The effects of the coronavirus on agency and distribution contracts.
The restrictive measures the government has taken against the coronavirus through the DCPM of 11.3.2020,[1] have led to the suspension of a large number of commercial activities, with a serious impact on existing contractual relationships. This article will attempt to focus attention on agency and distribution contracts, trying to understand what remedies are provided by our legal system to deal with the problems that are most likely to arise between the parties.
In contractual matters, following the above-mentioned ministerial order, the legislator did not intervene with measures ad hoc (only a few measures of a predominantly tax and contribution-related nature are to be found in agency matters),[2] merely providing in Article 91 Decree-Law of 18 March 2020, better known as 'Cura-Italia', on the subject of "provisions on delays or breach of contract resulting from the implementation of containment measures", as follows:
"compliance with the containment measures set out in this decree shall always be assessed for the purpose of excluding, pursuant to and for the purposes of Articles 1218 and 1223 of the Civil Code, the debtor's liability, also with respect to the application of any forfeiture or penalty related to delayed or omitted performance. "
The sense of this regulatory provision would seem to delegate to the judge a more accurate and prudential assessment of a possible culpable breach (Art. 1218 of the Civil Code) caused by the "compliance with containment measures" of the pandemic, also for the purpose of quantifying damages (art. 1223 Civil Code), raising compliance with these measures to a parameter for assessing the imputability and importance of the breach (art. 1455 Civil Code).
1. Civil law regulations.
As is well known, Art. 1218 of the Civil Code establishes the criteria for determining the liability of a debtor who fails to perform its bondby providing for its exemption from liability for damages (Art. 1223 of the Civil Code) whenever the non-performance or delay was caused by impossibility of performance resulting from a cause not attributable to it (Art. 1256 of the Civil Code).[3]
Art. 1256 of the Civil Code also provides that supervening impossibility may lead to the extinction of the obligation, although a distinction must be made between the case of definitive impossibility e impossibility temporary. While the former, being irreversible, extinguishes the obligation automatically (Art. 1256(1) of the Civil Code), the latter determines the extinction of the obligation only if it lasts until such time as the obligor can no longer be required to perform the obligation, or the obligee no longer has an interest in performing it.[4]
Given that in the contracts for consideration the impossibility of performing an obligation does not always automatically imply the impossibility of performance (e.g. if the seller cannot deliver a product, the buyer may still be able to pay the price of the thing sold)[5] The legislature intended to protect the non-performing party by providing in Art. 1460 of the Civil Code that either party may refuse to perform its obligation if the other does not perform or does not offer to perform at the same time, unless otherwise agreed in the contract (i.e. the seller may refuse to make payment if the manufacturer does not deliver the goods).
However, this exception may only be raised if there is proportionality between the two benefits, taking into account their respective impact on the balance of the relationship.[6]
In order to prevent the contractual relationship from being transformed into a "limbo" in which both parties merely declare that they do not wish to perform their respective obligations, if the non-performance (in our case of the seller) depends on supervening external factors (e.g. If the non-performance (in our case, the seller's non-performance depends on supervening external factors (e.g. the suspension measures of the covenant-19) the legislature (taking over the general principles dictated on the subject of rescission of the contract for non-performance, as in Art. 1453 of the Civil Code), provides the parties with certain remedies for cases where the impossibility is total or only partial.
Art. 1463 of the Civil Code (total impossibility) provides that the party who has been released from its obligation due to the supervening impossibility of performance (e.g. the seller who because of covid-19 can no longer deliver fruit that has perished because it could not be harvested during the pandemic), may not claim the counter-performance (i.e. payment of the price) and must also return what it may have already received (e.g. an advance).
Art. 1464 of the Civil Code (partial impossibility), on the other hand, provides that when the performance of one party has become partially impossible (e.g. delivery of 50% of the goods sold), the other party is entitled to a corresponding reduction of the performance owed by it (payment of 50% of the goods delivered), or may dissolve the contract if it has no appreciable interest in partial performance.
