Vietnam | Updated Law on Pharmacy

21 July 2025

  • Vietnam
  • Distribution
  • International trade
  • Pharmaceutical Law

On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

  • Pharmacy practice certificates
  • Certificates allowing pharmaceutical businesses to operate
  • Import and export of medicines and drug ingredients
  • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
  • Recalling medicines and drug ingredients
  • Certificates for medicine advertising content
  • Medicine price management

Key Changes in Decree 163

Here are some important changes and additions introduced by Decree 163:

Destroying Specially Controlled Medicines

You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

E-commerce in Pharmaceutical

Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

  • Their certificate allowing them to operate as a pharmaceutical business.
  • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
  • Information about the medicines themselves.

Shelf-Life Rules for Imported Products

For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

Controlling Imported Products

All medicines with marketing authorisation (MA) are subject to import control, except for:

  • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
  • Medicines with a shelf life of less than 30 days.

Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

Medicine Advertising

Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

Medicine Price Management

Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

  • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
  • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
  • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
  • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

Further Guidance in New Circular

On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

Key provisions of Circular 31 include:

Notification of Practising Pharmacists

Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

Medicine Information Activities

Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

The Brazilian market took the bait

Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

The same effect hit other sectors, from orange, honey, and coffee to aircraft.

Brazil’s response and sorcery: don’t mess with us (or our weather)

Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

Trump might want to check the weather forecast next time before penning another angry letter.

The unpredictable becoming predictable

Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

This is where good contract drafting comes into play

Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

  • hardship clauses that allow renegotiation when costs become commercially unreasonable;
  • price adjustment mechanisms linked to tariff thresholds;
  • termination rights triggered by specified levels of customs duties;
  • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

The unwitting cupid: strengthening EU-Brazil relations

While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

Summary

The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

What I am talking about in this article:

  • What is the supply framework agreement?
  • What is the function of the supply framework agreement?
  • The difference with the general conditions of sale or purchase
  • When to enter a purchase framework agreement?
  • When is it beneficial to conclude a sales framework agreement?
  • The content of the supply framework agreement
  • Price revision clause and hardship
  • Delivery terms in the supply framework agreement
  • The Force Majeure clause in international sales contracts
  • International sales: applicable law and dispute resolution arrangements

What is a framework supply agreement?

It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

What is the function of the framework supply agreement?

It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

What is the difference between a purchase or sales framework agreement and the general terms and conditions?

Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

When is it important to conclude a purchase framework agreement?

It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

When is it helpful to conclude a sales framework agreement?

This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

What is the content of the supply framework agreement?

There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

The most important clauses are:

  • the identification of products and technical specifications (often identified in an annex)
  • the minimum/maximum volume of supplies
  • the possible obligation to purchase/sell a minimum/maximum volume of products
  • the schedule of supplies
  • the delivery times
  • the determination of the price and the conditions for its possible modification (see also the next paragraph)
  • impediments to performance (Force Majeure)
  • cases of Hardship
  • penalties for delay or non-performance or for failure to achieve the agreed volumes
  • the hierarchy between the framework agreement and the orders and any other contracts between the parties
  • applicable law and dispute resolution (especially in international agreements)

How to handle price revision in a supply contract?

A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

How to manage delivery terms in a supply agreement?

Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

The Force Majeure clause in international sales contracts

A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

Applicable law and dispute resolution clauses

Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

Topics covered

  • The impact of Coronavirus (Covid-19) on the international Supply chain
  • What is Force Majeure?
  • The Force Majeure Contract Clause
  • What is Hardship?
  • Is the Coronavirus a Force Majeure or Hardship event?
  • What is the event reported by the Supplier?
  • Did the Supplier provide evidence of Force Majeure?
  • Does the contract establish a Force Majeure or Hardship clause?
  • What does the law applicable to the Contract establish?
  • How to limit supply chain risks?

The impact of Coronavirus (Covid-19) on the international Supply chain

Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

What is Force Majeure?

At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

The Force Majeure Contract Clause

The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

  • Give prompt notice to the other parties of the impediment;
  • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
  • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
  • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
  • In the event of termination of the contract, return any service received or an amount of equivalent value.

Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

What is Hardship?

Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

  • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
  • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

Is the Coronavirus a Force Majeure or Hardship event?

Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

  • The factual situation: what is the event reported by the Supplier?
  • Has the party invoking Force Majeure proven that the requirements exist?
  • What does the Contract (and/or the General Conditions of Contract) provide for?
  • What does the law applicable to the Contract establish?
  • What are the consequences on the obligations of the Parties?

What is the event reported by the Supplier?

As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

Did the Supplier provide evidence of Force Majeure?

The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

mascherine

Does the contract establish a Force Majeure or Hardship clause?

The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

Finally, it is still necessary to verify what is established by the law applicable to the contract.

What does the law applicable to the Contract establish?

The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

How to limit supply chain risks?

The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

The Agreement has four main characteristics:

  1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
  2. Promotes innovation, productivity and competition;
  3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
  4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

What is a NDA?

The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

NDA – Who are the parties?

Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

NDA – What is Confidential Information?

The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

NDA – Prohibition from using the Confidential Information

Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

NDA – Duration

The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

Breach of the NDA

Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

NDA – Litigation, jurisdiction and applicable law

Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

NDA – Conclusion

The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

“a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

(cf. the CJEU’s press release No. 132/2017).

This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

 

Practical Conclusions:

  1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
  2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
  3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
  4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
  5. For details on distribution networks and distribution online, please see my articles

 

The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

The signature of the contract

Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

The proper choice of contract

If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

Monitoring of legal and business relations

If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

Evidences about customers

In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

Evidences on purchases and sales

Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

Damages in case of termination of contracts

Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

Federico Vasoli

Practice areas

  • Corporate
  • Foreign investments
  • M&A
Contact Federico

Contact Federico





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    The USA vs. Brazil Trade War | How to Lose a Trade Partner in 10 Tweets

    18 July 2025

    • Brazil
    • USA
    • Distribution
    • International trade
    • Tax

    On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

    Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

    • Pharmacy practice certificates
    • Certificates allowing pharmaceutical businesses to operate
    • Import and export of medicines and drug ingredients
    • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
    • Recalling medicines and drug ingredients
    • Certificates for medicine advertising content
    • Medicine price management

    Key Changes in Decree 163

    Here are some important changes and additions introduced by Decree 163:

    Destroying Specially Controlled Medicines

    You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

    E-commerce in Pharmaceutical

    Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

    • Their certificate allowing them to operate as a pharmaceutical business.
    • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
    • Information about the medicines themselves.

    Shelf-Life Rules for Imported Products

    For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

    Controlling Imported Products

    All medicines with marketing authorisation (MA) are subject to import control, except for:

    • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
    • Medicines with a shelf life of less than 30 days.

    Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

    Medicine Advertising

    Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

    Medicine Price Management

    Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

    The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

    • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
    • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
    • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
    • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

    Further Guidance in New Circular

    On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

    Key provisions of Circular 31 include:

    Notification of Practising Pharmacists

    Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

    Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

    Medicine Information Activities

    Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

    However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

    Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

    And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

    In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

    Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

    The Brazilian market took the bait

    Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

    The same effect hit other sectors, from orange, honey, and coffee to aircraft.

    Brazil’s response and sorcery: don’t mess with us (or our weather)

    Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

    And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

    Trump might want to check the weather forecast next time before penning another angry letter.

    The unpredictable becoming predictable

    Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

    At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

    In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

    This is where good contract drafting comes into play

    Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

    • hardship clauses that allow renegotiation when costs become commercially unreasonable;
    • price adjustment mechanisms linked to tariff thresholds;
    • termination rights triggered by specified levels of customs duties;
    • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

    In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

    Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

    The unwitting cupid: strengthening EU-Brazil relations

    While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

    The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

    So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

    Summary

    The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

    The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

    What I am talking about in this article:

    • What is the supply framework agreement?
    • What is the function of the supply framework agreement?
    • The difference with the general conditions of sale or purchase
    • When to enter a purchase framework agreement?
    • When is it beneficial to conclude a sales framework agreement?
    • The content of the supply framework agreement
    • Price revision clause and hardship
    • Delivery terms in the supply framework agreement
    • The Force Majeure clause in international sales contracts
    • International sales: applicable law and dispute resolution arrangements

    What is a framework supply agreement?

    It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

    It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

    After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

    Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

    What is the function of the framework supply agreement?

    It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

    In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

    By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

    This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

    What is the difference between a purchase or sales framework agreement and the general terms and conditions?

    Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

    The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

    The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

    When is it important to conclude a purchase framework agreement?

    It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

    The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

    Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

    When is it helpful to conclude a sales framework agreement?

    This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

    Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

    What is the content of the supply framework agreement?

