Termination of the sales concession contract and inventory management: rights and obligations of the parties.
Sales dealership agreements often contain an agreement on how to deal with the stock of goods purchased by the dealer during the term of the agreement; this regulation may take the form of an option for the franchisor to repurchase the goods at a certain price, or the former dealer may distribute these goods.
Other times, the parties do not provide for any contractual provision governing this case, and upon termination of the relationship, the problem arises as to whether or not the former dealer may resell the stock in inventory, or require the supplier to repurchase the goods.
In the following, these cases will be analysed, albeit briefly, in view of their relevance from both a technical and legal as well as a practical and commercial point of view.
1. Absence of a written agreement in the concession contract.
1.1. Right to resell products in stock.
In the absence of different contractual agreements, the case under analysis must be treated from two different aspects: under the principles of civil law, on the one hand, and those of intellectual property law, on the other.
Civilly the grantor may not prevent his dealer from reselling the goods purchased by the latter, unless the same have been sold subject to reservation of title and the dealer disposes of the contractual goods before becoming the owner: in this case, in addition to the breach of contract, the disposal will even constitute the offence of embezzlement (Art. 646 of the Criminal Code).[1]
From the point of view of intellectual property lawInstead, it is necessary to take up a principle that has already been addressed several times in this blogthat of thebrand exhaustionreferred to inart. 5 c.p.i.
Read also - Parallel sales and the principle of trade mark exhaustion.
According to this principle, once the owner of one or more industrial property rights places a good directly or with his consent on the market in the territory of the European Union, he loses the relevant rights.
The exclusivity is therefore limited to the first act of marketingwhereas no exclusivity can subsequently be claimed by the proprietor of the trade mark on the circulation of the product bearing the mark.
Since in a sales dealership agreement, the consent to the first placing on the market (i.e. the sale by the grantor to the dealer) stems from the contractual relationship between the parties, in the absence of any agreement to the contrary, the grantor may not oppose the resale of the contractual goods even once the relationship has ended.
It is stated in case law on the subject that:
"the entrepreneur, who has purchased goods with distinctive signs, is indeed entitled to market the product even after termination of the relationship because, according to the principle of exhaustion, the holder of an industrial property right cannot oppose the circulation of a product, to which that right relates, when that product has been placed on the market by the holder of that right or with his consent in the territory of the state or in the territory of other Member States of the European Union."[2]
The principle of exhaustion nevertheless knows a limitation: the second paragraph of Art. 5 of the IPC contains a safeguard rule that allows the trade mark proprietor to oppose the circulation of the product placed on the market with his consent and, therefore, "exhausted", if there are
"legitimate reasons for the proprietor to object to the further marketing of the products, in particular when their condition is changed or altered after they have been placed on the market".
Therefore, in the absence of 'legitimate reasons'[3]the supplier may not prevent the dealer from reselling inventories, let alone from using its trade mark, if it is used by the dealer for the sole purpose of advertising the availability of the product it intends to sell or lease and the advertising activity is not such as to create in the public the belief that the dealer is part of the licensor's authorised network, otherwise such conduct would constitute a confusing offence under Article 2598(1)(1) of the Civil Code on the subject of unfair competition.[4]
1.2. Right to have inventories repurchased.
In the absence of a contractual obligation, in order to understand whether the dealer may require the grantor to repurchase the goods remaining in stock, one must refer primarily to the principles of loyalty and good faith formerly Article 1375 of the Civil Code.