Thus, while in the case of total impossibility the termination of the contractual relationship operates as a matter of right, in the case of partial impossibility the party suffering the non-performance may opt for partial performance or (if there is an appreciable interest) termination of the contractual relationship.
Still different is the case governed by Art. 1467 et seq. of the Civil Code, relating to relationships with continuous or periodic performance, or with deferred performance, where due to external factors the performance of one of the parties requires efforts that are excessive and disproportionatethan those that were enforceable once the relationship had been entered into. Even in such a case, the party who suffers the excessive onerousness of the performance may request the termination of the contractual relationship if a serious economic imbalance is created between performance and counter-performance.
In this case, the party against whom termination is sought may avoid it by offering (formerly Art. 1467(3) of the Civil Code) to modify the terms of the contract in an equitable manner so as to bring the relationship between the performances within the limits of thenormal alea of the contract.
It is therefore very important to emphasise that the does not provide for an obligation of the parties to renegotiate and reschedule the relationshipSuch an obligation cannot be inferred from an extensive application of the principle of good faith under Art. 1374 of the Civil Code, the subject matter of which is a different case. Nor, in the writer's opinion, can such an obligation be derived from an extensive application of the principle of good faith set forth in Art. 1374 of the Civil Code, which has as its object the different case of "integration of the contract" in cases of incomplete or ambiguous expression of the contracting parties' will (and not of modification of the contractual terms, in the event of variations in the equilibrium position of the contractual relationship due to facts not attributable to the parties).[7]
Bearing in mind that these are the instruments offered by the legal system, we go on below to try to respond to some of the problems that may arise in the context of commercial distribution, bearing in mind that the legislature's reference to the institutions set forth in Articles 1218 and 1223 of the Civil Code suggests that the legislator's concern was above all to keep contractual relations alivewhere possible and in the interest of the parties.[8]
2. Effects on distribution contracts
2.1. What happens if the manufacturer can no longer supply its distributors and/or customers because of the coronavirus?
As a general rule, if the manufacturer cannot supply its distributors due to a blockage and/or slowdown in production due to the implementation of government restrictive measures, it cannot be held liable for such delays if the impossibility was original (thus not known at the time the obligation arose) and occurred after the debtor's default (Art. 1219 of the Civil Code), the contract being in a state of 'quiescence'.
Whether it was foreseen (expressly or implicitly) for the delivery of the goods[9] a essential term (Art. 1457 of the Civil Code), the relationship will be terminated as of right once the term has expired.
If, on the other hand, the time of delivery of the goods is not essential, the contractual relationship is extinguished if the impossibility continues until the purchaser can no longer be considered obliged to perform, or if the purchaser's interest in obtaining performance ceases to exist.[10] The purchaser's right not to terminate the agreement and to demand only a reduction of the price, if the performance is/can be only partially performed (e.g. delivery of only a single batch of the purchased goods), shall remain unaffected.
2.2. Can the distribution agreement be terminated because of the pandemic?
The subject of the dissolution of the distribution relationship has already been dealt with in this blog, and reference is made to that article for further discussion.
The termination of the sales (or distribution, as the case may be) licence agreement.
As explained (briefly) in the introductory part of this article, the party who "suffers" the temporary non-performance may terminate the relationship if it has no interest in the partial continuation of performance. Therefore, given that due to covid-19 the distribution relationship is interrupted for a term that may be more or less prolonged, the interest in the continuation of the distribution contract must certainly be calibrated taking into account mainly two factors: the actual duration of the event (in this case the pandemic) and the remaining duration of the contract.
As a general rule, it may be said that the more prolonged the effects of the restraint and the closer the natural expiry date of the relationship, the greater will be the possibilities of terminating the obligatory relationship. Of course, in this assessment, one must also take into account the indirect effects of the restrictive measures, which are linked to a reasonable expectation of one of the parties of the perpetuation of a very important decline in trade even after the end of the blockade.