    There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

    Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

    The most important clauses are:

    • the identification of products and technical specifications (often identified in an annex)
    • the minimum/maximum volume of supplies
    • the possible obligation to purchase/sell a minimum/maximum volume of products
    • the schedule of supplies
    • the delivery times
    • the determination of the price and the conditions for its possible modification (see also the next paragraph)
    • impediments to performance (Force Majeure)
    • cases of Hardship
    • penalties for delay or non-performance or for failure to achieve the agreed volumes
    • the hierarchy between the framework agreement and the orders and any other contracts between the parties
    • applicable law and dispute resolution (especially in international agreements)

    How to handle price revision in a supply contract?

    A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

    In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

    To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

    How to manage delivery terms in a supply agreement?

    Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

    The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

    A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

    If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

    The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

    Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

    The Force Majeure clause in international sales contracts

    A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

    The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

    If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

    Applicable law and dispute resolution clauses

    Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

    The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

    In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

    Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

    Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

    Topics covered

    • The impact of Coronavirus (Covid-19) on the international Supply chain
    • What is Force Majeure?
    • The Force Majeure Contract Clause
    • What is Hardship?
    • Is the Coronavirus a Force Majeure or Hardship event?
    • What is the event reported by the Supplier?
    • Did the Supplier provide evidence of Force Majeure?
    • Does the contract establish a Force Majeure or Hardship clause?
    • What does the law applicable to the Contract establish?
    • How to limit supply chain risks?

    The impact of Coronavirus (Covid-19) on the international Supply chain

    Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

    Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

    The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

    Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

    To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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    What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

    There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

    Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

    The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

    To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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    If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

    Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

    In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

    To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

    What is Force Majeure?

    At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

    A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

    Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

    The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

    In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

    The Force Majeure Contract Clause

    The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

    The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

    • Give prompt notice to the other parties of the impediment;
    • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
    • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
    • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
    • In the event of termination of the contract, return any service received or an amount of equivalent value.

    Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

    The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

    It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

    What is Hardship?

    Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

    The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

    Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

    In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

    The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

    • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
    • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

    Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

    Is the Coronavirus a Force Majeure or Hardship event?

    Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

    Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

    • The factual situation: what is the event reported by the Supplier?
    • Has the party invoking Force Majeure proven that the requirements exist?
    • What does the Contract (and/or the General Conditions of Contract) provide for?
    • What does the law applicable to the Contract establish?
    • What are the consequences on the obligations of the Parties?

    What is the event reported by the Supplier?

    As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

    The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

    Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

    If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

    If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

    Did the Supplier provide evidence of Force Majeure?

    The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

    To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

    The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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    Does the contract establish a Force Majeure or Hardship clause?

    The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

    If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

    For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

    It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

    If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

    Finally, it is still necessary to verify what is established by the law applicable to the contract.

    What does the law applicable to the Contract establish?

    The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

    The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

    If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

    If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

    Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

    No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

    How to limit supply chain risks?

    The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

    In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

    If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

    Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

    On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

    This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

    The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

    As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

    The Agreement has four main characteristics:

    1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
    2. Promotes innovation, productivity and competition;
    3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
    4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

    To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

    With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

    This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

    The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

    Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

    However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

    We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

    What is a NDA?

    The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

    The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

    NDA – Who are the parties?

    Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

    NDA – What is Confidential Information?

    The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

    The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

    The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

    NDA – Prohibition from using the Confidential Information

    Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

    NDA – Duration

    The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

    Breach of the NDA

    Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

    There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

    NDA – Litigation, jurisdiction and applicable law

    Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

    In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

    NDA – Conclusion

    The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

    Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

    In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

    More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

    “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

    (cf. the CJEU’s press release No. 132/2017).

    This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

     

    Practical Conclusions:

    1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
    2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
    3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
    4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
    5. For details on distribution networks and distribution online, please see my articles

     

    The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

    Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

    These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

    The signature of the contract

    Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

    The proper choice of contract

    If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

    Monitoring of legal and business relations

    If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

    Evidences about customers

    In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

    Evidences on purchases and sales

    Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

    Damages in case of termination of contracts

    Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

    Geraldo Fonseca

    Practice areas

    • Corporate
    • Credit collection
    • Insolvency
    • International trade
    • Litigation
    Contact Geraldo

    Contact Geraldo





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      The Supply Framework Agreement

      20 March 2023

      • Contracts
      • Distribution
      • International trade

      On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

      Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

      • Pharmacy practice certificates
      • Certificates allowing pharmaceutical businesses to operate
      • Import and export of medicines and drug ingredients
      • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
      • Recalling medicines and drug ingredients
      • Certificates for medicine advertising content
      • Medicine price management

      Key Changes in Decree 163

      Here are some important changes and additions introduced by Decree 163:

      Destroying Specially Controlled Medicines

      You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

      E-commerce in Pharmaceutical

      Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

      • Their certificate allowing them to operate as a pharmaceutical business.
      • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
      • Information about the medicines themselves.

      Shelf-Life Rules for Imported Products

      For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

      Controlling Imported Products

      All medicines with marketing authorisation (MA) are subject to import control, except for:

      • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
      • Medicines with a shelf life of less than 30 days.

      Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

      Medicine Advertising

      Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

      Medicine Price Management

      Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

      The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

      • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
      • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
      • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
      • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

      Further Guidance in New Circular

      On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

      Key provisions of Circular 31 include:

      Notification of Practising Pharmacists

      Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

      Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

      Medicine Information Activities

      Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

      However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

      Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

      And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

      In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

      Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

      The Brazilian market took the bait

      Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

      The same effect hit other sectors, from orange, honey, and coffee to aircraft.

      Brazil’s response and sorcery: don’t mess with us (or our weather)

      Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

      And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

      Trump might want to check the weather forecast next time before penning another angry letter.

      The unpredictable becoming predictable

      Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

      At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

      In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

      This is where good contract drafting comes into play

      Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

      • hardship clauses that allow renegotiation when costs become commercially unreasonable;
      • price adjustment mechanisms linked to tariff thresholds;
      • termination rights triggered by specified levels of customs duties;
      • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

      In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

      Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

      The unwitting cupid: strengthening EU-Brazil relations

      While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

      The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

      So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

      Summary

      The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

      The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

      What I am talking about in this article:

      • What is the supply framework agreement?
      • What is the function of the supply framework agreement?
      • The difference with the general conditions of sale or purchase
      • When to enter a purchase framework agreement?
      • When is it beneficial to conclude a sales framework agreement?
      • The content of the supply framework agreement
      • Price revision clause and hardship
      • Delivery terms in the supply framework agreement
      • The Force Majeure clause in international sales contracts
      • International sales: applicable law and dispute resolution arrangements

      What is a framework supply agreement?

      It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

      It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

      After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

      Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

      What is the function of the framework supply agreement?

      It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

      In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

      By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

      This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

      What is the difference between a purchase or sales framework agreement and the general terms and conditions?

      Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

      The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

      The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

      When is it important to conclude a purchase framework agreement?

      It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

      The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

      Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

      When is it helpful to conclude a sales framework agreement?

      This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

      Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

      What is the content of the supply framework agreement?

      There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

      Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

      The most important clauses are:

      • the identification of products and technical specifications (often identified in an annex)
      • the minimum/maximum volume of supplies
      • the possible obligation to purchase/sell a minimum/maximum volume of products
      • the schedule of supplies
      • the delivery times
      • the determination of the price and the conditions for its possible modification (see also the next paragraph)
      • impediments to performance (Force Majeure)
      • cases of Hardship
      • penalties for delay or non-performance or for failure to achieve the agreed volumes
      • the hierarchy between the framework agreement and the orders and any other contracts between the parties
      • applicable law and dispute resolution (especially in international agreements)

      How to handle price revision in a supply contract?

      A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

      In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

      To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

      How to manage delivery terms in a supply agreement?

      Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

      The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

      A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

      If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

      The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

      Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

      The Force Majeure clause in international sales contracts

      A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

      The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

      If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

      Applicable law and dispute resolution clauses

      Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

      The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

      In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

      Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

      Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

      Topics covered

      • The impact of Coronavirus (Covid-19) on the international Supply chain
      • What is Force Majeure?
      • The Force Majeure Contract Clause
      • What is Hardship?
      • Is the Coronavirus a Force Majeure or Hardship event?
      • What is the event reported by the Supplier?
      • Did the Supplier provide evidence of Force Majeure?
      • Does the contract establish a Force Majeure or Hardship clause?
      • What does the law applicable to the Contract establish?
      • How to limit supply chain risks?

      The impact of Coronavirus (Covid-19) on the international Supply chain

      Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

      Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

      The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

      Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

      To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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      What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

      There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

      Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

      The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

      To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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      If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

      Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

      In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

      To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

      What is Force Majeure?

      At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

      A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

      Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

      The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

      In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

      The Force Majeure Contract Clause

      The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

      The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

      • Give prompt notice to the other parties of the impediment;
      • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
      • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
      • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
      • In the event of termination of the contract, return any service received or an amount of equivalent value.

      Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

      The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

      It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

      What is Hardship?

      Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

      The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

      Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

      In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

      The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

      • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
      • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

      Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

      Is the Coronavirus a Force Majeure or Hardship event?

      Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

      Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

      • The factual situation: what is the event reported by the Supplier?
      • Has the party invoking Force Majeure proven that the requirements exist?
      • What does the Contract (and/or the General Conditions of Contract) provide for?
      • What does the law applicable to the Contract establish?
      • What are the consequences on the obligations of the Parties?

      What is the event reported by the Supplier?

      As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

      The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

      Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

      If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

      If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

      Did the Supplier provide evidence of Force Majeure?

      The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

      To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

      The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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      Does the contract establish a Force Majeure or Hardship clause?

      The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

      If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

      For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

      It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

      If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

      Finally, it is still necessary to verify what is established by the law applicable to the contract.

      What does the law applicable to the Contract establish?

      The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

      The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

      If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

      If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

      Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

      No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

      How to limit supply chain risks?

      The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

      In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

      If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

      Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

      On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

      This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

      The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

      As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

      The Agreement has four main characteristics:

      1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
      2. Promotes innovation, productivity and competition;
      3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
      4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

      To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

      With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

      This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

      The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

      Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

      However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

      We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

      What is a NDA?

      The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

      The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

      NDA – Who are the parties?

      Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

      NDA – What is Confidential Information?

      The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

      The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

      The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

      NDA – Prohibition from using the Confidential Information

      Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

      NDA – Duration

      The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

      Breach of the NDA

      Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

      There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

      NDA – Litigation, jurisdiction and applicable law

      Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

      In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

      NDA – Conclusion

      The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

      Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

      In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

      More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

      “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

      (cf. the CJEU’s press release No. 132/2017).

      This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

       

      Practical Conclusions:

      1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
      2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
      3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
      4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
      5. For details on distribution networks and distribution online, please see my articles

       

      The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

      Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

      These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

      The signature of the contract

      Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

      The proper choice of contract

      If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

      Monitoring of legal and business relations

      If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

      Evidences about customers

      In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

      Evidences on purchases and sales

      Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

      Damages in case of termination of contracts

      Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

      Roberto Luzi Crivellini

      Practice areas

      • Arbitration
      • Distribution
      • International trade
      • Litigation
      • Real estate
      Contact Roberto

      Contact Roberto





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        The Effects of Coronavirus on the International Supply Chain

        7 March 2020

        • China
        • Italy
        • International trade

        On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

        Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

        • Pharmacy practice certificates
        • Certificates allowing pharmaceutical businesses to operate
        • Import and export of medicines and drug ingredients
        • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
        • Recalling medicines and drug ingredients
        • Certificates for medicine advertising content
        • Medicine price management

        Key Changes in Decree 163

        Here are some important changes and additions introduced by Decree 163:

        Destroying Specially Controlled Medicines

        You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

        E-commerce in Pharmaceutical

        Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

        • Their certificate allowing them to operate as a pharmaceutical business.
        • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
        • Information about the medicines themselves.

        Shelf-Life Rules for Imported Products

        For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

        Controlling Imported Products

        All medicines with marketing authorisation (MA) are subject to import control, except for:

        • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
        • Medicines with a shelf life of less than 30 days.

        Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

        Medicine Advertising

        Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

        Medicine Price Management

        Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

        The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

        • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
        • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
        • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
        • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

        Further Guidance in New Circular

        On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

        Key provisions of Circular 31 include:

        Notification of Practising Pharmacists

        Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

        Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

        Medicine Information Activities

        Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

        However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

        Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

        And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

        In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

        Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

        The Brazilian market took the bait

        Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

        The same effect hit other sectors, from orange, honey, and coffee to aircraft.

        Brazil’s response and sorcery: don’t mess with us (or our weather)

        Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

        And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

        Trump might want to check the weather forecast next time before penning another angry letter.

        The unpredictable becoming predictable

        Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

        At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

        In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

        This is where good contract drafting comes into play

        Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

        • hardship clauses that allow renegotiation when costs become commercially unreasonable;
        • price adjustment mechanisms linked to tariff thresholds;
        • termination rights triggered by specified levels of customs duties;
        • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

        In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

        Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

        The unwitting cupid: strengthening EU-Brazil relations

        While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

        The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

        So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

        Summary

        The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

        The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

        What I am talking about in this article:

        • What is the supply framework agreement?
        • What is the function of the supply framework agreement?
        • The difference with the general conditions of sale or purchase
        • When to enter a purchase framework agreement?
        • When is it beneficial to conclude a sales framework agreement?
        • The content of the supply framework agreement
        • Price revision clause and hardship
        • Delivery terms in the supply framework agreement
        • The Force Majeure clause in international sales contracts
        • International sales: applicable law and dispute resolution arrangements

        What is a framework supply agreement?

        It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

        It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

        After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

        Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

        What is the function of the framework supply agreement?

        It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

        In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

        By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

        This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

        What is the difference between a purchase or sales framework agreement and the general terms and conditions?

        Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

        The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

        The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

        When is it important to conclude a purchase framework agreement?

        It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

        The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

        Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

        When is it helpful to conclude a sales framework agreement?

        This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

        Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

        What is the content of the supply framework agreement?

        There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

        Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

        The most important clauses are:

        • the identification of products and technical specifications (often identified in an annex)
        • the minimum/maximum volume of supplies
        • the possible obligation to purchase/sell a minimum/maximum volume of products
        • the schedule of supplies
        • the delivery times
        • the determination of the price and the conditions for its possible modification (see also the next paragraph)
        • impediments to performance (Force Majeure)
        • cases of Hardship
        • penalties for delay or non-performance or for failure to achieve the agreed volumes
        • the hierarchy between the framework agreement and the orders and any other contracts between the parties
        • applicable law and dispute resolution (especially in international agreements)

        How to handle price revision in a supply contract?

        A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

        In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

        To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

        How to manage delivery terms in a supply agreement?

        Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

        The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

        A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

        If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

        The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

        Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

        The Force Majeure clause in international sales contracts

        A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

        The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

        If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

        Applicable law and dispute resolution clauses

        Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

        The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

        In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

        Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

        Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

        Topics covered

        • The impact of Coronavirus (Covid-19) on the international Supply chain
        • What is Force Majeure?
        • The Force Majeure Contract Clause
        • What is Hardship?
        • Is the Coronavirus a Force Majeure or Hardship event?
        • What is the event reported by the Supplier?
        • Did the Supplier provide evidence of Force Majeure?
        • Does the contract establish a Force Majeure or Hardship clause?
        • What does the law applicable to the Contract establish?
        • How to limit supply chain risks?

        The impact of Coronavirus (Covid-19) on the international Supply chain

        Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

        Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

        The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

        Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

        To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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        What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

        There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

        Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

        The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

        To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

        operaio

        If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

        Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

        In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

        To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

        What is Force Majeure?

        At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

        A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

        Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

        The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

        In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

        The Force Majeure Contract Clause

        The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

        The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

        • Give prompt notice to the other parties of the impediment;
        • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
        • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
        • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
        • In the event of termination of the contract, return any service received or an amount of equivalent value.

        Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

        The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

        It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

        What is Hardship?

        Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

        The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

        Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

        In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

        The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

        • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
        • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

        Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

        Is the Coronavirus a Force Majeure or Hardship event?

        Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

        Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

        • The factual situation: what is the event reported by the Supplier?
        • Has the party invoking Force Majeure proven that the requirements exist?
        • What does the Contract (and/or the General Conditions of Contract) provide for?
        • What does the law applicable to the Contract establish?
        • What are the consequences on the obligations of the Parties?

        What is the event reported by the Supplier?

        As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

        The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

        Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

        If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

        If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

        Did the Supplier provide evidence of Force Majeure?

        The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

        To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

        The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

        mascherine

        Does the contract establish a Force Majeure or Hardship clause?

        The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

        If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

        For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

        It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

        If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

        Finally, it is still necessary to verify what is established by the law applicable to the contract.

        What does the law applicable to the Contract establish?

        The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

        The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

        If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

        If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

        Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

        No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

        How to limit supply chain risks?

        The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

        In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

        If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

        Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

        On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

        This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

        The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

        As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

        The Agreement has four main characteristics:

        1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
        2. Promotes innovation, productivity and competition;
        3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
        4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

        To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

        With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

        This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

        The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

        Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

        However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

        We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

        What is a NDA?

        The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

        The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

        NDA – Who are the parties?

        Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

        NDA – What is Confidential Information?

        The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

        The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

        The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

        NDA – Prohibition from using the Confidential Information

        Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

        NDA – Duration

        The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

        Breach of the NDA

        Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

        There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

        NDA – Litigation, jurisdiction and applicable law

        Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

        In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

        NDA – Conclusion

        The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

        Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

        In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

        More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

        “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

        (cf. the CJEU’s press release No. 132/2017).

