Essay

Notes on Agency and Distribution - Italy

Under Italian law an independent agent(agente commerciale)is an agent who acts at his/her own risk, undertaking to promote for a commission fee the conclusion of contracts on behalf of the principal in a specific territory. The object of the contract can be products or services.

Agents working for one principal only are calledmonomandatari , while those working for more than one principal are calledplurimandatari .

Rappresentanti di commercioare agents who have the power to represent the principal and conclude contracts binding on the principal. An agent whose power is limited to the promotion of contracts on behalf of the principal is anagente di commercio .

2. Are there other forms of representation?

Yes. Independent agents must be distinguished from:

  • amediator , who is a person who puts two or more parties into contact for the conclusion of a transaction without being bound to either of them by a relationship of collaboration, employment or representation and who is not a party to the contract;
  • adealer , who acts for principal but on an irregular and intermittent basis with no specific territory or right of exclusivity;
  • anemployed agent , who has a business similar to that of the independent commercial agent but is an employee of the prinicipal. He/she benefits from welfare and social security assistance as an employee and bears no risk in relation to his/her activity; although in some instances he/she may receive salary and commission on sales as an incentive to generate business.

3. What must be included in the contract with a commercial agent?

i. Formal requirements

The agency agreement needs not to be in writing to be valid. However, each party has the right to obtain a written copy of the agreement (article1742 of the Civil Code).

ii. Applicable law

Since April 1, 1999, the Italian law applicable to international contractual relationships has been established pursuant to the Rome Convention on the law governing contractual obligations of June 19, 1980, which was ratified by Italy on December 18, 1984. Consequently the law applicable to agency agreements stipulated after April 1 1991, has been established according to the following criteria:

  • The parties can choose the law which they wish to apply to their relationship. The choice can be specified in the agreement or subsequently and does not need to be in writing (but see 3. i. above). The stipulated law can cover only part or the whole of the agreement.
  • Where parties have not specified the law governing the agreement, the law which is closest to the agreement will be applied. This is usually considered to be the law of the State where the agent carries out his activity.
  • The laws of a foreign country will not be applied in Italy if they contravene the rules of public order.

iii. Definition of the position of the agent

It is important to specify whether it is intended that the agent should promote contracts to be concluded by the principal, or whether he/she has the power to conclude contracts directly in the name, and on behalf of, the principal. The choice will be dictated by the kind of product to be distributed: where a product requires mass distribution and a large volume of sales, and if an agent is to keep a deposit. The agent will usually conclude the contracts on behalf of the principal, under the conditions of sale set by the principal. Where products are of higher value and the volume of sales is lower with longer terms for delivery, it is preferable for the principal to conclude the contracts, thus keeping better control over the sales and the risks involved.

Another consideration which must be taken into account is if the agent representing the principal may lead to tax liability of the principal in the country where the agent is acting. In the countries that have adopted the OCSE model of the Convention against double taxation, as Italy has, an independent agent does not constitute a stable organization of the principal even if the agent has representation for tax purposes. However, for countries that do not follow the OCSE model of the Convention against double taxation, some doubt exists as to whether an independent agent with representation can in fact constitute a stable organization of the principal, thus making the principal liable to tax on the sales promoted by the agent in the country where the agent is acting.

iv. Specification of the contractual products

It is not advisable to refer to the products to be covered by the contract in general terms i.e "all products of the principal." This can lead to difficulties if, for instance, in the future the principal widens the range of his/her products and wishes to have particular agents for new lines. It is better to list the products in an enclosure or annex, or make reference to particular product lines.

If the principal sells his/her products under different trademarks, the contractual products can be limited to those bearing a certain trade mark.

v. Territory

It is essential that there be a clear specification of the territory to be covered by the agent.

vi. Exclusivity

Pursuant to article 1742 of theItalian Civil Code , the agent operates in a specific territory, but under article 1743 the principal cannot have more than one agent in the same territory for the same range of products, and the agent cannot operate in the same territory and for the same range of products for more than one principal. It should be noted that under Italian law exclusivity is a natural element of an agency contract. However, it is not essential and parties may depart from these provisions by agreement.

If the agent does not have exclusivity over the territory, he/she will not have the right to commission otherwise due on business concluded directly by the principal under article 1748 of the Civil Code and on business concluded by other agents in his territory.