Furthermore, if one of the parties is contractually obliged to incur high costs for maintaining the distribution relationship (rent, employees, showroom, etc.) that make the collaboration no longer de facto sustainable, it may consider terminating the relationship for excessive onerousness pursuant to Art. 1467 of the Civil Code.
In this case, the party against whom termination is sought may avoid it by offering (Art. 1467(3) of the Civil Code) to modify the terms of the contract in an equitable manner so as to bring the relationship between the performances within the limits of thenormal alea of the contract.
2.3. Can the parties not respect the non-competition agreement?
The covenant of competition in distribution (and agency) relations may be agreed in two ways, namely:
- the manufacturer undertakes to supply only the distributor in a given territory;
- the distributor undertakes to purchase certain products only from the manufacturer.
If, because of covid-19, the manufacturer can no longer supply its distributor because it has been placed under a production freeze, i.e. the distributor can no longer perform because of the freeze, even though the manufacturer has the possibility of supplying it (e.g. because it had in stock the material), the question arises as to whether the party that no longer has an interest in maintaining the non-compete obligation due to a fact attributable to the other contracting party may decide not to perform its obligations by using the legal means referred to above.
On the assumption that the law does not provide for any obligation of the parties to renegotiate the original contractual arrangement,[11] the existence of a principle authorising one party to oblige the other to modify the contract in the interests of rebalancing cannot be inferred.
It follows that a temporary suspension of the non-compete clause (in the writer's opinion) is not legally foundedif this does not result from an agreement of both parties. Conversely, if the prohibition of 'competing' activities for the period in question creates unsustainable conditions, one may possibly consider terminating the contractual relationship on the ground of supervening impossibility or excessive onerousness.
2.4. Should advertising budgets be provided and spent as agreed even if distribution is not possible due to the pandemic?
If one of the parties is contractually obliged to incur fixed costs for marketing and advertising, might find itself in the position of deciding not to incur such expenses, believing that they are not necessary due to the halt in production.
In order to understand whether (and which) marketing activities can be blocked, it is necessary to analyse the nature of the individual advertising/marketing activities. It can tend to be said that all those 'general' activities that serve to maintain the brand positioning within the market, must be carried out even in the event of a distribution blockade, as they are in fact necessary prior to reopening.
A different reasoning should be made on the activities of marketing relating to sales actions that cannot be performed during the pandemic. In such a case, the problem is not so much that those performances cannot be performed (and thus permit the invocation of supervening impossibility), but rather the fact that they do not bring any commercial advantage to the party promoting them; moreover, very often those expenses will not burden the party obliged to bear them so much economically that they can sustain the breach of the contractual equilibrium and thus permit the invocation of the supervening excessive onerousness of the performance.
In such a case, if the parties fail to reach an agreement, the party obliged to perform the promotional activity may have as its only (rather blunt) weapon the decision not to perform and thus not to carry out such activities, relying essentially on the fact that the non-performance may be deemed by the court (having regard also to Art. 91 of the above-mentioned Decree) to be of minor importance (Art. 1455 of the Civil Code), taking into account that the performance would not have brought any commercial advantage to the parties in any event.
3. Effects on agency contracts
3.1. Does the principal still have to pay a fixed commission/expense reimbursement, if contractually agreed?
Especially in agency contracts, it is often stipulated that the entrepreneur pays a monthly fixed amount (as reimbursement of expenses, or as a fixed commission) to which a variable part is normally added.
In this period, since the promotion activity has in fact been largely blocked, one wonders whether the principal might decide to remove (at least this phase) this fixed part.
As noted above, although the law does not provide for an instrument entitling a party to unilaterally modify the contract, it is not at all atypical to find in agency contracts contractual clauses conferring on the principal the potestative right to unilaterally modify the agent's commissions, territory and/or customers.
Cf. Unilateral changes to the agency contract by the principal.