        This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

         

        Practical Conclusions:

        1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
        2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
        3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
        4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
        5. For details on distribution networks and distribution online, please see my articles

         

        The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

        Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

        These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

        The signature of the contract

        Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

        The proper choice of contract

        If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

        Monitoring of legal and business relations

        If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

        Evidences about customers

        In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

        Evidences on purchases and sales

        Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

        Damages in case of termination of contracts

        Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

        Roberto Luzi Crivellini

        Practice areas

        • Arbitration
        • Distribution
        • International trade
        • Litigation
        • Real estate
        Contact Roberto

        Contact Roberto





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          Trans-Pacific Partnership Agreement – CPTPP

          19 February 2019

          • Mexico
          • International trade

          On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

          Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

          • Pharmacy practice certificates
          • Certificates allowing pharmaceutical businesses to operate
          • Import and export of medicines and drug ingredients
          • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
          • Recalling medicines and drug ingredients
          • Certificates for medicine advertising content
          • Medicine price management

          Key Changes in Decree 163

          Here are some important changes and additions introduced by Decree 163:

          Destroying Specially Controlled Medicines

          You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

          E-commerce in Pharmaceutical

          Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

          • Their certificate allowing them to operate as a pharmaceutical business.
          • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
          • Information about the medicines themselves.

          Shelf-Life Rules for Imported Products

          For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

          Controlling Imported Products

          All medicines with marketing authorisation (MA) are subject to import control, except for:

          • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
          • Medicines with a shelf life of less than 30 days.

          Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

          Medicine Advertising

          Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

          Medicine Price Management

          Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

          The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

          • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
          • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
          • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
          • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

          Further Guidance in New Circular

          On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

          Key provisions of Circular 31 include:

          Notification of Practising Pharmacists

          Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

          Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

          Medicine Information Activities

          Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

          However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

          Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

          And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

          In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

          Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

          The Brazilian market took the bait

          Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

          The same effect hit other sectors, from orange, honey, and coffee to aircraft.

          Brazil’s response and sorcery: don’t mess with us (or our weather)

          Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

          And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

          Trump might want to check the weather forecast next time before penning another angry letter.

          The unpredictable becoming predictable

          Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

          At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

          In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

          This is where good contract drafting comes into play

          Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

          • hardship clauses that allow renegotiation when costs become commercially unreasonable;
          • price adjustment mechanisms linked to tariff thresholds;
          • termination rights triggered by specified levels of customs duties;
          • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

          In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

          Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

          The unwitting cupid: strengthening EU-Brazil relations

          While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

          The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

          So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

          Summary

          The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

          The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

          What I am talking about in this article:

          • What is the supply framework agreement?
          • What is the function of the supply framework agreement?
          • The difference with the general conditions of sale or purchase
          • When to enter a purchase framework agreement?
          • When is it beneficial to conclude a sales framework agreement?
          • The content of the supply framework agreement
          • Price revision clause and hardship
          • Delivery terms in the supply framework agreement
          • The Force Majeure clause in international sales contracts
          • International sales: applicable law and dispute resolution arrangements

          What is a framework supply agreement?

          It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

          It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

          After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

          Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

          What is the function of the framework supply agreement?

          It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

          In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

          By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

          This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

          What is the difference between a purchase or sales framework agreement and the general terms and conditions?

          Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

          The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

          The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

          When is it important to conclude a purchase framework agreement?

          It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

          The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

          Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

          When is it helpful to conclude a sales framework agreement?

          This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

          Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

          What is the content of the supply framework agreement?

          There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

          Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

          The most important clauses are:

          • the identification of products and technical specifications (often identified in an annex)
          • the minimum/maximum volume of supplies
          • the possible obligation to purchase/sell a minimum/maximum volume of products
          • the schedule of supplies
          • the delivery times
          • the determination of the price and the conditions for its possible modification (see also the next paragraph)
          • impediments to performance (Force Majeure)
          • cases of Hardship
          • penalties for delay or non-performance or for failure to achieve the agreed volumes
          • the hierarchy between the framework agreement and the orders and any other contracts between the parties
          • applicable law and dispute resolution (especially in international agreements)

          How to handle price revision in a supply contract?

          A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

          In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

          To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

          How to manage delivery terms in a supply agreement?

          Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

          The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

          A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

          If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

          The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

          Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

          The Force Majeure clause in international sales contracts

          A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

          The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

          If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

          Applicable law and dispute resolution clauses

          Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

          The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

          In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

          Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

          Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

          Topics covered

          • The impact of Coronavirus (Covid-19) on the international Supply chain
          • What is Force Majeure?
          • The Force Majeure Contract Clause
          • What is Hardship?
          • Is the Coronavirus a Force Majeure or Hardship event?
          • What is the event reported by the Supplier?
          • Did the Supplier provide evidence of Force Majeure?
          • Does the contract establish a Force Majeure or Hardship clause?
          • What does the law applicable to the Contract establish?
          • How to limit supply chain risks?

          The impact of Coronavirus (Covid-19) on the international Supply chain

          Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

          Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

          The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

          Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

          To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

          container

          What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

          There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

          Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

          The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

          To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

          operaio

          If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

          Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

          In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

          To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

          What is Force Majeure?

          At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

          A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

          Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

          The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

          In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

          The Force Majeure Contract Clause

          The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

          The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

          • Give prompt notice to the other parties of the impediment;
          • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
          • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
          • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
          • In the event of termination of the contract, return any service received or an amount of equivalent value.

          Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

          The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

          It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

          What is Hardship?

          Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

          The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

          Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

          In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

          The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

          • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
          • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

          Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

          Is the Coronavirus a Force Majeure or Hardship event?

          Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

          Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

          • The factual situation: what is the event reported by the Supplier?
          • Has the party invoking Force Majeure proven that the requirements exist?
          • What does the Contract (and/or the General Conditions of Contract) provide for?
          • What does the law applicable to the Contract establish?
          • What are the consequences on the obligations of the Parties?

          What is the event reported by the Supplier?

          As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

          The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

          Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

          If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

          If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

          Did the Supplier provide evidence of Force Majeure?

          The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

          To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

          The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

          mascherine

          Does the contract establish a Force Majeure or Hardship clause?

          The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

          If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

          For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

          It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

          If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

          Finally, it is still necessary to verify what is established by the law applicable to the contract.

          What does the law applicable to the Contract establish?

          The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

          The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

          If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

          If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

          Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

          No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

          How to limit supply chain risks?

          The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

          In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

          If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

          Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

          On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

          This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

          The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

          As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

          The Agreement has four main characteristics:

          1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
          2. Promotes innovation, productivity and competition;
          3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
          4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

          To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

          With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

          This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

          The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

          Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

          However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

          We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

          What is a NDA?

          The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

          The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

          NDA – Who are the parties?

          Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

          NDA – What is Confidential Information?

          The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

          The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

          The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

          NDA – Prohibition from using the Confidential Information

          Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

          NDA – Duration

          The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

          Breach of the NDA

          Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

          There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

          NDA – Litigation, jurisdiction and applicable law

          Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

          In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

          NDA – Conclusion

          The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

          Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

          In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

          More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

          “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

          (cf. the CJEU’s press release No. 132/2017).

          This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

           

          Practical Conclusions:

          1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
          2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
          3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
          4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
          5. For details on distribution networks and distribution online, please see my articles

           

          The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

          Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

          These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

          The signature of the contract

          Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

          The proper choice of contract

          If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

          Monitoring of legal and business relations

          If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

          Evidences about customers

          In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

          Evidences on purchases and sales

          Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

          Damages in case of termination of contracts

          Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

          Joaquin Rodriguez

          Practice areas

          • Corporate
          • Intellectual property
          • International trade
          • Investments
          Contact Joaquin

          Contact Joaquin





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            NDA – Non Disclosure Agreement

            11 December 2018

            • Distribution
            • International trade

            On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

            Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

            • Pharmacy practice certificates
            • Certificates allowing pharmaceutical businesses to operate
            • Import and export of medicines and drug ingredients
            • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
            • Recalling medicines and drug ingredients
            • Certificates for medicine advertising content
            • Medicine price management

            Key Changes in Decree 163

            Here are some important changes and additions introduced by Decree 163:

            Destroying Specially Controlled Medicines

            You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

            E-commerce in Pharmaceutical

            Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

            • Their certificate allowing them to operate as a pharmaceutical business.
            • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
            • Information about the medicines themselves.

            Shelf-Life Rules for Imported Products

            For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

            Controlling Imported Products

            All medicines with marketing authorisation (MA) are subject to import control, except for:

            • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
            • Medicines with a shelf life of less than 30 days.

            Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

            Medicine Advertising

            Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

            Medicine Price Management

            Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

            The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

            • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
            • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
            • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
            • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

            Further Guidance in New Circular

            On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

            Key provisions of Circular 31 include:

            Notification of Practising Pharmacists

            Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

            Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

            Medicine Information Activities

            Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

            However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

            Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

            And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

            In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

            Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

            The Brazilian market took the bait

            Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

            The same effect hit other sectors, from orange, honey, and coffee to aircraft.

            Brazil’s response and sorcery: don’t mess with us (or our weather)

            Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

            And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

            Trump might want to check the weather forecast next time before penning another angry letter.