Exclusivity in favour of the principal bars the agent from acting in the same territory and for the same range of products for competing companies, and from carrying on an activity in competition with that of the principal. On the other hand, exclusivity does not mean that the agent will not be able to act for different principals that are not in competition with one another. In fact the possibility of doing this is feasible where it has not been specified that the agent will act exclusively for one principal.

4. What are the duties and obligations of the agent?

The agent must promote the sales of the products (article 1742 of the Civil Code).

The agency agreement can ensure that it be done through a particular sales network or leave the agent free to organize himself/herself as he thinks best. The agency agreement can provide for a minimum quantity of orders that must be transmitted by the agent over a certain period. In fixing the minimum, the principal should keep in mind that it must always be reasonable, otherwise the agent could void the contract for impossibility of execution. Failure to promote sales adequately and, in particular, failure to reach specified minimum specified in the contract can lead to termination of the contract, or a claim for damages, a review of the range of products to be sold by the agent, or a review of the extent of his territory. The contract can provide for whatever the parties think best according to the market being covered.

The agent must promote the sales of the principal's products in accordance with the instructions given by the principal, and must therefore apply prices and conditions of sales fixed by the principal (article 1746 of the Civil Code).

The agent must keep the principal informed about the market conditions within the territory and give any other useful information to enable the principal to evaluate each sale proposed (article 1746 of the Civil Code).

Note that in Italy it is common to include among the obligations of the principal agent, compensation for losses caused by the default of a customer (star del credere). According to theCollective Bargaining Agreement of 1956applicable to all agency agreements governed by Italian law, the agent's liability is limited to 20% of the loss suffered by the principal and, in any event, cannot exceed one half of the commissions due to the agent for that year. According to the more recent Collective Bargaining Agreements which apply only to parties registered with the Contracting Trade Unions or Associations, the liability is limited to 15% of the loss suffered by the principal and, in any event, cannot be higher than three times the commission on the sale. Thus where the principal recovers all or a part of the price due from the customer, the agent shall be entitled to a proportional refund of thestar

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del crederepaid to the principal and of the corresponding commission.

The agent can also be bound by a non-competition clause effective after termination of the contract. To be valid such a clause must be in writing. The non-competition obligation must be limited to the same area, clientele, products or services contemplated by the original agency agreement, and its duration cannot exceed two years following the termination of the agreement (article 1751 of the Civil Code).

In certain cases, it can be of the utmost importance to include in the agreement assistance to be given by the agent, on behalf and at the expense of the principal, to clients for repairs and upkeep. Such an obligation is not provided for by law and must be agreed between the parties.

5. What are the duties and obligations of the principal?

The principal must provide the agent information concerning products or services dealt with, and give him/her all necessary information for the performance of his/her contractual obligations. This is done by specifying the principal's duty to supply booklets, brochures, etc. (article 1748 of the Civil Code).

The principal is also obliged to inform the agent within a reasonable time whether he intends to accept or refuse an order submitted by the agent (article 1748 of the Civil Code).

The principal has the duty to pay the agent commission as agreed in the contract. Pursuant to article 1748 of the Civil Code, commission is due on sales for which the price has been paid. In cases where the price has been paid only in part, the right to the commission will be proportional to the payment.

On the basis of exclusivity, commission is also due on sales made directly by the principal in the agent's territory, except where the contract expressly provides to the contrary. Commission is due to the agent on sales concluded after the termination of the agency agreement if it is the result of the agent's activity during the agency agreement.

It should be noted that the agent has no right to incur expenses unless otherwise specified in the contract.

Regarding payment of commission, the principal is bound to submit to the agent, no later than the last day of the month immediately following the end of each quarter, a written statement of account of the commission due. The statement of account shall indicate all items used in the calculation of the commission.

The commission due must be paid to the agent within the aforesaid period, i.e. the last day of the month following the quarter to which the commission refers.

The principal must place all necessary information at the agent's disposal so that he/she can check the amount of commission due. For this purpose the principal may request to provide the agent with extracts of his accounting records.

6. Termination

Termination of the contract is governed by articles 1750 and 1751 of the Civil Code as amended by Law 303/91 and Law 65/99, and where applicable, if the parties belong to the Contracting Trade Unions and Associations, by the collective agreements.

An agency contract can be for a limited or an unlimited term. In cases where it is for a limited term it ceases at the fixed expiry date. If it continues, it is thereafter treated as a contract for an unlimited term.

