COVID-19 – The Impact on Agency and Distribution Agreements: FAQ Agency Agreements

– By Avv. RA Dr. Massimo Fontana Ros

Each principal who decides to benefit from the activity of a commercial agent makes a prior assessment of the relevant business costs, in particular regarding commission, expense reimbursements and amount of the indemnity for termination.

Therefore, it is quite clear that during the exceptional measures introduced by the Italian Government due to the COVID-19 emergency, the most frequently asked questions by agents and principals are the following:

I) Can the principal demand that the commercial agent still visits potential clients, claiming that in the absence of appointments commissions will not be paid?

No.

The payment of the commission accrued by the commercial agent is an obligation of the principal. The constituent fact of the commission is the conclusion of the contract, whereas the chargeability condition is the performance of the contract by the principal. Unless otherwise agreed, the commission is payable at the time and to the extent that the principal has performed or should have performed the obligations under the contract signed with the customer. In particular – with reference to agency agreements within the EU – Directive 86/635/CEE transposed into Member States’ national law: – provides that the commercial agent is entitled to be paid commission at the latest when the client has performed his obligation under the contract signed with the principal or should have performed it if the principal already had performed his part of the transaction; – requires the principal to inform the commercial agent within a reasonable time about the acceptance or refusal and non-execution of a deal promoted by the agent.

The commercial agent is therefore entitled to be paid commission in the event of non-performance by the client: (i) caused by the principal’s non-performance; (ii) due to force majeure. In the latter case, however, the commission is going to be reduced in order to maintain the contractual balance.

II) What do “force majeure” and “factum principis” mean? Can the COVID-19 health emergency be an exemption of liability with consequences for existing agency agreements?

In the Italian Civil Code there is no definition of force majeure, there is only reference to <<Extraordinary and unforeseeable events>> in art. 1467 of the Italian Civil Code with the consequence that a definition has to be found in the jurisprudence. Italian judges have in several occasions specified that, in order to be considered as an exemption of liability in case of non-fulfilment of obligations by a party, the cause of force majeure must consist in an objective, extraordinary and unforeseeable event of such force as to make any kind of fulfilment impossible. In the same way as a cause of force majeure, the so-called factum principis, i.e. the order of the authority that makes the performance impossible, can integrate a cause of exemption of liability. Consequences regarding a definitive impossibility and a temporary impossibility are defined in the Italian Civil Code in art. 1256 of the Italian Civil Code.

In order to verify the existence of a cause of force majeure or a factum principis will always be necessary an analysis of the single case, including the agreements of the parties, taking into account the definition of force majeure might be agreed in the contract or provided for by the law applicable to the agreement.

III) Can the principal claim the intention not to pay the agreed sums as reimbursement of expenses if the commercial agent is unable to visit customers because of the restrictive measures introduced by the Government?

Under certain circumstances, yes. An expense reimbursement is usually recognized to the commercial agent, as a self-employed person who incurs significant expenses in the activity of promoting the conclusion of contracts on behalf of the principal. The principal agrees normally to cover fully or partly the agent’s expenses, sometimes on a lump sum basis, as a form of economic allocation linked to the agent’s activity. Therefore, if the commercial agent is not incurring costs, a suspension of the reimbursement may be justified. However, it should be borne in mind that meetings with clients can also take place electronically, without the need to go to their registered office during the period of health emergency. Therefore, it will be necessary to verify on a case-by-case basis whether or not the agents’ activity managed remotely, in the presence of orders and telephone reports (concrete activity of the agent), can benefit a full or reduced reimbursement of expenses.

Distribution agreements

Distribution agreements in Italy are not classified under a traditional pre-existing contractual form. Case law applies to distribution agreements the provisions relating to similar traditional contractual forms, such as supply and mandate agreements. Often distribution agreements are in fact mixed contracts and differ from each other for the different kind of autonomy of the distributor’s activity related to the supplier, which – for example – turns out to be more intense in a franchising agreement.

The concerns of suppliers during COVID-19 emergency raised the following questions:

Can a supplier claim damages if the distributor’s business is not running as usual and/ or if the distributor decides to cancel orders due to the Italian government’s provisions to contain the ongoing health emergency?

It is certainly necessary to verify the content of the contract. Parties may agreed that the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) applies, which lays down specific rules for cases of force majeure in addition to the obligation to communicate the impediment and its consequences for the performance of the contract.

If the contract is subject to Italian law and the parties have not provided for an independent provision of the cases in question, the specific case could be seen as a temporary impossibility, related to an unforeseeable circumstance beyond the distributor’s control which could also justify the cancellation of orders. If a temporary impossibility turns in definitive impossibility it determines the termination of the agreement with the consequence that the supplier will be required to return any down payments, without being able to claim any compensation as the impossibility is not attributable to the distributor. Temporary impossibility is different, it is an objective situation that only temporarily prevents the distributor from performing his obligations, with the consequence that the obligation is only extinguished if the impossibility continues until (i) the distributor can no longer be considered obliged to perform it in relation to the title of the obligation or the nature of its object; (ii) the supplier has no longer an interest in the fulfillment.