            The unpredictable becoming predictable

            Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

            At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

            In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

            This is where good contract drafting comes into play

            Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

            • hardship clauses that allow renegotiation when costs become commercially unreasonable;
            • price adjustment mechanisms linked to tariff thresholds;
            • termination rights triggered by specified levels of customs duties;
            • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

            In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

            Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

            The unwitting cupid: strengthening EU-Brazil relations

            While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

            The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

            So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

            Summary

            The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

            The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

            What I am talking about in this article:

            • What is the supply framework agreement?
            • What is the function of the supply framework agreement?
            • The difference with the general conditions of sale or purchase
            • When to enter a purchase framework agreement?
            • When is it beneficial to conclude a sales framework agreement?
            • The content of the supply framework agreement
            • Price revision clause and hardship
            • Delivery terms in the supply framework agreement
            • The Force Majeure clause in international sales contracts
            • International sales: applicable law and dispute resolution arrangements

            What is a framework supply agreement?

            It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

            It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

            After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

            Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

            What is the function of the framework supply agreement?

            It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

            In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

            By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

            This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

            What is the difference between a purchase or sales framework agreement and the general terms and conditions?

            Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

            The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

            The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

            When is it important to conclude a purchase framework agreement?

            It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

            The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

            Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

            When is it helpful to conclude a sales framework agreement?

            This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

            Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

            What is the content of the supply framework agreement?

            There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

            Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

            The most important clauses are:

            • the identification of products and technical specifications (often identified in an annex)
            • the minimum/maximum volume of supplies
            • the possible obligation to purchase/sell a minimum/maximum volume of products
            • the schedule of supplies
            • the delivery times
            • the determination of the price and the conditions for its possible modification (see also the next paragraph)
            • impediments to performance (Force Majeure)
            • cases of Hardship
            • penalties for delay or non-performance or for failure to achieve the agreed volumes
            • the hierarchy between the framework agreement and the orders and any other contracts between the parties
            • applicable law and dispute resolution (especially in international agreements)

            How to handle price revision in a supply contract?

            A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

            In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

            To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

            How to manage delivery terms in a supply agreement?

            Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

            The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

            A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

            If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

            The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

            Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

            The Force Majeure clause in international sales contracts

            A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

            The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

            If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

            Applicable law and dispute resolution clauses

            Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

            The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

            In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

            Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

            Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

            Topics covered

            • The impact of Coronavirus (Covid-19) on the international Supply chain
            • What is Force Majeure?
            • The Force Majeure Contract Clause
            • What is Hardship?
            • Is the Coronavirus a Force Majeure or Hardship event?
            • What is the event reported by the Supplier?
            • Did the Supplier provide evidence of Force Majeure?
            • Does the contract establish a Force Majeure or Hardship clause?
            • What does the law applicable to the Contract establish?
            • How to limit supply chain risks?

            The impact of Coronavirus (Covid-19) on the international Supply chain

            Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

            Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

            The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

            Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

            To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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            What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

            There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

            Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

            The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

            To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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            If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

            Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

            In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

            To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

            What is Force Majeure?

            At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

            A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

            Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

            The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

            In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

            The Force Majeure Contract Clause

            The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

            The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

            • Give prompt notice to the other parties of the impediment;
            • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
            • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
            • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
            • In the event of termination of the contract, return any service received or an amount of equivalent value.

            Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

            The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

            It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

            What is Hardship?

            Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

            The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

            Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

            In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

            The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

            • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
            • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

            Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

            Is the Coronavirus a Force Majeure or Hardship event?

            Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

            Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

            • The factual situation: what is the event reported by the Supplier?
            • Has the party invoking Force Majeure proven that the requirements exist?
            • What does the Contract (and/or the General Conditions of Contract) provide for?
            • What does the law applicable to the Contract establish?
            • What are the consequences on the obligations of the Parties?

            What is the event reported by the Supplier?

            As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

            The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

            Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

            If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

            If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

            Did the Supplier provide evidence of Force Majeure?

            The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

            To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

            The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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            Does the contract establish a Force Majeure or Hardship clause?

            The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

            If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

            For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

            It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

            If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

            Finally, it is still necessary to verify what is established by the law applicable to the contract.

            What does the law applicable to the Contract establish?

            The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

            The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

            If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

            If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

            Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

            No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

            How to limit supply chain risks?

            The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

            In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

            If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

            Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

            On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

            This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

            The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

            As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

            The Agreement has four main characteristics:

            1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
            2. Promotes innovation, productivity and competition;
            3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
            4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

            To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

            With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

            This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

            The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

            Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

            However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

            We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

            What is a NDA?

            The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

            The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

            NDA – Who are the parties?

            Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

            NDA – What is Confidential Information?

            The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

            The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

            The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

            NDA – Prohibition from using the Confidential Information

            Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

            NDA – Duration

            The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

            Breach of the NDA

            Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

            There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

            NDA – Litigation, jurisdiction and applicable law

            Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

            In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

            NDA – Conclusion

            The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

            Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

            In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

            More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

            “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

            (cf. the CJEU’s press release No. 132/2017).

            This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

             

            Practical Conclusions:

            1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
            2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
            3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
            4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
            5. For details on distribution networks and distribution online, please see my articles

             

            The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

            Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

            These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

            The signature of the contract

            Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

            The proper choice of contract

            If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

            Monitoring of legal and business relations

            If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

            Evidences about customers

            In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

            Evidences on purchases and sales

            Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

            Damages in case of termination of contracts

            Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

            Roberto Luzi Crivellini

            Practice areas

            • Arbitration
            • Distribution
            • International trade
            • Litigation
            • Real estate
            Contact Roberto

            Contact Roberto





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              EU Court of Justice allows online sales restrictions (Coty case)

              6 December 2017

              • Germany
              • Distribution
              • eCommerce
              • International trade

              On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

              Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

              • Pharmacy practice certificates
              • Certificates allowing pharmaceutical businesses to operate
              • Import and export of medicines and drug ingredients
              • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
              • Recalling medicines and drug ingredients
              • Certificates for medicine advertising content
              • Medicine price management

              Key Changes in Decree 163

              Here are some important changes and additions introduced by Decree 163:

              Destroying Specially Controlled Medicines

              You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

              E-commerce in Pharmaceutical

              Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

              • Their certificate allowing them to operate as a pharmaceutical business.
              • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
              • Information about the medicines themselves.

              Shelf-Life Rules for Imported Products

              For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

              Controlling Imported Products

              All medicines with marketing authorisation (MA) are subject to import control, except for:

              • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
              • Medicines with a shelf life of less than 30 days.

              Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

              Medicine Advertising

              Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

              Medicine Price Management

              Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

              The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

              • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
              • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
              • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
              • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

              Further Guidance in New Circular

              On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

              Key provisions of Circular 31 include:

              Notification of Practising Pharmacists

              Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

              Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

              Medicine Information Activities

              Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

              However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

              Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

              And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

              In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

              Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

              The Brazilian market took the bait

              Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

              The same effect hit other sectors, from orange, honey, and coffee to aircraft.

              Brazil’s response and sorcery: don’t mess with us (or our weather)

              Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

              And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

              Trump might want to check the weather forecast next time before penning another angry letter.

              The unpredictable becoming predictable

              Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

              At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

              In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

              This is where good contract drafting comes into play

              Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

              • hardship clauses that allow renegotiation when costs become commercially unreasonable;
              • price adjustment mechanisms linked to tariff thresholds;
              • termination rights triggered by specified levels of customs duties;
              • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

              In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

              Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

              The unwitting cupid: strengthening EU-Brazil relations

              While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

              The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

              So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

              Summary

              The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

              The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

              What I am talking about in this article:

              • What is the supply framework agreement?
              • What is the function of the supply framework agreement?
              • The difference with the general conditions of sale or purchase
              • When to enter a purchase framework agreement?
              • When is it beneficial to conclude a sales framework agreement?
              • The content of the supply framework agreement
              • Price revision clause and hardship
              • Delivery terms in the supply framework agreement
              • The Force Majeure clause in international sales contracts
              • International sales: applicable law and dispute resolution arrangements

              What is a framework supply agreement?

              It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

              It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

              After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

              Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

              What is the function of the framework supply agreement?

              It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

              In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

              By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

              This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

              What is the difference between a purchase or sales framework agreement and the general terms and conditions?

              Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

              The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

              The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

              When is it important to conclude a purchase framework agreement?

              It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

              The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

              Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

              When is it helpful to conclude a sales framework agreement?

              This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

              Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

              What is the content of the supply framework agreement?

              There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

              Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

              The most important clauses are:

              • the identification of products and technical specifications (often identified in an annex)
              • the minimum/maximum volume of supplies
              • the possible obligation to purchase/sell a minimum/maximum volume of products
              • the schedule of supplies
              • the delivery times
              • the determination of the price and the conditions for its possible modification (see also the next paragraph)
              • impediments to performance (Force Majeure)
              • cases of Hardship
              • penalties for delay or non-performance or for failure to achieve the agreed volumes
              • the hierarchy between the framework agreement and the orders and any other contracts between the parties
              • applicable law and dispute resolution (especially in international agreements)

              How to handle price revision in a supply contract?

