Practical Guide to International Commercial Agency Contracts

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The contract of commercial Agency is one of the most used agreements in international trade. In the European Union the legal framework is set by the Council Directive 86/653/EEC, but there are still significant differences among national regulations and jurisprudence of the Member States. Outside the EU, commercial Agency is often not regulated by a specific law or can be subject to laws at the federal or state level. In most countries even if the Parties are free to choose the law applicable to an international Agency agreement and the dispute settlement method, certain provisions provided by local laws cannot be opted out. And while the Agent is usually entitled to a goodwill (clientele) indemnity upon termination of the contract, such indemnity in some countries can be excluded. When negotiating an international Agency contract, therefore, it is very important to know what the available options are, which law is most favorable for the interests of the Principal or the Agent, what provisions cannot be derogated, which is the best jurisdiction for dispute resolution, and so on. In this Guide our legal experts provide some practical answers and advice.

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Italy

How are agency agreements regulated in Italy?

In Italy, commercial agency agreements are mainly regulated by Articles 1742 to 1753 of the Civil Code. These law rules have been repeatedly modified following the adoption of the European Directive 653/86/EC (See EU part of this Guide).
In addition to the Civil Code rules, Collective Bargaining Agreements (“Accordi Economici Collettivi”, or “AEC”) also contain important rules governing agency agreements.
AECs are agreements made on a regular basis between associations representing principals and agents in different sectors (for example manufacture, trade, and several others).
Most AECs are not laws, they are collective agreements which bind only those principals and agents who are part of those associations.
However, most of the agency agreements between Italian principals and Italian agents are governed by AECs.
In general, AECs intend to implement the Civil Code rules and those of the Directive 653/86. However, contractual AECs often deviate from those rules, and some differences are substantial (see for example the rules on unilateral modifications of certain contract terms; termination notice periods; remuneration for the post-contractual non-competition covenant; termination indemnity).
This has caused issues of compliance with the Civil Code and the EC Directive which are still unresolved by the courts.
With particular regard to the contract termination indemnity, some rulings from the EU Court of Justice have established that the AEC regime conflicts with the Directive, yet the Italian courts’ constant jurisprudence still keeps the AECs’ indemnity provisions in force.
It is commonly believed that AECs’ geographical scope of application is limited to the Italian territory. Therefore, they often apply to agency agreements which are governed by Italian law and are performed by the agent in Italy, when both parties or at least the principal are members of the associations stipulating the AECs.
In international agency agreements, AECs generally apply in limited circumstances, mainly when the parties expressly refer to them in the contract, or when they are de facto applied; to the latter case a foreign principal should pay special attention as it might lead to a “hidden” application of the AECs.
Although agency agreements are quite heavily regulated in Italy, there is certainly still room for the parties’ freedom in structuring the agreement properly and seeking to include clauses that protect them adequately. Yet, the complex Italian system needs to be taken into consideration in a careful drafting exercise.

What are the differences from other intermediaries?

According to Italian law, an agent is an individual or an entity being appointed to promote stably the conclusion of contracts in a specified area on behalf of another party (the principal) and is remunerated for that task.

Unless otherwise agreed, an agent has exclusivity rights in the area for which he has been appointed (which is typically a geographical area, however, it could be a range of customers, and/or a product range).

On the other hand, again unless otherwise agreed, an agent may not act in competition with the principal within the area assigned to him throughout the term of the agency relationship. The non-competition covenant may be extended to a further period after termination of the agency relationship, such period not to exceed 2 years. In this case, the non-competition covenant shall be remunerated.

An agent is an independent contractor, and this feature distinguishes agents from employees entrusted with the promotion of sales in a particular area on behalf of the employer.

An agent is appointed to perform a continuous and stable promotional activity. This feature of stable and continuous collaboration distinguishes commercial agents from “occasional business finders(“procacciatori d’affari”). A “procacciatore” is typically remunerated by a principal just for putting him in contact with another party for a single business, or in exchange for an occasional, not stable or continuous intermediation effort.

While in theory, the above-mentioned distinctions seem quite straightforward, in practice it is often not easy to establish when a particular relationship is one between a principal and an agent, or between a principal and an occasional business finder, or between an employer and an employee.

There has been so much litigation around these issues, as qualifying a relationship in one way or another may lead to very different consequences especially when such a relationship comes to an end. In qualifying the relationship from a legal point of view, courts will certainly look at whether a proper written agreement was made (which unfortunately does not happen so often), but the specific circumstances of each case will be reviewed too.

