its natural expiry translates into the right to claim damages, which, in the case of the agent, may be higher than theallowance for lack of notice (equal to the commissions lost by the agent during the notice period, averaged over the previous year).
The further damage that the agent could claim by way of compensation of damage, may be found, for example, in the case of the sale of seasonal goods. Consider the sale of a seasonal product (e.g. Easter egg, swimming costume, ski-pass, etc.): it is clear that if the termination takes place at the time when the sales season is about to start, the commissions lost by the agent during the notice period will almost certainly be higher than the average of the previous year.
In the case of wrongful termination by the agent, the principalmay, for example, suffer damage resulting from the loss of market sharecaused by the diversion of customers to competitors of the principal.
However, it should be emphasised that according to part of the doctrine (Toffoletto, Baldi-Venezia) and the case law (Civil cassation 1999 No. 5577), in the contract of indefinite duration the notice, contrary, constitutes an obligation of the withdrawing party and is not given 'real' effect. Any breach of that obligation therefore does not affect the validity of the termination, giving rise to only to an obligation to pay damages, corresponding to the indemnity for loss of notice.
While this discussion of the real and obligatory effectiveness of the notice period is still ongoing with regard to the civil law regulation of the agency relationship, as set forth in Article 1750 of the Civil Code, the collective bargaining agreements in force to date, AEC 2009 for trade and AEC 2014 for industry, expressly grant the parties the right to terminate the relationship earlywithout prejudice to the other party's right to severance pay.
Specifically, Article 11 of the AEC 2009 and Article 9 of the AEC 2014 provide that:
"if the withdrawing party at any time wishes to terminate the relationship with immediate effect, it shall pay the other party, in lieu of notice, a sum by way of compensation equal to one-twelfth of the commissions pertaining to the preceding calendar year as many months of notice are due. If the relationship began during the preceding calendar year, the following months of the current year shall be counted towards the twelve-month reference period.
In addition, there is a alternative calculation criterion to the one highlighted above, according to which:
"Where more favourable. the average salary for determining the indemnity in question shall be calculated over the twelve months immediately preceding the notice of termination. Where the relationship has lasted less than twelve months, the said calculation shall be made on the basis of the monthly average of the commissions paid during that relationship."
Therefore, to calculate the amount due as replacement of notice, it will be necessary to perform a double calculationfollowing the two different periods and apply whichever of the two is more favourable to the agent.
The 'minimum turnover' clause in the agency contract
One of the most frequently used and widely used clauses in agency contracts is certainly the 'minimum turnover' clause. With this clause, the parties establish the minimum annual turnover threshold that the agent must contribute to the principal.
In this regard, the question arises as to the validity of this clause and the consequences if the agent fails to meet the agreed thresholds.
Firstly, on a preliminary basis, so to speak, according to case law, the agreed turnover must be fairSecondly, it is noted that a clause granting the principal the power to unilaterally modify the minimum turnover figures during the course of the relationship is of doubtful validity: as a matter of principle, the parties cannot always and indiscriminately introduce contractual clauses conferring on one party the power to modify the contract in a discretionary manner, especially if they concern fundamental elements of the relationship, such as, for example, the zonethe agent's customer package, the commissionscontractual minimums, etc..
According to settled case-law, this power vested in the principal is, in principle, also subject to the general principles of our legal system of fairness and good faith in the performance of the contractual relationship, governed precisely by Articles 1175, 1375 and 1749 of the Civil Code.[1] In general, in an agency contract, the assignment to the principal of the power to modify essential elements of the relationship must "be justified by the need to better adapt the relationship to the needs of the parties as they have changed over time"[2] e not may result in a substantial circumvention of contractual obligations.
That said, in principle, case law holds that the failure to reach an agreed minimum implies a de facto default of the agent. The biggest problem is to understand whether this constitutes a breach of such gravity as to justify termination by the principal.
In the event that the parties had not foreseen anything in this regard, it will be necessary to assess, on a case-by-case basis, the seriousness of this breach and whether it could constitute a termination for just cause or termination of the contract.
If, on the contrary, the parties had expressly provided in the contract that failure to reach the minimums would result in the immediate termination of the relationship and, therefore, had provided for a express termination clause under Article 1456 of the Civil Code, it must be held that until a few years ago case law unequivocally held that:
"when [...] the parties, in their autonomy and freedom of bargaining, have previously assessed the significance of a specific non-performance, implying that the non-performance is of retermination of the contract without notice, the court may not make any enquiry into the extent of the non-performance itself in relation to the interest of the other contracting partybut must only accept whether it is attributable to the obligor at least by reason of fault, which is presumed under Art. 1218 of the Civil Code.".[3]
This jurisprudential direction has been radically changed by a more recent (and now consolidated) orientation of the Court in 2011,[4] in which the Court of Cassation, although on the one hand recognised the legitimacy of inserting an express termination clause in the contract, on the other hand partially limited its effectiveness: in this ruling, the Court specified that the termination of an agency contract by virtue of an express termination clause entails the preliminary and necessary verification by the court of the existence of a breach. The judge, specifically, will have to verify whether:
- the breach is of such gravity as to exclude theallowance for lack of notice pursuant to Article 1750 of the Civil Code;
- the breach is of such gravity as to exclude the agent's right to receive theseverance pay pursuant to Article 1751 of the Civil Code.
These are briefly analysed below.
(a) Indemnity for lack of notice
It is well established that the agency contract is subject to aanalogous application of Art. 2119 of the Civil Code., which provides for the right of the parties to terminate without notice in the event of a cause that does not permit the continuation, even provisional, of the relationship.
On the basis of this assumption, the aforementioned case law has therefore held that in the event of recourse by the principal to an express termination clause, the latter may be considered valid to the extent that it justifies a termination in the first place, since the freedom of the parties cannot in fact be absolute. The judge, in such cases, will have to ascertain whether the failure to achieve the budget is a "cause that does not permit the continuation, even temporarily, of the relationship'..[5]
Applying this principle to the minimum turnover clause, the case law on the merits has recently held that in itself the failure to achieve the budget of sale does not legitimise an immediate termination of the relationship by the principal,
"because [...] it is not one of the agent's obligations to cause the principal to achieve a certain turnover and because it is not possible, in principle, to charge the agent for the failure to achieve objectives, irrespective of whether or not that failure is attributable to the agent's defaulting behaviour.[6]
b) Severance pay
Similarly, as far as theseverance pay, the assessment of the gravity of the breach must be made on the basis of the standard set forth in Article 1751 of the Civil Code, which also makes the termination of this indemnity conditional upon the occurrence of a breach which, because of its seriousness "does not permit the continuation, even temporarily, of the relationship."
Since Art. 1751 of the Civil Code expressly provides that all the provisions contained therein are mandatory to the detriment of the agent, the possibility of excluding the agent's right to the termination indemnity shall be subject to the existence of a serious breach, irrespective of the insertion within the contract of an express termination clause.[7]
It follows that the non-achievement of the objectives, if it is unrelated to precise and specific failures of the agent that must be specifically proved by the principal, cannot be used as a ground for the breach of the fiduciary relationship such as to prevent the continuation of the relationship.[8]
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[1] On this point cf. Cass. Civ. No. 9924, 2009.
[2] Cass. Civ. no. 5467, no. 2000.
[5] Cass. Civ. 14.2.2011 no. 3595.
[6] Brescia Court of Appeal of 15.9.2019.
[7] Cf. on this point Court of Modena 10 June 2011.
[8] Id. Brescia Court of Appeal of 15.9.2019.