The clause of good faith in the performance of the contract operates as a criterion of reciprocity, requiring each party to the obligatory relationship to act in such a way as to preserve the interests of the other, and constitutes an autonomous legal duty incumbent on the parties to the contract, irrespective of the existence of specific contractual obligations or of what is expressly laid down by law.[5]
Since this is a very broad principle and certainly not easy to implement in practice, it is necessary to assess from time to time how it should be applied to the concrete case, on the basis of all those factors that may impact on the contractual balance: it will certainly be assessed differently if the concessionaire had been contractually obliged to maintain a stock in stock, as opposed to the case where the stocks are due to a failure to adhere to the rules of prudence, which should have advised the dealer to suspend or otherwise reduce purchases and dispose of medium warmth inventories in view of an upcoming report.[6]
A ruling by the Court of Milan is recorded,[7] which considered contrary to these principles the conduct of a supplier who prevented (contrary to the principle of exhaustion) the plaintiff from marketing the product it had supplied prior to withdrawal, without having cooperated in safeguarding the interest of the other party by making available - although not contractually provided for - the repurchase of the goods.
The Court therefore ordered the defendant to pay damages, quantified in the value of the goods remaining in stock.
There is also a further ruling, again by the Court of Milan,[8] relating to a licensing relationship, in which the court reached such a result with the aid of the instrument provided by Article 1340 of the Civil Code, according to which contractual usages or usage clauses are deemed to be included in the contract if it is not apparent that they were not intended by the parties.
The Court therefore held that the licensor was obliged to repurchase the goods sold, in addition to cooperation and conduct in good faith, on the basis of the fact that in the industry in which the parties operated it was customary for the licensor to purchase at least part of the unsold goods following the termination of the relationship.
2. Existence of an agreement between the grantor and the concessionaire.
2.1. Prohibition to resell stock.
A contractual clause that imposes a prohibition on the dealer to sell goods in stock following termination of the contractual relationship, without there being a commitment on the part of the grantor to repurchase such goods, is, in the opinion of the writer, of doubtful validity, both from a antitrustand civil law, for the reasons set out below.
In the field of antitrustArticle 5(b) of the Regulation 330/2010imposes limitations on the supplier's ability to require its buyer to engage in competitive activities after termination of the relationship. "The parties may not impose any direct or indirect obligation on the buyer, after the agreement has expired, not to manufacture, purchase, sell or resell certain goods or services, unless such obligation [...].:
- refers to goods or services in competition with the contract goods or services;
- is limited to the premises and land from which the purchaser has operated during the contractual period;
- is indispensable to protect the 'know-how' transferred from supplier to purchaser;
- the duration of this obligation is limited to one year. "
Since the requirements for the legitimacy of this obligation are cumulative, the rule does not normally apply to typical forms of sales concessions, which do not imply the need to protect know-how provided to retailers, but rather to the franchising,[9] with the consequence that this exemption can hardly be applied to the contractual case under analysis.
Moreover, the non-compete obligation is not part of the 'severe restrictions' (hardcore) governed by Article 4 of the Regulationbut of those that are simply not exempt, with the consequence that these limitations are only applied to contracts that have no less importancei.e. which do not appreciably restrict competition: this is the case whenever the market share held by each of the parties to the agreement exceeds 15% on the relevant markets affected by the agreement.[10]
If the dealership contract qualifies as a contract of minor importance, an agreement imposing a prohibition on the resale of the stored goods would benefit from the exemption and would (at least from a antitrust) lawful.
Mind you, this does not alter the fact that such a contractual agreement must in any case be subjected to the scrutiny of the principles of good faith and contractual fairness, so that it may be invalid if it is not adequately counterbalanced by - for example - an obligation on the part of the grantor to repurchase the goods in stock, in particular if the latter was contractually obliged to maintain a stock minimum in stock in the course of the report.[11]
2.2. The grantor's right to repurchase the goods.
A different reasoning must be made - again for the purpose of assessing its legality - in the case where the parties provide for a right of the grantor to repurchase the stock of the products, following the termination of the relationship.
To do so, it is first necessary to understand the legal nature of such an agreement, i.e. whether it should be framed as:
- preliminary contract formerly 1351 of the Civil Code, ancillary to the concession contract, i.e.
- purchase option agreement, formerly 1331 c.c.
The differences between these institutions are briefly examined below.
(a) Preliminary contract.
