Distribution arrangement: how is it governed by Italian law system?

//Distribution arrangement: how is it governed by Italian law system?

Distribution arrangement: how is it governed by Italian law system?

Adistribution  agreement is a contract pursuant to which a party undertakes, for an ongoing time, to buy and resell the goods of another contracting party, on his own name and on his own account, in a delimited area. Due to the growth of globalisation market process, such contractual scheme is more often adopted by Companies which desire to duly regulate their commercial relationship with third parties operating at different levels of supply chain.

How does the Italian law system regulate a distribution agreement?

The Italian law system does not have a specific statute regulating distribution agreement (commonly called “contratto di concessione di vendita”), as it involves several and distinct elements of other contractual schemes, such sale, mandate and supply.

Over the years, whether the doctrine as well the jurisprudence have attempted to clarify the nature of such contract on the purpose of providing a specific definition thereof.

Whilst some Italian scholars initially agreed upon to qualify it as a type of supply contract, pursuant the wider provisions of Book 4, title II, Chapter V, article 1159 and following of Italian civil code, which governs a “contract whereby a party undertakes, for a consideration, to provide an other party with things (i.e. products, services, etc) on periodical or continuing basis”, it can now be said that such contract is an “atypical contract” (“contratto atipico o innominato”), i.e. a contract that does not fall within any contract type expressly regulated by the law, or rather as “framework contract” (“contratto quadro”) whereby a distributor agrees to promote the sale of a supplier’s products which it will purchase through separate contracts of sale: it has been stated by the main Italian scholars and jurisprudence.

What does it imply?

This implies that the distribution agreement falls under the wider provisions of Book IV, Title II, Chapter I, article 1321- 1469 of the civil code related to general contracts, as well as under the provisions related to other contract types that can be applied on them for analogy, such as supply (art. 1559 and following), mandate (articles 1703 and following) and agency (art. 1742 and following).

Termination of a distribution agreement 

Although the Italian Civil Code does not contain a general provision concerning the ending of a distribution agreement, a general principle according to which each party to a contract for an indefinite period of time may end the contract by giving notice in advance can be derived from the rules regulating the single contractual types, such as the article 1569 of the Italia Civil code: the time of notice has to be reasonable and can be agreed upon by the parties; in the absence of the contractual clause, it is defined in accordance with usages or practices.

In exercising their contractual freedom, however, the parties must take into consideration a counterparty’s interests and – as far as possible – must avoid harming such interests; in other words, they must comply with the good faith principle.

Such principle is definitely recognised as an autonomy duty and must be considered by the parties whether throughout the formation of the contract as well as during its performance, regardless of the presence of specific contractual terms. Its breach means not-fulfilment of the contract and may imply an obligation to indemnify the occurred damages as well as it may imply an abuse of right in certain circumstances.

What is the abuse of right?

Although the Italian law system does not have a specific statute regulating the abuse of right, it is generally deemed to occur when a party exercises a right in such a manner that its benefit and the counterparty’s loss or burden are unjustifiably disproportionate.

The conditions required for the applications of the abuse of right are delineated as follow:

1) ownership of a subjective right;

2) the possibility to exercise such right according to several ways undefined by the law;

3) the fact that such right is exercised in censurable ways despite according to the contract;

4) if there is an unjustified disproportion between the benefit of the right holder and the sacrifice which is subject the counterparty.

Can a contracting party be stopped from exerting its power to withdraw from the contract, regardless the presence of a specific termination clause?

In this regard, it is important to remark that the Italian Supreme Court of Cassation, decision n. 20106, issued on 18/09/2009 and decision n. 23868, issued on 23.11.2005, has held that the good faith principle has to be regarded as a criterion to value whether the power to withdrawal unilaterally from the contract is exercised by lawfully or not, as a judge must always monitor and interpret the parties’ actions, taking account of their respective positions and determining whether either party has unduly exploited its stronger position – or its counterparty’s weaker position – to achieve its goals. Thus, a judge must interpret the parties’ behaviour to ensure that the parties’ contrasting interests are fairly balanced.

As a consequence, a contracting party might be stopped from exerting its power to withdraw from the contract whether such exercise may be qualified as an abuse of right.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Need help? Feel free to contact us.

Davide Palazzo – commercial lawyer at Palazzo Law Boutique – www.palazzolawboutique.com – info@palazzolawboutique.com – Tel. +44 020 32399065.

By | 2017-09-08T12:26:32+00:00 July 2nd, 2015|Uncategorized|0 Comments

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