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PROTECTION OF THE DISTRIBUTOR AGAINST UNILATERAL WITHDRAWAL BY THE PRODUCER

What is a "distribution contract"? Why is the distributor a "weak party"? Most common profiles of litigation between distributor and producer seen also under a supranational perspective. 

By Avv. Simone Ceresoli - 10/3/2021

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Introduction
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Most of products, both for consumer and for Industry, once they have left the production chain do not reach the final user directly. They are used to pass through a network of intermediate relationships between the producer and another entity, called "distributor". 
In these relationships the strutture of interesse between the parties is, in certain circumstances, significantly unbalanced against the distributor.

Below a brief analysis of the distribution agreement and the most widespread litigation profiles also considered in the broader supranational context.   


1. Notion

The "distribuito contract" is a widespread figure which, however, does not have a specific legislative definition.

In general, it is the contract by which a producer entrusts another entity, called distributor, to sell its product within a specific territory.

The essential features join other more specific contracts: sales concession; franchising; agency.

On an objective level, the distribution contract consists in a web of obligations that case by case can become particularly various. According to the most common structure, can be identified the following:

   a) obligations of the producer:

   - discount salei.e. guaracteeing the distributore purchases of the product in certain quantities at a lower price than the list price (this discount is greater the more stringent are commitments on the distributor);

   - payment of a "brokerage commission" on procured sales (if the contract provides the product is sold to the end user directly by the manufacturer while the distributor acts only as a broker); 

   b) obligations of the distributor:

   - product marketing / advertising activities (the committente can be strenthened by specific periodi obligations, such as publication of articles in specialized magazines or of online demonstration videos, or participation in specific events);

   - after-sales tecnica assistance (i.e. installato services, ordinare and/or extraordinary maintenance, supply of stare parts and/or consumables, etc.);

   - the so-called "exclusivity", i.e. the obligation not to sell computing products within the reference area marketing exclusively the product set in the contract (the exclusivity rarely is bilateral, requiring also the manufacturer not to keep relations with competitors of the distributor).

Each obligation lacks - as seen - a specific disclipline and so is regulated by applying the rule of the contract specifically disciplined which is most similar to the concrete obligation. Always unaffected the application of the rules on the contract in general, first of all on fairness and good faith, as well as unfair clauses.


2. Termination by unilateral will of the producer
Distribution contract are mainly permanent or have in any case rather extender duration.

Over time, the distributor incurs increasing expenses to carry out his assignment (e.g. hiring ad hoc employees).

For this reason, the moment when the relationship ends is particularly delicate.

If the relationship ends with the consent of both parties or due to a serious breach by the distributor, no particular problem arise.

On the other hand, if the reason for a withdrawal is exclusively the will of the manufacturer, the situation is different.

The distributor would suddenly risk losing all his investments and business.

Therefore, it is necessary to reconcile the interests of both parties: (i) contractual self-determination; (ii)  continuation of the relationship.

To this end, parties usually provide for a notice period: the manufacturer undertakes to  comunicate his withdrawal with a certain advance, guaranteeing the continuation of the relationship in the meantime.

The concrete function of this period is to enable the distributor to find other commercial partners while remaining operational.

.However, it may happen that the notice is communicated in late, i.e. beyond the deadline, or that t is not communicated at all, i.e. the manufacturer communicates his withdrawal "overnight": in all these situations withdrawal can cause a damage.


3. The protection: compensazione for delayed or lack of notice
Withdrawal by the manufacturer in violation of the notice period can have a significant negative impact on the Organization of the manufacturer.

The infuri manifesta itself in multiple ways: (i) earnings loss during the notice period; (ii) costs to be incurred to reconvert the organization; (iii) sudden loss of all customers and specific investments incurred.

A precise quantification of the injury - and therefore of the compensazione due - is particularly complex both because of the multiple offense of the injury and because, as we have seen, there are no specific provisions.

However, this does not prevent the application of alternative forms of protection.

The Courts, in fact, recognizing the concrete need for protection, fills the regolatore gap by referring to other cases in our legal system, including:

- abuse of economic dependence (art. 9 L. 192/92);

- breach of good-faith rule (artt. 1175 and 1375 Cod. Civ.);

- abuse of the right of withdrawal.

Naturally, the invocation of each of these cases implies the need for scrupoloso and analytical fulfillment of the related probative burdens.

In any case, the quantificazione of the damage will be based on circustantial elements to be necessario evalued as a whole.

Therefore, to build  a soli defense, it is advisable to support the claim with most of the factual elements useful to quantify and describe the dimension of the suffered injury (primarily, the "specific turnover" consisting of the volume of revenues related to the product).


4. A supranational perspective
The protection of the distributor against the unjustified and sudden withdrawal of the manufacturer does not have a dedicated discipline not just in Italy but also in most of other Countries.

To date, in EU the only Member State where there is such a provision is Belgium.

The legal source is Law 27 July 1961 as amended by Law 13 April 1971, now transfused into artt. X.35 et seq. of Belgio Economic Law Code:

   - it applies to exclusive sales concession contracts od indefinite duration;

   - if the concessionaire suffers the unilateral withdrawal by the other party, he is entitled in any case to "fair notice" (the fairness is parameterized, case by case,  on the basis of the concrete factors such as duration territorial extension of the contract);

   - if fair notice is not granted, the withdrawing party must pay a "just indemnity", made up as follow:

   a) a substitutive indemnity of termination (art. X.36), usually quantified by multiplying the duration of the notice term and the specific annual turnover;

   b) in addition, a supplementary indemnity (art. X.37), which includes:

      (i) customer indemnity, usually the largest item consisting of the value of the network built and retained over time by the distributor in relation to the grantor's product;

      (ii) indemnity for expenses, aimed at compensating any specific investment made to maximize the business;

      (iii) severance pay, consisting of the sum of the severance pay due by the concessionaire for the dismissal of its employees due to the termination of the contract.

In the rest of the World, similar provisions exist in a few states, including the United States of America.


Conclusions
In the distribution contract, one of the parties, the distributor, is particularly exposed to the arbitrary interruption of the contractual relationship by the producer.

In Italy, in line with the most common international practice, there is no specific discipline.

Nevertheless, in these situations the Courts recognize the concrete need for protection of the weaker party by referring to other institutions already known in our legal system.

In any case, it seem desirable a regulatory intervention to guarantee weak subjects a more agile protection tool and to stimulate national and international commercial traffic.

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