This is the case whenever in the contract both parties agree that upon termination of the relationship the products to stock will be bought back by the supplier at an agreed price.
Ex. The parties agree that at the end of the contract the dealer shall be obliged to resell to the licensor the entire remaining stock of products at a price equal to the invoice price net of VAT, with a discount of _____.
Such a contractual clause (which would indeed constitute a preliminary contract) is certainly valid, unless it is proved that the contract was null and void ab originee.g. for lack of consent of one of the parties, abuse of rights, etc.
(b) Call option covenant.
If, on the other hand, in the contract one party undertakes to hold firm to its own proposal and the other party (the beneficiary) is granted the right to make use of the option to accept the proposal or not, we fall into the different case of the option contract formerly Article 1331 of the Civil Code.
Ex. At the end of the contract, the grantor has the option to repurchase the stock at the price _______, to be notified within _____ of the termination of the contract.
Such an agreement must also tend to be considered valid; the only problem might be connected with the case where the option right is granted free of charge, i.e. without payment of a price (so-called premium).
Some (albeit minority) case law[12] holds that in such a case the option agreement would be null and void, since the right cannot be granted free of charge (e.g. a discount on the repurchase of goods). It should be noted, however, that the majority jurisprudence is in favour of the option being gratuitous: "Article 1331 of the Civil Code does not provide for the payment of any consideration and, therefore, the option may be offered for consideration or free of charge".[13]
[1] Torrente - Schlesinger, Handbook of Private Law, Giuffrè, § 377.
[2] Trib. Milan, 6.5.2015; in case law Court of Justice, 8.7.2010, Portakabin case.
[3] The following constitute 'legitimate reasons' for the non-application of the principle of trade mark exhaustion: (a) the modification or alteration of the condition of the goods, after they have been put on the market and (b) all those cases implying a serious and grave prejudice: the latter must be ascertained in concreto. On this point cf. Trib. Milan 17.3.2016.
[4] On this point Civil cassation 1998, no. 10416; Trib. Rome, 28.4.2004.
[5] Cass. Civ. 2014, no. 1179.
[6] On this point cf. Trib. Milan, 19.9.2014.
[9] Bortolotti, Distribution Contracts, Walters Kluver, 2016.
[10] Cf. De Minimis Communication 2014 of the EU Commissionin conjunction with the Commission Notice on Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty.
[11] On this point cf. Trib. Milan, 19.9.2014.
[12] See Appeal Milan 5.2.1997.
[13] Trib. Milan 3.10.2013
Agent's right to commission on long-term contracts.
If an agent procures long-term contracts, is he entitled to commission if the contracts continue after the agency relationship is terminated?
Where an agent procures long-term contracts, such as long-term supply contracts or subcontracts, the question arises as to whether or not the agent is entitled to commission on the deliveries made in performance of the contract procured following a possible termination of the agency relationship.
To answer this question, it is necessary to take a brief step back and understand in detail when the agent's right to commission arises (on this point see also Agent's commissions for business concluded by the principal after termination of the relationship). Article 1748(3) of the Civil Code provides on this point that:
"The agent is entitled to commission on business concluded after the date of termination of the contract if the proposal was received to the principal or agent before or business is concluded within a reasonable time from the date of termination of the contract and the conclusion is from mainly traceable to his activityIn such cases the commission is due only to the previous agent, unless specific circumstances show that it is equitable to allocate the commission among the intervening agents."
This approach[1] is intended to prevent the principal from running the risk of paying a double commission: one to the outgoing and one to the incoming agent.[2] In the event of termination of the relationship, therefore, the agent will be entitled to the commission:
- if the proposal was received on antecedent upon termination of the relationship;
- if the deal is concluded within a reasonable term from the date of termination of the contract and the conclusion is due to mainly to theactivities of the agent.
While the first hypothesis does not give rise to any particular problems of interpretation, the second, on the other hand, may give rise to several doubts, mainly related to the interpretation of the concept of 'prevalence' and of 'reasonableness[3]".