According to the prevailing view of the Court, the granting of this power to the principal must "be justified by the need to better adapt the relationship to the needs of the parties as they have changed over time".[12] It may therefore be held that the adjustment of the commission fee on account of covid-19 can only be legitimately implemented if there is a contractual clause providing for such an option on the part of the principal, who will in any event be obliged to avail himself of it in a reasonable and appropriate manner.
It is a different matter, however, if AECs apply to the agency agreement, which confer on the one hand the possibility of the principal to modify the agent's commissions, but on the other hand the right of the agent to reject the modifications and terminate the relationship for cause if those modifications are significant (on this topic see commission changes based on AECs). It is argued that this rule cannot be altered in favour of the principal even taking into account the impact of the covid-19 on the principal's sales network, who must be aware that any change in the commission may lead to a termination of the relationship for cause by its agent.
3.2. What should agents do if they cannot visit their customers?
It is clear that if the agent can no longer visit his customers, he will not be forced to do so; moreover, if before the pandemic he did not carry out any promotion activities online and was not contractually obliged to do so, the principal will certainly not be able to impose disproportionate efforts on his agent by requiring the latter to engage in 'telematic' promotion by using new computer tools.
3.3. What are the consequences of not reaching the turnover minimums due to covid-19?
In recent years, the jurisprudential orientation is becoming more and more established[13] which, while confirming the unquestionable applicability of the general rule under Article 1456 of the Civil Code on the subject of express termination clauses, nevertheless specified that in order to legitimately activate the relevant termination mechanism, the court must in any event ascertain the existence of a serious breach, constituting just cause.[14]
Cf. The 'minimum turnover' clause in the agency contract.
Following this orientation, the failure to reach the minimum turnover due to covid-19, cannot be considered in itself as a breach such as to legitimise a termination of the relationship due to an act attributable to the agent, with the judge having to assess on a case-by-case basis the actual imputability and culpability of such non-compliance.
3.4. Does the commercial agent retain the right to commission if the customer terminates the contract with the principal because of the coronavirus?
If the customer terminates the contract with the principal because of the coronavirus (e.g. because his shop had to close or his carriers stopped), the question arises whether the commercial agent loses the right to commission under Art. 1748 of the Civil Code.
The current Art. 1748(6) of the Civil Code provides that the agent is obliged to return the commissions collected in the sole event that the contract between the principal and the third party has not been performed for reasons not attributable to the principal (a rule that is, inter alia, mandatory for the parties).
The notion of a cause attributable to the principal has been understood as any intentional or negligent conduct of the principal that resulted in the non-performance of the contract.[15]
Since the customer's breach of contract due to impossibility and/or supervening excessive onerousness of performance (due to the coronavirus) is not a fact attributable to the principal, the agent will not be entitled to receive the commission on such business and will be obliged to return it to the principal if it has already been paid in full or in part.
3.5. The repercussions on severance and termination payments.
As is well known, the parties have the right to terminate the relationship by giving the other party notice. The agent upon termination of the contract is entitled to a severance payment, unless:
- the principal terminates the contract for an act attributable to the agent;
- the agent terminates the contract for an act attributable to the agent.
Taking the above into account, it can be reasonably argued that the arguments made in the previous paragraph "Can the distribution agreement be terminated due to the effects of the Corona pandemic?"may, in principle, also be valid for the agency contract, although one should be aware that it is nevertheless necessary to act with the utmost care and awareness before terminating the contractual relationship, assessing prudently on a case-by-case basis.
One thing, however, is certain, that this pandemic will have a significant effect on the calculations of severance pay and loss of notice for all terminations of contracts that occur close to the arrival of the pandemic.
If those indemnities were to be excessively distorted due to the economic framework connected with covid-19, the question arises whether the agent may supplement them by availing itself of the right guaranteed by Art. 1751(4) of the Civil Code, which grants the agent the right to claim damages in addition to those indemnities.
The prevailing view holds that the damages that the agent may claim in addition to the indemnity are only those from default or tort.[16] It follows that it will be very difficult for the agent to claim further sums beyond those paid to it by way of termination indemnities, given that the decrease in turnover (which led to the decrease in indemnities) is unlikely to be attributable to fault on the part of the principal.