              A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

              In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

              To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

              How to manage delivery terms in a supply agreement?

              Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

              The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

              A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

              If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

              The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

              Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

              The Force Majeure clause in international sales contracts

              A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

              The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

              If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

              Applicable law and dispute resolution clauses

              Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

              The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

              In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

              Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

              Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

              Topics covered

              • The impact of Coronavirus (Covid-19) on the international Supply chain
              • What is Force Majeure?
              • The Force Majeure Contract Clause
              • What is Hardship?
              • Is the Coronavirus a Force Majeure or Hardship event?
              • What is the event reported by the Supplier?
              • Did the Supplier provide evidence of Force Majeure?
              • Does the contract establish a Force Majeure or Hardship clause?
              • What does the law applicable to the Contract establish?
              • How to limit supply chain risks?

              The impact of Coronavirus (Covid-19) on the international Supply chain

              Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

              Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

              The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

              Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

              To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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              What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

              There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

              Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

              The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

              To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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              If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

              Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

              In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

              To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

              What is Force Majeure?

              At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

              A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

              Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

              The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

              In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

              The Force Majeure Contract Clause

              The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

              The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

              • Give prompt notice to the other parties of the impediment;
              • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
              • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
              • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
              • In the event of termination of the contract, return any service received or an amount of equivalent value.

              Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

              The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

              It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

              What is Hardship?

              Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

              The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

              Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

              In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

              The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

              • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
              • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

              Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

              Is the Coronavirus a Force Majeure or Hardship event?

              Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

              Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

              • The factual situation: what is the event reported by the Supplier?
              • Has the party invoking Force Majeure proven that the requirements exist?
              • What does the Contract (and/or the General Conditions of Contract) provide for?
              • What does the law applicable to the Contract establish?
              • What are the consequences on the obligations of the Parties?

              What is the event reported by the Supplier?

              As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

              The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

              Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

              If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

              If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

              Did the Supplier provide evidence of Force Majeure?

              The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

              To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

              The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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              Does the contract establish a Force Majeure or Hardship clause?

              The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

              If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

              For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

              It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

              If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

              Finally, it is still necessary to verify what is established by the law applicable to the contract.

              What does the law applicable to the Contract establish?

              The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

              The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

              If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

              If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

              Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

              No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

              How to limit supply chain risks?

              The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

              In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

              If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

              Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

              On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

              This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

              The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

              As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

              The Agreement has four main characteristics:

              1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
              2. Promotes innovation, productivity and competition;
              3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
              4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

              To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

              With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

              This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

              The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

              Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

              However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

              We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

              What is a NDA?

              The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

              The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

              NDA – Who are the parties?

              Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

              NDA – What is Confidential Information?

              The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

              The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

              The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

              NDA – Prohibition from using the Confidential Information

              Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

              NDA – Duration

              The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

              Breach of the NDA

              Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

              There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

              NDA – Litigation, jurisdiction and applicable law

              Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

              In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

              NDA – Conclusion

              The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

              Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

              In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

              More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

              “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

              (cf. the CJEU’s press release No. 132/2017).

              This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

               

              Practical Conclusions:

              1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
              2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
              3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
              4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
              5. For details on distribution networks and distribution online, please see my articles

               

              The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

              Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

              These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

              The signature of the contract

              Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

              The proper choice of contract

              If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

              Monitoring of legal and business relations

              If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

              Evidences about customers

              In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

              Evidences on purchases and sales

              Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

              Damages in case of termination of contracts

              Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

              Benedikt Rohrssen

              Practice areas

              • Agency
              • Distribution
              • e-commerce
              • Franchising
              • Investments
              Contact Benedikt

              Contact Benedikt





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                Commercial distribution contracts – Six key questions to consider

                30 November 2017

                • Spain
                • Agency
                • Contracts
                • Distribution
                • International trade

                On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

                Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

                • Pharmacy practice certificates
                • Certificates allowing pharmaceutical businesses to operate
                • Import and export of medicines and drug ingredients
                • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
                • Recalling medicines and drug ingredients
                • Certificates for medicine advertising content
                • Medicine price management

                Key Changes in Decree 163

                Here are some important changes and additions introduced by Decree 163:

                Destroying Specially Controlled Medicines

                You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

                E-commerce in Pharmaceutical

                Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

                • Their certificate allowing them to operate as a pharmaceutical business.
                • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
                • Information about the medicines themselves.

                Shelf-Life Rules for Imported Products

                For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

                Controlling Imported Products

                All medicines with marketing authorisation (MA) are subject to import control, except for:

                • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
                • Medicines with a shelf life of less than 30 days.

                Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

                Medicine Advertising

                Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

                Medicine Price Management

                Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

                The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

                • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
                • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
                • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
                • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

                Further Guidance in New Circular

                On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

                Key provisions of Circular 31 include:

                Notification of Practising Pharmacists

                Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

                Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

                Medicine Information Activities

                Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

                However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

                Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

                And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

                In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

                Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

                The Brazilian market took the bait

                Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

                The same effect hit other sectors, from orange, honey, and coffee to aircraft.

                Brazil’s response and sorcery: don’t mess with us (or our weather)

                Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

                And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

                Trump might want to check the weather forecast next time before penning another angry letter.

                The unpredictable becoming predictable

                Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

                At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

                In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

                This is where good contract drafting comes into play

                Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

                • hardship clauses that allow renegotiation when costs become commercially unreasonable;
                • price adjustment mechanisms linked to tariff thresholds;
                • termination rights triggered by specified levels of customs duties;
                • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

                In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

                Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

                The unwitting cupid: strengthening EU-Brazil relations

                While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

                The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

                So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

                Summary

                The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

                The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

                What I am talking about in this article:

                • What is the supply framework agreement?
                • What is the function of the supply framework agreement?
                • The difference with the general conditions of sale or purchase
                • When to enter a purchase framework agreement?
                • When is it beneficial to conclude a sales framework agreement?
                • The content of the supply framework agreement
                • Price revision clause and hardship
                • Delivery terms in the supply framework agreement
                • The Force Majeure clause in international sales contracts
                • International sales: applicable law and dispute resolution arrangements

                What is a framework supply agreement?

                It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

                It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

                After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

                Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

                What is the function of the framework supply agreement?

                It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

                In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

                By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

                This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

                What is the difference between a purchase or sales framework agreement and the general terms and conditions?

                Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

                The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

                The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

                When is it important to conclude a purchase framework agreement?

                It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

                The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

                Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

                When is it helpful to conclude a sales framework agreement?

                This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

                Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

                What is the content of the supply framework agreement?

                There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

                Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

                The most important clauses are:

                • the identification of products and technical specifications (often identified in an annex)
                • the minimum/maximum volume of supplies
                • the possible obligation to purchase/sell a minimum/maximum volume of products
                • the schedule of supplies
                • the delivery times
                • the determination of the price and the conditions for its possible modification (see also the next paragraph)
                • impediments to performance (Force Majeure)
                • cases of Hardship
                • penalties for delay or non-performance or for failure to achieve the agreed volumes
                • the hierarchy between the framework agreement and the orders and any other contracts between the parties
                • applicable law and dispute resolution (especially in international agreements)

                How to handle price revision in a supply contract?

                A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

                In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

                To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

                How to manage delivery terms in a supply agreement?

                Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

                The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

                A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

                If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

                The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

                Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

                The Force Majeure clause in international sales contracts

                A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

                The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

                If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

                Applicable law and dispute resolution clauses

                Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

                The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

                In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

                Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

                Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

                Topics covered

                • The impact of Coronavirus (Covid-19) on the international Supply chain
                • What is Force Majeure?
                • The Force Majeure Contract Clause
                • What is Hardship?
                • Is the Coronavirus a Force Majeure or Hardship event?
                • What is the event reported by the Supplier?
                • Did the Supplier provide evidence of Force Majeure?
                • Does the contract establish a Force Majeure or Hardship clause?
                • What does the law applicable to the Contract establish?
                • How to limit supply chain risks?

                The impact of Coronavirus (Covid-19) on the international Supply chain

                Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

                Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

                The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

                Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

                To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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                What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

                There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

                Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

                The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

                To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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                If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

                Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

                In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

                To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

                What is Force Majeure?

                At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

                A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

                Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

                The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

                In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

                The Force Majeure Contract Clause

                The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

                The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

                • Give prompt notice to the other parties of the impediment;
                • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
                • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
                • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
                • In the event of termination of the contract, return any service received or an amount of equivalent value.

                Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

                The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

                It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

                What is Hardship?

                Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

                The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

                Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

                In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

                The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

                • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
                • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

                Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

                Is the Coronavirus a Force Majeure or Hardship event?

                Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

                Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

                • The factual situation: what is the event reported by the Supplier?
                • Has the party invoking Force Majeure proven that the requirements exist?
                • What does the Contract (and/or the General Conditions of Contract) provide for?
                • What does the law applicable to the Contract establish?
                • What are the consequences on the obligations of the Parties?

                What is the event reported by the Supplier?

                As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

                The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

                Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

                If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

                If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

                Did the Supplier provide evidence of Force Majeure?