Distributors and agents are, again in theory, quite different. Distributors typically buy and resell a principal’s products or services in their own name and behalf in a specified area or country; while agents procure sales contracts which are then concluded by the principal in his name, or conclude – providing the agent is expressly empowered thereto – sale contracts in the principal’s name and behalf. Promotional and collaboration duties may be, however, quite similar.

It is worth noting that distribution agreements in Italy are not governed by law, and courts so far have not, to our knowledge, extended to distributors the rules and protections that the law recognizes to commercial agents.

Mediators have certain similarities with agents and occasional business finders since mediators also typically put two parties in contact for concluding a single business and are remunerated for that. However, the essential difference between the two is that a mediator – as stated by Article 1754 of the Civil Code – is totally independent from both parties, while an occasional business finder acts in the interest of a principal.

How to appoint an agent in Italy

Generally, under Italian law, contracts can be formed in writing, orally, or even in a silent manner, by performance. However, under Article 1742 of the Civil Code, an agency agreement must be evidenced in writing, and each of the parties is entitled to receive from the other party a document, signed by the latter, containing the content of the contract and the additional clauses. This right cannot be waived.

Italian agents must be registered with the “Enasarco”, a private law foundation which administers a supplementary pension fund for agents, and a termination indemnity fund, called “FIRR” (referring to the termination indemnity as calculated in accordance with the criteria set forth by the AECs).
Whenever an agency agreement is relevant for the Enasarco, the principal must notify the foundation that the agency agreement has been entered, within 30 days from the agreement date. Also, regular contributions to the Enasarco funds must be made throughout the whole term of the agreement. Finally, termination of the agreement will also have to be communicated.

The Enasarco will then pay the agent part of the termination indemnities provided for by the AECs from the regular contributions made during the relationship. The rest of the termination indemnities (if due) will be paid by the principal.

This registration requirement concerns mainly Italian agents of Italian and foreign principals. In some cases, however, it also concerns agents working outside Italian territory especially when there are links with Italy (for example, according to Italian Ministry of Labour, non-residing agents having their main centre of interest in Italy, and agents habitually operating in Italy but performing their activity abroad for no more than 24 months, shall be registered with the Enasarco). You can refer to this post on Legalmondo if you want to know more on this point.

Today, Italian agents still have registration requirements. Anyone wanting to start a business as a commercial agent in Italy must file a “SCIA” (Certified Notice of Business Start) with the Chamber of Commerce having local jurisdiction. The Chamber of Commerce then registers the agent with the Register of Businesses if the agent is organized as a business entity, otherwise, it registers the agent for a special section of the “REA” (List of Business and Administrative Information) of the same Chamber (see Legislative Decree n.59 dated 26.3.2010, implementing the Directive 2006/123/EC “Services Directive”).

Even though the absence of such registration does not invalidate the agency agreement, it is still a mandatory requirement.

Is it possible to apply a foreign law?

Under Italian law, an agreement is considered "international” under any “situations involving a conflict of laws”.

The situations which more often involve a conflict of laws in agency agreements – making them “international” - are (i) the principal’s seat being located in a country different from the agent’s seat; or (ii) the agreement being performed abroad, even when the principal’s and the agent’s seats are both located in the same country.

It is indeed possible for an international agency agreement to be governed by a law other than Italian law.

First of all, this can be obtained by including a clear choice of law clause in a written agency agreement, having the effect of submitting the agreement to a foreign law.

The conditions for the validity and effectiveness of a choice of law, as well as the limits of such e choice, are set forth in Article 3 of Regulation (EC) n.593/2008 (“Rome I” Regulation) (see EU part of this Guide).

A foreign law (i.e. a law other than Italian law) may govern an international agency agreement even in the absence of any choice of law, In particular, the law of the agent’s “habitual residence” (i.e. the place of central administration, or the principal place of business) shall apply pursuant to Article 4 of the Rome I Regulation (see EU part of this Guide).

An Italian principal should, therefore, be aware of this provision and, to avoid a foreign governing law in an agreement with a foreign agent, he should include in the agency agreement a clear choice of law clause stating that Italian law shall apply.

Besides, to confirm the effectiveness of the above choice, it would be generally wise to couple such a provision with a clause stating that Italian courts have jurisdiction on any and all disputes.