An interpretative aid can be derived from Art. 6, last paragraph, AEC 30.7.2014[4] (cf. when applying ERM e how the AEC Industry 2014 severance payment is calculated), which imposes an obligation on the agent to report to the principal in detail on negotiations undertaken and not concluded at the time of termination of the relationship; this provision also provides that if, within six months from the date of termination of the relationship, some of those negotiations are successful, the agent will be entitled to the relevant commissions (cf. The agent's obligation to inform the principal).
On the basis of the foregoing, where the agent in the course of the relationship promotes term contracts, the entitlement to commission on deliveries made in performance of the contract procured after the termination of the relationship depends essentially on the nature of the term contract.
In principle, in the event that the term contract is a a supply contract, a subcontracting contract, or a sales contract with divided deliveries, it can be stated that (unless otherwise agreed)[5]the agent is entitled to commission on all deliveries made even after termination of the agency contract, since these are in fact acts of performance of a contract concluded during the course of the relationship.
Conversely, where the contract promoted is a framework contractwhere each supply is to be the subject of a further agreement (order - acceptance), in which case the individual supplies are to be regarded as independent sales contracts,[6] even if concluded in the context of the framework contract, with the consequence that such subsequent sales contracts will not give rise to an entitlement to commission (unless the agent can prove that such business is attributable to its promotion activity and was concluded within a reasonable time).
Continuing with the reasoning, if, on the other hand, the term relationship is signed by the principal following the termination of the relationshipIn order to understand whether the agent may be entitled to commission, it will not be sufficient to ascertain the nature of the relationship of duration, but also to prove that the conclusion of the transaction is attributable to the agent's promotional activity.
A very interesting case is recalled below[7]which was decided by a series of three judgments of the Court of GrossetoA case in point was the following: an agent, following burdensome negotiations lasting several months, had procured for the principal (a company operating in the frozen food sector) a deal with a chain of supermarkets for the indefinite supply of frozen and pre-packaged ready meals. The administration contract was concluded a few months after the termination of the agency relationship.
The agent sued the principal for payment of commissions on supplies made in performance of the supply contract. By judgment No. 52/2012, the Court of Grosseto upheld the agent's claims, holding that:
"the administration contract was formally concluded [...]. just over two months after the termination of the agency contract [...], a term that must be considered, due to its objective brevity, absolutely reasonable.
Although the Court had found that the agent was entitled to commissions, it rejected the plaintiff's claim seeking an order that the principal pay them
"until the end of the administration contract [...] as this would be a pronouncement of sentence 'in the future' related, moreover, to a term that was not identified by the parties in the administration contract, since the same contract was concluded for an indefinite period."
The agent, a few years after the delivery of the first judgement, brought a further action, in which it sought an order that the principal be ordered to pay commissions on supplies made after the expert valuation referred to in the first judgement. The agent based its claim on the principle of Article 2909 of the Civil Code.according to which the finding contained in the final judgment shall be conclusive for all purposes between the parties. The Court again condemned the principal, stating that
"the right to obtain the payment of the commissions that will gradually accrue in relation to the prolonged performance of the supply contract, is unquestionable and has already been ascertained in the irrevocable ruling issued by this Office with the consequent application of the revocatory effect provided for by Article 2909 (on this point, among others, Court of Cass. Sez. Lav. 2001 no. 4304).
Following this ruling, in order to avoid the payment of commissions on future business, the principal proceeded to effectively giving up the business to a company of the same group, also active in the frozen food sector. The agent then appealed again to the Court of Grosseto, arguing that the assignment of the duration contract pursuant to Article 1406 of the Civil Code entailed the transferee's obligation to pay commissions. The Court of Grosseto[8]again supported the plaintiff's argument, stating that:
"since the characteristic feature of the assignment of the contract under Art. 1406 of the Civil Code is that it has as its object the transmission of a unitary set of active and passive legal situations resulting from each party to the contract [...], the transferee shall be obliged to pay to the plaintiff commissions - in the same amount as agreed in the agency contract - on the supplies of frozen food products made to X srl."