[1] Urgent measures to contain the infection throughout the country.
[2] Limatola, News on agency contracts in April 2020.
[3] Trabucchi, Institutions of Civil Law, § 310, CEDAM.
[4] Torrente - Schlesinger, Handbook of Private Law, §210, Giuffrè Editore.
[5] In that case the debtor's financial difficulties will not be relevant in any event, on this point see Gazzoni, Manuale di diritto privato, Edizioni Scientifiche Italiane.
[6] Cass. Civ. 2016, no. 22626.
[7] On this point, see Vertucci, Non-performance of obligations in the time of the coronavirus: first reflections, ilcaso.it
[8] Vertucci, op. cit.
[9] See Cass. Civ. Cass. of 2013, no. 3710: essentiality is a characteristic that must result either from the express will of the parties or from the nature of the contract.
[10] See on this point Studio Chiomenti, Impact of Covid-19 on contracts.
[11] See on this point Vertucci, op. cit.
[12] Cf. Cass. Civ. 2000, no. 5467.
[13] Cass. Civ. 2011, no. 10934, Cass. Civ. 2012, no. 8295.
[14] Venice, Il recesso, la giusta causa e la clausola risolutiva espressa nel contratto di agenzia, March 2020, La consulenza del lavoro, Eutekne.
[15] Toffoletto, The Agency Contract, Giuffrè.
[16] Bortolotti, Termination Indemnity and Compensation for Further Damage, www.mglobale.it
Vienna Convention and termination of the contract of sale. Limitation and prescription periods of the action.
As already noted, the Vienna Convention does not deal with the limitation of actionswhich, according to the most authoritative doctrine[1] and case law,[2] is governed by the domestic rules. The limitation period, therefore, pursuant to Article 7(2) of the same Convention, is governed by the rules of the applicable law and, in the case of Italian law, by Article 1495 of the Civil Code et seq.
- Time limits under Art. 39 and 49 of the Convention
In contrast, the Convention expressly regulates the time limits for the forfeiture of the purchaser's right to warranty. Art. 39 reads as follows:
- The purchaser forfeits the right to rely on a lack of conformity if he does not report it to the seller, specifying the nature of the lack of conformity, within a period of one year. reasonable termfrom the time it found or should have found it.
- In all cases, the purchaser loses the right to assert a conformity defect if he does not report it at the latest within a period of two yearsfrom the date on which the goods were actually delivered to it, unless such expiry is incompatible with the duration of a contractual guarantee.
Art. 39 thus provides that the buyer's right to rely on a lack of conformity of the goods, including the right to terminate the contract, ceases to exist if he does not report it to the seller within a reasonable time after he has discovered it or ought to have discovered it and, in any case at the latest within two years from the date on which the goods were actually delivered to it.
Contrary to civil law rules, in the event that the purchaser wishes to request termination of the contractual relationship, the Convention provides for a further limitation period, in addition to that described above for reporting the defect, which requires it to notify the seller of its intention to declare the contract terminated. Art 49 of the Convention provides as follows:
- The purchaser may declare the contract terminated [avoided]:
- if the seller's non-performance of any of its obligations under the contract or this Convention constitutes a fundamental breach of the contract; [...].
- However, when the seller has delivered the goods, the buyer's right to declare the contract terminated expires if it has not done so:
- in the event of late delivery, within a reasonable time from the time it became aware that delivery had taken place;
- in the event of non-compliance other than late delivery, within a reasonable deadline.
This article contemplates the most radical of remedies for non-performance by the seller: termination of the contract. Para. (2) of Art. 49 provides that where the buyer has delivered, the purchaser loses the right to terminate the contract if it does not exercise it within a "term reasonable" through its own unilateral declaration.
The buyer under the Vienna Convention must therefore:
- within a reasonable time (and at the latest within two years after delivery) to notify the defect (Art. 39);
- within a reasonable time after delivery, declare the contract terminated (Art. 49).