Conversely, a foreign principal in an agency agreement with an agent whose main place of business is in Italy may wish to include a proper choice of law and jurisdiction clauses if he wants to avoid Italian law to apply.

Choosing a foreign law (within the limits set forth by the Rome I Regulation) will necessarily exclude the application of the Italian Collective Bargaining Agreements (AEC).

Is it possible to submit any disputes to a foreign jurisdiction or foreign arbitrators?

Any disputes arising from an international agency agreement may be submitted to the jurisdiction of foreign judicial courts or foreign arbitrators.

This can be obtained through an agreement on jurisdiction. Art.25 of EU Regulation n.1215/2012 (“Brussels 1-bis” Regulation) allows for such agreement to be concluded in various manners (see EU part of this Guide).

However, the safest manner to agree on jurisdiction is to include a proper, clear choice of court clause in the agency agreement, specifying at least the country whose courts will have jurisdiction on any and all disputes arising from the agreement.

As regards the possible submission of disputes arising from an international agency agreement to foreign arbitrators, this is often possible as Italy is part of the most important international treaties on the recognition of arbitral awards (e.g. the New York Convention) and has its own civil procedural rules on international arbitration.

Therefore, it is generally possible to consider including a proper arbitration clause in an agency agreement.

However, in one case such a choice might prove ineffective. That is the case where an individual (or sole proprietorship) resident in Italy and with his main place of business in the same country is appointed as agent.

This is because disputes with individual Italian agents would fall into the exclusive competence of the labour courts (see Article 409 of the Civil Procedure Code).

It follows that agency relationships with individual agents in Italy are considered similar to employment matters and therefore an arbitration clause might be at risk of being judged ineffective as concerning a non-arbitrable matter. This, however doesn’t seem to affect the validity of a choice of any foreign judicial court clause according to the Brussels 1-bis Regulation.

In the absence of any choice of a foreign judicial or arbitration court, the venue on disputes in an international agency agreement would be mainly regulated as follows.

Under Brussels 1-bis Regulation, and Italian private international law, as a general principle the defendant’s domicile forum has jurisdiction or, as an alternative to the “defendant’s forum”, Brussels 1-bis Regulation allows for litigation to be conducted before the “place of performance” courts. (see EU part of this Guide).

Therefore, if an Italian principal wishes to submit all disputes with a foreign agent to Italian courts, or if a foreign principal wishes to submit the disputes to the principal’s courts, a proper choice of court/arbitration clause should be included in the agency agreement (taking into account any mandatory rules existing in the agent’s country).
The effectiveness of a choice of court clause is often to be evaluated in connection with the possibility to have the court judgment recognized and enforced in another country.

Agency agreement termination

Agency agreements are meant to establish a standing and continuous co-operation between agent and principal.

Under Italian law, agency agreements may be entered into for a limited or unlimited time. If a limited term is agreed, the agreement will expire and the relationship will naturally end on the expiration date as originally stipulated. Automatic renewal for further periods may apply only if expressly agreed so. Generally, an agency agreement for a limited term may not be terminated earlier unless in particular situations (for example, in case of a substantial breach of contract).

If an agency agreement has no limited term, according to Article 1750 of the Italian Civil Code, either party may terminate it unilaterally at any time without cause, by prior notice from one to six months depending on the actual duration of the relationship when termination is notified.

Such notice period is: of one month if termination is notified during the first year of the relationship; two months if notified during the second year; three months if notified during the third year; four months if notified during the fourth year; five months if notified during the fifth year; six months if notified during or after the sixth year.
It is worth noting that AECs provide for partially different (i.e. longer) notice terms. Therefore, it is important to ascertain whether or not AECs apply to a specific agency agreement.

Termination for breach is of course available. Unilateral immediate termination is however only possible in limited cases, e.g.: (i) in case of substantial breach, not remedied within 15 days from receipt of a special written notice (unless a different notice period is specified in the agreement) pursuant to Article 1454 of the Civil Code; or (ii) in case of breach of certain clauses specified in the agreement (according to the procedure set out in Article 1456 of the Civil Code); or (iii) in case of a breach which is so serious as to be considered as “just cause” for termination (under Article 2119 of the Civil Code). Otherwise, termination for breach can only be sought by obtaining a court judgment.

In principle, the parties are free to include unilateral termination clauses setting forth specific breaches legitimating the non-breaching party to terminate the contract. However, such freedom is not unlimited.