                The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

                To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

                The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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                Does the contract establish a Force Majeure or Hardship clause?

                The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

                If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

                For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

                It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

                If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

                Finally, it is still necessary to verify what is established by the law applicable to the contract.

                What does the law applicable to the Contract establish?

                The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

                The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

                If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

                If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

                Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

                No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

                How to limit supply chain risks?

                The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

                In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

                If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

                Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

                On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

                This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

                The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

                As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

                The Agreement has four main characteristics:

                1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
                2. Promotes innovation, productivity and competition;
                3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
                4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

                To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

                With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

                This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

                The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

                Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

                However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

                We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

                What is a NDA?

                The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

                The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

                NDA – Who are the parties?

                Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

                NDA – What is Confidential Information?

                The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

                The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

                The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

                NDA – Prohibition from using the Confidential Information

                Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

                NDA – Duration

                The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

                Breach of the NDA

                Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

                There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

                NDA – Litigation, jurisdiction and applicable law

                Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

                In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

                NDA – Conclusion

                The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

                Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

                In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

                More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

                “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

                (cf. the CJEU’s press release No. 132/2017).

                This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

                 

                Practical Conclusions:

                1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
                2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
                3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
                4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
                5. For details on distribution networks and distribution online, please see my articles

                 

                The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

                Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

                These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

                The signature of the contract

                Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

                The proper choice of contract

                If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

                Monitoring of legal and business relations

                If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

                Evidences about customers

                In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

                Evidences on purchases and sales

                Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

                Damages in case of termination of contracts

                Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

                Ignacio Alonso

                Practice areas

                • Agency
                • Corporate
                • Distribution
                • Franchising
                Contact Ignacio

                Contact Ignacio





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                  Punitive damages – The Court of Cassation opens the door in Italy

                  25 November 2017

                  • Italy
                  • Conflict of laws
                  • Contracts
                  • Credit collection
                  • International trade
                  • Litigation

                  On 29 June 2025, the Vietnamese government introduced Decree No. 163/2025/ND-CP (Decree 163). This decree provides detailed guidance on how the updated Law on Pharmacy will be implemented.

                  Like the amended Law on Pharmacy, Decree 163 came into effect on 1 July 2025, replacing the previous Decree No. 54/2017/ND-CP (Decree 54). The new decree sets out comprehensive rules for key aspects of managing pharmaceuticals, including:

                  • Pharmacy practice certificates
                  • Certificates allowing pharmaceutical businesses to operate
                  • Import and export of medicines and drug ingredients
                  • Good Manufacturing Practice (GMP) inspections of overseas manufacturers
                  • Recalling medicines and drug ingredients
                  • Certificates for medicine advertising content
                  • Medicine price management

                  Key Changes in Decree 163

                  Here are some important changes and additions introduced by Decree 163:

                  Destroying Specially Controlled Medicines

                  You no longer need to get approval from the relevant authority before destroying narcotic, psychotropic, and precursor drugs, or pharmaceutical ingredients that are narcotic or psychotropic substances or precursors used in medicines. Instead, you just need to provide notification at least seven working days in advance. This notification must include the planned destruction date and a detailed list of items to be destroyed.

                  E-commerce in Pharmaceutical

                  Pharmaceutical businesses that sell products online must openly display the following information to ensure transparency and consumer safety:

                  • Their certificate allowing them to operate as a pharmaceutical business.
                  • The pharmacy practice certificate of the person responsible for pharmaceutical expertise.
                  • Information about the medicines themselves.

                  Shelf-Life Rules for Imported Products

                  For medicines and ingredients with a total shelf life of nine months or less, at least one-third of their shelf life must remain when they clear customs. Medicines with a shelf life of 30 days or less must still be within their shelf life at the time of customs clearance.

                  Controlling Imported Products

                  All medicines with marketing authorisation (MA) are subject to import control, except for:

                  • Medicines needed for preventing and treating Group A infectious diseases that have been declared epidemics, as per the Law on Prevention and Control of Infectious Diseases.
                  • Medicines with a shelf life of less than 30 days.

                  Importers must inform the provincial People’s Committee at least five working days before making a customs declaration. The People’s Committee can then issue a written notice of non-compliance to the customs authority within five working days of receiving this notification.

                  Medicine Advertising

                  Decree 163 adds a process that allows an approved medicine advertising certificate to be adjusted for certain changes (such as a change to the MA holder or manufacturer information). This means you don’t have to go through the entire initial registration process for medicine advertising content again, as was required under the previous rules.

                  Medicine Price Management

                  Businesses must announce or re-announce wholesale prices, similar to the medicine price declaration process under Decree 54. Some medicines are exempt from this requirement, including those provided free of charge for emergency responses, national health programmes, humanitarian aid, clinical trials, scientific research, or exhibition purposes, and medicines carried as personal luggage.

                  The Ministry of Health (MOH) can make recommendations if the announced or re-announced price is significantly higher than similar medicines already on the market. This includes situations where:

                  • The announced or re-announced wholesale price of the medicine is higher than the highest price of similar medicines.
                  • The price difference is more than 35% (for medicines priced under VND 1 million) or 15% (for medicines priced at VND 1 million and above) compared to winning bid prices in tenders.
                  • The announced or re-announced price is higher than prices in the country of origin or other markets (if there’s no similar product in Vietnam).
                  • When such differences are found, the MOH issues a formal recommendation to the announcing business and publishes it online for transparency and accountability.

                  Further Guidance in New Circular

                  On 1 July 2025, the MOH issued Circular No. 31/2025/TT-BYT (Circular 31), which further details how the amended Law on Pharmacy and Decree 163 should be implemented. Circular 31 officially replaces Circular No. 07/2018/TT-BYT and Decree 54 and came into effect immediately.

                  Key provisions of Circular 31 include:

                  Notification of Practising Pharmacists

                  Pharmaceutical businesses that are not part of a pharmacy chain must inform the relevant authority of a list of people currently working at the business who hold pharmacy practice certificates. This notification must be submitted within 15 days of the date the certificate allowing the pharmaceutical business to operate was issued, or when there are any changes to the list. This is a shorter deadline than the previous 30 days under earlier rules.

                  Pharmacy chains have similar notification duties and deadlines. Specifically, the chain operator must inform the provincial authority where each pharmacy in the chain is located about the list of practising pharmacists at those sites. Additionally, pharmacy chains must notify the authority if pharmacies are added or removed from the chain, and if there are any rotations of the people responsible for pharmaceutical expertise between pharmacies within the chain.

                  Medicine Information Activities

                  Under Circular 31, medicine information can still be given to healthcare professionals through information materials, seminars, and medical representatives.

                  However, Circular 31 introduces a significant change by removing the need to obtain a certificate for medicine information content before carrying out these activities. Under the new rules, pharmaceutical businesses, representative offices of foreign pharmaceutical companies in Vietnam, and MA holders are now responsible for creating and distributing medicine information materials. These materials must comply with the package inserts for medicines approved by the MOH, the Vietnamese National Drug Formulary, and any related documents and professional instructions issued or recognised by the MOH.

                  Donald Trump, never one to shy away from drama or diplomacy-via-caps-lock, has slapped a 50% tariff on all Brazilian exports to the United States. The justification? In his own delicate prose: “The treatment of former President Jair Bolsonaro is a disgrace… A witch hunt that must end IMMEDIATELY!”

                  And just in case anyone thought this was about trade imbalances or economic strategy, Trump made things crystal clear: “Due to Brazil’s insidious attacks on free elections…”.

                  In short, the 50% tariff isn’t about coffee, orange juice, or flip-flops. It’s about a Supreme Court judgment, applying Brazilian law, regarding Brazilian politicians accused of conspiring in a coup d’état. In other words, this is a brazen (and frankly absurd) attempt at judicial intervention via trade war.

                  Trump, with his characteristic subtlety, offered a solution: manufacture in the U.S., and he’ll look kindly upon Brazil, like a mafia don offering “protection” after smashing your shop window. But what he meant was: consider Bolsonaro innocent, and we’ll talk.

                  The Brazilian market took the bait

                  Although the fishy interference in Brazilian affairs was determined from a fish out of the water, the market took the bait: in the first 48 hours after the infamous letter, at least 1500 tons of fish were already held in Brazilian ports, as US buyers suspended their contracts due to uncertainty about the costs upon arrival. The fish market is on alert, as 80% of the exports head to the US, mainly coming from small family-owned industries that distribute the catch from artisanal fishing communities.

                  The same effect hit other sectors, from orange, honey, and coffee to aircraft.

                  Brazil’s response and sorcery: don’t mess with us (or our weather)

                  Naturally, Brazil will not sit quietly sipping caipirinhas while its sovereignty is trampled. Reciprocity is on the table: if Washington raises tariffs, Brasília can do the same. But above all, one thing is sure: Brazil will never tolerate foreign interference in its independent judiciary.