On the interpretation of 'reasonable time' in Art. 49 for the declaration of termination of a contract, the Courts have pronounced themselves taking into account the type of goods sold and product sector.
The period of five months from the moment the buyer informed the seller of the defects in the goods was deemed unreasonable;[3] a declaration of termination made eight weeks after the buyer became aware of the existence of the defects was also held to be out of time;[4] "The period of eight months after the buyer should have known of the defects was also held to be 'unreasonable'.[5] On the other hand, the period of one month to five weeks was considered reasonable and therefore timely to make the declaration referred to in Art. 49 (2) (b).[6]
Moreover, according to authoritative doctrine, the reasonable period of time referred to in Art. 49(2) may never exceed the period of time referred to in Art. 39(2), i.e. two years from the date on which the goods were actually delivered.
"The buyer loses the right to rely on the lack of conformity and consequently to terminate the contract. In such a case, the time limit provided for in Art. 39 prevails over that provided for in Art. 49(2)(B); the date of the complaint under Art. 39 and that of the declaration of termination under Art. 49 may not coincide, but the time limit for both starts at the same time, and has the same expiry date [note date of actual delivery].[7]"
This implies that within a maximum of two years after delivery, the buyer must either denounce the defects (ex art. 39) or declare the contract void (ex art. 49)if it intends to seek termination of the contractual relationship in court.
About the mode with which such a declaration must be made, Article 26 of the Convention provides:
"A declaration of termination is effective only if it is made by notice to the other party."
This implies that this declaration must contain expressly and unequivocally that the contract has been terminated and therefore terminated.[8]
[1] Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, UNCITRALS, 2016 UNITED NATIONS, 2016 Edition, p. 25; Schlechtriem, Internationales UN-Kaufrecht, Tübingen 2007, 124, n. 162; Honsel, Das einheitliche UN-Kaufrecht, available at. http://20iahre.cisg-library.org."
[2] Bundesgerichtshof, Germany, 23 October 2013, Internationales Handelsrecht 2014, 25 = CISG-online No. 2474; Bundesgericht, Switzerland, 18 May 2009, English translation available on the Internet at www.cisg.law.pace.edu; Appellationsgericht Basel-Stadt, Switzerland, 26 September 2008, English translation available on the Internet at www.cisg.law.pace.edu; Supreme Court, Slovakia, 30 April 2008, English translation available on the Internet at www.cisg.law.pace.edu; Oberlandesgericht Köln, Germany, 13 February, 2006, also in Internationales Handeslrecht 2006, 145 ff.; Cour d'appel de Versailles, France, 13 October 2005, English translation available on the Internet at www.cisg.law.pace.edu, Tribunale di Padova, sez. Este, 20 February 2004, available at http://www.uncitral.org/docs/clout/ITA/ITA_100106_FT_clean.pdf.
[3] Bundesgerichtshof, Germany, 15 February 1995; see also Oberlandesgericht München, Germany, 2 March 1994] (4 months).
[4] Oberlandesgericht Koblenz, Germany, 31 January 1997.
[5] Cour d'appel Paris, France, 14 June 2001; see also Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Russia, 22 October 1998. (which considered a complaint made after five or six months to be untimely); Hof 's-Hertogenbosch, Denmark, 11 October 2005.
[6] [Tribunal cantonal du canton de Valais, Switzerland, 21 February 2005] (one month); CLOUT case No. 165 [Oberlandesgericht Oldenburg, Germany, 1 February 1995] (five weeks); Bundesgericht, Switzerland, 18 May 2009, Internationales Handelsrecht 2010, 27 (one to two months).
[7] Bianca and Bonell, Commentary on the Vienna Convention on the International Sale of Goods, New Civil Laws Annotated, CEDAM, Padua, 1989.
[8] Kantonsgericht des Kantons Zug, Switzerland, 30 August 2007; UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, UNCITRALS, 2016 UNITED NATIONS, 2016 Edition, p. 233.