* * *
Lastly, it should also be emphasised that the signing of term contracts can be used as a determinant for prove that the conditions required by Article 1751 of the Civil Code are fulfilled.for the agent's right to receive severance pay (cf. Agent's severance pay. How is it calculated if AEC does not apply?). We read in an interesting Supreme Court ruling that:
"The termination indemnity compensates the agent for the asset increase that its activity brings to the principal by developing the goodwill of the business. It follows that this condition must be deemed to exist, and the indemnity is therefore due, where the contracts concluded by the agent are contracts of duration, since the development of goodwill and the continuation of benefits to the principal, even after the termination of the agency relationship, are in re ipsa'..[9]
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[1] Article reformed by Legislative Decree No. 65/1999, by which the legislature transposed the principles of European Directive No. 86/653 and, in particular, Article 8, which provides as follows: "For a commercial transaction concluded after the termination of the agency contract, the commercial agent shall be entitled to commission; (a) if the transaction is mainly due to the result of the work performed by him during the agency contract and if the transaction is concluded within a reasonable period after the termination of the agency contract, or (b) if, in accordance with the conditions set out in Article 7, the order placed by the third party was received by the principal or the commercial agent before the termination of the agency contract. "
[2]Cf. Court of Rimini, 22.9.2004, No. 238, which excluded the agent's right to commissions in the event of extensions of supply offers, given the absence of the former agent's preponderant promotional intervention. On this point see VENEZIA, Il contratto di agenzia, pg. 281, 2015, CEDAM.
[3] Jurisprudence has also considered a term of six months to be reasonable (Court of Cassation Civ. 9.2.2006) and in some cases, such term has even been extended to two years (see Court of Cassation Civ. 16.1.2013 in which the Court held that the two-year term for loyalty cards sold thanks to the agent's promotional activity was reasonable, thus considering fuel sales made after the termination of the relationship attributable to the agent's performance.
[4] Art. 6, last paragraph AEC 2014 Industry: "The agent or representative is entitled to commission on business proposed and concluded even after termination of the contract, if the conclusion is primarily the result of the activity performed by the agent or representative and takes place within a reasonable time after termination of the relationship. To this end, upon termination of the relationship, the agent or representative shall report to the principal in detail on the business negotiations undertaken, but not concluded, due to the termination of the agency agreement.
If, within a period of six months from the date of termination of the relationship, any such negotiations are successful, the agent shall be entitled to the relevant commission, as regulated above. Once that period has elapsed, the conclusion of any order, whether or not included in the agent's report, shall no longer be considered a consequence of the agent's activity and no commission shall be paid. This is without prejudice, however, to any agreements between the parties providing for a different time limit or for the distribution of the commission among the agents who have been present in the area and who have intervened in the promotion and conclusion of the transaction. "
[5] Art. 1748 para. 3 of the Civil Code, on commissions due for business concluded after termination of the contract, is entirely derogable: in favour Saracini-Toffoletto, Il contratto di agenzia. Commentario, 2014, GIUFFRÈ and Bortolotti, op. cit., p. 276; contrary, Trioni, who holds that this rule is not mandatory, given that the third paragraph of Art. 1748 cc, unlike the second and fourth, does not expressly provide for the salvation of contrary agreements.
[6] See on this point BORTOLOTTI, Concessione di Vendita, Franchising e altri contratti di distribuzione, p. 8, 2007, CEDAM.
[7] For more details see Giulia Cecconi, Le provigioni sui contratti di durata, in Agents and sales representatives, 1/2019, PUBLISHING AGE.
[8] Court of Grosseto, Judgment No. 269 of 2018.
[9] Cass. Civ. sez. lav. no. 24776 of 2013.