                  And then, a curious coincidence: right after Trump’s speech, a tornado accompanied by lightning struck the White House grounds. Pure chance? Maybe. Or could it have been the work of Brazilian indigenous shamans, a particularly well-organized group of umbanda practitioners, or simply the fact that, as every Brazilian child knows, God is Brazilian.

                  Trump might want to check the weather forecast next time before penning another angry letter.

                  The unpredictable becoming predictable

                  Trade wars are rarely tidy affairs, but one thing they consistently deliver is chaos (in legal terms, disruption). And when disruption meets contracts, force majeure disputes often end up in court.

                  At first glance, Trump’s decision to impose a 50% tariff overnight might feel like an unpredictable thunderbolt (quite literally, given the weather at the White House). But here’s the catch: by now, unpredictable tariffs are becoming predictable. When a government with a well-documented love for impulsive economic diplomacy imposes politically motivated tariffs, can anyone claim to be surprised?

                  In most jurisdictions, force majeure requires that the event be extraordinary, unforeseeable, and beyond the parties’ control. A sudden 50% tariff certainly ticks a few of those boxes, but following a repetition of erratic trade policy, one might argue that businesses should expect what in past times was considered unexpected, especially when dealing with certain jurisdictions or political figures. In other words, Trump’s tariffs might not excuse performance if parties didn’t prepare for exactly this kind of volatility.

                  This is where good contract drafting comes into play

                  Savvy businesses are learning that their contracts must go beyond a vague boilerplate clause about “acts of government” or “changes in law.” Instead, they should expressly address the risk of sudden tariff changes, including

                  • hardship clauses that allow renegotiation when costs become commercially unreasonable;
                  • price adjustment mechanisms linked to tariff thresholds;
                  • termination rights triggered by specified levels of customs duties;
                  • currency fluctuation provisions (because tariffs rarely travel alone, and currency swings often accompany them).

                  In short, while no contract can immunize a business from every shock, smart drafting can mean the difference between a commercial headache and a catastrophic breach.

                  Therefore, tariffs may no longer be an unpredictable storm; they are part of the new predictable landscape. Given that your contract might wake up tomorrow facing ‘IMMEDIATE’ punitive tariffs in all caps, your contract should be ready today.

                  The unwitting cupid: strengthening EU-Brazil relations

                  While the tariffs may ruffle trade flows between Brasília and Washington, there’s an unintended silver lining: Trump is proving to be the most efficient matchmaker between Brazil and other markets, such as China and the European Union.

                  The EU-Brazil relationship, already a flirtation with promising prospects, with relevant progress in the EU-Mercosur Agreement, now seems destined for deeper romance. If Mr. Trump insists on isolating the US from Brazil, the old continent stands ready, with flowers and wine in hand, to pick up where the US left off. After all, Brazilian fish can pair up nicely with champagne, cava and prosecco.

                  So thank you, Mr. Trump. In your quest to bully Brazil into submission, you may have done more to strengthen transatlantic ties than any EU Commissioner ever could. As they say in Brasília these days: Trump is not a trade warrior. He’s a cupid in disguise.

                  Summary

                  The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

                  The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

                  What I am talking about in this article:

                  • What is the supply framework agreement?
                  • What is the function of the supply framework agreement?
                  • The difference with the general conditions of sale or purchase
                  • When to enter a purchase framework agreement?
                  • When is it beneficial to conclude a sales framework agreement?
                  • The content of the supply framework agreement
                  • Price revision clause and hardship
                  • Delivery terms in the supply framework agreement
                  • The Force Majeure clause in international sales contracts
                  • International sales: applicable law and dispute resolution arrangements

                  What is a framework supply agreement?

                  It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

                  It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

                  After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

                  Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

                  What is the function of the framework supply agreement?

                  It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

                  In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

                  By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

                  This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

                  What is the difference between a purchase or sales framework agreement and the general terms and conditions?

                  Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

                  The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

                  The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

                  When is it important to conclude a purchase framework agreement?

                  It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

                  The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

                  Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

                  When is it helpful to conclude a sales framework agreement?

                  This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

                  Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

                  What is the content of the supply framework agreement?

                  There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

                  Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

                  The most important clauses are:

                  • the identification of products and technical specifications (often identified in an annex)
                  • the minimum/maximum volume of supplies
                  • the possible obligation to purchase/sell a minimum/maximum volume of products
                  • the schedule of supplies
                  • the delivery times
                  • the determination of the price and the conditions for its possible modification (see also the next paragraph)
                  • impediments to performance (Force Majeure)
                  • cases of Hardship
                  • penalties for delay or non-performance or for failure to achieve the agreed volumes
                  • the hierarchy between the framework agreement and the orders and any other contracts between the parties
                  • applicable law and dispute resolution (especially in international agreements)

                  How to handle price revision in a supply contract?

                  A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

                  In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

                  To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

                  How to manage delivery terms in a supply agreement?

                  Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

                  The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

                  A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

                  If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

                  The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

                  Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

                  The Force Majeure clause in international sales contracts

                  A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

                  The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

                  If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

                  Applicable law and dispute resolution clauses

                  Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

                  The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

                  In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

                  Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

                  Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

                  Topics covered

                  • The impact of Coronavirus (Covid-19) on the international Supply chain
                  • What is Force Majeure?
                  • The Force Majeure Contract Clause
                  • What is Hardship?
                  • Is the Coronavirus a Force Majeure or Hardship event?
                  • What is the event reported by the Supplier?
                  • Did the Supplier provide evidence of Force Majeure?
                  • Does the contract establish a Force Majeure or Hardship clause?
                  • What does the law applicable to the Contract establish?
                  • How to limit supply chain risks?

                  The impact of Coronavirus (Covid-19) on the international Supply chain

                  Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

                  Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

                  The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

                  Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

                  To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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                  What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

                  There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

                  Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

                  The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

                  To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

                  operaio

                  If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

                  Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

                  In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

                  To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

                  What is Force Majeure?

                  At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

                  A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

                  Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

                  The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

                  In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

                  The Force Majeure Contract Clause

                  The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

                  The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

                  • Give prompt notice to the other parties of the impediment;
                  • In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
                  • In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
                  • In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
                  • In the event of termination of the contract, return any service received or an amount of equivalent value.

                  Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

                  The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

                  It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

                  What is Hardship?

                  Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

                  The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

                  Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

                  In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

                  The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

                  • The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
                  • The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

                  Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

                  Is the Coronavirus a Force Majeure or Hardship event?

                  Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

                  Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

                  • The factual situation: what is the event reported by the Supplier?
                  • Has the party invoking Force Majeure proven that the requirements exist?
                  • What does the Contract (and/or the General Conditions of Contract) provide for?
                  • What does the law applicable to the Contract establish?
                  • What are the consequences on the obligations of the Parties?

                  What is the event reported by the Supplier?

                  As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

                  The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

                  Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

                  If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

                  If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

                  Did the Supplier provide evidence of Force Majeure?

                  The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

                  To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

                  The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

                  mascherine

                  Does the contract establish a Force Majeure or Hardship clause?

                  The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

                  If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

                  For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

                  It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

                  If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

                  Finally, it is still necessary to verify what is established by the law applicable to the contract.

                  What does the law applicable to the Contract establish?

                  The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

                  The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

                  If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

                  If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

                  Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

                  No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

                  How to limit supply chain risks?

                  The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

                  In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

                  If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

                  Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

                  On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

                  This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

                  The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

                  As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

                  The Agreement has four main characteristics:

                  1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
                  2. Promotes innovation, productivity and competition;
                  3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
                  4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

                  To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

                  With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

                  This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

                  The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

                  Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.

                  However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.

                  We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.

                  What is a NDA?

                  The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.

                  The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.

                  NDA – Who are the parties?

                  Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.

                  NDA – What is Confidential Information?

                  The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.

                  The problem regarding these templates is that it is difficult, ex post, to verify whether certain information  would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).

                  The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).

                  NDA – Prohibition from using the Confidential Information

                  Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).

                  NDA – Duration

                  The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.

                  Breach of the NDA

                  Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).

                  There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.

                  NDA – Litigation, jurisdiction and applicable law

                  Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on  legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).

                  In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual  negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.

                  NDA – Conclusion

                  The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract  (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).

                  Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

                  In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

                  More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

                  “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

                  (cf. the CJEU’s press release No. 132/2017).

                  This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

                   

                  Practical Conclusions:

                  1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
                  2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
                  3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
                  4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
                  5. For details on distribution networks and distribution online, please see my articles

                   

                  The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

                  Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

                  These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

                  The signature of the contract

                  Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

                  The proper choice of contract

                  If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

                  Monitoring of legal and business relations

                  If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

                  Evidences about customers

                  In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

                  Evidences on purchases and sales

                  Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

                  Damages in case of termination of contracts

                  Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

                  Roberto Luzi Crivellini

                  Practice areas

                  • Arbitration
                  • Distribution
                  • International trade
                  • Litigation
                  • Real estate
                  Contact Roberto

                  Contact Roberto





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