How can an agency agreement be terminated? A contract for an unlimited term can be terminated by giving one month's notice for the first year of duration of the contract, two months for the second year, three months for the third year, etc.

Where collective agreements are applicable, the longer terms provided by them will be enforced.

It is possible substitute the notice period to an indemnity to be calculated on the basis of commissions received by the agent during the preceding year, divided by 12 and multiplied by the number of months of the notice period for which the indemnity is substituted.

When termination of the contract is not caused by the agent, an indemnity is due in cases where the agent has brought new clients to the principal or has developed business with existing clients in such a way that the principal is left with substantial advantages deriving from business with such clients, or where payment of such an indemnity is considered equitable having regard to all the circumstances, in particular the commissions deriving from those clients which the agent loses on termination.

The amount of the indemnity due is not calculated on the basis of fixed parameters, and is fixed only as to its maximum amount: it cannot exceed a sum corresponding to the yearly average calculated on the basis of the sum of the average of commissions over 12 months for each year of contract for the preceding five years or the period of the contract, if shorter.

Any claim by the agent concerning the indemnity must be made to the principal within a year of contract termination. The payment of an indemnity does not deprive the agent of the right to advance a claim for compensation of damages.

7. Termination for breach of contract

Breach of obligation or terms of contract can lead to:

  1. termination of the agreement under article 1453 et seq. of the Civil Code, and
  2. a consequent claim for compensation by way of damages to be calculated taking into account loss of commission where the party in breach is the principal, and loss of profits where the party in breach is the agent.

The agreement can provide for automatic termination in certain circumstances (compulsory liquidation, change of ownership of the company, etc).

In the case where the principal terminates the contract, the agent will be entitled to an indemnity for termination of the contract as provided in 6 above, apart from compensation by way of damages.

8. What is the difference between an agency and a distributorship agreement?

Both an agent and a distributor have the same economic function, i.e. the organization and promotion of sales of products of the principals. However, there is a basic difference in their position. The agent promotes sales on behalf of the principal and receives a commission on the sale as compensation. The distributor purchases the products from the principal, resells them and makes a profit on the difference between the purchase price and the reselling price. An agent differs from all other clients due to the special terms that bind him/her to the principal and to sales regulations.

Italian law does not contain specific provisions governing the position of a distributor. However, there is a tendency to consider distributorship agreements as falling under the provisions regulating supply contracts (article 1559 of the Civil Code), i.e. contracts whereby a party undertakes, in exchange for a consideration, to supply goods regularly or periodically to another. However, because of their particular characteristics, distribution agreements are only to be partially covered by rules governing supplies, and should be considered on a case-by-case basis taking into account the terms and conditions of each individual agreement and the general rules covering contracts and obligations.

The position of the distributor is characterized by a higher risk than that of the agent, as he/she must sustain a client's failure to pay. On the other hand, the distributor enjoys better control of the market and greater independence.

The choice to be made between appointing an agent or a distributor will be dictated by a series of factors concerning the kind of product to be dealt with, whether a deposit is necessary, whether the principal thinks he/she must have direct control over the market, and the need for a facility to provide direct assistance to clients.

The table below indicates the main differences.

Agency and Distribution - Italy
ItemDistributorAgent Without RepresentationAgent With RepresentationAgent Employee
Transactionpurchases and sells on own behalfsubmits orders to principalconcludes contracts in name and on behalf of principalacts under the direct control of principal with or without representation
Remunerationdifference between purchase and sale pricecommissions on sales once price paid to principalas agreed in agency contractsalary and, if agreed, commissions
Expensesundertaken by distributor, publicity expenses sometimes sharedundertaken by agent except accounts and often publicityundertaken by agent except publicityundertaken by principal
Other Paymentsnoneindemnity for termination ENASARCOas agreed in agency contractonerous for principal as collective agreements and national assistance apply
Market Controlweak although the contract can provide for reports on clients, etc.principal knows the market through orderscontract can provide for visits to clients, etcprincipal has control
Riskundertaken by distributorundertaken by principalexcept forstar del credere undertaken by principal

These notes should be regarded as no more than a general guide to current legal issues and should not be relied on as a definitive expression of the law. They are not designed to be exhaustive, or to be regarded as a comprehensive or formal legal opinion on any matter mentioned. Professional advice should be obtained concerning specific questions.

September 2016


Category: Research paper

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