For example, according to a quite recent but standing case law, in case a principal terminates the agency agreement due to the agent’s failure to reach the minimum sales target expressly outlined in the agreement, and despite the contract clause entitling him to do so, such termination is not per se legitimate, but – in case of a lawsuit - the court will scrutiny if under the circumstances the agent’s failure actually constituted a material breach of contract, and, if the court determines it was not, termination may be declared illegitimate.

Nevertheless, including express termination clauses is something the parties should surely consider carefully when drafting a commercial agency agreement.

Termination indemnity

Italian law entitles the agent to an indemnity if the agency agreement is terminated, according to Article 1751 of the Civil Code which implements Articles 17 and 18 of the EC Directive 86/653, particularly the so-called “German law type” of indemnity.

The indemnity is due to the agent if the following conditions are met:

  • he has brought the principal new customers or has significantly increased the business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and
  • the payment of this indemnity is equitable in view of all the circumstances and, in particular, the commission lost by the commercial agent resulting from the business with such customers.

The amount of the indemnity may not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent's average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question.

The indemnity or compensation referred to in Article 17 shall not be payable:

  • where the principal has terminated the agency contract because of a default attributable to the commercial agent which is so substantial to prevent the relationship to continue even temporarily; or
  • where the commercial agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or by circumstances attributable to the agent such as age, infirmity or illness in consequence of which he cannot reasonably be required to continue his activities; or in case of the agent’s death;
  • where, with the agreement of the principal, the commercial agent assigns his rights and duties under the agency contract to a third party.

The grant of such an indemnity shall not prevent the commercial agent from seeking damages. In practice, the agent may claim damages in the event of the principal’s illegitimate termination or in the event of the agent’s termination due to the principal’s breach of contract.

The commercial agent shall lose his right to an indemnity if he hasn't notified the principal that he intends pursuing his entitlement within one year from the termination of the contract.

The parties may not derogate from the indemnity provisions to the detriment of the commercial agent, which means that a clause in the agency agreement denying in whole or in part the agent’s indemnity, would be invalid.

As said before, AECs also provide for various termination indemnities for commercial agents. Most of such indemnities are calculated as percentages of the total amount of commissions the agent has earned during the agency relationship, regardless of whether or not the agent has met the conditions set forth by Article 1751 of the Civil Code as described above.

Therefore, it can be surely said that such indemnities do not meet the requirements set forth by the EC Directive and the Civil Code. Following some EU Court of Justice rulings stating that such indemnities were in conflict with the Directive, the most recent AECs have only partially modified their indemnity system, introducing additional indemnity elements which in some way resemble the Directive’s principles.

Italian courts continuously state that the AECs indemnity system is valid (in cases where AECs apply) stating that the AEC regime is more favourable to agents as being a “minimum indemnity” system for those who do not meet the Civil Code requirements. In practice, the AEC indemnities will be granted to an agent unless he’s able to prove that by applying the Civil Code/Directive rules he would be entitled to a higher amount, in which case he will be granted such higher amount.

Other peculiarities

There are many other important legal aspects to consider when appointing an agent in Italy. Only a few of them are mentioned here below.

For example, the agent’s exclusivity rights should be taken into account. Whenever an agent is appointed to operate in a particular geographical area (e.g. one or more Italian regions, or even the entire Italian territory) he will be entitled to commissions, not only on sales procured by him but on all sales made by the principal with customers located within that territory even if the agent has not done anything to procure the sale, unless the contract states otherwise.

Commissions are due when a sale contract is concluded, which means usually when the principal accepts the customer’s purchase order. The parties may, however, (and they often do) derogate to such rule: for example, a principal may wish the agency agreement to state that commission’s right only accrues when the customer actually pays the purchase price.

An agent may not be generally held liable for the customers’ failure to pay, as the “star del credere” clause is no longer allowed in Italy. It is merely possible for the agent to guarantee that the customer does not fail to pay with regard to individual business transactions of particular importance and such guarantee may not exceed an amount equal to the commission that would otherwise be due.

Payment of commissions is due no later than within strict time limits provided for by the Civil Code. The agent has strong inspection rights on the principal’s accounting books to verify the amount of commissions due to him. The agent may seek a court order if such inspection rights are denied.

It is possible to have the agent agree on a post-termination non – compete covenant, in which case a special remuneration may be due as provided for by the Civil Code (and by the AECs when applicable). The agent might be entitled to remuneration also if entrusted with other particular tasks, for example, credit collection.