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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

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Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

The Legalmondo Africa Desk

We help companies invest and do business in Africa with our experts in Algeria, Tunisia, Morocco, Senegal, Sudan, Egypt, Ghana, Lybia, Côte d’Ivoire, Cameroon, and Malawi.

We can also assist foreign entities in African countries where we are not directly present with an office through our network of local partners.

How it works

• We set up a meeting (in person or online) with one of our experts to understand the client’s needs.
• Once we start working together, we follow the client with a dedicated counsel for all its legal needs (single cases, or ongoing legal assistance)

Get in touch to know more.

Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

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Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

The Legalmondo Africa Desk

We help companies invest and do business in Africa with our experts in Algeria, Tunisia, Morocco, Senegal, Sudan, Egypt, Ghana, Lybia, Côte d’Ivoire, Cameroon, and Malawi.

We can also assist foreign entities in African countries where we are not directly present with an office through our network of local partners.

How it works

• We set up a meeting (in person or online) with one of our experts to understand the client’s needs.
• Once we start working together, we follow the client with a dedicated counsel for all its legal needs (single cases, or ongoing legal assistance)

Get in touch to know more.

Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

The Legalmondo Africa Desk

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How it works

• We set up a meeting (in person or online) with one of our experts to understand the client’s needs.
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Get in touch to know more.

Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

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Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

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Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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).

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of «implied warranties» under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 («CISG,» ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a «defect» in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a «lack of conformity» within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as «warranty of merchantability»).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the «warranty of merchantability» should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, «unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.»

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as «implied warranties.»

The Court noted that the warranties in question, including the one of «merchantability» just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must «result from a specific provision agreed upon by the parties.«

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the «implied guarantee» of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the «warranty of merchantability» had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the «implied warranties» (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the «warranty of merchantability» not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which — with the exception of Eritrea — covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them.  47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this «transitional arrangement«, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one — and some to more than one — recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements — FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

• coordinating negotiating positions and assisting member states in the implementation of the agreement.
• solution-oriented mediation in the event of disagreements between member states
• supporting member states in the harmonisation of tariffs and other border protection regulations
• promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

The Legalmondo Africa Desk

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We can also assist foreign entities in African countries where we are not directly present with an office through our network of local partners.

How it works

• We set up a meeting (in person or online) with one of our experts to understand the client’s needs.
• Once we start working together, we follow the client with a dedicated counsel for all its legal needs (single cases, or ongoing legal assistance)

Get in touch to know more.

Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden «partial» termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

• the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
• the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a «partial» termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
• the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of «unforeseeability» provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

• an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
• a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
• the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

• first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
• then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
• finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

• article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
• this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
• during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

• analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
• correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
• document the causes of the price increase;
• check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
• consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the «size of the parties»: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

• the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
• As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as «competence-competence», Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the «weak» party.

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts. 

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount. 

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer. 

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.  

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount. 

The agent / distributor, the expert and the attorney should consider the following: 

Check what the agent’s contribution has been 

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones. 

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about «clientele» if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal. 

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed. 

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc. 

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc. 

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors. 

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge. 

Check out the Practical Guide on International Agency Agremeents 

 To read more about the main features of a contract of agency in Spain, go to our Guide.  

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